-----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, TrfTFlmoUtpefYAiIgJ2UBSam1QKEqT1MigoYF5j1tLnzfwfGV3+1dHx5/BzIbUM DLqnKtzfWRoTchSpQAIFyw== 0000950123-99-002248.txt : 19990319 0000950123-99-002248.hdr.sgml : 19990319 ACCESSION NUMBER: 0000950123-99-002248 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHANY CORP /DE CENTRAL INDEX KEY: 0000775368 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 510283071 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09371 FILM NUMBER: 99567626 BUSINESS ADDRESS: STREET 1: 375 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10152 BUSINESS PHONE: 2127521356 MAIL ADDRESS: STREET 1: 375 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10055 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHANY FINANCIAL CORP DATE OF NAME CHANGE: 19870115 10-K 1 ALLEGHANY CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] 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 1-9371 ALLEGHANY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 51-0283071 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 375 PARK AVENUE, NEW YORK, NEW YORK 10152 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212/752-1356 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NOT APPLICABLE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 1, 1999, 7,217,848 shares of Common Stock were outstanding, and the aggregate market value (based upon the closing price of these shares on the New York Stock Exchange) of the shares of Common Stock of Alleghany Corporation held by non-affiliates was $1,065,506,208. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the indicated part(s) of this Report:
PART ---- Annual Report to Stockholders of Alleghany Corporation for I and II the year 1998 Proxy Statement relating to Annual Meeting of Stockholders III of Alleghany Corporation to be held on April 23, 1999
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ALLEGHANY CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS
DESCRIPTION PAGE ----------- ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 26 Item 3. Legal Proceedings........................................... 29 Item 4. Submission of Matters to a Vote of Security Holders......... 30 Supplemental Item Executive Officers of Registrant............................ 30 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 30 Item 6. Selected Financial Data..................................... 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 31 Item 7A Quantitative and Qualitative Disclosures About Market Risk...................................................... 31 Item 8. Financial Statements and Supplementary Data................. 31 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................. 31 PART III Item 10. Directors and Executive Officers of Registrant.............. 31 Item 11. Executive Compensation...................................... 31 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 31 Item 13. Certain Relationships and Related Transactions.............. 31 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 32 Signatures..................................................................... 39 Index to Financial Statement Schedule.......................................... FINANCIAL STATEMENT SCHEDULES.................................................. INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES.................. Index to Exhibits.............................................................. EXHIBITS.......................................................................
1 3 PART I ITEM 1. BUSINESS. Alleghany Corporation ("Alleghany") was incorporated in 1984 under the laws of the State of Delaware. In December 1986, Alleghany succeeded to the business of its parent company, Alleghany Corporation, a Maryland corporation incorporated in 1929, upon the parent company's liquidation. Alleghany's principal executive offices are located at 375 Park Avenue, New York, New York 10152 and its telephone number is (212) 752-1356. Alleghany is engaged, through its subsidiary Underwriters Re Group, Inc. ("Underwriters Re Group") and its subsidiaries, in the property and casualty reinsurance and insurance businesses. Alleghany is also engaged, through its subsidiary Alleghany Asset Management, Inc. ("Alleghany Asset Management") and its subsidiaries, in the financial services business. In addition, Alleghany is engaged, through its subsidiaries World Minerals Inc. ("World Minerals"), Celite Corporation ("Celite") and Harborlite Corporation ("Harborlite") and their subsidiaries, in the industrial minerals business. Alleghany conducts a steel fastener importing and distribution business through its Heads and Threads division. Until June 17, 1998, Alleghany was also engaged, through its subsidiaries Chicago Title and Trust Company ("CT&T"), Chicago Title Insurance Company, Security Union Title Insurance Company and Ticor Title Insurance Company and their subsidiaries, in the sale and underwriting of title insurance and in other real estate-related services businesses. On that date, Alleghany completed the tax-free spin-off of Chicago Title Corporation, the newly formed holding company of CT&T, to Alleghany stockholders. As a part of the spin-off, the common stock of Chicago Title Corporation was listed on the New York Stock Exchange under the symbol "CTZ." Until October 31, 1994, Alleghany was also engaged, through its subsidiary Sacramento Savings Bank ("Sacramento Savings") in retail banking. On that date, Alleghany completed the sale of Sacramento Savings and an ancillary company to First Interstate Bank of California for a cash purchase price of $331 million. As part of the transaction, Alleghany, through its wholly owned subsidiary Alleghany Properties, Inc. ("API"), purchased real estate and real estate-related assets of Sacramento Savings for a purchase price of about $116 million. During 1994 and early 1995, with temporary borrowings under Alleghany's revolving credit agreement, the proceeds from the sale of Sacramento Savings and cash on hand, Alleghany and its subsidiaries acquired a substantial number of shares of common stock of Santa Fe Pacific Corporation ("Santa Fe"). On September 22, 1995, Santa Fe and Burlington Northern, Inc. merged under a new holding company named Burlington Northern Santa Fe Corporation ("BNSF"). As a result of the merger, the shares of Santa Fe beneficially owned by Alleghany were converted into about 7.43 million shares of BNSF, or about 4.7 percent of BNSF's currently outstanding common stock. BNSF is engaged primarily in rail transportation. BNSF owns one of the largest railroad networks in North America, providing transportation services to shippers throughout the western two-thirds of the United States as well as to Canada and Mexico. In 1998, Alleghany studied a number of potential acquisitions. Alleghany intends to continue to expand its operations through internal growth at its subsidiaries as well as through possible operating-company acquisitions and investments. Reference is made to Items 7 and 8 of this Report for further information about the business of Alleghany in 1998. The consolidated financial statements of Alleghany, incorporated by reference in Item 8 of this Report, include the accounts of Alleghany and its subsidiaries for all periods presented. PROPERTY AND CASUALTY REINSURANCE AND INSURANCE BUSINESSES GENERAL Underwriters Re Group, Inc. ("URG"), formerly known as URC Holdings Corp., headquartered in Calabasas, California, is engaged in the property and casualty reinsurance and insurance businesses, through 2 4 Underwriters Reinsurance Company ("Underwriters") and its primary insurance subsidiaries (collectively, "Underwriters Re Group"). Underwriters was organized in 1867 as a primary insurer in New York under the name "Buffalo German Insurance Company." By 1970, Underwriters had become principally a reinsurer, and in 1977 it changed its corporate domicile to New Hampshire. Underwriters operates throughout the United States, including Puerto Rico and the District of Columbia, and Canada, either as a licensed carrier or accredited reinsurer, and has branch offices in Chicago, Houston, New York and Calabasas. On October 23, 1998, Underwriters acquired Venton Holdings Ltd. ("VHL") for approximately $181.1 million in cash and Alleghany common stock valued at approximately $8.9 million. VHL, through its subsidiaries, is a managing agent and provider of corporate capital for syndicates in the Lloyd's insurance market, and also has operations in Bermuda. In connection with the purchase, Underwriters established a letter of credit facility in the amount of $225 million to support the corporate capital provided by VHL to the Lloyd's syndicates that it manages. The acquisition of VHL and its subsidiaries is expected to enhance the competitive position of Underwriters Re Group by providing access to the Lloyd's and Bermuda markets, as well as diversifying the group's growth and earnings prospects outside the United States. In October 1993, Alleghany acquired approximately 93 percent of URG, and thereafter contributed about $51 million in 1993 and $100 million in 1994 to the capital of Underwriters Re Group. The capital contribution in 1994 was in the form of about 6 million shares of Santa Fe common stock, which was subsequently converted into approximately 7.4 million shares of BNSF common stock. On October 3, 1997, Alleghany exchanged shares of Alleghany Common Stock for shares of common stock of URG held by ten employees of URG and representing 2.7 percent of the outstanding common stock of URG. Alleghany now owns all of the issued and outstanding shares of common stock of URG. As of December 31, 1998, Underwriters' statutory surplus was $602.6 million. Reinsurance Since 1995, Underwriters has been rated "A+ (Superior)" by A.M. Best Company, Inc., an independent insurance industry rating organization ("Best's"). Best's publications indicate that such rating is assigned to companies which Best's believes have achieved superior overall performance and have a very strong ability to meet their obligations over a long period of time. According to Best's, the rating reflects Underwriters' consistently strong operating results, solid capitalization and strong presence in the broker market. Additionally, since 1995 Underwriters has been rated "AA- (Excellent)" by Standard & Poor's. Standard & Poor's publications indicate that this rating is assigned to companies with strong capacity to meet policyholders' obligations under a variety of economic and underwriting conditions. Primary Insurance Underwriters Re Group established Commercial Underwriters Insurance Company ("CUIC") at the end of 1992, acquired Underwriters Insurance Company ("UIC"), an inactive Nebraska insurance company in 1994, and established Newmarket Underwriters Insurance Company ("NUIC") in 1996 to capitalize on advantageous market conditions for certain primary insurance business lines. In connection with the acquisition of UIC, Underwriters was indemnified for all losses that occurred prior to the acquisition date. CUIC, UIC and NUIC are rated "A+ (Superior)" by Best's because Underwriters reinsures a significant share of their business. CUIC is a California property and casualty insurance company that focuses on specialized primary commercial insurance, individual commercial excess liability insurance, commercial surplus lines, and specialized personal lines liability insurance, including excess private passenger liability and comprehensive personal liability insurance. CUIC conducts its business in California and New York on an admitted basis and in 45 other states, Guam and the District of Columbia on an approved nonadmitted basis. In 1998, CUIC generated $82.9 million in direct written premiums and retained net written premiums of $29.8 million representing 6.8 percent of Underwriters Re Group's consolidated net written premiums in 1998. 3 5 UIC has licenses to write primary property and casualty insurance in 48 states and the District of Columbia and focuses on marine insurance, primary liability policies for medium- to large-sized businesses and certain professional liability coverages. In 1998, UIC generated $57.2 million in direct written premiums and retained net written premiums of $21.0 million, constituting 4.8 percent of Underwriters Re Group's consolidated net written premiums in 1998. NUIC is licensed to write property and casualty insurance in New Hampshire, and is qualified on a non-admitted basis in California and New York. Its focus is on general liability policies for medium to large-sized businesses. In 1998, NUIC generated $8.6 million in direct written premiums and retained net written premiums of $3.1 million, constituting 0.7 percent of Underwriters Re Group's consolidated net written premiums in 1998. The Center Insurance Services, Inc. ("The Center"), was established in 1995 as a wholly owned subsidiary of URG to capitalize on the considerable expertise of certain individuals in handling specialized classes of primary business. The Center's four subsidiaries act as agents and underwrite business on behalf of CUIC, UIC, NUIC and at present, to a lesser extent, non-affiliated insurers. Business underwritten by The Center includes marine insurance, products liability insurance, general liability insurance for certain insureds with self-insured retentions and vehicle service contracts. During 1998, approximately $79.8 million of gross written premiums was underwritten by The Center. The Center's subsidiaries have offices in Kennesaw and Roswell, Georgia, New York, New York and St. Louis, Missouri. International Representative offices were established in Barbados at the end of 1995 and in London, England in 1996 to capitalize on international underwriting opportunities. In addition, in 1995, Underwriters Re Group made a strategic investment in a reinsurance company in Barbados. Venton Holdings Ltd. Underwriters acquired VHL in October 1998. Due to the complexity of converting Lloyd's accounting information to U.S. accounting principles, the consolidated financial statements of Alleghany incorporated by reference in Item 8 of this Report do not include the accounts of VHL, except that Alleghany's consolidated balance sheet as of December 31, 1998 includes VHL's accounts as of September 30, 1998, which date is being used as the opening balance sheet date. VHL's accounts will be included in the consolidated financial statements of Alleghany on a one-quarter lag. Therefore, VHL's results from the date of purchase through December 31, 1998 will be included in Alleghany's consolidated financial statements for the quarter ending March 31, 1999. VHL participates in the Lloyd's market through its subsidiaries Venton Underwriting Agencies Ltd. ("Venton"), and Venton Underwriting Ltd. ("VUL"). Venton is a managing agency for three Lloyd's syndicates: Syndicate 376 (non-marine), Syndicate 1183 (marine) and Syndicate 1207 (non-marine). In 1998, the three syndicates had available capacity of approximately L271 million (equivalent to a maximum gross premiums written of $580 million); such capacity increased to L301.8 million for 1999. Venton is currently the thirteenth-largest managing agency in Lloyd's, representing about 2.9 percent of the market's 1999 capacity. VUL and two affiliated companies are corporate names at Lloyd's which provide capital to the syndicates managed by Venton, including, on an exclusive basis, to Syndicate 1207. They provided approximately L169.1 million, or 62.3 percent, of the available capacity of the Venton-managed syndicates for 1998, and approximately L234.4 million, or 77.7 percent, of such syndicates' available capacity for 1999, the remainder in each year being supplied by non-affiliated persons. Corporate capital was first admitted by Lloyd's in 1994 in response to shortages of capacity due to poor results in the Lloyd's market prior to 1993. Since then, Venton's strategy has been to increase its proportion of corporate capital. The following discussion relates to the Venton-managed syndicates in general, including the participation therein by VUL and its two affiliated corporate capital providers. Approximately two-thirds of Venton's 1998 gross premiums written were generated by its primary insurance operations, with reinsurance comprising the remaining one-third. Venton's insurance and reinsur- 4 6 ance operations focus on specialty commercial lines that Venton believes provide opportunities for strong profitability. Through the syndicates it manages, Venton underwrites risks across diverse commercial classes, including property (marine and non-marine) and casualty (such as financial institution and directors and officers liability insurance), at varying risk layers from primary coverage to high layer excess of loss. The majority of Venton's casualty business is on a claims-made basis. Venton's risks are located around the world, primarily in the United States, the United Kingdom, Western Europe, Canada and Australia. About half of Venton's business in the 1998 year of account involved insureds located in the United States and risks located in the United States of non-U.S. insureds. In general, Lloyd's syndicates, including those managed by Venton, may only access business through Lloyd's brokers. The Venton-managed syndicates have strong and long-standing relationships with the principal brokers in the Lloyd's market. Reflecting the typical level of concentration, Aon, J&H Marsh & McLennan and Willis Faber produced a substantial portion of the business of the Venton-managed syndicates done in the Lloyd's market. Without the replacement of business from other brokers, the termination of relationships with any one of these brokers could have a material adverse effect on Venton's results of operations. No such terminations are anticipated. For certain lines of business, it is possible to utilize a service company to access and service business from both Lloyd's and non-Lloyd's brokers. Venton manages two such service companies, Yachtsure Ltd. and Venton Risk Services Ltd. These companies deal predominantly with Lloyd's brokers but also access business from non-Lloyd's brokers in the U.K. and overseas. The Venton-managed syndicates establish reserves for the estimated unpaid liability for losses and loss expenses for claims made under the terms of its policies and agreements. Such reserves are determined by Venton claims personnel based upon a variety of factors, including an evaluation of the nature of the claim, the coverage afforded by the policy, the jurisdiction in which the claim is brought and general economic and social conditions. Additional reserves are established on an aggregate basis to provide for losses incurred but not yet reported. Venton engages an independent actuarial firm to review the reserving methods and assumptions of the syndicates. Although such reserves are necessarily based on estimates and therefore the ultimate losses and loss expenses may differ from such reserves, the management of Venton believes that reserves for losses at September 30, 1998 are adequate. The investment policy of the Venton-managed syndicates is to maximize overall return, in accordance with guidelines established by Lloyd's and Underwriters. With rare exception, Lloyd's syndicates are required to provide profit distributions to members (both individual names and corporate capital providers) annually upon the close of each three-year underwriting cycle, and portfolio managers engaged by Venton to manage the syndicates' portfolios have adopted a conservative approach to investments. Investments, which are held in trust at Lloyd's, consist mainly of cash and cash equivalents and bonds issued by governments or public authorities; these investments constituted about 90 percent of the syndicates' total investment portfolio as of September 30, 1998. The Venton-managed syndicates compete for business with other Lloyd's syndicates and major international insurers and reinsurers. On international risks, competition may also come from the domestic insurers in the country of origin of the insured. Competition is based on many factors, including underwriting expertise, premiums charged and overall financial strength. Venton's operations in the United Kingdom are subject to regulation by Lloyd's. Lloyd's Regulatory Division establishes rules and regulations that must be adhered to by all businesses in the Lloyd's market. These cover such areas as capital adequacy, related party transactions, ownership and control, standards of conduct and conflicts of interest. The prior approval of Lloyd's was required for the acquisition of Venton by Underwriters. Lloyd's is at present primarily self-governing, subject to overall supervision by the Treasury in the U.K.; however, the U.K. government has announced the establishment of the Financial Services Authority as a single independent regulator that will supervise the securities, bank and insurance industries, including Lloyd's. The framework for such supervision is currently under discussion by relevant authorities in the U.K. 5 7 VHL and its subsidiaries employed 94 persons as of December 31, 1998. 6 8 Other than as specifically noted, the following information relating to Underwriters Re Group and its subsidiaries does not include information relating to VHL and its subsidiaries. GENERAL DESCRIPTION OF REINSURANCE Reinsurance is an agreement between two insurance companies in which one company, the "reinsurer," agrees to indemnify the other company, the "cedent" or "ceding company," for all or part of the insurance risks underwritten by the ceding company. Reinsurance provides ceding companies with three major benefits: (i) it reduces net liability on individual risks, (ii) it protects against catastrophic losses, and (iii) it helps to maintain acceptable surplus and reserve ratios. In addition, reinsurance provides the ceding company with additional underwriting capacity. Ordinarily, a ceding company will enter into a reinsurance agreement only if it will receive credit for the reinsurance ceded on its statutory financial statements. In general, such credit is allowed if the reinsurer meets the licensing and accreditation requirements of the ceding company's domicile, or the reinsurance obligations are collateralized by letters of credit, funds withheld or pledged trust agreements. In general, property insurance protects the insured against financial loss arising out of loss of property or its use caused by an insured peril. Casualty insurance protects the insured against financial loss arising out of the insured's obligation to others for loss or damage to persons or property. While both property and casualty reinsurance may involve a high degree of loss volatility, property losses are generally reported within a relatively short time period after the event; in contrast, there tends to be a significant time lag in the reporting and payment of casualty claims. Consequently, an insurer generally knows of the losses associated with property risks in a shorter time than losses associated with casualty risks. Underwriters provides reinsurance on both a treaty and a facultative basis. Treaty reinsurance is based on a standing arrangement (a "treaty"), usually for a year, between a cedent and a reinsurer for the cession and assumption of a certain class of risk specified in such treaty. Under most treaties, the cedent is obligated to offer, and the reinsurer is obligated to accept, a specified portion of a class of risk underwritten by the cedent. Reinsurers assume classes of risk under treaties without having reviewed each individual risk. Alternatively, facultative certificate reinsurance is the reinsurance of individual risks. Unlike treaty reinsurance, in the case of facultative reinsurance contracts, a reinsurer separately rates and underwrites each individual risk and is free to accept or reject each risk offered by the cedent. Facultative reinsurance is normally purchased by insurance companies for risks not otherwise covered or covered only in part by their reinsurance treaties, and for unusual risks. Underwriters writes treaty and facultative reinsurance on both a pro rata and excess of loss basis. Under pro rata reinsurance contracts, the ceding company and reinsurer share the premiums as well as the losses and expenses of any single risk, or an entire group of risks, based upon contractually defined rates. Under excess of loss reinsurance contracts, the reinsurer agrees to reimburse the ceding company for all losses in excess of a predetermined amount (commonly referred to as the cedent's "retention"), generally up to a predetermined limit. Excess of loss reinsurance is often written in "layers" or levels, with one reinsurer assuming the risk of loss on the primary insurance policy in excess of the cedent's retention level up to a predetermined level, above which the risk of loss is assumed by another reinsurer or reverts to the cedent. Excess of loss reinsurance allows the reinsurer to better control the relationship of the premium charged to the related exposure assumed by it. The reinsurer assuming the risk immediately above the cedent's retention level is said to write "working layer" or "low layer" excess of loss reinsurance. A loss that reaches just beyond a cedent's retention level would create a loss for such cedent's low layer reinsurers but would not adversely affect the reinsurers on higher layers. MARKETING Reinsurance An important element of Underwriters' strategy is to respond quickly to market opportunities (such as increased demand or more favorable pricing) by adjusting the mix of property and casualty business it writes. In recent years, Underwriters has taken advantage of such market opportunities by increasing its writings of 6 9 marine and aviation, property catastrophe, clash, homeowners and workers compensation coverages and certain excess and surplus lines. Underwriters concentrates on coverages which require a relatively high degree of underwriting or actuarial expertise, including certain excess and surplus lines programs, umbrella liability and directors and officers' liability. Such expertise is also required for certain business that Underwriters has developed in nontraditional areas, such as providing capital in combination with reinsurance and providing reinsurance to alternative risk markets, including risk retention groups, captives, underwriting syndicates and self-insured funds and associations. Nontraditional reinsurance may also refer to reinsurance contracts which limit exposure to loss through the use of aggregate loss limits, loss ratio caps or other loss containment features. Underwriters believes that coverages which require high levels of underwriting or actuarial expertise offer greater potential for favorable results than more general coverages, based on current market conditions. In 1998, Underwriters wrote 58% of its treaty business and all of its facultative certificate business through reinsurance brokers. The remaining treaty business was principally reinsurance of portions of the primary insurance underwritten by subsidiaries of Underwriters. By working primarily through brokers, Underwriters does not need to maintain a large sales organization which, during periods of reduced premium volume, could result in significant non-productive overhead. In addition, management believes that submissions from the broker market, including those for certain targeted specialty coverages, are more numerous and diverse than would be available through a salaried sales organization. Consequently, Underwriters is able to exercise greater selectivity than would usually be possible in dealing directly with ceding companies. As a result of certain of Underwriters' subsidiaries placing reinsurance on their primary business through reinsurance brokers, management believes that such brokers may also bring more reinsurance opportunities to Underwriters. Reinsurance brokers regularly approach Underwriters for quotations on reinsurance being placed on behalf of ceding companies. In 1998, Underwriters paid brokers $10.0 million in commissions, which represents approximately 2.0% of its gross written premiums of $505.9 million. Underwriters' five leading brokers, accounted for 51% of Underwriters' gross written premiums in 1998. Over this period, Guy Carpenter & Co., Jardin Thompson Graham Ltd. and E.W. Blanch Company accounted for 14.6%, 11.6% and 10.9% of such premiums, respectively, and no other broker accounted for more than 10% of such premiums. The brokers that account for relatively large percentages of gross written premiums tend to vary from year to year. Management does not believe that the termination of its business with any one broker would have a material effect on Underwriters Re Group's financial condition or results of operations. A significant percentage of Underwriters' gross written premiums are generally obtained from a relatively small number of ceding companies. In 1998, approximately 27% of gross written premiums were obtained from Underwriters' ten largest unaffiliated ceding companies. No unaffiliated ceding company accounted for more than 10% of such premiums. The ceding companies that account for relatively large percentages of gross written premiums tend to vary from year to year. Management does not believe that the loss of any one ceding company account would have a material effect on Underwriters Re Group's financial condition or results of operations. Primary Insurance Insurance is purchased from the primary insurance companies of Underwriters Re Group through retail and wholesale agents and brokers. These professional intermediaries are acquainted with the product lines and custom coverage capabilities of Underwriters Re Group's primary insurance companies, which generally concentrate on hard to place risks and markets neglected by the industry. The custom capabilities offered include access to nonadmitted companies that operate under Underwriters Re Group and carry Underwriters' Best's rating. 7 10 UNDERWRITING OPERATIONS Reinsurance Underwriters maintains a disciplined underwriting program with a focus on generating profitable business rather than on increasing market share. Underwriters has maintained a defensive underwriting posture by reducing writings in lines of business that offer inadequate contract terms. Another factor supporting Underwriters' underwriting discipline is its focus on low level attachment points (i.e., dollar-levels at which risk is assumed). While such layers are generally characterized by greater loss frequency, they are also characterized by lower loss severity and quicker loss settlement than layers with higher attachment points. Management believes that these factors result in greater predictability of losses, which improves Underwriters' ability to analyze its exposure on each contract and to price such exposure appropriately. In addition, Underwriters seeks to serve as lead or co-lead underwriter on its treaties. Management believes that, as lead or co-lead underwriter, Underwriters is able to influence more effectively the pricing and terms of the treaties into which it enters and thereby achieve better underwriting results. During 1998, Underwriters acted as lead or co-lead underwriter on a majority of its treaty business. Treaty reinsurance generated approximately $378 million, or 99%, of Underwriters' net written premiums in 1998. Facultative certificate reinsurance is no longer a significant source of premiums. Casualty lines represented approximately 65% of Underwriters Re Group's net written premiums, with the remainder represented by property lines. Reinsurance written on an excess of loss basis represented approximately 50% of Underwriters' net reinsurance written premiums, with reinsurance written on a pro rata basis representing the balance. In 1998, Underwriters Re Group's net written premiums increased $24.0 million, or 5.8%, from 1997. Management believes that the increase in such premiums is attributable primarily to growth in Underwriters Re Group's primary insurance operations. Underwriters generally wrote up to $2.0 million per reinsurance risk in 1998 on a net basis. In the case of reinsurance of certain clash coverage, Underwriters has written up to $2.5 million on a net basis and in limited circumstances has accepted more. The largest net risk assumed in 1998 was $13.3 million. Primary Insurance Underwriters Re Group's underwriting strategy is to identify insurance opportunities that can be profitably underwritten. Such business is generally in less competitive segments of the overall insurance marketplace because they frequently require a higher level of underwriting expertise or are not viewed as acceptable in conventional markets for some other reason. Many of the classes and risks underwritten are in otherwise normally accepted categories but are viewed as nonstandard due to past loss history. Business written that is viewed as requiring special expertise would include marine insurance, professional liability and errors and omissions insurance. Risks are underwritten by employees of the primary companies and by both affiliated and unaffiliated underwriting agents. Underwriters Re Group wrote up to $1.0 million per primary insurance risk in 1998 on a net basis. RETROCESSIONAL AND REINSURANCE ARRANGEMENTS A reinsurer often reinsures some of its risk with other reinsurers ("retrocessionaires") pursuant to retrocessional agreements, and pays such retrocessionaires a portion of the premiums it receives. Reinsurance companies enter into retrocessional agreements for the same reasons that primary insurers purchase reinsurance. Underwriters has retrocessional agreements with a number of domestic and international reinsurance companies. In the event that a retrocessionaire is unable to meet its obligations assumed under the retrocessional agreement, Underwriters remains liable to its ceding companies for the portion reinsured. Consequently, the most important factors in Underwriters' selection of retrocessionaires are financial strength and stability. 8 11 Underwriters carefully evaluates potential retrocessionaires, which must meet the approval of several members of senior management before being engaged. Once engaged, Underwriters monitors the financial condition of its retrocessionaires and takes appropriate actions to eliminate or minimize bad debt exposure. Generally, Underwriters requires that unpaid losses and loss adjustment expenses for non-admitted reinsurers that are not regulated by domestic insurance regulatory authorities be collateralized by letters of credit, funds withheld or pledged trust agreements. Additionally, commutations may be taken to reduce or eliminate credit exposure when necessary. Although there can be no assurance that such will be the case in future years, Underwriters' write-offs for unrecoverable reinsurance were negligible in 1998 and 1997. As of December 31, 1998, Underwriters had an allowance for estimated unrecoverable reinsurance of $3.4 million. Underwriters currently has reinsurance contracts in force which cede to retrocessionaires risks in excess of Underwriters' net risk retention. Underwriters cedes up to $1.5 million per casualty facultative risk and up to $1.1 million per property facultative risk. Underwriters also has an aggregate reinsurance contract to cover losses up to $125.0 million incurred during the period July 1, 1998 through June 30, 1999 in excess of a 98.2% net loss and loss adjustment expense ratio. Such net loss ratio is calculated by dividing losses by premiums net of commissions and brokerage. The contract covers essentially all lines of business written by Underwriters; however, property catastrophe losses are subject to a sublimit of $100.0 million. Upon its expiration, management expects to renew this contract or to enter into a new contract providing similar coverage. In addition, Underwriters from time to time purchases retrocessional reinsurance in varying amounts for specific assumed treaties. Underwriters has two reinsurance contracts with Continental Casualty Company (the "Continental Contracts") that provide coverage for pre-1987 business up to an aggregate limit of $200.0 million. Underwriters received payments under these contracts totaling $23.7 million in 1997 and $22.1 million in 1998, reducing the reinsurance receivable attributable to such contracts from $87.8 million at year-end 1997 to $65.7 million at year-end 1998. Such receivable is secured by a trust fund dedicated solely to payments under the Continental Contracts. As of December 31, 1998, Underwriters had reported reinsurance receivables of $491.2 million through retrocessional agreements, including $65.7 million of reinsurance receivables under the Continental Contracts, which was fully secured as described above, and $218 million due from another reinsurer, 98.7 percent of which was secured with a combination of letters of credit and funds withheld. OUTSTANDING LOSSES AND LOSS ADJUSTMENT EXPENSES In many cases, significant periods of time may elapse between the occurrence of an insured loss, the reporting of such loss to the insurer and the reinsurer, the insurer's payment of such loss and the subsequent payment by the reinsurer. To recognize liabilities for unpaid losses, insurers and reinsurers establish "reserves." These reserves are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred, including events which have not been reported to the insurer. When a reinsurance claim is reported by the ceding company, Underwriters establishes a "case" reserve for the estimated amount of Underwriters' ultimate payment. Such reserves are based upon the amounts recommended by the ceding company and are often supplemented by additional amounts as deemed necessary by Underwriters after Underwriters has evaluated such claim on the basis of numerous factors, including coverage, liability, severity of injury or damage, jurisdiction and ability of the ceding company to evaluate and handle the claim properly. In many cases Underwriters establishes case reserves even if the ceding company believes that Underwriters will have no ultimate liability. Underwriters always establishes a case reserve in an amount at least equal to that recommended by the ceding company. Case reserves are periodically adjusted by Underwriters based on its evaluation of subsequent reports from and audits of the ceding companies. When a primary claim is reported, Underwriters Re Group personnel establish a "case" reserve based on evaluation of the claim and estimation of the ultimate payment amount. All primary claims are supervised by Underwriters Re Group personnel who at times may engage outside counsel or adjusting firms, if necessary. 9 12 Additional reserves are established on an aggregate basis to provide for losses incurred but not yet reported ("IBNR") to the reinsurer and to supplement the overall adequacy of reported case reserves and estimated expenses of settling such claims, including legal and other fees and general expenses of administering the claims adjustment process. Underwriters Re Group establishes IBNR reserves by using accepted loss reserving standards and principles to estimate the ultimate liability for LAE. The process implicitly recognizes the impact of inflation and other factors that affect claims reporting by taking into account changes in historic loss reporting patterns and perceived probable trends. Underwriters Re Group reviews its aggregate loss reserves at least twice each year. Between the semi-annual reviews, Underwriters Re Group updates its loss reserves by applying the loss ratios determined in the previous review to earned premiums to date, less incurred losses reported. Underwriters Re Group does not discount its reserves for anticipated investment income. There are inherent uncertainties in estimating reserves due primarily to the significant periods of time that may elapse between occurrence of an insured or reinsured loss and reporting and ultimate settlement of such loss, the diversity of development patterns among different lines of business and types of reinsurance, and the necessary reliance on the ceding company for information regarding reinsurance claims. Actual losses and loss expenses may deviate, perhaps substantially, from reserves in Underwriters Re Group financial statements, which could have a material adverse effect on Underwriters Re Group financial condition and results of operations. Based on current information, management believes reserves for losses and loss expenses at December 31, 1998 are adequate. Asbestos and Environmental Impairment Claims Reserves Underwriters' reserve for losses and loss expenses includes amounts for various liability coverages related to asbestos and environmental impairment claims that arose from certain general liability and commercial multiple-peril coverages. Restrictive asbestos and environmental impairment exclusions were introduced in late 1986 on both primary and reinsurance contracts, significantly reducing these exposures for accidents occurring after 1986. Reserves for asbestos and environmental impairment claims cannot be estimated with traditional loss reserving techniques because of uncertainties that are greater than those associated with other types of claims. Factors contributing to those uncertainties include a lack of historical data, the significant period of time that has elapsed between the occurrence of the loss and the reporting of that loss to the ceding company and the reinsurer, uncertainty as to the number and identity of insureds with potential exposure to such risks, unresolved legal issues regarding policy coverage, and the extent and timing of any such contractual liability. Such uncertainties are not likely to be resolved in the near future. As with all reinsurance claims, Underwriters establishes case reserves for both asbestos and environmental impairment excess of loss reinsurance claims by applying reinsurance contract terms to losses reported by ceding companies, and analyzing from the first dollar of loss incurred by the primary insurer. Additionally, ceding companies often report potential losses on a precautionary basis (a "precautionary notice") to protect their rights under reinsurance contracts, which generally call for prompt notice to the reinsurer. Ceding companies, at the time they report such potential losses, advise Underwriters of the ceding companies' current estimate of the amount of such loss. Underwriters reviews each of these precautionary notices and, based upon current information, assesses the likelihood of loss to Underwriters. Such assessment is one of the factors used in determining the adequacy of IBNR reserves. For asbestos claims, Underwriters closely reviews precautionary notices which concern any named insured previously linked to large asbestos exposure (a "target defendant"). If the named insured is a "target defendant," Underwriters assumes there is a probability of loss even if the named ceding company has not itself reported reserves. IBNR reserves are recorded based on this review, as well as an additional subjective evaluation of the aggregate reported losses (approximately $2.9 million per year) for the last three years. The per year figures are net of reinsurance, including the Continental Contracts. For environmental impairment claims, Underwriters establishes case reserves and reviews precautionary notices as described above. Ultimate environmental impairment claims exposure is especially uncertain because of the problematic apportionment of clean-up costs under federal and state laws, the uncertain enforceability of contract exclusions and the lack of specific "target defendants." IBNR reserves are recorded 10 13 based on Underwriters' assessment of precautionary notices and a review of aggregate reported losses (approximately $1.5 million per year) for the last three years. The per year figures are net of reinsurance, including the Continental Contracts. During the three years ended December 31, 1998, the average net loss payment per claim (open and settled) for asbestos and environmental impairment exposures (excluding cessions to the Continental Contracts) was $17,250 and $33,300, respectively, and the highest paid loss was $0.7 million for an asbestos claim and $1.0 million for an environmental impairment claim, in each case net of ceded reinsurance (excluding cessions to the Continental Contracts). All loss payments for asbestos and environmental impairment exposures for the last three years have been recovered through cessions to the Continental Contracts. Most claims paid to date have been paid under contracts with varying levels of retention by the ceding company or insurer. Although the range of losses paid by Underwriters has been wide, most losses paid have involved dollar amounts at the lower end of such range. As of December 31, 1998, Underwriters' case and IBNR reserves (net of reinsurance, including cessions to the Continental Contracts) totaled approximately $23.0 million for asbestos liabilities, which includes reserves for approximately 694 open claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. As of December 31, 1998, Underwriters' case and IBNR reserves (net of reinsurance, including cessions to the Continental Contracts) totaled about $24.0 million for environmental impairment claims, which includes reserves for approximately 438 open claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. Additionally, ceding companies have submitted 1,591 precautionary notices for asbestos claims and 4,530 precautionary notices for environmental impairment claims to Underwriters; however, based on information provided by the ceding companies and Underwriters' assessment of such claims, Underwriters does not currently expect the losses with respect to such claims to grow large enough to reach Underwriters' layer of reinsurance coverage. The reconciliation of the beginning and ending reserves for unpaid losses and LAE related to asbestos and environmental impairment claims for the last three years (net of cessions to the Continental Contracts, but excluding an additional $13.9 million provision for such claims, discussed in the text following the tables), is shown below (dollars in thousands): RECONCILIATION OF ASBESTOS-RELATED CLAIMS RESERVE FOR LOSSES AND LAE
1998 1997 1996 ------- ------- ------- Reserve, net of reinsurance recoverables, as of January 1........................................... $21,172 $17,494 $14,494 Incurred loss, net of reinsurance..................... 1,872 3,678 3,000 Paid loss, net of reinsurance......................... 0 0 0 ------- ------- ------- Reserve, net of reinsurance recoverables, as of December 31......................................... 23,044 21,172 17,494 Reinsurance recoverables, as of December 31........... 15,746 14,726 15,176 ------- ------- ------- Reserve, gross of reinsurance recoverables, as of December 31......................................... $38,790 $35,898 $32,670 ======= ======= ======= Type of reserve, net of reinsurance recoverables: Case................................................ $ 3,544 $ 3,172 $ 4,494 IBNR................................................ 19,500 18,000 13,000 ------- ------- ------- Total................................................. $23,044 $21,172 $17,494 ======= ======= =======
11 14 RECONCILIATION OF ENVIRONMENTAL IMPAIRMENT CLAIMS RESERVE FOR LOSSES AND LAE
1998 1997 1996 ------- ------- ------- Reserve, net of reinsurance recoverables, as of January 1........................................... $23,922 $22,600 $19,600 Incurred loss, net of reinsurance..................... 28 1,322 3,000 Paid loss, net of reinsurance......................... 0 0 0 ------- ------- ------- Reserve, net of reinsurance recoverables, as of December 31......................................... 23,950 23,922 22,600 Reinsurance recoverables, as of December 31........... 4,222 4,640 4,939 ------- ------- ------- Reserve, gross of reinsurance recoverables, as of December 31......................................... $28,172 $28,562 $27,539 ======= ======= ======= Type of reserve, net of reinsurance recoverables: Case................................................ $ 9,950 $10,922 $ 9,600 IBNR................................................ 14,000 13,000 13,000 ------- ------- ------- Total................................................. $23,950 $23,922 $22,600 ======= ======= =======
Increases to asbestos and environmental impairment claims reserves, if any, may be covered to varying degrees by Underwriters' existing reinsurance contracts with its retrocessionaires. In addition to case and IBNR reserves for asbestos and environmental impairment claims reported in the tables above, Underwriters carries an additional reserve for such exposures in its financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). The amount of such reserve was $13.9 million as of December 31, 1998, compared with $18.9 million as of December 31, 1997. While there can be no assurance that such total reserves will be adequate, management believes that Underwriters' total asbestos and environmental impairment reserves, taking into consideration the additional GAAP reserves, are a reasonable provision for such claims. Changes in Historical Net Loss and LAE Reserves The following table shows changes in historical net loss and LAE reserves for Underwriters Re Group for each year since 1988. Reported reserve development is derived primarily from information included in statutory financial statements of Underwriters, CUIC, UIC and NUIC. The first line of the upper portion of the table shows the net reserves at December 31 of each of the indicated years, representing the estimated amounts of net outstanding losses and LAE for claims arising during that year and in all prior years that are unpaid, including losses that have been incurred but not yet reported to Underwriters Re Group. For the year ended December 31, 1998, the first line also includes the loss reserves associated with the corporate capital provided by VUL and two affiliated companies to the Venton-managed syndicates at Lloyd's. The upper (paid) portion of the table shows the cumulative net amounts paid as of December 31 of successive years with respect to the net reserve liability for each year. The lower portion of the table shows the re-estimated amount of the previously recorded net reserves for each year based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about claims for individual years. In evaluating the information in the table, it should be noted that a reserve amount reported in any period includes the effect of any subsequent change in such reserve amount. For example, if a loss was first reserved in 1988 at $100,000 and was determined in 1991 to be $150,000, the $50,000 deficiency would be included in the Cumulative Redundancy (Deficiency) row shown below for each of the years 1988 through 1990. Conditions and trends that have affected the development of the net reserve liability in the past may not necessarily occur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on this table. During the mid-1980s, the reinsurance industry, including Underwriters Re Group, experienced substantial underwriting losses. Such losses are reflected in the table, beginning with the comparatively high cumulative deficiencies in the year 1988. The cumulative reserve deficiencies in the years 1988 through 1992 primarily resulted from prior increases to asbestos and environmental impairment claims reserves and includes the $35.8 million reserve strengthening in 1993. 12 15 CHANGES IN HISTORICAL NET RESERVES FOR LOSSES AND LAE (IN MILLIONS)
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------- 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ----- ---- ---- ---- ---- ---- ---- ------ ------ ------ ------ Net liability as of the end of year....... $ 461 $453 $411 $411 $437 $509 $536 $ 628 $ 732 $ 784 $1,000 Cumulative amount of net liability paid as of: One year later.......................... $ 119 $137 $101 $ 84 $ 98 $112 $102 $ 117 $ 175 $ 134 -- Two years later......................... 242 227 173 161 178 189 167 214 247 -- -- Three years later....................... 306 285 239 214 236 236 220 256 -- -- -- Four years later........................ 348 342 274 254 266 265 252 -- -- -- -- Five years later........................ 394 370 294 276 287 285 -- -- -- -- -- Six years later......................... 414 384 311 287 301 -- -- -- -- -- -- Seven years later....................... 425 396 319 296 -- -- -- -- -- -- -- Eight years later....................... 434 403 326 -- -- -- -- -- -- -- -- Nine years later........................ 440 407 -- -- -- -- -- -- -- -- -- Ten years later......................... 440 -- -- -- -- -- -- -- -- -- -- Net liability re-estimated as of: One year later.......................... 454 457 414 412 483 516 539 629 727 782 -- Two years later......................... 457 460 421 455 487 518 538 622 724 -- -- Three years later....................... 462 474 465 460 491 523 531 620 -- -- -- Four years later........................ 492 520 472 469 496 519 530 -- -- -- -- Five years later........................ 538 528 485 469 493 519 -- -- -- -- -- Six years later......................... 548 545 483 468 498 -- -- -- -- -- -- Seven years later....................... 568 544 479 472 -- -- -- -- -- -- -- Eight years later....................... 567 541 485 -- -- -- -- -- -- -- -- Nine years later........................ 567 550 -- -- -- -- -- -- -- -- -- Ten years later......................... 573 -- -- -- -- -- -- -- -- -- -- Cumulative Redundancy (Deficiency)...... $(112) $(97) $(74) $(61) $(61) $(10) $ 6 $ 8 $ 8 $ 2 -- Gross Liability -- End of Year............ $861 $940 $1,014 $1,110 $1,159 $1,555 Reinsurance Recoverable................... 352 404 386 378 375 555 ---- ---- ------ ------ ------ Net Liability -- End of Year.............. $509 $536 $ 628 $ 732 $ 784 $1,000 ==== ==== ====== ====== ====== Gross Re-estimated Liability -- Latest.... $921 $934 $1,056 $1,165 $1,280 Re-estimated Recoverable -- Latest........ 402 404 436 441 498 ---- ---- ------ ------ Net Re-estimated Liability -- Latest...... $519 $530 $ 620 $ 724 $ 782 ==== ==== ====== ======
13 16 The reconciliation between the reserves reported in the annual statements filed with state insurance departments in accordance with statutory accounting practices ("SAP") and those reported in Underwriters Re Group's (including Venton) consolidated financial statements prepared in accordance with GAAP for the last three years is shown below (in thousands): RECONCILIATION OF RESERVES FOR LOSSES AND LAE FROM SAP BASIS TO GAAP BASIS
DECEMBER 31 -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Statutory Reserves............................. $ 866,647 $ 765,419 $ 705,106 Venton Reserves................................ 119,905 0 0 Additional Mass Action Reserves(1)............. 13,850 18,850 27,350 Reinsurance Recoverables....................... 554,416 374,801 377,564 ---------- ---------- ---------- GAAP Reserves.................................. $1,554,818 $1,159,070 $1,110,020 ========== ========== ==========
- --------------- (1) Amount represents additional reserves recorded by Underwriters in 1993 for probable asbestos-related and environmental impairment claims exposure. The reconciliation of reserves for Underwriters Re Group (including Venton) for the last three years on a GAAP basis is shown below (in thousands): RECONCILIATION OF RESERVES FOR LOSSES AND LAE
1998 1997 1996 ---------- ---------- ---------- Reserve, net of reinsurance recoverables, as of January 1.................................... $ 784,269 $ 732,456 $ 628,420 Incurred loss, net of reinsurance, related to: Current year................................. 290,513 267,530 242,332 Prior years.................................. (2,254) (5,702) 1,393 ---------- ---------- ---------- Total incurred loss, net of reinsurance........ 288,259 261,828 243,725 ---------- ---------- ---------- Paid loss, net of reinsurance, related to: Current year................................. (57,788) (35,033) (23,341) Prior years.................................. (134,243) (174,982) (116,348) ---------- ---------- ---------- Total paid loss, net of reinsurance............ (192,031) (210,015) (139,689) ---------- ---------- ---------- Venton reserves, net of reinsurance recoverables, as of September 30............. 119,905 0 0 Reserve, net of reinsurance recoverables, as of December 31.................................. 1,000,402 784,269 732,456 Reinsurance recoverables, as of December 31.... 554,416 374,801 377,564 ---------- ---------- ---------- Reserve, gross of reinsurance recoverables, as of December 31............................... $1,554,818 $1,159,070 $1,110,020 ========== ========== ==========
INVESTMENT OPERATIONS Investments of Underwriters Re Group must comply with the insurance laws of New Hampshire, California and Nebraska, the domiciliary states of Underwriters and NUIC, CUIC, and UIC, respectively, and the other states in which they are licensed. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. 14 17 Underwriters Re Group's investment strategy is to match the average duration of its high-quality diversified fixed maturity portfolio to the average adjusted duration of its liabilities and to provide sufficient cash flow to meet its obligations while maximizing its after-tax rate of return. The average adjusted duration of liabilities is estimated by adjusting the average duration of liabilities to reflect anticipated cash flows from writings of future business. Underwriters Re Group's average adjusted duration of liabilities is currently estimated to be four years and is re-estimated from time to time. Securities may be sold from time to time to take advantage of investment opportunities created by changing interest rates, prepayments, tax and credit considerations or other factors. Underwriters Re Group's entire fixed maturity portfolio has been designed to enable management to react to such opportunities or to circumstances that could result in a mismatch between the duration of such portfolio assets and the duration of liabilities and, as such, is classified as available for sale. The following table reflects investment results for the fixed maturity portfolio of Underwriters Re Group for the years ended December 31, 1998, 1997 and 1996 (dollars in thousands): INVESTMENT RESULTS
NET NET PRE-TAX PRE-TAX AFTER-TAX REALIZED AVERAGE INVESTMENT INVESTMENT GAINS EFFECTIVE AFTER-TAX PERIOD INVESTMENTS(1) INCOME(2) INCOME(3) (LOSSES) YIELD(4) YIELD(5) - ------ --------------- ---------- ---------- -------- --------- --------- Year Ended December 31, 1998.................... $1,244,611 $74,895 $54,614 $ 844 6.0% 4.4% Year Ended December 31, 1997.................... $1,147,064 $69,229 $50,239 $(855) 6.0% 4.4% Year Ended December 31, 1996.................... $ 984,345 $59,542 $42,971 $ (94) 6.0% 4.4%
- --------------- (1) Average of amortized cost of fixed maturities at beginning and end of period, excluding operating cash. (2) After investment expenses, excluding realized gains or losses from sale of investments. (3) Net pre-tax investment income less appropriate income taxes. (4) Net pre-tax investment income for the period divided by average investments for the same period. (5) Net after-tax investment income for the period divided by average investments for the same period. As of December 31, 1998, the equity portfolio of Underwriters Re Group was carried at a market value of approximately $290.0 million with an original cost of approximately $135.5 million, and consisted primarily of approximately 7.4 million shares of BNSF common stock. The cost of equities listed in the table below, $109.7 million, includes the cost paid by Alleghany for the BNSF common stock prior to being contributed to Underwriters Re Group. In 1998, Underwriters Re Group realized a gain of $6.6 million related to the sale of equity securities and had dividend income of $6.6 million therefrom. 15 18 The following table summarizes the investments of Underwriters Re Group, excluding cash, as of December 31, 1998, with all investments carried at fair value (dollars in thousands):
INVESTMENTS ---------------------------------------------------- AMORTIZED COST OR COST FAIR VALUE ------------------------ ------------------------ AMOUNT PERCENTAGE AMOUNT PERCENTAGE ---------- ---------- ---------- ---------- Short-term investments....................... $ 108,388 8% $ 108,388 7% Corporate bonds.............................. 278,283 21 285,539 19 United States government and government agency bonds............................... 126,641 10 129,330 8 Mortgage- and asset-backed securities........ 275,308 21 284,155 19 Foreign bonds................................ 26,146 2 25,809 2 Redeemable and auction preferred stocks...... 21,618 2 22,243 1 Municipal bonds.............................. 371,371 28 383,253 25 Equity securities(1)......................... 109,643 8 290,029 19 ---------- --- ---------- --- Total.............................. $1,317,398 100% $1,528,746 100% ========== === ========== ===
- --------------- (1) Includes 7,424,469 shares of BNSF common stock at the original cost to Alleghany. The following table indicates the composition of the long-term fixed maturity portfolio by Moody's rating as of December 31, 1998 (dollars in thousands): LONG-TERM FIXED MATURITY PORTFOLIO BY MOODY'S RATING
FAIR VALUE PERCENTAGE ---------- ---------- Aaa.................................................. $ 567,843 50% Aa................................................... 184,426 16 A.................................................... 266,658 24 Baa.................................................. 82,865 7 Ba................................................... 21,155 2 Non-rated............................................ 7,382 1 ---------- --- Total...................................... $1,130,329 100% ========== ===
The following table indicates the composition of the long-term fixed maturity portfolio by years until contractual maturity as of December 31, 1998 (dollars in thousands): LONG-TERM FIXED MATURITY PORTFOLIO BY YEARS UNTIL MATURITY
FAIR VALUE PERCENTAGE ---------- ---------- One year or less..................................... $ 58,645 5% Over one through five years.......................... 335,358 30 Over five through ten years.......................... 327,901 29 Over ten years....................................... 124,270 11 Mortgage- and asset-backed securities................ 284,155 25 ---------- --- Total...................................... $1,130,329 100% ========== ===
COMPETITION Underwriters competes primarily in the United States reinsurance market with numerous domestic and foreign reinsurers, many of which have greater financial resources than Underwriters. Underwriters' competitors include independent reinsurance companies, subsidiaries or affiliates of worldwide insurance companies, 16 19 reinsurance departments of certain primary insurance companies and domestic, European and Asian underwriting syndicates. Competition in the types of reinsurance in which Underwriters is engaged is based on many factors, including the perceived overall financial strength of the reinsurer, premiums charged, contract terms and conditions, services offered, speed of claims payment, reputation and experience. Competition in the property and casualty reinsurance industry has historically been cyclical in nature. Typically, a cycle begins with attractive premium rates for reinsurance, which cause increased writing by existing reinsurers and the entrance into the market of new reinsurers. Competition within the market continues to grow, resulting in a decrease in premium rates. As the cycle continues, assuming loss experience is consistent, these declining premium rates eventually result in a period of underwriting losses. Such losses in turn cause reinsurers to slow or stop writing reinsurance or to withdraw from the market altogether, which results in decreased competition and a subsequent increase in premium rates. Management believes this competitive cycle, which may affect particular market segments at different times, is a critical factor affecting reinsurance profitability over time. There can be no assurance that historical trends in the property and casualty reinsurance industry will continue or that Underwriters will be able to accurately anticipate any such trends. To enhance Underwriters' financial strength, Alleghany, through URG, contributed approximately $51 million in cash and equity securities in 1993 and $100 million in equity securities in 1994 to the capital of Underwriters. Underwriters' enhanced financial strength has allowed it to benefit from the continuing trend toward consolidation in the domestic reinsurance market, resulting from the tendency of reinsurance buyers to purchase coverage from larger and more financially secure reinsurers. In 1996, URG issued $200 million principal amount of 7 7/8% Senior Notes due 2006. Of the net proceeds of the offering, $120 million was contributed to the capital of Underwriters, $50 million was used to repay indebtedness under URG's credit agreement and the remainder is being used for general corporate purposes. According to the Reinsurance Association of America, at December 31, 1998 there were 38 domestic professional reinsurers, and Underwriters was the nation's tenth-largest in terms of statutory surplus and thirteenth-largest in terms of net written premiums. The commercial property and casualty insurance industry is highly competitive on the basis of price and service. CUIC's, UIC's and NUIC's competitors include other primary insurers and new forms of insurance organizations such as alternative self-insurance mechanisms. Many such competitors have considerably greater financial resources, greater experience in the insurance industry and offer a broader line of insurance products than CUIC, UIC and NUIC. REGULATION Underwriters, CUIC, UIC and NUIC are subject to regulation and supervision by state insurance regulatory authorities under the insurance statutes and regulations of states in which they are incorporated (New Hampshire for Underwriters and NUIC, California for CUIC, and Nebraska for UIC). In addition, each of these companies is regulated in each jurisdiction in which it conducts business. Among other things, insurance statutes and regulations typically limit the amount of dividends that can be paid without prior regulatory notification and approval, impose restrictions on the amounts and types of investments that may be held, prescribe solvency standards that must be met and maintained, require filing of annual or other reports with respect to financial condition and other matters and provide for periodic company examinations. The terms and conditions of reinsurance agreements generally are not subject to regulation by any governmental authority with respect to rates or policy terms. These agreements contrast with primary insurance policies and agreements, the rates and policy terms of which are generally closely regulated by state insurance departments. As a practical matter, however, the rates charged by primary insurers have an effect on the rates that can be charged by reinsurers. Each of the operating subsidiaries of The Center is subject to regulation and supervision by state insurance regulators in the states in which its subsidiary is licensed as an insurance agency. Such regulations address the solicitation and effectuation of insurance in such states and impose certain requirements relating to, among other things, countersignatures, continuing education and maintenance of trust accounts. 17 20 State insurance holding company statutes provide a regulatory mechanism designed to protect the financial condition of domestic insurance companies operating as subsidiaries of holding companies. All holding company statutes require disclosure and, in some instances, prior approval of significant transactions between a domestic insurance company and its affiliates. Holding company statutes also may require, among other things, prior approval of any acquisition of control of a domestic insurance company. As an insurance holding company, Alleghany is subject to such regulations in New Hampshire, California and Nebraska. The acquisition of Underwriters, CUIC and UIC by Alleghany was subject to prior approval from the insurance regulatory authorities in the states in which such companies are incorporated. Alleghany and its other subsidiaries, however, generally are not otherwise subject to restrictions on their business activities due to their affiliation with Underwriters, CUIC, UIC and NUIC. Beginning with the 1994 year-end statutory financial statements, the insurance laws of New Hampshire, California and Nebraska imposed risk-based capital ("RBC") requirements on property and casualty insurers and reinsurers, based on a model adopted by the National Association of Insurance Commissioners. The RBC requirements attempt to assess a property and casualty company's statutory capital and surplus needs, taking into account the risk characteristics of the companies' investments and products, by measuring the following risks: (i) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing, (ii) declines in asset values arising from credit risks and (iii) declines in asset values arising from investment risks. The ratio of a company's total adjusted capital to its risk-based capital provides regulators with an early warning tool to identify weakly capitalized companies for purposes of initiating corrective action. At December 31, 1998, each of Underwriters, CUIC, UIC and NUIC had surplus well in excess of the risk-based capital thresholds that would require any corrective action. EMPLOYEES Underwriters Re Group employed 367 persons as of December 31, 1998. FINANCIAL SERVICES BUSINESS Alleghany Asset Management, organized as a Delaware corporation in 1995, conducts a financial services business through its subsidiaries, The Chicago Trust Company ("Chicago Trust"), a Chicago-based investment firm with trust powers, Montag & Caldwell, Inc. ("Montag & Caldwell"), an Atlanta-based investment counseling firm acquired in July 1994, and Chicago Deferred Exchange Corporation ("CDEC"), which facilitates certain tax-deferred property exchanges. In 1996, Chicago Trust acquired Security Trust Company ("Security Trust"), a California trust company, from a subsidiary of CT&T. Alleghany Asset Management and its subsidiaries, formerly a part of the financial services group of CT&T, were transferred to Alleghany in June 1998 and were not a part of the spin-off of CT&T. During 1998, Alleghany Asset Management expanded its product line by adding a small capitalization value equity product and acquiring a 40 percent interest in Veredus Asset Management LLC ("Veredus"), a Louisville, Kentucky based small capitalization growth equity manager with about $100 million in assets under management. In addition, Alleghany Asset Management entered into a definitive agreement to acquire Blairlogie Capital Management, an Edinburgh, Scotland based investment manager that manages approximately $800 million in assets, principally in non-U.S. equities. Blairlogie would provide Alleghany Asset Management with its first international investment manager. Alleghany Asset Management provides distribution and marketing services to its investment managers through the 401(k) services offered by Chicago Trust and the Alleghany Funds, a mutual funds family offering ten no-load mutual funds. Chicago Trust's full service 401(k) administration group provides trustee, plan design, investment management and other administrative services. Such services are marketed through internal sales forces in Chicago and Atlanta as well as consultants and brokerage sources. The Alleghany Funds are marketed primarily through registered investment advisers, broker-dealers and direct sales to institutional clients, as well as through intermediary services, including Schwab and Fidelity. 18 21 Montag & Caldwell Founded in 1945, Montag & Caldwell, one of the Southeast's oldest investment management firms, concentrates on managing large capitalization growth equity and balanced portfolios for institutional, mutual fund and high net worth clients. Montag & Caldwell believes that success in the institutional investment business is dependent upon a disciplined and consistently applied investment process translating into outstanding investment results. Montag & Caldwell's equity results have consistently placed the firm among the top money managers in its category. Montag & Caldwell targets separate accounts of $40 million and higher, accessed through independent consultants or direct calls to prospective clients. Its investment expertise is also available through the Alleghany Funds. Montag & Caldwell advises two of the Alleghany Funds' mutual funds. Chicago Trust Chicago Trust and its predecessors have managed assets for investors since 1887. Chicago Trust is an investment firm with full trust powers engaged in the following lines of business: institutional investment management, full service 401(k) administration, personal trust and investment services and administration of the Alleghany Funds. Chicago Trust specializes in fixed income and large capitalization equity money management for institutional clients. Chicago Trust's fixed income results have consistently placed Chicago Trust among the top money managers in its category. Chicago Trust markets its fixed income and equity products through pension consultants and directly to plan sponsors. Chicago Trust also advises seven of the Alleghany Funds' mutual funds. Chicago Trust's personal trust and investment services business serves the investment and estate planning needs of individuals and families, mainly in the metropolitan Chicago area. Chicago Trust believes that the business is well-positioned to benefit from growth in family wealth and the demographics of an aging baby boom generation. Chicago Trust's full service 401(k) business administers assets, approximately half of which are invested in the Alleghany Funds and collective funds managed by the subsidiaries of Alleghany Asset Management, and the remainder of which is invested in third-party managed funds. Alleghany Funds Alleghany Funds had approximately $3.4 billion in assets under management at December 31, 1998, compared with $1.9 billion at year-end 1997. Montag & Caldwell Growth Fund and The Chicago Trust Growth & Income Fund experienced the greatest increase in assets under management from year-end 1997 to 1998. The ten no-load mutual funds consist of five equity funds, two balanced funds, two fixed income funds and a money market fund. All of the funds are registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as investment companies. Each of the mutual funds is managed by one of Chicago Trust, Montag & Caldwell or Veredus pursuant to a management contract which is renewable annually by vote of either of such fund's board of trustees (including a majority of members who are not "interested persons" as defined under the 1940 Act) or such fund's shareholders. All management contracts terminate if assigned and may be terminated by either party without penalty on 60 days' written notice. The management contracts for the Alleghany Funds were all renewed for an additional year in 1998. Under these contracts, Chicago Trust, Montag & Caldwell and Veredus, respectively, is authorized in its discretion to buy and sell securities for the accounts of the Alleghany Funds, subject to certain limitations. To date, no management agreements of Alleghany Asset Management or any of its subsidiaries with any of the Alleghany Funds have been involuntarily terminated. As compensation for its management services, Chicago Trust, Montag & Caldwell and Veredus, respectively, receives management fees from the Alleghany Funds that range from 0% to 0.8% per year of average daily net assets depending on the mutual fund. For 1998 and 1997, Alleghany Asset Management 19 22 received revenues from management fees from the Alleghany Funds of approximately $17.3 million and $9.2 million, respectively. The assets of the Alleghany Funds are managed by the same investment professionals who manage Alleghany Asset Management's accounts of institutional and high net-worth individuals. Current information with respect to the Alleghany Funds can be found on its website, www.alleghanyfunds.com. CDEC and Security Trust CDEC was established in 1989 and facilitates, with the assistance of Chicago Trust, tax-deferred exchanges of like-kind property. In 1998, CDEC facilitated more than 2,200 exchanges. CDEC acts as a qualified intermediary, holding and investing the cash proceeds from the sale of property relinquished by a taxpayer in a qualified trust account, of which Chicago Trust acts as trustee, until replacement property is acquired. Security Trust provides trust, investment and tax-deferred property exchange services in California. MARKETING Growth in profitability of Alleghany Asset Management is largely dependent on growth in assets under management, which results from market appreciation of existing assets and new business (new clients and additional investments from existing clients). Approximately 85 percent of Alleghany Asset Management's assets under management are for institutional clients where competition is intense and success is driven by investment performance. Both Montag & Caldwell and Chicago Trust have strong investment records and have received high ratings in various consultant and mutual fund informational service data bases. The largest portion of the revenues of Alleghany Asset Management consists of advisory fees based primarily on the value of assets under management. Annual rates vary and typically decline as account size increases. Fees earned from the management of assets for institutional clients represented approximately 75% and 69% of the revenues of Alleghany Asset Management for 1998 and 1997, respectively. As of December 31, 1998, Alleghany Asset Management, through its subsidiaries, managed assets totaling about $35.6 billion. The separately managed accounts of Alleghany Asset Management are managed pursuant to advisory agreements between the client and Alleghany Asset Management. Such agreements are generally terminable on short notice. The trustees or corporate officials who control such accounts are usually free to change investment advisers without cumbersome legal procedures. None of the clients of Alleghany Asset Management accounted for 10 percent or more of the revenues of Alleghany Asset Management. Accordingly, the loss of any single client would not have a material adverse effect on the business of Alleghany Asset Management. The business of Alleghany Asset Management is not seasonal. INVESTMENT OPERATIONS Investments held by Chicago Trust and Security Trust must comply with the banking laws of the states of Illinois and California. These laws prescribe the kind, quality and concentration of investments which may be made by trust companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds and common stocks. Chicago Trust's and Security Trust's current investment strategy is to maximize after-tax investment income through a high-quality diversified investment portfolio, consisting primarily of taxable and tax-exempt fixed maturity securities, while maintaining an adequate level of liquidity. COMPETITION Alleghany Asset Management and its subsidiaries compete with national, regional and local providers of financial services, many of which have substantially greater capital and other resources and some of which offer a wider range of financial services. Competition is chiefly on the basis of service and investment performance. 20 23 REGULATION Acting as fiduciaries, Chicago Trust is regulated by the State of Illinois Office of Banks and Real Estate, and Security Trust is regulated by the California Department of Banking. Regulation covers such matters as the fiduciary's management capabilities, the investment of funds held for its own account, the soundness of its policies and procedures, the quality of the services it renders to the public and the effect of its trust activities on its financial soundness. Montag & Caldwell is a registered investment advisor and is therefore subject to regulation by the Securities and Exchange Commission, the state of Georgia, its domiciliary jurisdiction, and all other states in which it is licensed to act in the capacity of investment advisor. As registered investment companies, each of the funds of the Alleghany Funds is subject to extensive regulation by the Securities and Exchange Commission, governing all aspects of its operations. In addition, the Alleghany Funds are also subject to certain limited regulation by the securities regulators in all 50 states. EMPLOYEES At December 31, 1998, Alleghany Asset Management and its subsidiaries had approximately 315 employees, including full-time and part-time employees. INDUSTRIAL MINERALS BUSINESS On July 31, 1991, a holding company subsidiary of Alleghany acquired all of Manville Corporation's worldwide industrial minerals business, now conducted principally through World Minerals. The present chief executive officer of World Minerals currently owns an equity interest, including outstanding options, of about 6.6 percent of World Minerals' immediate parent company. World Minerals, headquartered in Santa Barbara, California, is principally engaged in the mining, production and sale of two industrial minerals, diatomite and perlite: Diatomite World Minerals conducts its diatomite business through Celite. Celite is believed to be the world's largest producer of filter-aid grade diatomite, which it markets worldwide under the Celite(R) and Kenite(R) brand names; Celite also markets filter-aid grade diatomite in Europe under the Primisil(R) brand name and in Latin America and other areas under the Diactiv(R) brand name. Diatomite is a silica-based mineral consisting of the fossilized remains of microscopic freshwater or marine plants. Diatomite's primary applications are in filtration and as a functional filler. Filtration accounts for the majority of the worldwide diatomite market and for over 50 percent of Celite's diatomite sales. Diatomite is used as a filter aid in the production of beer, food, juice, wine, water, sweeteners, fats and oils, pharmaceuticals, chemicals, lubricants and petroleum. Diatomite is used as a filler, mainly in paints, and as an anti-block agent in plastic film. In addition to diatomite, Celite also produces calcium silicate products and magnesium silicate products, which are sold worldwide under the MicroCel(R)and Celkate(R) brand names (except in portions of Europe where calcium silicate products are sold under the Calflo(R) brand name). These products, which have high surface area and adsorption and absorption capabilities, are used to convert liquid, semi-solid and sticky ingredients into dry, free-flowing powders in the production of rubber, sweeteners, flavorings and pesticides. Celite has its world headquarters in Lompoc, California and owns, directly or through wholly owned subsidiaries, diatomite mines and/or processing plants in Lompoc, California; Quincy, Washington; Murat, France; Alicante, Spain; Arica, Chile; Arequipa, Peru; and Guadalajara, Mexico. Celite also owns 48.6 percent of Kisilidjan, h.f., a joint venture with the Government of Iceland which mines and processes diatomite from Lake Myvatn in Iceland. In 1995, World Minerals, through various subsidiaries of Celite, acquired controlling interests in three joint ventures which are engaged in the mining and processing of diatomite in Jilin Province, Peoples Republic of China ("PRC"). 21 24 Perlite On September 25, 1998, Harborlite and Europerlite Acquisition Corp. merged and World Minerals now conducts its worldwide perlite business through Harborlite. World Minerals believes that Harborlite is the world's largest producer of perlite filter aids and that Harborlite, which is also engaged in the business of selling perlite ore, is one of the world's largest merchant producers of perlite ore. These products are marketed worldwide under the Harborlite(R) and Europerl(R) brand names. Perlite is a volcanic rock which contains between 2 percent and 5 percent natural combined water. When heated rapidly, the natural combined water turns explosively to steam and the perlite ore "pops" in a manner similar to popcorn, expanding up to twenty times its original volume and creating a soft material with large surface area and correspondingly low density. Perlite ore is mined at Harborlite's No Agua, New Mexico mine and is sold primarily to companies that expand it in their own expansion plants and use it in the manufacture of roofing board, formed pipe insulation and acoustical ceiling tile. Perlite ore for filter aid and certain filler applications is mined at Harborlite's Superior, Arizona mine and is expanded at Harborlite's six expansion plants located within the United States. Expanded perlite is also produced at Harborlite's European expansion plants at Hessle, United Kingdom and Wissembourg, France, Barcelona, Spain and Milan, Italy, from perlite ore obtained from Harborlite's perlite mine at Dikili, Turkey and from merchant ore producers in Europe. Most of the expanded perlite is used as a filter aid in the brewing, food, wine, sweetener, pharmaceutical, chemical and lubricant industries, or as a filler and insulating medium in various construction applications. On October 31, 1995, World Minerals acquired control of all of the outstanding capital stock of two privately owned perlite filter aid companies with operations in Italy and Spain, respectively, and a privately owned perlite sales company in Spain. These are now part of Harborlite. Harborlite has its world headquarters in Lompoc, California and owns, directly or through wholly-owned subsidiaries, a perlite mine and mill in No Agua, New Mexico, a perlite loading facility in Antonito, Colorado, a perlite mine and a mill in Superior, Arizona, a perlite mine and mill in Dikili, Turkey, a perlite deposit in Central Mexico, and perlite expansion facilities in Escondido, California; Green River, Wyoming; Laporte, Texas; Youngsville, North Carolina; Vicksburg, Michigan; Quincy, Florida; Wissembourg, France; Hessle, England; Barcelona, Spain and Milan, Italy. World Minerals conducts its business on a worldwide basis, with mining and processing operations in eleven countries. In 1998, approximately 43 percent of World Minerals' revenues (equal to 9.4 percent of Alleghany's consolidated revenues) were generated by foreign operations, and an additional 13 percent of World Minerals' revenues were generated by export sales from the United States. While World Minerals believes that the international scope of its operations gives it unique competitive advantages, international operations can be subject to additional risks, such as currency fluctuations, changes in foreign legal requirements and political instability. World Minerals closely monitors its methods of operating in each country and adopts strategies responsive to changing economic and political environments. World Minerals minimizes its exposure to the risk of foreign currency fluctuation by, among other things, causing its subsidiaries to declare and pay dividends whenever feasible, and having its foreign subsidiaries invoice their export customers in United States dollars or other "hard currencies." World Minerals' foreign operations do not subject Alleghany to a material risk from foreign currency fluctuation. During 1998, the currency turmoil in Asia did not have a material adverse effect on World Minerals' results and it is not currently expected that such turmoil will have a material adverse impact on World Minerals' earnings in 1999. Celite's largest diatomite mine and plant is located near Lompoc, California. All additional diatomite supplies are currently obtained by Celite from its mines in the state of Washington, in France, Spain, Mexico, Chile, Peru, and PRC, and from the Lake Myvatn mine in Iceland (although environmental regulations and volcanic and seismic activity may adversely affect future production at Lake Myvatn). Celite believes that diatomite reserves at each site (including its Quincy, Washington mine upon completion of drilling programs 22 25 and process improvements in 1999) are generally sufficient to last for at least 20 more years at the current rate of utilization. Celite enhanced its reserves at Lompoc, California in 1998 through the acquisition of rights to two diatomite mines formerly controlled by a competitor, following such competitor's decision to close its Lompoc-based diatomite business. Harborlite obtains perlite ore in the United States from its No Agua and Superior mines, and believes that its perlite ore reserves at each site are sufficient to last at least 20 more years at the current rate of utilization. The perlite used by Harborlite for expansion in Europe is obtained from Harborlite's Dikili mine and from third parties in Europe. Ore reserves at Harborlite's Dikili mine are believed to be sufficient to last at least 20 more years at the current rate of utilization. Celite's silicate products are produced from purchased magnesium and calcium compounds and internally supplied diatomite. World Minerals' operating subsidiaries experienced no interruption in raw material availability in 1998, except that severe El Nino-related storms in the spring of 1998, which produced record rainfall totals in Santa Barbara County, created some flooding conditions at Celite's Lompoc mine and resulted in higher production costs and some delay in raw material availability. Barring unforeseen circumstances, World Minerals anticipates no such interruptions in 1999. Celite and Harborlite believe that they have taken reasonable precautions for the continuous supply of their critical raw materials. Many of Celite's and Harborlite's operations use substantial amounts of energy, including electricity, fuel oil, natural gas, and propane. Celite and Harborlite have supply contracts for most of their energy requirements. Most of such contracts are for one year or less. Celite and Harborlite have not experienced any energy shortages and they believe that they have taken reasonable precautions to ensure that their energy needs will be met, barring any unusual or unpredictable developments. From the time World Minerals began operations in 1991, none of its customers accounted for 10 percent or more of World Minerals' annual sales. World Minerals presently owns, controls or holds licenses either directly or through its subsidiaries to approximately 20 United States and 48 foreign patents and patent applications. While World Minerals considers all of its patents and licenses to be valuable, World Minerals believes that none of its patents or licenses is by itself material to its business. World Minerals normally maintains approximately a one- to four-week supply of inventory on certain products due to production lead times. Although diatomite mining activities at Celite's principal mine in Lompoc, California may be suspended during periods of heavy rainfall, World Minerals believes that, because of the stockpiling of ore during dry periods, such suspensions do not materially affect the supply of inventory. The unusually severe El Nino-related storms, however, did create brief interruptions during the early part of 1998. Barring unusual circumstances, World Minerals does not experience backlogs of orders. World Minerals' business is not seasonal to any material degree. World Minerals' domestic and international operations have been consolidated into a single, centrally managed worldwide business under the direction of a highly capable management team. Since 1993, financial systems and controls have been upgraded, and the Celite and Harborlite sales, operations and financial groups have been consolidated to improve efficiency and take advantage of synergies. World Minerals acts as the sales agent for both Celite and Harborlite in the United States and procures orders from customers and distributors on their behalf. World Minerals also distributes Celite's and Harborlite's products in Europe to dealers, distributors and end users on Celite's and Harborlite's behalf. World Minerals has research and development, environmental control and quality control laboratories at its Lompoc production facilities and quality control laboratories at each of its other production facilities. In 1998, World Minerals spent approximately $2.6 million on company-sponsored research and technical services (in addition to amounts spent on engineering and exploration) related to the development and improvement of its products and services. 23 26 COMPETITION World Minerals believes that Celite is the world's largest producer of filter-aid grade diatomite. The remainder of the market is shared by Celite's four major competitors: Eagle-Picher Minerals (United States), Grefco (United States), CECA (France) and Showa (Japan), and a number of smaller competitors. World Minerals believes that Harborlite is the world's largest producer of perlite filter aids and is one of the world's largest merchant producers of perlite ore. Harborlite has two large competitors in the expanded perlite market, Grefco and CECA, and many smaller competitors. Harborlite also has two large competitors in the merchant perlite ore market, Grefco and Silver & Baryte, and numerous smaller competitors. The filter aid products of Celite and Harborlite compete with other filter aids, such as cellulose, and other filtration technologies, such as crossflow and centrifugal separation. Celite's silicates compete with a wide variety of other synthetic mineral products. In all of World Minerals' businesses, competition is principally on the basis of service, product quality and performance, warranty terms, speed and reliability of delivery, availability of the product and price. REGULATION All of Celite's and Harborlite's domestic operations are subject to a variety of federal, state and local environmental laws and regulations. These laws and regulations establish potential liability for costs incurred in cleaning up waste sites and impose limitations on atmospheric emissions, discharges to domestic waters, and disposal of hazardous materials. Certain state and local jurisdictions have adopted regulations that may be more stringent than corresponding federal regulations. Celite and Harborlite believe that the impact of environmental regulation on their respective operating results has been minimal due to their environmental compliance programs; however, Celite and Harborlite cannot predict the potential future impact of such regulations, given the increasing number and complexity, and changing character, of such regulations. Moreover, federal and state laws governing disposal of wastes impact customers who must dispose of used filter-aid materials. World Minerals works with its customers to implement disposal strategies to minimize the impact of these disposal regulations. The domestic mining operations of Celite and Harborlite are subject to regulation by the Mine Safety and Health Administration ("MSHA"). This agency establishes health and safety standards relating to noise, respiratory protection and dust for employee work environments in the mining industry. Celite's and Harborlite's domestic production facilities which are not under the jurisdiction of MSHA are subject to regulation by the Occupational Safety and Health Administration ("OSHA"), which establishes regulations regarding, among other things, workplace conditions, and exposure to dust and noise. In addition, certain state agencies exercise concurrent jurisdiction in these areas. During 1997, both MSHA and OSHA announced special emphasis programs to reduce the incidence of silicosis in the workplace. Due to Celite's industrial hygiene and monitoring programs, Celite does not expect these special emphasis programs to impact its business in any material way. World Minerals maintains a staff of experienced environmental, safety and industrial hygiene professionals who assist plant personnel in complying with environmental, health and safety regulations. Its environmental, safety and industrial hygiene audit group also performs routine internal audits and reviews of World Minerals' plant facilities worldwide. Due to these programs and responsible management at the local plant level, compliance with such regulations has been facilitated and the financial impact of such regulations on operating results has been minimal. Certain products of Celite and Harborlite are subject to the Hazard Communication Standard promulgated by OSHA, which requires Celite and Harborlite to disclose the hazards of those products to employees and customers. Celite's diatomite products and certain of Harborlite's products contain varying amounts of crystalline silica, a mineral which is among the most common found on earth. In 1997, the International Agency for Research on Cancer ("IARC") reclassified the inhalation of crystalline silica from occupational sources from "probably carcinogenic to humans" to a category reflecting "sufficient evidence of human 24 27 carcinogenicity." Celite and Harborlite provide required warning labels on their products containing in excess of 0.1 percent respirable crystalline silica, advising customers of the IARC designation and providing recommended safety precautions. Such requirements also mandate that industrial customers who purchase diatomite or perlite for use as a filler in their products label such products to disclose hazards which may result from the inclusion of crystalline silica-based fillers, if such products contain in excess of 0.1 percent of crystalline silica by volume. Due to labeling concerns, some manufacturers of paint may be considering the use of other fillers in place of Celite's products. However, Celite believes that the loss of these customers would not have a material adverse effect on its operating results. Several states have also enacted or adopted "right to know" laws or regulations, which seek to expand the federal Hazard Communication Standard to include providing notice of hazards to the general public, as well as to employees and customers. Celite, through the industry-sponsored International Diatomite Producers Association ("IDPA"), has participated in funding several studies to examine in more detail the cancer risk to humans from occupational exposure to crystalline silica. One such study, conducted by the University of Washington on diatomite workers in Lompoc, California (the "Washington Study") found a modest increase in lung cancer deaths in the cohort compared with national rates (indicated by a standardized mortality ratio ("SMR") equal to 1.43). The standardized mortality ratio compares the number of expected cancer deaths in the cohort with 1, representing the number of cancer deaths in the population at large. The study also found an increase in non-malignant respiratory disease ("NMRD") (SMR equal to 2.59); this finding was expected because the NMRD category included silicosis resulting from exposures in past decades. After the publication of the Washington Study, Celite conducted its own review of the portion of the cohort representing the Lompoc plant and found that more workers in this portion of the cohort may have been exposed to asbestos, prior to World Minerals' purchase of the Lompoc plant, than originally thought. Since exposure to asbestos has been found to cause lung cancer and respiratory disease, this finding has raised concern that the Washington Study may have overstated the adverse health effects of exposure to crystalline silica. IDPA engaged an epidemiologist and an industrial hygienist to examine the cohort to determine whether asbestos exposure was properly accounted for in the Washington Study's results. The final IDPA report (the "Asbestos Study") was issued in December 1994 and found: "Although asbestos operations were small relative to the diatomaceous earth operations, analyses in this report showed that exposure to asbestos by workers was relatively common. For example, the number of cohort members who were ever definitely, probably or possibly exposed to asbestos was shown to involve approximately 60 percent of the cohort. Even when only men employed in jobs definitely exposed to asbestos for more than [one] year in the period 1950-1977 were considered, more than 8 percent of the cohort had held such jobs." The Asbestos Study's authors called for further analyses which fully take into account the results of their study stating "[t]he interpretation of the silica-lung cancer risk relationships based on the [Lompoc] cohort should await the outcome of such analyses." The results of the Asbestos Study were analyzed by the authors of the Washington Study. They did not agree that asbestos was a likely confounder of the results of the initial study. In 1996, the Washington Study's authors, in association with researchers from Tulane University, conducted a seven year follow-up study of the Lompoc cohort. The follow-up study, funded by a grant from the National Institute for Occupational Safety and Health, reported a lower SMR for the cohort (1.29 vs. 1.43), a weakened dose response relationship, which may suggest a less conclusive indication of a causative relationship between occupational exposure and cancer deaths, and a continued absence of excess lung cancers in workers hired after 1960. Data errors later discovered in the follow-up study reduced the final SMR to 1.22 and further weakened the dose response relationship. An additional aspect of the study, which seeks to compare results of the cohort study to radiographic readings of the workers, awaits publication. The various agreements covering the purchase of the business of Celite in 1991 provide for the indemnification of the holding company subsidiary of Alleghany which acquired Celite by the various selling 25 28 Manville entities in respect of any environmental and health claims arising from the operations of the business of Celite prior to its acquisition by the holding company subsidiary. EMPLOYEES During 1997, World Minerals reorganized and centralized much of the sales functions of its foreign subsidiaries, placing many of them directly under World Minerals ownership. As of December 31, 1998, World Minerals had 203 employees worldwide, Celite had about 1,548 employees worldwide, and Harborlite had about 240 employees worldwide. Approximately 380 of Celite's employees and 38 of Harborlite's employees in the United States are covered by collective bargaining agreements. All of the collective bargaining agreements covering workers at Celite and Harborlite are in full force and effect. STEEL FASTENER BUSINESS The Heads and Threads division of Alleghany, headquartered in Northbrook, Illinois, is believed to be one of the nation's leading importers and distributors of steel fasteners. Heads and Threads imports and sells commercial fasteners -- nuts, bolts, screws, washers and other fasteners -- for resale to fastener manufacturers and distributors through a network of sales offices and warehouses located in nineteen states. The strength of Heads and Threads lies in its long years of association with suppliers and customers. In 1998, Heads and Threads acquired the assets of Gardenbolt International Corp. of Sayreville, New Jersey, substantially increasing both the size of Heads and Threads and its presence in East Coast markets. In addition, it completed the installation and implementation of a new fully-integrated, enterprise-wide computer system which should enhance the functionality of all areas of Heads and Threads' business operations, including order processing, sales and inventory management, transportation services and accounting and finance. Since Heads and Threads imports virtually all of its fasteners, it is necessary to forecast inventory requirements from six months to a year in advance to allow time for shipments to reach their destinations in the United States. In addition, Heads and Threads' costs are subject to fluctuations in foreign currency and import duties. Increases in import duties may result from determinations by United States federal agencies that foreign countries are violating United States laws or intellectual property rights, or are following restrictive import policies. Heads and Threads' operations do not subject Alleghany to a material risk from fluctuations in foreign currency or import duties. Regulations implementing the Fastener Quality Act, the effective date of which has been postponed to 1999, will increase costs. At December 31, 1998, Heads and Threads had about 227 employees. REAL ESTATE BUSINESS Headquartered in Sacramento, California, Alleghany Properties and its subsidiary own and manage, among other real estate and real estate-related assets, 28 properties in California. Such properties are comprised primarily of improved and unimproved commercial land (office, retail and industrial), and improved and unimproved commercial and residential lots. A major portion of API's real estate assets are located in North Natomas, the only large undeveloped area in the City of Sacramento. Development in the area had been delayed by flood plan zoning and wildlife habitat issues, both of which appear to be close to resolution. At December 31, 1998, API had 5 employees. ITEM 2. PROPERTIES. Alleghany's headquarters is located in leased office space of about 11,000 square feet at 375 Park Avenue in New York City. 26 29 Chicago Trust leases about 57,000 square feet at 171 North Clark Street in Chicago, Illinois. In 1998, Montag & Caldwell entered into a lease covering approximately 23,500 square feet of office space for its new headquarters in Atlanta, Georgia. The lease term is expected to begin in the third quarter of 1999 upon completion of construction and relocation. Currently, Montag & Caldwell leases about 18,400 square feet in Atlanta, Georgia and Security Trust leases about 8,100 square feet in San Diego, California. URG is leasing approximately 45,000 square feet of office space for its new headquarters in Calabasas, California. All of its four branch office locations are also in leased space, ranging in size from about 2,900 square feet to 6,700 square feet. CUIC leases about 19,700 square feet of office space. All four branch offices of The Center are also in leased space, ranging in size from about 4,300 square feet to 5,800 square feet. VHL is leasing approximately 13,000 square feet of office space in London. World Minerals' headquarters is located in leased premises of approximately 13,000 square feet in Santa Barbara, California. Celite, Harborlite and certain departments of World Minerals share 16,800 square feet of leased premises in Lompoc, California. A description of the major plants and properties owned and operated by Celite and Harborlite is set forth below. All of the following properties are owned, with the exception of Plant #1 at Quincy, Washington, the headquarters offices at Santa Barbara and Lompoc, California, the Nanterre, France, Santiago, Chile and Izmir, Turkey offices and the plant at Wissembourg, France, which are leased.
LOCATION AND APPROXIMATE NATURE OF PROPERTY SQUARE FOOTAGE PRODUCT OR USE - ------------------ -------------- -------------- CELITE: Lompoc, CA............................ 997,410 Diatomite filter aids, fillers, Production facility; 18 multi-story silicates and specialty products. production buildings; 5 one-story warehouse buildings; 6 one-story laboratory buildings; 4 multi-story bulk handling buildings; 6 one-story office buildings; 2 one-story lunch and locker-room buildings; and 10 one-story shops. Lompoc, CA............................ 16,800 Administrative office 1 one-story building; and 3 units within 1 one-story building. Quincy, WA............................ 60,941 Diatomite filter aids and fillers Production facility; Plant #1 -- 1 multi-story production building and 7 one-story buildings. Plant #2 -- 1 multi-story production building and 6 one-story buildings. Murat, Department of Cantal, France... 77,000 Diatomite filter aids Production facility; 1 one-story manufacturing building; 2 one-story warehouses; and 1 one-story office building. Nanterre, France...................... 6,600 Sales and administrative offices 1 single floor. Guadalajara, Mexico................... 116,610 Diatomite filter aids and fillers Production facility; 2 multi-story production buildings; 2 multi-story pollution-control buildings; and 20 one-story buildings. Mexico City, Mexico................... 2,700 Sales and administrative offices 1 single floor condominium.
27 30
LOCATION AND APPROXIMATE NATURE OF PROPERTY SQUARE FOOTAGE PRODUCT OR USE - ------------------ -------------- -------------- Arica, Chile.......................... 50,000 Diatomite filter aids Production facility; 1 calcined line; 1 administration building; 1 laboratory; 1 warehouse building; 1 changing room building; 1 maintenance workshop; and 1 product warehouse. Santiago, Chile....................... 1,682 Offices 1 single floor in a multi-story, rented office building. Alicante, Spain....................... 70,777 Diatomite filter aids and fillers Production facility; 2 multi-story manufacturing buildings; 3 one-story warehouses; 2 one-story office buildings; 1 two-story laboratory; and 3 miscellaneous buildings. Changbai County, Jilin Province, 95,000 Diatomite filter aids PRC................................... Production facility; 1 multi-story processing facility; 4 one-story warehouse buildings; 1 multi-story office building; and 4 one-story miscellaneous buildings. Linjiang County, Jilin Province, 74,665 Diatomite filter aids PRC................................... Production facility; 1 multi-story production facility; 1 two-story office building; 3 one-story warehouse buildings; and 3 one-story miscellaneous buildings. Linjiang County, Jilin Province, 142,000 Diatomite filter aids PRC................................... Production facility; 3 multi-story production facilities; 1 one-story office building; 2 one-story warehouse buildings; and 5 one-story miscellaneous buildings. HARBORLITE: Antonito, CO.......................... 9,780 Warehouse facilities for perlite ore 1 one-story manufacturing building and warehouse; 1 one-story office building; and 1 one-story warehouse. No Agua, NM........................... 40,550 Perlite ore Production facility; 1 six-story mill building; 1 one-story office and shop building; and 8 miscellaneous one-story buildings. Superior, AZ.......................... 6,900 Perlite ore Production facility; 1 one-story warehouse building; and 1 one-story office building. Escondido, CA......................... 8,450 Perlite filter aids 1 one-story warehouse building; and 1 one-story office building. Green River, WY....................... 17,300 Perlite filter aids 1 one-story warehouse building; and 1 one-story office building. Vicksburg, MI......................... 25,050 Perlite filter aids 2 one-story warehouse buildings; and 1 one-story office building. Youngsville, NC....................... 22,500 Perlite filter aids 1 one-story warehouse building; 1 one-story manufacturing building; and 1 one-story office building.
28 31
LOCATION AND APPROXIMATE NATURE OF PROPERTY SQUARE FOOTAGE PRODUCT OR USE - ------------------ -------------- -------------- Quincy, FL............................ 18,450 Perlite filter aids 1 one-story warehouse building; 1 one-story manufacturing building; and 1 one-story office building. LaPorte, TX........................... 23,000 Perlite filter aids and fillers 1 one-story expansion warehouse and office building. Wissembourg, France................... 5,000 Perlite filter aids and fillers a portion of 1 multi-story production and warehouse building. Hessle, Humberside, United Kingdom.... 36,700 Perlite filter aids and fillers 1 one-story manufacturing building; and 1 two-story office building. Dikili, Turkey........................ 63,200 Perlite crushing mill Production facility; 1 four-story manufacturing building; 1 one-story warehouse building; 1 one-story raw material warehouse; 1 one-story office building; and 1 one-story maintenance shop. Izmir, Turkey......................... 1,000 Sales and administrative offices 1 single floor. Barcelona, Spain...................... 70,300 Perlite filter aids and fillers Production facility; 1 one-story manufacturing and warehouse building; 1 one-story raw material warehouse; and 1 two-story office building. Milan, Italy.......................... 68,600 Perlite filter aids Production facility; 1 one-story manufacturing/warehouse building; 1 one-story raw material warehouse; and 1 two-story office building. WORLD MINERALS: Santa Barbara, CA..................... 13,000 Headquarters office 1 one-story rented building.
Celite's largest mine is located on owned property immediately adjacent to the City of Lompoc, California, and is the site of one of the most unusual marine diatomite deposits in the world. The mine celebrated its 100th anniversary of production in 1993 and has been in continuous operation for more than 60 years. Reserves are believed to be sufficient for the operation of the plant for at least 20 more years at the current rate of utilization. The Lompoc production facility has a rated capacity in excess of 200,000 tons annually and currently supplies more than 25 different grades of products to the filtration and filler markets. The facility also houses World Minerals' research and development, and health, safety and environmental departments and Celite's quality control laboratories. World Minerals, Celite and Harborlite also lease warehouses, office space and other facilities in the United States and abroad. A joint venture between Celite and the Government of Iceland has rights to mine diatomaceous earth in sections of Lake Myvatn, Iceland, and Celite's joint ventures in PRC have rights to mine diatomaceous earth in sections of Jilin Province, PRC. ITEM 3. LEGAL PROCEEDINGS. Alleghany's subsidiaries and division are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such operating unit makes provision on its books, in accordance with generally accepted accounting principles, for estimated losses to be incurred in such litigation and claims, 29 32 including legal costs. In the opinion of management, such provision is adequate under generally accepted accounting principles as of December 31, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of 1998. SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT. The name, age, current position, date elected and five-year business history of each executive officer of Alleghany are as follows:
CURRENT POSITION BUSINESS EXPERIENCE NAME AGE (DATE ELECTED) DURING LAST 5 YEARS - ---- --- ---------------------------------- ---------------------------------- F.M. Kirby 79 Chairman of the Board (since 1967) Chairman of the Board, Alleghany. John J. Burns, 67 President, chief operating officer President, chief operating officer Jr. (since 1977) and chief executive and chief executive officer, officer (since 1992) Alleghany. David B. Cuming 66 Senior Vice President and chief Senior Vice President and chief financial officer (since 1989) financial officer, Alleghany. Robert M. Hart 54 Senior Vice President, General Senior Vice President and General Counsel (since 1994) and Secretary Counsel since September 1994 and (since 1995) Secretary since January 1995; Partner, Donovan Leisure Newton & Irvine, prior thereto. Peter R. Sismondo 43 Vice President, Controller, Vice President, Controller, Assistant Secretary, principal Treasurer, Assistant Secretary and accounting officer (since 1989) principal accounting officer, and Treasurer (since 1995) Alleghany, since January 1995; Vice President, Controller, Assistant Secretary and principal accounting officer, Alleghany, prior thereto.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this Item with respect to the market price of and dividends on Alleghany's common stock and related stockholder matters is incorporated by reference from page 22 of Alleghany's Annual Report to Stockholders for the year 1998, filed as Exhibit 13 hereto. RECENT SALES OF UNREGISTERED SECURITIES. On December 17, 1998, Alleghany sold to the Chairman of VHL 15,604 shares of Alleghany common stock for an aggregate purchase price of $2,978,413.50, or $190.875 per share. The sale was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, as a transaction not involving a public offering. Other than unregistered issuances of Alleghany common stock previously reported in Alleghany's Quarterly Reports on Form 10-Q for the quarters ending March 31, 1998, June 30, 1998 and September 30, 1998, such issuances that did not involve a sale consisting of issuances of common stock and other securities pursuant to employee incentive plans and the sale described above, Alleghany did not sell any Alleghany common stock during 1998 that was not registered under the Securities Act. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item 6 is incorporated by reference from page 22 of Alleghany's Annual Report to Stockholders for the year 1998, filed as Exhibit 13 hereto. 30 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item 7 is incorporated by reference from pages 3 through 5, 7, 9 through 11, 13 through 15, 17, 19, and 24 through 28, of Alleghany's Annual Report to Stockholders for the year 1998, filed as Exhibit 13 hereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this Item 7A is incorporated by reference from pages 28 through 29 of Alleghany's Annual Report to Stockholders for the year 1998, filed as Exhibit 13 hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item 8 is incorporated by reference from pages 30 through 46 of Alleghany's Annual Report to Stockholders for the year 1998, filed as Exhibit 13 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT. As permitted by General Instruction G(3), information concerning the executive officers of Alleghany is set forth as a supplemental item included in Part I of this Form 10-K Report under the caption "Executive Officers of Registrant." Information concerning the directors of Alleghany is incorporated by reference from pages 5 through 9 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 23, 1999. Information concerning compliance with the reporting requirements under Section 16 of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the bottom of pages 10 through 11 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 23, 1999. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item 11 is incorporated by reference from pages 11 through 18 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 23, 1999. The information set forth beginning with the middle of page 18 through page 24 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 23, 1999, is not "filed" as a part hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item 12 is incorporated by reference from pages 2 through 4, and from pages 9 through 10, of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 23, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item 13 is incorporated by reference from pages 12 through 13 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 23, 1999. 31 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The consolidated financial statements of Alleghany and subsidiaries, together with the report thereon of KPMG LLP, independent certified public accountants, are incorporated by reference from the Annual Report to Stockholders for the year 1998 into Item 8 of this Report. 2. Financial Statement Schedules. The schedules relating to the consolidated financial statements of Alleghany and subsidiaries, together with the report thereon of KPMG LLP, independent certified public accountants, are detailed in a separate index herein. 3. Exhibits. The following are filed as exhibits to this Report:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.01 Restated Certificate of Incorporation of Alleghany, as amended by Amendment accepted and received for filing by the Secretary of State of the State of Delaware on June 23, 1988, filed as Exhibit 20 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 3.02 By-Laws of Alleghany as amended April 18, 1995, filed as Exhibit 3.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference. *10.01 Description of Alleghany Management Incentive Plan, filed as Exhibit 10.01 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.02 Alleghany Corporation Deferred Compensation Plan as amended and restated as of December 15, 1992, filed as Exhibit 10.03 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.03 Alleghany 1993 Long-Term Incentive Plan, as amended and restated effective as of January 1, 1994, filed as Exhibit 10.06(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.04 Alleghany Supplemental Death Benefit Plan dated as of May 15, 1985 and effective as of January 1, 1985, filed as Exhibit 10.08 to Old Alleghany's Annual Report on Form 10-K for the year ended December 31, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.05(a) Trust Agreement Amendment made as of July 8, 1994 between Alleghany and Chemical Bank, filed as Exhibit 10.08(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.05(b) Alleghany Retirement Plan, as amended and restated on March 14, 1995, filed as Exhibit 10.08(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.05(c) Amendments to Alleghany Retirement Plan, effective as of January 1, 1996, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, is incorporated herein by reference.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.05(d) Amendments to Alleghany Retirement Plan, effective as of January 1, 1998, filed as Exhibit 10.05(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. *10.06 Alleghany Retirement COLA Plan dated and effective as of January 1, 1992, as adopted on March 17, 1992, filed as Exhibit 10.7 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.07 Description of Alleghany Group Long Term Disability Plan effective as of July 1, 1995, filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.08 Alleghany Amended and Restated Directors' Stock Option Plan effective as of April 20, 1993, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. *10.09 Alleghany Directors' Equity Compensation Plan, effective as of January 16, 1995, filed as Exhibit 10.11 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.10 Alleghany Non-Employee Directors' Retirement Plan effective July 1, 1990, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.11(a) Description of compensatory arrangement between Alleghany and Paul F. Woodberry, filed as Exhibit 10.11(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. *10.11(b) Description of long-term incentive arrangement between Alleghany and Paul F. Woodberry, filed as Exhibit 10.21(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.12 Revolving Credit Loan Agreement dated as of June 14, 1995 among Alleghany and Chemical Bank, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, is incorporated herein by reference. 10.12(a) First Amendment dated as of April 8, 1998, to the Revolving Credit Loan Agreement dated as of June 14, 1995, among Alleghany and Chase Manhattan Bank (formerly known as Chemical Bank), filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by reference. 10.13(a) Distribution Agreement dated as of June 16, 1998 by and between Alleghany Corporation and Chicago Title Corporation (the "Spin-Off Distribution Agreement"), filed as Exhibit 2.1(a) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.13(b) List of Contents of Exhibits to the Spin-Off Distribution Agreement, filed as Exhibit 2.1(b) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.13(c) Tax Sharing Agreement dated as of June 17, 1998 by and among Alleghany Corporation and Chicago Title Corporation, filed as Exhibit 10.2 to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 Distribution Agreement dated as of May 1, 1987 between Alleghany and MSL Industries, Inc., filed as Exhibit 10.21 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.15 Amendment to Distribution Agreement dated June 29, 1987, effective as of May 1, 1987, between Alleghany and MSL Industries, Inc., filed as Exhibit 10.22 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.16(a) Stock Purchase Agreement dated as of May 18, 1994 by and between First Interstate Bank of California and Alleghany (the "Sacramento Savings Stock Purchase Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, is incorporated herein by reference. 10.16(b) List of Contents of Exhibits and Schedules to the Sacramento Savings Stock Purchase Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, is incorporated herein by reference. 10.17(a) Note Purchase Agreement dated as of January 15, 1995 by and among Alleghany Properties, Inc., Alleghany and Hartford Life Insurance Company Separate Account CRC (the "Alleghany Properties Note Purchase Agreement"), filed as Exhibit 10.28(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. Agreements dated as of January 15, 1995 among Alleghany Properties, Inc., Alleghany and each of Transamerica Life Insurance & Annuity Company, Transamerica Occidental Life Insurance Company, United of Omaha Life Insurance Company, Mutual of Omaha Insurance Company, The Lincoln National Life Insurance Company, Knights of Columbus and Woodmen Accident and Life Company are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K. 10.17(b) List of Contents of Annexes and Exhibits to the Alleghany Properties Note Purchase Agreement, filed as Exhibit 10.28(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.17(c) Amendment to Alleghany Properties Note Purchase Agreement dated as of June 23, 1995 among Alleghany, Alleghany Properties, Inc. and the Purchasers listed on Annex 1 to the Alleghany Properties Note Purchase Agreement, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is incorporated herein by reference. 10.17(d) Amendment No. 2 to Alleghany Properties Note Purchase Agreement dated as of November 6, 1995 among Alleghany, Alleghany Properties, Inc. and the Purchasers listed on Annex 1 to the Alleghany Properties Note Purchase Agreement, filed as Exhibit 10.28(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.17(e) Third Amendment to Alleghany Properties Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany, Alleghany Properties, Inc., Hartford Life Insurance Company, Transamerica Life Insurance & Annuity Company, Transamerica Occidental Life Insurance Company, United of Omaha Life Insurance Company, Mutual of Omaha Insurance Company, The Lincoln National Life Insurance company, Knights of Columbus and Woodmen Accident and Life Company.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.18(a) Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany Properties, Inc., Alleghany and United of Omaha Life Insurance Company (the "Alleghany Properties 1998 Note Purchase Agreement"). Agreements dated as of December 11, 1998 among Alleghany Properties, Inc., Alleghany and each of Companion Life Insurance Company, Hartford Life Insurance Company, The Lincoln National Life Insurance Company, and First Penn-Pacific Life Insurance Company are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K. 10.18(b) List of Contents of Annexes and Exhibits to the Alleghany Properties 1998 Note Purchase Agreement. Alleghany agrees to furnish supplementally a copy of any omitted annex or exhibit to the Securities and Exchange Commission upon request. 10.19(a) Installment Sales Agreement dated December 8, 1986 by and among Alleghany, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch & Co., Inc., filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.19(b) Intercreditor and Collateral Agency Agreement dated as of October 20, 1997 among The Chase Manhattan Bank, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.19(c) Master Agreement dated as of October 20, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, and related Amended Confirmation dated October 24, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.19(d) Indenture dated as of October 20, 1997 between Alleghany Funding Corporation and The Chase Manhattan Bank, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.20(a) Stock Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville International, B.V. (the "Celite Stock Purchase Agreement"), filed as Exhibit 10.2(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.20(b) List of Contents of Exhibits and Schedules to the Celite Stock Purchase Agreement, filed as Exhibit 10.2(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(a) Joint Venture Stock Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville Corporation (the "Celite Joint Venture Stock Purchase Agreement"), filed as Exhibit 10.3(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(b) List of Contents of Exhibits and Schedules to the Celite Joint Venture Stock Purchase Agreement, filed as Exhibit 10.3(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22(a) Asset Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville Sales Corporation (the "Celite Asset Purchase Agreement"), filed as Exhibit 10.4(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(b) List of Contents of Exhibits and Schedules to the Celite Asset Purchase Agreement, filed as Exhibit 10.4(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(c) Amendment No. 1 dated as of July 31, 1991 to the Celite Asset Purchase Agreement, filed as Exhibit 10.32(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(a) Acquisition Related Agreement dated as of July 1, 1991, by and between Celite Holdings Corporation, Celite Corporation and Manville Corporation (the "Celite Acquisition Related Agreement"), filed as Exhibit 10.5(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(b) List of Contents of Exhibits to the Celite Acquisition Related Agreement, filed as Exhibit 10.5(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(c) Amendment dated as of July 31, 1991 to Celite Acquisition Related Agreement, filed as Exhibit 10.33(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.24(a) Amended and Restated Credit Agreement dated as of March 10, 1995 (the "World Minerals Credit Agreement") among Mineral Holdings Inc., World Minerals, the banks named therein, NationsBank, N.A. (Carolinas), Bank of America National Trust and Savings Association and Chemical Bank, filed as Exhibit 10.36(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.24(b) List of Contents of Exhibits and Annexes to World Minerals Credit Agreement, filed as Exhibit 10.36(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.25(a) Stock Purchase Agreement dated as of July 28, 1993 (the "Underwriters Stock Purchase Agreement") among Alleghany, The Continental Corporation, Goldman, Sachs & Co. and certain funds which Goldman, Sachs & Co. either control or of which they are general partner, Underwriters Re Holdings Corp. and Underwriters Re Corporation, filed as Exhibit 10.3(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.25(b) List of Contents of Exhibits and Schedules to the Underwriters Stock Purchase Agreement, filed as Exhibit 10.3(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.26 Indenture dated as of June 25, 1996 between URC Holdings Corp. (now known as Underwriters Re Group, Inc.) and The First National Bank of Chicago, as trustee, relating to the 7 7/8% Senior Notes due 2006, filed as Exhibit 10.30(j) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.27(a) Amended and Restated Credit Agreement dated as of December 31, 1998 among Underwriters Re Group, Inc., the Lenders named therein and The First National Bank of Chicago, as Agent (the "Underwriters Credit Agreement"). 10.27(b) List of Contents of Exhibits to the Underwriters Credit Agreement. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.27(c) Guaranty dated as of December 31, 1998 by Underwriters Reinsurance Company in favor of The First National Bank of Chicago, as Agent, pursuant to the Underwriters Credit Agreement. 10.28(a) Agreement and Plan of Amalgamation dated as of July 30, 1998 by and among Underwriters Reinsurance Company, Underwriters Acquisition Company Ltd. and Venton Holdings Ltd. (the "Amalgamation Agreement"). 10.28(b) List of Contents of Exhibits to the Amalgamation Agreement. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.28(c) Amendment No. 1 dated as of September 24, 1998 to the Amalgamation Agreement (the "Amalgamation Amendment No. 1"). 10.28(d) List of Contents of Exhibits to the Amalgamation Amendment No. 1. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.29(a) Letter of Credit Facility and Reimbursement Agreement dated as of October 23, 1998 by and among Venton Underwriting Limited, Talbot Underwriting Limited, Underwriters Re Group, Inc., Underwriters Reinsurance Company, the Banks parties thereto, Mellon Bank, N.A., Dresdner Kleinwort Benson North America LLC and Dresdner Bank AG, New York and Grand Cayman Branches (the "Underwriters Letter of Credit Facility"). 10.29(b) List of Contents of Exhibits to the Underwriters Letter of Credit Facility. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.29(c) First Amendment dated as of November 25, 1998 to the Underwriters Letter of Credit Facility. 10.29(d) Second Amendment dated as of December 8, 1998 to the Underwriters Letter of Credit Facility. 10.30(a) Agreement and Plan of Merger dated as of August 22, 1996 among Chicago Title of Colorado, Inc. ("CT of Colorado"), Alleghany Acquisition Corporation, Alleghany and each of the shareholders of CT of Colorado (the "CT of Colorado Merger Agreement"), filed as Exhibit 2.1 to Alleghany's Registration Statement on Form S-3 (Registration No. 333-13971), is incorporated herein by reference. 10.30(b) List of Contents of Exhibits to the CT of Colorado Merger Agreement, filed as Exhibit 2.2 to Alleghany's Registration Statement on Form S-3 (Registration No. 333-13971), is incorporated herein by reference. 13 Pages 3 through 5, 7, 9 through 11, 13 through 15, 17, 19, 22, and 24 through 46 of the Annual Report to Stockholders of Alleghany for the year 1998. 21 List of subsidiaries of Alleghany.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 23 Consent of KPMG LLP, independent certified public accountants, to the incorporation by reference of their reports relating to the financial statements and related schedules of Alleghany and subsidiaries in Alleghany's Registration Statements on Form S-8 (Registration No. 33-27598), Form S-8 (Registration No. 333-323), Form S-8 (Registration No. 333-37237), Form S-8 (Registration No. 333-57133), Form S-3 (Registration No. 33-55707), Form S-3 (Registration No. 33-62477), Form S-3 (Registration No. 333-09881), and Form S-3 (Registration No. 333-13971). 27 Financial Data Schedule.
- --------------- * Compensatory plan or arrangement. (b) Reports on Form 8-K. Alleghany did not file any reports on Form 8-K during the fourth quarter of 1998. 38 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLEGHANY CORPORATION (Registrant) By /s/ JOHN J. BURNS, JR. ------------------------------------ John J. Burns, Jr. President Date: March 16, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 16, 1999 By /s/ JOHN J. BURNS, JR. -------------------------------------------------- John J. Burns, Jr. President and Director (principal executive officer) Date: March 16, 1999 By /s/ DAN R. CARMICHAEL -------------------------------------------------- Dan R. Carmichael Director Date: March 16, 1999 By /s/ DAVID B. CUMING -------------------------------------------------- David B. Cuming Senior Vice President (principal financial officer) Date: March 16, 1999 By /s/ THOMAS S. JOHNSON -------------------------------------------------- Thomas S. Johnson Director Date: March 16, 1999 By /s/ ALLAN P. KIRBY, JR. -------------------------------------------------- Allan P. Kirby, Jr. Director Date: March 16, 1999 By /s/ F.M. KIRBY -------------------------------------------------- F.M. Kirby Chairman of the Board and Director Date: March 16, 1999 By /s/ WILLIAM K. LAVIN -------------------------------------------------- William K. Lavin Director Date: March 16, 1999 By /s/ ROGER NOALL -------------------------------------------------- Roger Noall Director
39 42 Date: March 16, 1999 By /s/ PETER R. SISMONDO ----------------------------------------------------- Peter R. Sismondo Vice President, Controller, Treasurer and Assistant Secretary (principal accounting officer) Date: March 16, 1999 By /s/ JAMES F. WILL ----------------------------------------------------- James F. Will Director Date: March 16, 1999 By /s/ PAUL F. WOODBERRY ----------------------------------------------------- Paul F. Woodberry Director
40 43 ALLEGHANY CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES I SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES II CONDENSED FINANCIAL INFORMATION OF REGISTRANT III SUPPLEMENTARY INSURANCE INFORMATION IV REINSURANCE VI SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES All other schedules are omitted since they are not required, are not applicable, or the required information is set forth in the financial statements or notes thereto. 44 SCHEDULE I ALLEGHANY CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31,1998 (IN THOUSANDS)
AMOUNT AT WHICH FAIR SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - ------------------ ---------- ---------- --------------- Fixed maturities: Bonds: United States Government and government agencies and authorities..................... $ 309,088 $ 318,755 $ 318,755 States, municipalities and political subdivisions................................. 379,861 391,968 391,968 Foreign governments............................ 26,146 25,809 25,809 Public utilities............................... 35,614 37,258 37,258 All other corporate bonds...................... 342,418 350,109 350,109 Certificates of deposit........................... 1,333 1,333 1,333 Redeemable preferred stock........................ 21,618 22,243 22,243 ---------- ---------- ---------- Fixed maturities............................... 1,116,078 $1,147,475 $1,147,475 ---------- ========== ---------- Equity securities: Common stocks: Banks, trust, and insurance companies.......... 16,000 $ 16,000 16,000 Industrial, miscellaneous, and all other....... 301,216 808,326 808,326 ---------- ---------- ---------- Total equity securities................... 317,216 $ 824,326 824,326 ---------- ========== ---------- Other long-term investments......................... 19,407 19,433 Short-term investments.............................. 134,794 134,799 ---------- ---------- Total investments......................... $1,587,495 $2,126,033 ========== ==========
45 SCHEDULE II ALLEGHANY CORPORATION CONDENSED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
1998 1997 ---------- ---------- ASSETS Investment securities (Cost: 1998 $207,857; 1997 $218,307)................................................. $ 534,580 $ 499,502 Cash........................................................ 999 0 Accounts and other receivables, less allowances............. 27,992 20,560 Property and equipment -- at cost, less accumulated depreciation.............................................. 4,866 3,049 Other assets................................................ 47,347 32,118 Investment in CT&T (discontinued operations)................ 0 385,451 Investment in consolidated subsidiaries..................... 898,450 865,131 ---------- ---------- $1,514,234 $1,805,811 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Other liabilities........................................... $ 78,513 $ 76,896 Net deferred tax liability.................................. 140,686 122,857 Long-term debt.............................................. 47,607 35,123 ---------- ---------- Total liabilities................................. 266,806 234,876 Commitments and contingent liabilities Common stockholders' equity................................. 1,247,428 1,570,935 ---------- ---------- $1,514,234 $1,805,811 ========== ==========
See accompanying Notes to Condensed Financial Statements. 46 SCHEDULE II ALLEGHANY CORPORATION CONDENSED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1998 (IN THOUSANDS)
1998 1997 1996 ------- -------- ------- Revenues: Interest, dividend and other income....................... $73,477 $ 61,362 $58,647 Net (loss) gain on investment transactions........................ 318 (11,280) 801 ------- -------- ------- Total revenues.................................... 73,795 50,082 59,448 ------- -------- ------- Costs and Expenses: Interest expense.......................................... 6,597 4,466 3,444 General and administrative................................ 91,934 73,908 67,192 ------- -------- ------- Total costs and expenses.......................... 98,531 78,374 70,636 ------- -------- ------- Operating loss............................................ (24,736) (28,292) (11,188) Equity in earnings of consolidated subsidiaries............. 115,752 93,522 68,578 ------- -------- ------- Earnings from continuing operations, before income taxes.................................................. 91,016 65,230 57,390 Income taxes................................................ 27,635 13,830 16,920 ------- -------- ------- Earnings from continuing operations....................... 63,381 51,400 40,470 Earnings from discontinued operations, net of tax......... 32,725 54,267 46,578 ------- -------- ------- Net earnings.............................................. $96,106 $105,667 $87,048 ======= ======== =======
See accompanying Notes to Condensed Financial Statements. 47 SCHEDULE II ALLEGHANY CORPORATION CONDENSED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1998 (IN THOUSANDS)
1998 1997 1996 -------- --------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Earnings from continuing operations....................... $ 63,381 $ 51,400 $40,470 Adjustments to reconcile earnings from continuing operations to cash provided by (used in) continuing operations: Depreciation and amortization........................... 894 501 463 Net (gain) loss on investment transactions.............. (318) 11,280 (801) (Increase) decrease in accounts and other receivables, less allowances....................................... (7,432) (2,402) 884 (Increase) decrease in other assets..................... (15,327) (2,874) 3,554 Increase (decrease) in other liabilities................ 3,513 (7,375) (12,268) Other operating, net.................................... 471 1,226 (1,625) Equity in undistributed net earnings of consolidated subsidiaries.......................................... (79,071) (64,007) (46,731) -------- --------- ------- Net adjustments......................................... (97,270) (63,651) (56,524) -------- --------- ------- Cash used in continuing operations...................... (33,889) (12,251) (16,054) -------- --------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments................................... (66,133) (250,930) (7,502) Sales of investments...................................... 76,895 226,032 6,469 Capital contributions to consolidated subsidiaries........ (263) (1,171) (446) Cash dividends from consolidated subsidiaries............. 61,826 14,362 4,441 Purchase of property and equipment........................ (2,613) (976) (333) Disposition of property and equipment..................... 0 0 18 -------- --------- ------- Net cash provided by (used in) investing activities..... 69,712 (12,683) 2,647 -------- --------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt...................... 0 0 (35,000) Proceeds of long-term debt................................ 12,484 16,000 35,000 Cash provided by discontinued operations.................. 3,903 18,805 30,000 Other, net................................................ (51,211) (11,726) (15,570) -------- --------- ------- Net cash (used in) provided by financing activities..... (34,824) 23,079 14,430 -------- --------- ------- Net increase (decrease) in cash......................... 999 (1,855) 1,023 Cash at beginning of year................................... 0 1,855 832 -------- --------- ------- CASH AT END OF YEAR......................................... $ 999 $ 0 $ 1,855 ======== ========= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest................................................ $ 5,147 $ 4,869 $ 3,443 Income taxes............................................ $ 56,112 $ 34,100 $54,822
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Book value of spin-off of Chicago Title and Trust Company... $413,767 $ 0 $ 0
In 1996, Alleghany made a noncash capital contribution to its consolidated subsidiaries by contributing two newly-acquired companies with a combined cost basis of $994. See accompanying Notes to Condensed Financial Statements. 48 SCHEDULE II ALLEGHANY CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (in thousands) 1. INVESTMENT IN CONSOLIDATED SUBSIDIARIES. Reference is made to Note 2 of the Notes to Consolidated Financial Statements incorporated herein by reference for information regarding the spin-off of Chicago Title and Trust. 2. LONG-TERM DEBT. Reference is made to Note 6 of the Notes to Consolidated Financial Statements incorporated herein by reference for information regarding the significant provisions of the revolving credit loan agreement of Alleghany. Included in long-term debt in the accompanying condensed balance sheets is $19,123 in 1998 and 1997 of intercompany notes payable due to Alleghany Funding. 3. INCOME TAXES. Reference is made to Note 7 of the Notes to Consolidated Financial Statements incorporated herein by reference. 4. COMMITMENTS AND CONTINGENCIES. Reference is made to Note 13 of the Notes to Consolidated Financial Statements incorporated herein by reference. 5. STOCKHOLDERS' EQUITY. Reference is made to Note 8 of the Notes to Consolidated Financial Statements incorporated herein by reference with respect to stockholders' equity and surplus available for dividend payments to Alleghany from its subsidiaries. 49 SCHEDULE III ALLEGHANY CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS)
AT DECEMBER 31 FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------------- ---------------------------------- FUTURE POLICY OTHER BENEFITS, BENEFITS, POLICY CLAIMS, DEFERRED LOSSES, CLAIMS LOSSES POLICY CLAIMS AND NET AND ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT YEAR SEGMENT COST EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES - ---- ------- ----------- ---------- -------- -------- -------- ---------- ---------- 1998................. Property and casualty reinsurance $93,397 $1,554,818 $389,603 $0 $420,809 $80,404 $288,259 ======= ========== ======== == ======== ======= ======== 1997................. Property and casualty reinsurance $29,644 $1,159,070 $136,288 $0 $376,672 $75,531 $261,828 ======= ========== ======== == ======== ======= ======== 1996................. Property and casualty reinsurance $20,771 $1,110,020 $ 95,472 $0 $346,777 $63,184 $243,725 ======= ========== ======== == ======== ======= ======== FOR THE YEAR ENDED DECEMBER 31 ----------------------------------- AMORTIZATION OF DEFERRED POLICY OTHER ACQUISITION OPERATING PREMIUMS YEAR COSTS EXPENSES WRITTEN - ---- ------------ --------- -------- 1998................. $113,170 $54,805 $438,162 ======== ======= ======== 1997................. $ 94,444 $51,769 $414,191 ======== ======= ======== 1996................. $ 88,895 $40,373 $360,305 ======== ======= ========
50 SCHEDULE IV ALLEGHANY CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, 1998 (IN THOUSANDS)
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED YEAR SEGMENT AMOUNT COMPANIES COMPANIES AMOUNT TO NET - ---- ------- -------- --------- ---------- -------- ---------- 1998................. Property and casualty reinsurance premiums $144,812 $110,377 $386,374 $420,809 92% ======== ======== ======== ======== ===== 1997................. Property and casualty reinsurance premiums $112,158 $ 88,416 $352,930 $376,672 94% ======== ======== ======== ======== ===== 1996................. Property and casualty reinsurance premiums $ 85,437 $ 65,968 $327,308 $346,777 94.39% ======== ======== ======== ======== =====
51 SCHEDULE VI ALLEGHANY CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (IN THOUSANDS)
DISCOUNT, IF ANY, DEDUCTED CLAIMS AND CLAIM RESERVES IN RESERVES ADJUSTMENT FOR FOR EXPENSES UNPAID UNPAID INCURRED RELATED TO DEFERRED CLAIMS CLAIMS ------------------- AFFILIATION POLICY AND CLAIM AND CLAIM NET (1) (2) WITH ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT PRIOR REGISTRANT COST EXPENSES EXPENSES PREMIUMS PREMIUMS INCOME YEAR YEAR - ----------- ----------- ---------- ----------- -------- -------- ---------- -------- -------- 1998 Consolidated property- casualty entities........ $93,397 $1,554,818 $0 $389,603 $420,809 $80,404 $290,513 $(2,254) ======= ========== == ======== ======== ======= ======== ======== 1997 Consolidated property- casualty entities........ $29,644 $1,159,070 $0 $136,288 $376,672 $75,531 $267,530 $(5,702) ======= ========== == ======== ======== ======= ======== ======== 1996 Consolidated property- casualty entities........ $20,771 $1,110,020 $0 $ 95,472 $346,777 $63,184 $242,332 $ 1,393 ======= ========== == ======== ======== ======= ======== ======== AMORTIZATION OF DEFERRED PAID CLAIMS AFFILIATION POLICY AND CLAIM WITH ACQUISITION ADJUSTMENT PREMIUMS REGISTRANT COSTS EXPENSES WRITTEN - ----------- ------------ ----------- -------- 1998 Consolidated property- casualty entities........ $113,170 $192,031 $438,162 ======== ======== ======== 1997 Consolidated property- casualty entities........ $ 94,444 $210,015 $414,191 ======== ======== ======== 1996 Consolidated property- casualty entities........ $ 88,895 $139,689 $360,305 ======== ======== ========
52 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Alleghany Corporation: Under date of February 19, 1999, we reported on the consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings, changes in common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998 as contained in the 1998 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Annual Report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statements schedules as listed in the accompanying index. These financial statements schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements schedules based on our audits. In our opinion, such financial statements schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP KPMG LLP New York, New York February 19, 1999 53 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.01 Restated Certificate of Incorporation of Alleghany, as amended by Amendment accepted and received for filing by the Secretary of State of the State of Delaware on June 23, 1988, filed as Exhibit 20 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 3.02 By-Laws of Alleghany as amended April 18, 1995, filed as Exhibit 3.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference. *10.01 Description of Alleghany Management Incentive Plan, filed as Exhibit 10.01 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.02 Alleghany Corporation Deferred Compensation Plan as amended and restated as of December 15, 1992, filed as Exhibit 10.03 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.03 Alleghany 1993 Long-Term Incentive Plan, as amended and restated effective as of January 1, 1994, filed as Exhibit 10.06(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.04 Alleghany Supplemental Death Benefit Plan dated as of May 15, 1985 and effective as of January 1, 1985, filed as Exhibit 10.08 to Old Alleghany's Annual Report on Form 10-K for the year ended December 31, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.05(a) Trust Agreement Amendment made as of July 8, 1994 between Alleghany and Chemical Bank, filed as Exhibit 10.08(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.05(b) Alleghany Retirement Plan, as amended and restated on March 14, 1995, filed as Exhibit 10.08(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.05(c) Amendments to Alleghany Retirement Plan, effective as of January 1, 1996, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, is incorporated herein by reference. *10.05(d) Amendments to Alleghany Retirement Plan, effective as of January 1, 1998, filed as Exhibit 10.05(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. *10.06 Alleghany Retirement COLA Plan dated and effective as of January 1, 1992, as adopted on March 17, 1992, filed as Exhibit 10.7 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.07 Description of Alleghany Group Long Term Disability Plan effective as of July 1, 1995, filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.08 Alleghany Amended and Restated Directors' Stock Option Plan effective as of April 20, 1993, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. *10.09 Alleghany Directors' Equity Compensation Plan, effective as of January 16, 1995, filed as Exhibit 10.11 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference.
54
EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.10 Alleghany Non-Employee Directors' Retirement Plan effective July 1, 1990, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.11(a) Description of compensatory arrangement between Alleghany and Paul F. Woodberry, filed as Exhibit 10.11(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by reference. *10.11(b) Description of long-term incentive arrangement between Alleghany and Paul F. Woodberry, filed as Exhibit 10.21(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.12 Revolving Credit Loan Agreement dated as of June 14, 1995 among Alleghany and Chemical Bank, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, is incorporated herein by reference. 10.12(a) First Amendment dated as of April 8, 1998, to the Revolving Credit Loan Agreement dated as of June 14, 1995, among Alleghany and Chase Manhattan Bank (formerly known as Chemical Bank), filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by reference. 10.13(a) Distribution Agreement dated as of June 16, 1998 by and between Alleghany Corporation and Chicago Title Corporation (the "Spin-Off Distribution Agreement"), filed as Exhibit 2.1(a) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.13(b) List of Contents of Exhibits to the Spin-Off Distribution Agreement, filed as Exhibit 2.1(b) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.13(c) Tax Sharing Agreement dated as of June 17, 1998 by and among Alleghany Corporation and Chicago Title Corporation, filed as Exhibit 10.2 to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.14 Distribution Agreement dated as of May 1, 1987 between Alleghany and MSL Industries, Inc., filed as Exhibit 10.21 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.15 Amendment to Distribution Agreement dated June 29, 1987, effective as of May 1, 1987, between Alleghany and MSL Industries, Inc., filed as Exhibit 10.22 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.16(a) Stock Purchase Agreement dated as of May 18, 1994 by and between First Interstate Bank of California and Alleghany (the "Sacramento Savings Stock Purchase Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, is incorporated herein by reference. 10.16(b) List of Contents of Exhibits and Schedules to the Sacramento Savings Stock Purchase Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, is incorporated herein by reference.
55
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.17(a) Note Purchase Agreement dated as of January 15, 1995 by and among Alleghany Properties, Inc., Alleghany and Hartford Life Insurance Company Separate Account CRC (the "Alleghany Properties Note Purchase Agreement"), filed as Exhibit 10.28(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. Agreements dated as of January 15, 1995 among Alleghany Properties, Inc., Alleghany and each of Transamerica Life Insurance & Annuity Company, Transamerica Occidental Life Insurance Company, United of Omaha Life Insurance Company, Mutual of Omaha Insurance Company, The Lincoln National Life Insurance Company, Knights of Columbus and Woodmen Accident and Life Company are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K. 10.17(b) List of Contents of Annexes and Exhibits to the Alleghany Properties Note Purchase Agreement, filed as Exhibit 10.28(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.17(c) Amendment to Alleghany Properties Note Purchase Agreement dated as of June 23, 1995 among Alleghany, Alleghany Properties, Inc. and the Purchasers listed on Annex 1 to the Alleghany Properties Note Purchase Agreement, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is incorporated herein by reference. 10.17(d) Amendment No. 2 to Alleghany Properties Note Purchase Agreement dated as of November 6, 1995 among Alleghany, Alleghany Properties, Inc. and the Purchasers listed on Annex 1 to the Alleghany Properties Note Purchase Agreement, filed as Exhibit 10.28(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.17(e) Third Amendment to Alleghany Properties Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany, Alleghany Properties, Inc., Hartford Life Insurance Company, Transamerica Life Insurance & Annuity Company, Transamerica Occidental Life Insurance Company, United of Omaha Life Insurance Company, Mutual of Omaha Insurance Company, The Lincoln National Life Insurance company, Knights of Columbus and Woodmen Accident and Life Company. 10.18(a) Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany Properties, Inc., Alleghany and United of Omaha Life Insurance Company (the "Alleghany Properties 1998 Note Purchase Agreement"). Agreements dated as of December 11, 1998 among Alleghany Properties, Inc., Alleghany and each of Companion Life Insurance Company, Hartford Life Insurance Company, The Lincoln National Life Insurance Company, and First Penn-Pacific Life Insurance Company are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K. 10.18(b) List of Contents of Annexes and Exhibits to the Alleghany Properties 1998 Note Purchase Agreement. Alleghany agrees to furnish supplementally a copy of any omitted annex or exhibit to the Securities and Exchange Commission upon request. 10.19(a) Installment Sales Agreement dated December 8, 1986 by and among Alleghany, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch & Co., Inc., filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.19(b) Intercreditor and Collateral Agency Agreement dated as of October 20, 1997 among The Chase Manhattan Bank, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
56
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.19(c) Master Agreement dated as of October 20, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, and related Amended Confirmation dated October 24, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.19(d) Indenture dated as of October 20, 1997 between Alleghany Funding Corporation and The Chase Manhattan Bank, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.20(a) Stock Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville International, B.V. (the "Celite Stock Purchase Agreement"), filed as Exhibit 10.2(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.20(b) List of Contents of Exhibits and Schedules to the Celite Stock Purchase Agreement, filed as Exhibit 10.2(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(a) Joint Venture Stock Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville Corporation (the "Celite Joint Venture Stock Purchase Agreement"), filed as Exhibit 10.3(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(b) List of Contents of Exhibits and Schedules to the Celite Joint Venture Stock Purchase Agreement, filed as Exhibit 10.3(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(a) Asset Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville Sales Corporation (the "Celite Asset Purchase Agreement"), filed as Exhibit 10.4(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(b) List of Contents of Exhibits and Schedules to the Celite Asset Purchase Agreement, filed as Exhibit 10.4(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(c) Amendment No. 1 dated as of July 31, 1991 to the Celite Asset Purchase Agreement, filed as Exhibit 10.32(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(a) Acquisition Related Agreement dated as of July 1, 1991, by and between Celite Holdings Corporation, Celite Corporation and Manville Corporation (the "Celite Acquisition Related Agreement"), filed as Exhibit 10.5(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
57
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.23(b) List of Contents of Exhibits to the Celite Acquisition Related Agreement, filed as Exhibit 10.5(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(c) Amendment dated as of July 31, 1991 to Celite Acquisition Related Agreement, filed as Exhibit 10.33(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.24(a) Amended and Restated Credit Agreement dated as of March 10, 1995 (the "World Minerals Credit Agreement") among Mineral Holdings Inc., World Minerals, the banks named therein, NationsBank, N.A. (Carolinas), Bank of America National Trust and Savings Association and Chemical Bank, filed as Exhibit 10.36(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.24(b) List of Contents of Exhibits and Annexes to World Minerals Credit Agreement, filed as Exhibit 10.36(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.25(a) Stock Purchase Agreement dated as of July 28, 1993 (the "Underwriters Stock Purchase Agreement") among Alleghany, The Continental Corporation, Goldman, Sachs & Co. and certain funds which Goldman, Sachs & Co. either control or of which they are general partner, Underwriters Re Holdings Corp. and Underwriters Re Corporation, filed as Exhibit 10.3(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.25(b) List of Contents of Exhibits and Schedules to the Underwriters Stock Purchase Agreement, filed as Exhibit 10.3(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.26 Indenture dated as of June 25, 1996 between URC Holdings Corp. (now known as Underwriters Re Group, Inc.) and The First National Bank of Chicago, as trustee, relating to the 7 7/8% Senior Notes due 2006, filed as Exhibit 10.30(j) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.27(a) Amended and Restated Credit Agreement dated as of December 31, 1998 among Underwriters Re Group, Inc., the Lenders named therein and The First National Bank of Chicago, as Agent (the "Underwriters Credit Agreement"). 10.27(b) List of Contents of Exhibits to the Underwriters Credit Agreement. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.27(c) Guaranty dated as of December 31, 1998 by Underwriters Reinsurance Company in favor of The First National Bank of Chicago, as Agent, pursuant to the Underwriters Credit Agreement. 10.28(a) Agreement and Plan of Amalgamation dated as of July 30, 1998 by and among Underwriters Reinsurance Company, Underwriters Acquisition Company Ltd. and Venton Holdings Ltd. (the "Amalgamation Agreement"). 10.28(b) List of Contents of Exhibits to the Amalgamation Agreement. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.28(c) Amendment No. 1 dated as of September 24, 1998 to the Amalgamation Agreement (the "Amalgamation Amendment No. 1").
58
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.28.(d) List of Contents of Exhibits to the Amalgamation Amendment No. 1. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.29(a) Letter of Credit Facility and Reimbursement Agreement dated as of October 23, 1998 by and among Venton Underwriting Limited, Talbot Underwriting Limited, Underwriters Re Group, Inc., Underwriters Reinsurance Company, the Banks parties thereto, Mellon Bank, N.A., Dresdner Kleinwort Benson North America LLC and Dresdner Bank AG, New York and Grand Cayman Branches (the "Underwriters Letter of Credit Facility"). 10.29(b) List of Contents of Exhibits to the Underwriters Letter of Credit Facility. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.29(c) First Amendment dated as of November 25, 1998 to the Underwriters Letter of Credit Facility. 10.29(d) Second Amendment dated as of December 8, 1998 to the Underwriters Letter of Credit Facility. 10.30(a) Agreement and Plan of Merger dated as of August 22, 1996 among Chicago Title of Colorado, Inc. ("CT of Colorado"), Alleghany Acquisition Corporation, Alleghany and each of the shareholders of CT of Colorado (the "CT of Colorado Merger Agreement"), filed as Exhibit 2.1 to Alleghany's Registration Statement on Form S-3 (Registration No. 333-13971), is incorporated herein by reference. 10.30(b) List of Contents of Exhibits to the CT of Colorado Merger Agreement, filed as Exhibit 2.2 to Alleghany's Registration Statement on Form S-3 (Registration No. 333-13971), is incorporated herein by reference. 13 Pages 3 through 5, 7, 9 through 11, 13 through 15, 17, 19, 22, and 24 through 46 of the Annual Report to Stockholders of Alleghany for the year 1998. 21 List of subsidiaries of Alleghany. 23 Consent of KPMG LLP, independent certified public accountants, to the incorporation by reference of their reports relating to the financial statements and related schedules of Alleghany and subsidiaries in Alleghany's Registration Statements on Form S-8 (Registration No. 33-27598), Form S-8 (Registration No. 333-323), Form S-8 (Registration No. 333-37237), Form S-8 (Registration No. 333-57133), Form S-3 (Registration No. 33-55707), Form S-3 (Registration No. 33-62477), Form S-3 (Registration No. 333-09881), and Form S-3 (Registration No. 333-13971). 27 Financial Data Schedule.
- --------------- * Compensatory plan or arrangement. EX-10.17.E 2 THIRD AMENDMENT TO NOTE PURCHASE AGREEMENT 1 Exhibit 10.17(e) THIRD AMENDMENT TO NOTE PURCHASE AGREEMENT THIS THIRD AMENDMENT TO NOTE PURCHASE AGREEMENT (this "AGREEMENT") is made as of December 11, 1998 by and among ALLEGHANY PROPERTIES, INC. (the, "COMPANY"), a Delaware corporation, ALLEGHANY CORPORATION (the "PARENT"), a Delaware corporation, HARTFORD LIFE INSURANCE COMPANY ("HARTFORD LIFE"), TRANSAMERICA LIFE INSURANCE & ANNUITY COMPANY ("TRANSAMERICA LIFE"), TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY ("TRANSAMERICA"), UNITED OF OMAHA LIFE INSURANCE COMPANY ("OMAHA LIFE"), MUTUAL OF OMAHA INSURANCE COMPANY ("MUTUAL OF OMAHA"), THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("LINCOLN NATIONAL"), KNIGHTS OF COLUMBUS ("KNIGHTS OF COLUMBUS"), WOODMEN ACCIDENT AND LIFE COMPANY ("WOODMEN ACCIDENT") (Hartford Life, Transamerica Life, Transamerica, Omaha Life, Mutual of Omaha, Lincoln National, Knights of Columbus and Woodmen Accident are herein referred to collectively as the "NOTEHOLDERS"). RECITALS WHEREAS, the Company and the Parent entered into those separate Note Purchase Agreements (as in effect prior to the effectiveness of this Agreement, collectively, the "EXISTING NOTE PURCHASE AGREEMENT" and as amended by this Agreement, the "AMENDED NOTE PURCHASE AGREEMENT"), each dated as of January 15, 1995, with the Noteholders, pursuant to which the Company sold, and the Noteholders purchased the Company's 8.62% Senior Notes due February 23, 2000 in the aggregate original principal amount of Fifty Million Dollars ($50,000,000) (the "NOTES"); WHEREAS, the Noteholders, are the holders of one hundred percent (100%) of the Notes outstanding as of the Effective Time (defined below); WHEREAS, the Company and the Parent are contemporaneously entering into those separate Note Purchase Agreements (collectively, the "1998 NOTE PURCHASE AGREEMENT"), each dated as of the date hereof, with the Purchasers identified on Annex 1 thereto, pursuant to which the Company has agreed to sell, and such Purchasers have agreed to purchase the Company's 6.83% Senior Notes due December 11, 2004 in the aggregate original principal amount of Forty Million Dollars ($40,000,000); WHEREAS, in connection with the execution and delivery of the 1998 Note Purchase Agreement the Noteholders, the Company and the Parent wish to amend certain provisions of the Existing Note Purchase Agreement and have agreed to be bound by the Amended Note Purchase Agreement, in each case, pursuant to and in accordance with the provisions hereof; NOW, THEREFORE, in consideration of the foregoing, the mutual premises, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINED TERMS Unless otherwise defined herein, terms that are defined in the Existing Note Purchase Agreement are used herein as so defined. 2 2. AMENDMENTS 2.1 AMENDMENT OF EXISTING NOTE PURCHASE AGREEMENT. The Existing Note Purchase Agreement is hereby amended in the manner specified in Exhibit A to this Agreement (such amendments herein referred to as, the "AMENDMENTS"). 2.2 EFFECT OF AMENDMENT. Except as expressly amended hereby, the Existing Note Purchase Agreement and the other Financing Documents shall continue in full force and effect in accordance with the provisions thereof. Except as expressly provided herein, this Agreement shall not be deemed (a) to be a waiver of, or consent to, or a modification or amendment of, any other term or condition of the Existing Note Purchase Agreement or any other Financing Document or (b) to prejudice any right or rights which the Noteholders may have in the future under or in connection with the Existing Note Purchase Agreement or any other Financing Document. 2.3 EFFECTIVE. This Agreement shall become effective upon execution and delivery of this Agreement by each of the parties hereto. The term "Effective Time" shall mean the first time all conditions set forth in Section 3 shall have been satisfied (or waived by each of the Noteholders). 3. CONDITIONS TO CONSENT OF REQUIRED HOLDERS The effectiveness of the Amendments are subject to satisfaction of the following conditions precedent (or waiver of one or more of such conditions by each of the Noteholders): 3.1 WARRANTIES AND REPRESENTATIONS TRUE; COMPLIANCE WITH THIS AGREEMENT. (a) WARRANTIES AND REPRESENTATIONS TRUE. The warranties and representations contained in Section 4 hereof shall be true at the Effective Time with the same effect as though made on and as of that time. (b) COMPLIANCE WITH THIS AGREEMENT. Each of the Company and the Parent shall have performed and complied with all agreements and conditions contained herein that, in each case, are required to be performed or complied with by the Company and the Parent on or prior to the Effective Time, and such performance and compliance shall remain in effect at the Effective Time. 3.2 OFFICERS' CERTIFICATES. The Noteholders shall have received from each of the Company and the Parent (a) a certificate signed by the President, any Vice-President or the Treasurer of such Person, substantially in the form of Exhibit B hereto, with respect to the matters therein set forth, and 2 3 (b) a certificate signed on behalf of such Person by the Secretary or an Assistant Secretary of such Person, substantially in the form of Exhibit C hereto, with respect to the matters therein set forth. 3.3 FEES AND EXPENSES. The Company shall have paid the fees and disbursements of the Noteholders special counsel reflected in a statement of such counsel rendered to the Company. 3.4 PROCEEDINGS SATISFACTORY. All proceedings taken in connection herewith and all documents and papers relating thereto shall be satisfactory to the Noteholders and their special counsel. The Noteholders and their special counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to the Noteholders and their special counsel. 4. REPRESENTATIONS AND WARRANTIES The Company and the Parent represent, warrant and covenant as of the date hereof and as of the Effective Time: (A) Each of the representations and warranties contained in the 1998 Note Purchase Agreement and each of the other documents executed or delivered in connection therewith are true and correct as of the date hereof. (B) No Default or Event of Default has occurred or is continuing, nor does any event or condition exist that, upon the execution and delivery of this Agreement and the effectiveness of the Amendments, would constitute a Default or an Event of Default. (C) The execution and delivery of this Agreement by the Company and the Parent have been duly authorized by all requisite corporate action on the part of the Company and the Parent and will not violate any provisions of law, any order, judgment or decree of any court or other agency of government, or the organizational documents of the Company or the Parent, or any other agreement or instrument to which the Company or the Parent is a party, or by which the Company or the Parent is bound. (D) Each of the Company and the Parent shall take any and all such actions and execute any and all such instruments and documents as are reasonably requested for the purpose of effectuating this Agreement. (E) Neither this Agreement nor any financial statements and other certificates provided to the Noteholders pursuant to the provisions of the Existing Note Purchase Agreement, nor any other written statement furnished by or on behalf of the Company or the Parent to the Noteholders in connection with the proposal and negotiation of the Amendments contain any untrue statement of a material fact or omit a material fact 3 4 necessary to make the statements contained therein not misleading. There is no fact relating to any event or circumstance that has occurred or arisen since the last day of the fiscal year of the Company most recently ended that either the Company or the Parent has disclosed to the Noteholders in writing that has had or, so far as the Company can now reasonably foresee, could reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise) or operations of the Company or the Parent. (F) Neither the nature of the Company or the Parent, or of their respective businesses or Properties, nor any relationship between the Company or the Parent and any other Person, nor any circumstance in connection with the execution and delivery of this Agreement, is such as to require an order, consent, approval, license, authorization or validation of, or filing, recording, registration or qualification with, any Governmental Authority on the part of the Company or the Parent as a condition to the execution, delivery or performance of this Agreement or the Amended Note Purchase Agreement, or the legality, validity, binding effect or enforceability of this Agreement or the Amended Note Purchase Agreement. (G) The obligations of the Company and the Parent set forth in this Agreement, the Amended Note Purchase Agreement, the Notes and other Financing Documents are valid, binding and enforceable in accordance with their respective terms, except as such enforceability may be: (i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium, or other similar laws affecting the enforceability of creditors' rights generally and (ii) subject to the availability of equitable remedies. 5. SURVIVAL All warranties, representations, certifications and covenants made by any of the Company or the Parent in this Agreement or in any certificate or other instrument delivered by either of them or on their behalf under this Agreement shall be considered to have been relied upon by the Noteholders and shall survive the execution of this Agreement, regardless of any investigation made by or on behalf of the Noteholders. All statements in any such certificate or other instrument shall constitute warranties and representations of the Company and the Parent under this Agreement. 6. GOVERNING LAW THIS AGREEMENT SMALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 7. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. [Remainder of page intentionally left blank. Next page is signature page.] 4 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized representatives under seal, all as of the day and year first above written. ALLEGHANY CORPORATION By_/s/ David B. Cuming_______________ Name: David B. Cuming Title: Senior Vice President ALLEGHANY PROPERTIES, INC. By_/s/ David B. Cuming_________________ Name: David B. Cuming Title: President HARTFORD LIFE INSURANCE COMPANY BY: HARTFORD INVESTMENT SERVICES, INC., ITS AGENT AND ATTORNEY-IN-FACT By_/s/ Betsy Roberts_____________________ Name: Betsy Roberts Title: Senior Vice President TRANSAMERICA LIFE INSURANCE & ANNUITY COMPANY By_/s/ John M. Casparian _________________ Name: John M. Casparian Title: Investment Officer TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY By_/s/ John M. Casparian__________________ Name: John M. Casparian Title: Investment Officer 6 UNITED OF OMAHA LIFE INSURANCE COMPANY By_/s/ Edwin H. Garrison, Jr._______________ Name: Edwin H. Garrison, Jr. Title: First Vice President MUTUAL OF OMAHA INSURANCE COMPANY By_/s/ Edwin H. Garrison, Jr._______________ Name: Edwin H. Garrison, Jr. Title: First Vice President THE LINCOLN NATIONAL LIFE INSURANCE COMPANY BY: LINCOLN NATIONAL INVESTMENT MANAGEMENT COMPANY, ITS ATTORNEY-IN-FACT By_/s/ Timothy L. Powell___________________ Name: Timothy L. Powell Title: Vice President KNIGHTS OF COLUMBUS By_/s/ Robert J. Lane _____________________ Name: Robert J. Lane Title: Assistant Supreme Secretary WOODMEN ACCIDENT AND LIFE COMPANY By_/s/ A.M. McCray_________________________ Name: A.M. McCray Title: Senior Director, Securities Investments and Assistant Treasurer 7 EXHIBIT A AMENDMENTS TO EXISTING NOTE PURCHASE AGREEMENT 1. AMENDMENT OF SECTION 7 OF THE EXISTING NOTE PURCHASE AGREEMENT. Section 7 of the Existing Note Purchase Agreement is deleted in its entirety and the following substituted in lieu thereof: "7. COVENANTS Each of the Parent and the Company covenants that on and after the Closing Date and so long as any of the Notes shall be outstanding: 7.1 PAYMENT OF TAXES AND CLAIMS. Each of the Parent and the Company will, and the Company will cause SPHI to, pay before they become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or its Property, and (b) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons that, if unpaid, might result in the creation of a Lien upon its Property, provided, that items of the foregoing description need not be paid (i) while being contested in good faith and by appropriate proceedings as long as adequate book reserves have been established and maintained and exist with respect thereto, and (ii) so long as the title of the Parent, the Company or SPHI, as the case may be, to, and its right to use, such Property, is not materially adversely affected thereby. 7.2 MAINTENANCE OF PROPERTIES; CORPORATE EXISTENCE; ETC..2 MAINTENANCE OF PROPERTIES; CORPORATE EXISTENCE; ETC. Each of the Parent and the Company will, and the Company will cause SPHI to, (a) PROPERTY -- maintain, preserve and keep its Property in good condition, ordinary wear and tear excepted, and make all necessary renewals, replacements, additions, betterments and improvements thereto, except where the failure to do so (i) could not reasonably be expected to have a Material Adverse Effect and (ii) is in conformity with the marketing strategy of the Company (A) to maximize proceeds from the sale of Real Estate Assets or (B) to sell the Real Exhibit A-1 8 Estate Assets on an "as is" basis; (b) INSURANCE -- maintain, with financially sound and reputable insurers, insurance with respect to its Property and business against such casualties and contingencies, of such types (including, without limitation, insurance with respect to losses arising out of Property loss or damage, public liability, business interruption, larceny, workers' compensation, embezzlement or other criminal misappropriation) and in such amounts as is customary in the case of corporations of established reputations engaged in the same or a similar business and similarly situated, it being understood that the Parent, the Company and SPHI may self-insure against hazards and risks with respect to which, and in such amounts as, the Parent, the Company or SPHI in good faith determines to be prudent and consistent with sound financial and business practice; (c) FINANCIAL RECORDS -- keep accurate and complete books of records and accounts in which full and correct entries shall be made of all its business transactions and which will permit the provision of accurate and complete financial statements in accordance with GAAP, and the Parent will cause each other Subsidiary to keep accurate and complete books of records and accounts in which full and correct entries shall be made of all its business transactions and which will permit the provision of accurate and complete financial statements in accordance with GAAP, to the extent required by the provisions of Section 8.1(a); (d) CORPORATE EXISTENCE AND RIGHTS -- do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises, subject to Section 7.9, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; and (e) COMPLIANCE WITH LAW -- be in compliance with all laws, ordinances or governmental rules or regulations to which it is subject (including, without limitation, any Environmental Protection Law) and obtain any licenses, certificates, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business if such non-compliance or failure to obtain could reasonably be expected to have a Material Adverse Effect or materially adversely affect the ability of the Parent, the Company or SPHI to conduct in the future the business it conducts at the time of such violation or failure to obtain. Exhibit A-2 9 7.3 PAYMENT OF NOTES AND MAINTENANCE OF OFFICE. The Company will punctually pay, or cause to be paid, the principal of and interest (and Make-Whole Amount, if any) on, the Notes, as and when the same shall become due according to the terms hereof and of the Notes, and will maintain an office at the address of the Company set forth in Section ERROR! REFERENCE SOURCE NOT FOUND. where notices, presentations and demands in respect hereof or of the Notes may be made upon it. Such office will be maintained at such address until such time as the Company shall notify the holders of the Notes in writing of any change of location of such office, which will in any event be located within the United States of America. 7.4 PENSION PLANS. (a) COMPLIANCE. Each of the Parent and the Company will, and will cause each ERISA Affiliate to, at all times with respect to each Pension Plan, make timely payment of contributions required to meet the minimum funding standard set forth in ERISA or the IRC with respect thereto, and to comply with all other applicable material provisions of ERISA and the IRC. (b) RELATIONSHIP OF VESTED BENEFITS TO PENSION PLAN ASSETS. The Parent or an ERISA Affiliate will contribute sufficient amounts to each Pension Plan so that the present value of all employee benefits vested under each Pension Plan at any time will not exceed, by more than Two Million Five Hundred Thousand Dollars ($2,500,000), the assets of such Pension Plan allocable to such vested benefits at such time, in each case determined pursuant to Section 7.4(c). (c) VALUATIONS. All assumptions and methods used to determine the actuarial valuation of vested employee benefits under Pension Plans and the present value of assets of Pension Plans will be reasonable in the good faith judgment of the Parent, the Company or the actuary engaged by the Parent or the Company, as the case may be, and will comply with all requirements of law. (d) PROHIBITED ACTIONS. Each of the Parent and the Company will not, and will not permit any ERISA Affiliate to: (i) engage in any "prohibited transaction" (as such term is defined in section 406 of ERISA or section 4975 of the IRC) that would result in the imposition of a material tax or penalty; (ii) incur with respect to any Pension Plan any material "accumulated funding deficiency" (as such term is defined in section 302 of ERISA), whether or not waived; (iii) terminate any Pension Plan in a manner that could result in Exhibit A-3 10 the imposition of a Lien on the Property of the Parent, the Company or any Subsidiary pursuant to section 4068 of ERISA or the creation of any liability under section 4062 of ERISA; (iv) fail to make any payment required by section 515 of ERISA; or (v) at any time be an "employer" (as such term is defined in section 3 of ERISA) required to contribute to any Multiemployer Plan or a "substantial employer" (as such term is defined in section 4001 of ERISA) required to contribute to any Multiple Employer Pension Plan if, at such time, it could reasonably be expected that the Parent, the Company or any Subsidiary will incur withdrawal liability in respect of such Multiemployer Plan or Multiple Employer Pension Plan if the aggregate amount of the taxes, penalties, funding deficiencies, interest or other amounts and any other liabilities in respect of any of the foregoing could reasonably be expected to have a Material Adverse Effect. 7.5 LINE OF BUSINESS. The Company will not, and will not permit SPHI to, engage in any business other than the ownership, operation and disposition of Real Estate Assets and activities reasonably related thereto. 7.6 INDEBTEDNESS. (a) TOTAL INDEBTEDNESS. The Company will not, and will not permit SPHI to, incur or in any manner be or become liable in respect of any Indebtedness, on and after the Closing Date, except (i) Indebtedness evidenced by the Notes, (ii) Indebtedness evidenced by the 1998 Notes, and (iii) an additional amount of Indebtedness of the Company and SPHI, determined on a consolidated basis for such Persons, not exceeding Ten Million Dollars ($10,000,000) in the aggregate at any time outstanding. (b) INDEBTEDNESS COVERAGE. The Company will not at any time permit the ratio of (i) Qualified Indebtedness Coverage Assets at such time to (ii) the sum of Exhibit A-4 11 (A) the aggregate of all Indebtedness of the Company and SPHI at such time, determined on a consolidated basis for such Persons, plus (B) Scheduled Interest Payments at such time, plus (C) the amount of Operating Expenses that the Company and SPHI would be permitted to incur on such date pursuant to Section 7.8, plus (D) if such time is on or after the date the last Real Estate Asset is sold and prior to the first date of the establishment of the Defeasance Trust pursuant to Section 7.15, the Make-Whole Amount in respect of the Notes and the 1995 Notes at such time to be less than 1.0 to 1.0. 7.7 RESTRICTED INVESTMENTS AND RESTRICTED PAYMENTS. The Company will not, and will not permit SPHI to, make any Restricted Investment and the Company will not declare or make, or become obligated to declare or make, any Restricted Payment (except for the Permitted Extraordinary Dividend), unless: (a) immediately after, and after giving effect to, such Restricted Investment or such Restricted Payment, as the case may be, the aggregate amount of all Restricted Investments of the Company and SPHI at such time plus all Restricted Payments declared, made or obligated to be declared or made by the Company on and after the Closing Date would not exceed the sum of (i) Excess Cumulative Net Proceeds at such time, plus (ii) the greater of (A) Zero Dollars ($0) and (B) the result of (1) Cumulative Non-Essential Contributions at such time minus (2) the Transfer Contribution Amount at such time; (b) immediately prior to, immediately after, and after giving effect to, Exhibit A-5 12 such Restricted Investment or such Restricted Payment, as the case may be, the ratio of (i) Qualified Restricted Payment Assets at such time to (ii) the aggregate of all Indebtedness of the Company and SPHI at such time would not be less than 2.0 to 1.0; and (c) at the time of such declaration, making or becoming obligated and immediately before, and after giving effect to, such Restricted Investment or such Restricted Payment and any concurrent transactions, no Default or Event of Default exists or would exist. Notwithstanding the requirements of clause (b) above and provided that the requirements of clauses (a) and (c) above have been satisfied, a cash dividend may be declared by the Company in respect of its capital stock in an amount, when added to the aggregate of other cash dividends made by the Company after the Closing Date (other than the Permitted Extraordinary Dividend) that does not exceed the aggregate amount of Cumulative Non-Essential Contributions at such time minus the Transfer Contribution Amount at such time. 7.8 OPERATING EXPENSES. The Company will not, and will not permit SPHI to: (a) incur any Operating Expense unless Cumulative Operating Expenses at such time would not exceed the sum of (i) Forty Million Dollars ($40,000,000), plus (ii) Operating Expense Contributions at such time; or (b) permit, at any time, the sum of (i) Cumulative Operating Expenses at such time minus Operating Expense Contributions at such time, plus (ii) the aggregate amount outstanding on all Seller Notes at such time to exceed Ninety Million Dollars ($90,000,000). 7.9 MERGER AND CONSOLIDATION. Exhibit A-6 13 The Company will not, and will not permit SPHI to, merge into, consolidate with, or sell, lease, transfer or otherwise dispose of all or substantially all of its Property (except as permitted under Section 7.10) to, any other Person or permit any other Person to consolidate with or merge into it (except that SPHI may merge into or consolidate with the Company if the Company is the surviving corporation); provided that the foregoing restriction does not apply to the merger or consolidation of the Company with, or the sale, lease, transfer or other disposition by the Company of all or substantially all of its Property to, another corporation, if: (a) the Company is the surviving corporation that results from such merger or consolidation; and (b) immediately prior to, and immediately after the consummation of the transaction, and after giving effect thereto, no Default or Event of Default exists or would exist. 7.10 TRANSFERS OF PROPERTY.10 TRANSFERS OF PROPERTY. The Company will not, and will not permit SPHI to, sell, lease as lessor, transfer or otherwise dispose of any Property (collectively, "Transfers") (provided that "Transfers" shall not include transfers of cash for the purpose of paying Operating Expenses, interest, principal or Make-Whole Amount, if any, relating to the Notes and any other Indebtedness, Restricted Payments to the Parent and Permitted Investments), except: (a) Transfers of Property, other than Real Estate Assets, if the sum of (i) the book value of such Property at the time of such Transfer, plus (ii) the aggregate book value of all other Property of the Company and SPHI, other than Real Estate Assets, that has been the subject of a Transfer (in each case measured at the time of the Transfer of such Property) during the period commencing on the Closing Date and ended at the time of such Transfer, would be less than Two Hundred Thousand Dollars ($200,000), provided that the Company will not Transfer any shares of the stock (or any warrants, rights or options to purchase stock or other Securities exchangeable for or convertible into stock) of SPHI; (b) any Transfer of Real Estate Assets for cash consideration or Seller Notes, or a combination of cash consideration and Seller Notes, so long as the aggregate amount outstanding with respect to all Seller Notes does not exceed Fifty Million Dollars ($50,000,000) and if either of the following conditions would be satisfied with respect to such Transfer: Exhibit A-7 14 (i) the Transfer Consideration with respect to such Transfer is at least equal to the Designated Disposition Value of the Real Estate Asset which is the subject of such Transfer, or (ii) the sum of (A) the Transfer Consideration with respect to such Transfer, plus (B) the aggregate Transfer Consideration received by the Company and SPHI with respect to all other Real Estate Assets that have been the subject of a Transfer on and after the Closing Date, plus (C) Cumulative Non-Essential Contributions at such time would exceed the aggregate Designated Disposition Values of all Real Estate Assets that have been the subject of Transfers (in each case measured at the time of such Transfer) on and after the Closing Date; and (c) immediately prior to, and immediately after the consummation of any such Transfer, and after giving effect thereto, no Default or Event of Default exists or would exist. 7.11 PURCHASE OBLIGATION OF THE PARENT. The Parent will purchase Real Estate Assets, selected by the Parent and for cash consideration equal to the Designated Disposition Value of such Real Estate Assets, in an amount sufficient to provide the Company with net cash proceeds, as necessary, to pay (a) the principal of and interest (and Make-Whole Amount, if any) on, the Notes, and any amounts due under Section 9.2(e) as and when the same shall become due according to the terms hereof and of the Notes (including, without limitation, the terms of Section 5.3), or (b) Operating Expenses due and payable at such time. Exhibit A-8 15 7.12 TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit SPHI to, enter into any material transaction or material arrangement, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate, except the sales contemplated by Section 7.11 or in the ordinary course of and pursuant to the reasonable requirements of the Company's or SPHI's business and upon fair and reasonable terms no less favorable to the Company or SPHI than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. 7.13 LIENS. (a) NEGATIVE PLEDGE. The Company will not, and will not permit SPHI to, cause or permit to exist, or agree or consent to cause or permit to exist in the future (upon the happening of a contingency or otherwise), any of its Property, whether now owned or hereafter acquired, to be subject to a Lien except: (i) Liens described in Part 7.13(a)(i) of Annex 3; (ii) Liens (A) arising from judicial attachments and judgments, (B) securing appeal bonds or supersedeas bonds, and (C) arising in connection with court proceedings (including, without limitation, surety bonds and letters of credit or any other instrument serving a similar purpose), provided that (1) such Liens are fully released within sixty (60) days of their creation or the execution or other enforcement of such Liens is effectively stayed, (2) the claims secured thereby are being contested in good faith and by appropriate proceedings and (3) adequate book reserves in accordance with GAAP shall have been established and maintained and shall exist with respect thereto; (iii) Liens incurred or deposits made in the ordinary course of business to secure the performance of letters of credit, bids, tenders, sales contracts, leases, statutory obligations, construction obligations, bonds and assessments or improvements, surety and performance bonds (of a type other than set forth in Section 7.13(a)(ii)) and other similar obligations not incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property, provided that, after giving effect to any enhancement in value and use of other Property related to such Property as a result of such Lien, (1) such Exhibit A-9 16 Liens do not in the aggregate materially detract from the value of such Property and (2) the title of the Company or SPHI to, and its right to use, such Property, is not materially adversely affected thereby; (iv) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other like laws; (v) Liens securing Property taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, vendors, landlords and other like Persons, provided that the payment thereof is not at the time required by Section 7.1; and (vi) Liens in the nature of reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions or encumbrances affecting real Property, provided that such exceptions and encumbrances do not in the aggregate detract from the value of such Property or interfere with the use of such Property in the ordinary conduct of the business of the Company and SPHI in a manner that has or could reasonably be expected to have a Material Adverse Effect. (b) EQUAL AND RATABLE LIEN; EQUITABLE LIEN. In case any Property shall be subjected to a Lien in violation of this Section 7.13, the Company will forthwith make or cause to be made, to the fullest extent permitted by applicable law, provision whereby the Notes will be secured equally and ratably with all other obligations secured thereby pursuant to such agreements and instruments as shall be approved by the Required Holders, and the Company will cause to be delivered to each holder of a Note an opinion of independent counsel to the effect that such agreements and instruments are enforceable in accordance with their terms, and in any such case the Notes shall have the benefit, to the full extent that, and with such priority as, the holders of Notes may be entitled under applicable law, of an equitable Lien on such Property securing the Notes. Such violation of this Section 7.13 will constitute an Event of Default hereunder, whether or not any such provision is made pursuant to this Section 7.13(b). (c) FINANCING STATEMENTS. The Company will not, and will not permit SPHI to, sign or file a financing statement under the Uniform Commercial Code of any jurisdiction that names the Company or SPHI as debtor, or sign any security agreement authorizing any secured party thereunder to file any such financing statement, except, in any such case, a financing statement filed or to be filed to perfect or protect a security interest that the Company or SPHI is entitled to create, assume or incur, or permit to exist, under the foregoing provisions of this Section 7.13 or to evidence for informational purposes a lessor's interest in Property leased Exhibit A-10 17 to the Company or SPHI. 7.14 PRIVATE OFFERING Neither the Parent nor the Company will, nor will they permit any Person acting on their behalf to, offer the Notes or any part thereof or any similar Securities for issue or sale to, or solicit any offer to acquire any of the same from, any Person so as to bring the issuance and sale of the Notes within the provisions of section 5 of the Securities Act." 7.15 DEFEASANCE (a) ESTABLISHMENT OF DEFEASANCE TRUST. If at any time neither the Company nor SPHI holds any Real Estate Assets, the Company shall contemporaneously with the sale of last Real Estate Asset and upon written notice (the "Trust Notice") to the holders of Notes then outstanding, establish a trust (the "Defeasance Trust"), solely in favor of all holders of Notes then outstanding, and irrevocably and absolutely assign, transfer, and convey to, and deposit into, said Defeasance Trust an amount of United States Governmental Obligations having interest and principal payments sufficient, in the opinion of independent certified public accountants of the Company expressed in a written certification thereof delivered to the holders of the Notes, to pay in full all remaining principal and interest payments, as the same shall fall due, in respect of all Notes then outstanding. Anything to the contrary contained herein notwithstanding, the Company may, at its sole discretion and at any time upon the delivery of a Trust Notice to the holders of Notes then outstanding, elect to establish a Defeasance Trust. (b) DISCHARGE. Provided that (i) the Defeasance Trust, the trustee thereof and the terms and conditions (as well as the form and substance) of the indenture whereby the Defeasance Trust shall have been established shall be reasonably satisfactory to all holders of Notes then outstanding (as evidenced by their written consent thereto), (ii) the purchase price of the United States Governmental Obligations to be deposited into the Defeasance Trust shall have been fully paid by the Company, and such United States Governmental Obligations shall have been so deposited into the Defeasance Trust (and each holder of Notes then outstanding shall have received written verification thereof by the trustee of the Defeasance Trust) and shall, as so deposited, be unencumbered by any Lien and sufficient to pay all principal and interest to fall due on the Notes then outstanding as provided in Section 5.1 and in the Notes, Exhibit A-11 18 (iii) the Company shall have (1) paid in full all fees, costs and expenses of the trustee of the Defeasance Trust and of all holders of Notes then outstanding incurred in connection with the preparation of the trust indenture and the establishment of the Defeasance Trust, including, without limitation, all reasonable attorney's fees and disbursements, and (2) prepaid in full any and all fees, costs and expenses of the trustee of the Defeasance Trust for the entire term of the Defeasance Trust, (iv) the Company shall have no continuing legal or equitable interest in the Defeasance Trust or the United States Governmental Obligations deposited into the Defeasance Trust (other than a reversionary interest in any such United States Governmental Obligations, or the proceeds therefrom, remaining after the full, final and indefeasible payment of all Notes and all interest thereon) and shall have no right to direct or instruct the trustee of the Defeasance Trust, or to remove such trustee, or to otherwise require such trustee to take any action with respect to such United States Governmental Obligations or otherwise, (v) no Event of Default shall have occurred and be continuing at the time of such deposit, (vi) the Company shall have delivered the Trust Notice to all holders of Notes then outstanding and a legal opinion of counsel to the Company, reasonably satisfactory to all holders of Notes then outstanding (as evidenced by their written approval thereof), stating, among other things which any holder of Notes then outstanding may reasonably request, that (1) the Defeasance Trust is validly created and duly constituted and that the sole beneficiaries thereof are the holders of Notes then outstanding, (2) the United States Governmental Obligations deposited therein were validly contributed to the Defeasance Trust and constitute a legal and valid res of the Defeasance Trust, (3) the Company's actions in creating the Defeasance Trust and contributing the United States Governmental Obligations thereto were duly authorized and valid, (4) the Company, as the settlor of the Defeasance Trust, has no right, title or interest in and to the Defeasance Trust or the res thereof (other than a reversionary interest in any United States Governmental Obligations or the proceeds thereof remaining after the full, final and indefeasible payment of all Notes and all interest thereon) and has no power of direction, or right of removal, with respect to the trustee of the Defeasance Trust, (5) all fees, costs and expenses of the trustee for the entire term of the Defeasance Trust have been prepaid in full and (6) the creation of the Defeasance Trust and the depositing of the United States Governmental Obligations therein shall not, for IRC purposes with respect to any holder of Notes then outstanding, result in a taxable event whereby (x) such holder may become liable to pay a tax on any gain deemed to have arisen with respect to such transaction or Exhibit A-12 19 (y) such holder shall have been deemed to have suffered a loss with respect to such transaction and (7) such holder will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if the Notes were paid in the accordance with their terms and the terms of this Agreement and such defeasance and discharge were not to occur; (vii) all principal, interest costs, expenses and other sums due and payable under the this Agreement to the holders of Notes outstanding on the date the Defeasance Trust is created shall have been paid in full; and (viii) the Company shall have delivered to the holders of Notes then outstanding an opinion of independent certified public accountants of the Company, reasonably satisfactory to such holders, stating that (i) the amount of United States Government Obligations deposited in the Defeasance Trust are sufficient to pay in full all remaining principal and interest payments, as the same shall fall due, in respect of all Notes then outstanding and (ii) under GAAP the creation of the Defeasance Trust and the depositing of the United States Governmental Obligations therein shall not result, with respect to any such holder, in an exchange of the Note or Notes of such holder for all or part of such United States Governmental Obligations which exchange would result in a gain or loss being realized by such holder under GAAP in respect of such transaction, then and in that case, all financial and restrictive covenants in respect of the Company set forth in Section 7 (other than this Section 7.15) of this Agreement shall be discharged; provided, however, if the contribution to the Defeasance Trust of any United States Governmental Obligations is invalidated, declared to be fraudulent or preferential, set aside, or if any such United States Governmental Obligations are required to be returned or redelivered to the Company, or any custodian, trustee, receiver or any other Person under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such invalidation, return or redelivery, the financial and restrictive covenants set forth in Section 7 of this Agreement shall be revived and restored. As used in this Section 7.15, the term "United States Governmental Obligations" shall mean any direct obligation of, or obligation guaranteed by, the United States of America, or any agency controlled or supervised by or acting as instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, so long as such obligation or guarantee shall have the benefit of the full faith and credit of the United States of America which shall have been pledged pursuant to authority granted by the Congress of the United States of America. Exhibit A-13 20 7.16 PERFORMANCE OF AGREEMENT. The Parent shall not cause or permit the Company or SPHI to take any action, or fail to take any action, which would result in a violation of any term or condition of this Agreement. 2. AMENDMENT OF SECTION 8.1 OF THE EXISTING NOTE PURCHASE AGREEMENT. Subsections (iii) and (v) of clause (c) of Section 8.1 of the Existing Note Purchase Agreement are deleted in their entirety and the following are respectively substituted in lieu thereof: "(III) ERISA -- promptly upon becoming aware of the occurrence of any (A) "reportable event" (as such term is defined in section 4043 of ERISA) and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations, or (B) "prohibited transactions" (as such term is defined in section 406 or section 4975 of the IRC) in connection with any Pension Plan or any trust created thereunder if the liability to the Parent, the Company or any ERISA Affiliate, taken together with any other such liabilities could reasonably be expect to have a Material Adverse Effect, a written notice specifying the nature thereof, what action the Parent or the Company, as the case may be, is taking or proposes to take with respect thereto, and, when known, any action taken by the IRS, the DOL or the PBGC with respect thereto;" . . . "(V) OTHER ERISA NOTICES -- prompt written notice of and, where applicable, a description of (A) any notice from the PBGC in respect of the commencement of any proceedings pursuant to section 4042 of ERISA to terminate any Pension Plan or for the appointment of a trustee to administer any Pension Plan, (B) any distress termination notice delivered to the PBGC under section 4041 of ERISA in respect of any Pension Plan, and any determination of the PBGC in respect thereof, (C) the placement of any Multiemployer Plan in reorganization status under Title IV of ERISA, (D) any Multiemployer Plan becoming "insolvent" (as such term is defined in section 4245 of ERISA) under Title IV of ERISA, Exhibit A-14 21 (E) the whole or partial withdrawal of the Parent or the Company or any ERISA Affiliate from any Multiemployer Plan and the withdrawal liability incurred in connection therewith, and (F) the withdrawal of the Parent or the Company or any ERISA Affiliate from any Multiple Employer Pension Plan and the withdrawal liability under ERISA incurred in connection therewith; and, in each of the cases specified in this clause (v), where the effect of any such notice, condition or event or of any event or condition related thereto would reasonably be expected to have a Material Adverse Effect;" 3. AMENDMENT OF SECTION 10.1 OF THE EXISTING NOTE PURCHASE AGREEMENT. (a) AMENDMENT TO EXISTING DEFINITIONS. Section 10.1 of the Existing Note Purchase Agreement is hereby amended by deleting the definitions of "Closing Date," "Cumulative Operating Expenses," "Designated Disposition Value," "Downgrade Event," "Excess Cumulative Net Proceeds," "Multiple Employer Pension Plan," "Pension Plan," "Person," "Qualified Indebtedness Coverage Assets," "Qualified Restricted Payment Assets," "Real Estate Loans" and "Scheduled Interest Payments" and the following definitions are substituted respectively in lieu thereof: "CLOSING DATE -- means December 11, 1998." "CUMULATIVE OPERATING EXPENSES -- means, at any time, the aggregate amount of Operating Expenses of the Company and SPHI, determined on a consolidated basis for such Persons, paid, or due and payable, from and including the Closing Date to such time." "DESIGNATED DISPOSITION VALUE -- means, at any time, with respect to each Real Estate Asset, the amount set forth on Annex 4 pertaining to such Real Estate Asset, adjusted as follows: the Designated Disposition Value shall, subject to the provisions of Section 8.2(c), be reduced (a) with respect to any Real Estate Property, on a Pro-Rata Basis in the event that a portion or portions of such Real Estate Property shall have been sold at or prior to such time, or (b) with respect to any Real Estate Loan, on a dollar-for-dollar basis to the extent that principal reductions shall have been made on such Real Estate Loan at or prior to such time; provided that in the case of any Real Estate Loan made by the Company or SPHI in the form of a Seller Note, the net book value (determined in accordance with GAAP) of such Seller Note shall in all cases be deemed to be its Designated Disposition Value. As used herein, the term "Pro-Rata Basis" means, with respect to any portion of any Real Estate Exhibit A-15 22 Property sold, the relationship of such portion sold to the portion retained by the Company on a basis which is reasonably related to the respective fair market values of the portions sold and retained at the time of such sale, provided that the sum of the Designated Disposition Value assigned to the portion sold plus the Designated Disposition Value assigned the portion retained shall equal the Designated Disposition Value of such Real Estate Property prior to adjustment." "DOWNGRADE EVENT -- means the existence or occurrence of any one or more of the following conditions: (a) the Parent shall have senior unsecured debt obligations with an actual credit rating of lower than "BBB-" by S&P or lower than "Baa3" by Moody's, (b) the Parent shall have subordinated unsecured debt obligations with an actual credit rating of lower than "BB+" by S&P or lower than "Ba1" by Moody's or (c) the Parent shall fail to have any unsecured debt obligations with a credit rating issued by S&P or Moody's, unless (i) the Company shall have obtained, and shall maintain on an ongoing basis, at its expense, private letter ratings of the Notes of at least "BBB-" from S&P and of at least "Baa3" from Moody's, or an Issuer Credit Rating (or a comparable rating) of the Parent of at least "BBB-" from S&P and an Issuer Rating (or a comparable rating) of the Parent of at least "Baa3" from Moody's and (ii) Consolidated Net Worth shall, at all times, be at least Eight Hundred Million Dollars ($800,000,000)." "EXCESS CUMULATIVE NET PROCEEDS -- means, at any time, an amount equal to the result of (a) the aggregate net cash proceeds received by the Company and SPHI from all Real Estate Assets sold, paid down or repaid at or prior to such time minus (b) the aggregate of the Designated Disposition Values for such Real Estate Assets, in each case determined as of the date of sale, pay down or repayment of such Real Estate Asset." "MULTIPLE EMPLOYER PENSION PLAN -- means any employee benefit plan within the meaning of section 3(3) of ERISA (other than a Multiemployer Plan), subject to Title IV of ERISA, constituting a "single-employer plan" (as defined in section 4001 of ERISA) which has two (2) or more "contributing sponsors" (as defined in section 4001 of ERISA), at least Exhibit A-16 23 two (2) of which are not under "common control" (as defined in section 4001 of ERISA) and to which the Parent, the Company or any ERISA Affiliate contribute; provided that for purposes of this Agreement the Chicago Title & Trust Pension Plan shall be deemed not to be a Multiple Employer Pension Plan." "PENSION PLAN -- means, at any time, any "employee pension benefit plan" (as defined in section 3 of ERISA) maintained at such time by the Parent, the Company or any ERISA Affiliate for employees of the Parent, the Company or such ERISA Affiliate, excluding any Multiemployer Plan, but including, without limitation, any Multiple Employer Pension Plan; provided that for purposes of this Agreement the Chicago Title & Trust Pension Plan shall be deemed not to be a Pension Plan." "PERSON -- means an individual, partnership, corporation, limited liability company, trust, unincorporated organization, or a government or agency or political subdivision thereof." "QUALIFIED INDEBTEDNESS COVERAGE ASSETS -- means (a) at any time, when the Company or SPHI holds Real Estate Assets, the sum (without duplication) of (i) the aggregate Allowable Value of all Real Estate Assets held by the Company and SPHI at such time, plus (ii) cash of the Company and SPHI at such time, plus (iii) Permitted Investments (other than cash and Real Estate Assets) of the Company and SPHI at such time, and (b) at any time, when neither the Company nor SPHI holds any Real Estate Assets, cash of the Company and SPHI at such time. As used in this definition: Allowable Value -- means, (i) with respect to each North Natomas Property, the Designated Disposition Value of such Real Estate Property at such time (ii) with respect to each Real Estate Loan which is a Seller Note, the net book value (determined in accordance with GAAP) of such Seller Note at such time, and (iii) with respect to each of the other Real Estate Assets not covered by subclause (i) or subclause (ii) above, the lesser of Exhibit A-17 24 (A) the Designated Disposition Value of such Real Estate Asset at such time and (B) the net book value (determined in accordance with GAAP) of such Real Estate Asset at such time." "QUALIFIED RESTRICTED PAYMENT ASSETS -- means, at any time, the sum (without duplication) of (a) the lesser of (i) the aggregate Designated Disposition Value of all Real Estate Assets held by the Company and SPHI at such time and (ii) the Reserve for Disposition at such time plus (A) in the case of all Real Estate Assets held by the Company and SPHI at such time other than the North Natomas Properties, the aggregate net book value (each as determined in accordance with GAAP) of such Real Estate Assets, and (B) in the case of the North Natomas Properties, the aggregate Designated Disposition Value of such Real Estate Properties at such time, plus (b) cash of the Company and SPHI at such time, plus (c) Permitted Investments (other than cash and Real Estate Assets) of the Company and SPHI at such time. As used in this definition: Reserve for Disposition -- means, at any time, the lesser of (i) Four Million Five Hundred Thirty-One Thousand Three Hundred Seventy-Nine Dollars ($4,531,379) and (ii) the aggregate amount of reserves for disposition reflected on Annex 4 and attributable to Real Estate Assets other than the North Natomas Properties owned by the Company and SPHI at such time." "REAL ESTATE LOANS -- means loans to be repaid to the Company or SPHI, Exhibit A-18 25 including, without limitation, loans in the form of Seller Notes, that are secured by unimproved or improved land with no significant building improvements, which loans are available for sale by the Company or SPHI." "SCHEDULED INTEREST PAYMENTS -- means, at any time, the sum of (a) all future unpaid scheduled payments of interest in respect of the Notes and the 1998 Notes at such time plus (b) the aggregate amount of all future unpaid scheduled payments of interest in respect of all other Indebtedness of the Company and SPHI outstanding at such time, in each case without application of any "present value" discount thereto and assuming for such calculation that all principal payments on the Notes and such other Indebtedness will be paid in accordance with the regularly scheduled terms." (b) ADDITION OF NEW DEFINITIONS. Section 10.1 is amended by adding the following definitions in their appropriate alphabetical order: "1998 NOTES -- means the Company's 6.83% Senior Notes due December 11, 2004 issued pursuant to those certain Note Purchase Agreements, each dated December 11, 1998, among the Company, the Parent and each of the purchasers identified on Annex 1 thereto." "NORTH NATOMAS PROPERTIES -- means the Real Estate Properties identified on Part 10.1 of Annex 3." "PERMITTED EXTRAORDINARY DIVIDEND -- means the dividend by the Company to the Parent, on or about the Closing Date, in the amount of Thirty-Nine Million Five Hundred Thousand Dollar ($39,500,000)." "QPAM EXEMPTION means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor." (c) DELETION OF EXISTING DEFINITIONS -- Section 10.1 is hereby amended by deleting the definition of "Cumulative Contributions" . Exhibit A-19 26 EXHIBIT B ALLEGHANY CORPORATION CERTIFICATE OF OFFICERS The undersigned, ________________ and ________________, each hereby certifies that we are the _______________ and ______________ of ALLEGHANY CORPORATION, a Delaware corporation (the "PARENT"), and that, as such, we have access to its corporate records and are familiar with the matters herein certified, and we are authorized to execute and deliver this Certificate in the name and on behalf of the Parent, and that: 1. This certificate is being delivered pursuant to (a) Section 3.3(a) of the separate Note Purchase Agreements (collectively, the "NOTE PURCHASE AGREEMENT"), each dated as of December 11, 1998, among Alleghany Properties, Inc. (the "COMPANY"), the Parent and each of the purchasers listed in Annex 1 thereto (the "PURCHASERS") and (b) Section 3.2(a) of the Third Amendment to Note Purchase Agreement (the "THIRD AMENDMENT") dated as of December 11, 1998 among the Company, the Parent and the holders of the 1995 Notes (the "1995 NOTEHOLDERS"). The terms used in this Certificate and not defined herein have the respective meanings specified in the Note Purchase Agreement. 2. The warranties and representations contained in Section 2 of the Note Purchase Agreement and Section 4 of the Third Amendment are in all material respects true on the date hereof with the same effect as though made on and as of the date hereof. 3. The Parent has performed and complied with all agreements and conditions contained in the Note Purchase Agreement and the Third Amendment that are required to be performed or complied with by the Parent prior to or on the date hereof, and such performance and compliance remains in effect on the date hereof. 4. _____________, from _____________ to the date hereof, inclusive, has been and is the duly elected, qualified and acting Secretary of the Parent, and the signature appearing on the Certificate of Secretary dated the date hereof and delivered to each Purchaser and the 1995 Noteholders contemporaneously herewith is his/her genuine signature. 27 IN WITNESS WHEREOF, we have executed this Certificate in the name and on behalf of the Parent on December __, 1998. ALLEGHANY CORPORATION By:__________________________________ Name:__________________________ By:__________________________________ Name:__________________________ 2 28 Exhibit B ALLEGHANY PROPERTIES, INC. CERTIFICATE OF OFFICER The undersigned, ________________ and ________________, each hereby certifies that we are the _______________ and ______________ of ALLEGHANY PROPERTIES, INC., a Delaware corporation (the "COMPANY"), and that, as such, we have access to its corporate records and are familiar with the matters herein certified, and we are authorized to execute and deliver this Certificate in the name and on behalf of the Company, and that: 1. This certificate is being delivered pursuant to (a) Section 3.3(b) of the separate Note Purchase Agreements (collectively, the "NOTE PURCHASE AGREEMENT"), each dated as of December 11, 1998, among the Company, Alleghany Corporation (the "PARENT") and each of the purchasers listed in Annex 1 thereto (the "PURCHASERS") and (b) Section 3.2(a) of the Third Amendment to Note Purchase Agreement (the "THIRD AMENDMENT") dated as of December 11, 1998 among the Company, the Parent and the holders of the 1995 Notes (the "1995 NOTEHOLDERS"). The terms used in this Certificate and not defined herein have the respective meanings specified in the Note Purchase Agreement. 2. The warranties and representations contained in Section 2 of the Note Purchase Agreement and Section 4 of the Third Amendment are in all material respects true on the date hereof with the same effect as though made on and as of the date hereof. 3. The Company has performed and complied with all agreements and conditions contained in the Note Purchase Agreement and the Third Amendment that are required to be performed or complied with by the Company prior to or on the date hereof, and such performance and compliance remains in effect on the date hereof. 4. _________________, from ______________ to the date hereof, inclusive, has been and is the duly elected, qualified and acting Secretary of the Company, and the signature appearing on the Certificate of Secretary dated the date hereof and delivered to the Purchasers and the 1995 Noteholders contemporaneously herewith is his genuine signature. IN WITNESS WHEREOF, we have executed this Certificate in the name and on behalf of the Company on December __, 1998. ALLEGHANY PROPERTIES, INC. By:__________________________________ Name:________________________ By:__________________________________ Name:________________________ 29 Exhibit C ALLEGHANY CORPORATION CERTIFICATE OF SECRETARY I, ___________________, hereby certify that I am the duly elected, qualified and acting Secretary of ALLEGHANY CORPORATION (the "PARENT"), a Delaware corporation, and that, as such, I have access to its corporate records and am familiar with the matters herein certified, and I am authorized to execute and deliver this Certificate in the name and on behalf of the Parent, and that: 1. This Certificate is being delivered pursuant to (a) Section 3.3(c) of the separate Note Purchase Agreements (collectively, the "NOTE PURCHASE AGREEMENT"), each dated as of December 11, 1998, among Alleghany Properties, Inc. (the "COMPANY"), the Parent and each of the purchasers listed on Annex 1 thereto (collectively, the "PURCHASERS") and (b) Section 3.2(b) of the Third Amendment to Note Purchase Agreement (the "THIRD AMENDMENT") dated as of December 11, 1998 among the Company, the Parent and the holders of the 1995 Notes. The capitalized terms used in this Certificate and not defined herein have the respective meanings specified in the Note Purchase Agreement. 2. Attached hereto as Attachment A is a true and correct copy of resolutions adopted by the Executive Committee of the Board of Directors of the Parent on ____________, and such resolutions set forth in Attachment A hereto were duly adopted by said Executive Committee and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of the Executive Committee. 3. The Note Purchase Agreement and the Third Amendment were executed and delivered by the Parent pursuant to and in accordance with the resolutions set forth in Attachment A hereto and said document as executed is substantially in the form approved by the Executive Committee of the Parent as aforementioned. 4. Attached hereto as Attachment B is a true, correct and complete copy of the bylaws of the Parent as in full force and effect on and as of the date hereof, which bylaws have been in full effect in said form at all times from _______________ to the date hereof, inclusive, without modification or amendment in any respect. 5. Each of the persons named on Attachment C is and has been a duly elected, qualified and acting officer of the Parent holding the office or offices set forth below opposite his or her name on Attachment C from ________________ to the date hereof, inclusive. 6. The signature appearing opposite the name of each such person set forth on Attachment C is his or her genuine signature. 7. Attached hereto as Attachment D is a long-form good standing certificate in respect of the Parent from the State of Delaware which certificate (a) lists all corporate documents filed with the Secretary of State of Delaware on or prior to the date hereof in respect of the Parent, (b) has attached copies of such documents, 30 (c) bears the certification of the Secretary of State of Delaware, and (d) is true, correct and complete. 8. There have been no amendments or supplements to or restatements of the Certificate of Incorporation of the Parent since ______________. IN WITNESS WHEREOF, I have hereunto set my hand on December __, 1998. ALLEGHANY CORPORATION Secretary _____________________________________ 2 31 ATTACHMENT A Resolutions of the Parent [To be supplied by the Parent] 3 32 ATTACHMENT B Bylaws of the Parent [To be supplied by the Parent] 4 33 ATTACHMENT C Authorized Officers and Specimen Signatures [To be supplied by the Parent] 5 34 ATTACHMENT D Long Form Good Standing Certificate [To be supplied by the Parent] 6 35 Exhibit C ALLEGHANY PROPERTIES, INC. CERTIFICATE OF SECRETARY I, __________, hereby certify that I am the duly elected, qualified and acting Secretary of ALLEGHANY PROPERTIES, INC. (the "COMPANY"), a Delaware corporation, and that, as such, I have access to its corporate records and am familiar with the matters herein certified, and I am authorized to execute and deliver this Certificate in the name and on behalf of the Company, and that: 1. This Certificate is being delivered pursuant to (a) Section 3.3(d) of the separate Note Purchase Agreements (collectively, the "NOTE PURCHASE AGREEMENT"), each dated as of December 11, 1998, among the Company, Alleghany Corporation (the "PARENT") and each of the purchasers listed on Annex 1 thereto (collectively, the "PURCHASERS") and (b) Section 3.2(b) of the Third Amendment to Note Purchase Agreement (the "THIRD AMENDMENT") dated as of December 11, 1998 among the Company, the Parent and the holders of the 1995 Notes. The capitalized terms used in this Certificate and not defined herein have the respective meanings specified in the Note Purchase Agreement. 2. Attached hereto as Attachment A is a true and correct copy of the resolutions, and the preamble thereto, of the Board of Directors of the Company adopting resolutions on ____________, and such resolutions were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of the Board of Directors. 3. The documents listed below were executed and delivered by the Company pursuant to and in accordance with the resolutions set forth in Attachment A hereto and said documents as executed are substantially in the form approved by the Board of Directors of the Company as aforementioned: (a) the Note Purchase Agreement providing for, among other things, the issuance and sale by the Company and the purchase by the Purchasers of the Company's 6.83% Senior Notes due December 11, 2004 (the "Notes"); (b) the Notes; and (c) the Third Amendment. 4. Attached hereto as Attachment B is a true, correct and complete copy of the bylaws of the Company as in full force and effect on and as of the date hereof, which bylaws have been in full effect in said form at all times from __________ to the date hereof, inclusive, without modification or amendment in any respect. 5. Each of the persons named on Attachment C is and has been a duly elected, qualified and acting officer of the Company holding the office or offices set forth below his or her name on Attachment C from _____________ to the date hereof, inclusive. 6. The signature appearing opposite the name of each such person set forth on Attachment C is his or her genuine signature. 36 7. Attached hereto as Attachment D is a long-form good standing certificate in respect of the Company from the State of Delaware which certificate (a) lists all corporate documents filed with the Secretary of State of Delaware on or prior to the date hereof in respect of the Company, (b) has attached copies of such documents, (c) bears the certification of the Secretary of State of Delaware, and (d) is true, correct and complete. 1. There have been no amendments or supplements to or restatements of the Certificate of Incorporation of the Company since _______________. IN WITNESS WHEREOF, I have hereunto set my hand on December __, 1998. ALLEGHANY PROPERTIES, INC. Secretary ------------------------------------ 37 ATTACHMENT A Resolutions of the Company [To be supplied by the Company] 3 38 ATTACHMENT B Bylaws of the Company [To be supplied by the Company] 4 39 ATTACHMENT C Authorized Officers and Specimen Signatures [To be supplied by the Company] 5 40 ATTACHMENT D Long Form Good Standing Certificate [To be supplied by the Company] 6 EX-10.18.A 3 NOTE PURCHASE AGREEMENT DATED DECEMBER 11, 1998 1 Exhibit 10.18(a) ALLEGHANY CORPORATION ALLEGHANY PROPERTIES, INC. NOTE PURCHASE AGREEMENT DATED AS OF DECEMBER 11, 1998 $40,000,000 6.83% SENIOR NOTES DUE DECEMBER 11, 2004 2
TABLE OF CONTENTS PAGE 1. PURCHASE AND SALE OF NOTES............................................................................... 1 1.1 Issue of Notes.................................................................................. 1 1.2 The Closing..................................................................................... 1 1.3 Purchase for Investment......................................................................... 2 1.4 Failure To Deliver, Failure of Conditions....................................................... 4 1.5 Expenses........................................................................................ 4 2. WARRANTIES AND REPRESENTATIONS........................................................................... 5 2.1 Nature of Business.............................................................................. 5 2.2 Financial Statements; Indebtedness; Material Adverse Change..................................... 5 2.3 Subsidiaries and Affiliates..................................................................... 6 2.4 Pending Litigation.............................................................................. 6 2.5 Title to Properties............................................................................. 6 2.6 Patents, Trademarks, Licenses, etc.............................................................. 7 2.7 Taxes........................................................................................... 7 2.8 Full Disclosure................................................................................. 7 2.9 Corporate Organization and Authority............................................................ 8 2.10 Restrictions on Parent, Company and SPHI........................................................ 8 2.11 Compliance with Law............................................................................. 9 2.12 Pension Plans................................................................................... 9 2.13 Certain Laws.................................................................................... 10 2.14 Environmental Compliance........................................................................ 10 2.15 Sale is Legal and Authorized; Obligations are Enforceable....................................... 11 2.16 Governmental Consent............................................................................ 12 2.17 Private Offering................................................................................ 12 2.18 No Defaults..................................................................................... 12 2.19 Use of Proceeds................................................................................. 13 2.20 Year 2000 Compliant............................................................................. 13 3. CLOSING CONDITIONS....................................................................................... 13 3.1 Opinions of Counsel............................................................................. 13 3.2 Warranties and Representations True............................................................. 14 3.3 Officers' Certificates.......................................................................... 14 3.4 Legality........................................................................................ 14 3.5 Private Placement Number........................................................................ 14 3.6 Expenses........................................................................................ 15 3.7 Other Purchasers................................................................................ 15 3.8 Proceedings Satisfactory........................................................................ 15 3.9 Compliance with this Agreement.................................................................. 15 4. PURCHASERS' SPECIAL RIGHTS............................................................................... 15 4.1 Direct Payment.................................................................................. 15 4.2 Delivery Expenses............................................................................... 16 4.3 Issuance Taxes.................................................................................. 16
i 3 5. PREPAYMENTS.............................................................................................. 16 5.1 Required Prepayments............................................................................ 16 5.2 Optional Prepayments............................................................................ 16 5.3 Prepayment upon a Downgrade Event............................................................... 17 5.4 Partial Prepayment Pro Rata..................................................................... 18 5.5 Notation of Notes on Prepayment................................................................. 19 5.6 No Other Optional Prepayments................................................................... 19 6. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES............................................................ 19 6.1 Registration of Notes........................................................................... 19 6.2 Exchange of Notes............................................................................... 19 6.3 Replacement of Notes............................................................................ 20 7. COVENANTS................................................................................................ 20 7.1 Payment of Taxes and Claims..................................................................... 20 7.2 Maintenance of Properties; Corporate Existence; etc............................................. 21 7.3 Payment of Notes and Maintenance of Office...................................................... 22 7.4 Pension Plans................................................................................... 22 7.5 Line of Business................................................................................ 23 7.6 Indebtedness.................................................................................... 23 7.7 Restricted Investments and Restricted Payments.................................................. 24 7.8 Operating Expenses.............................................................................. 25 7.9 Merger and Consolidation........................................................................ 25 7.10 Transfers of Property........................................................................... 26 7.11 Purchase Obligation of the Parent............................................................... 27 7.12 Transactions with Affiliates.................................................................... 27 7.13 Liens........................................................................................... 27 7.14 Private Offering................................................................................ 29 7.15 Defeasance...................................................................................... 29 7.16 Performance of Agreement........................................................................ 31 8. INFORMATION AS TO PARENT AND COMPANY..................................................................... 31 8.1 Financial and Business Information.............................................................. 31 8.2 Officers' Certificates.......................................................................... 37 8.3 Accountants' Certificates....................................................................... 38 8.4 Inspection...................................................................................... 38 8.5 Confidential Information........................................................................ 38 9. EVENTS OF DEFAULT........................................................................................ 40 9.1 Nature of Events................................................................................ 40 9.2 Default Remedies................................................................................ 42 9.3 Annulment of Acceleration of Notes.............................................................. 44 10. INTERPRETATION OF THIS AGREEMENT......................................................................... 44 10.1 Terms Defined................................................................................... 44 10.2 GAAP............................................................................................ 60
ii 4 10.3 Directly or Indirectly.......................................................................... 60 10.4 Section Headings and Table of Contents and Construction......................................... 60 10.5 Governing Law................................................................................... 60 11. MISCELLANEOUS............................................................................................ 61 11.1 Communications.................................................................................. 61 11.2 Reproduction of Documents....................................................................... 62 11.3 Survival........................................................................................ 62 11.4 Successors and Assigns.......................................................................... 62 11.5 Amendment and Waiver............................................................................ 63 11.6 Payments, When Received......................................................................... 64 11.7 Entire Agreement................................................................................ 64 11.8 Duplicate Originals, Execution in Counterpart................................................... 65
Annex 1 -- Information as to Purchasers Annex 2 -- Payment Instructions at Closing Annex 3 -- Information as to Parent and Company Annex 4 -- Designated Disposition Values and Reserves for Disposition Exhibit A -- Form of 6.83% Senior Note Due December 11, 2004 Exhibit B1 -- Form of Company Counsel's Closing Opinion Exhibit B2 -- Form of Special Counsel's Closing Opinion Exhibit C1 -- Form of Officers' Certificate - Parent Exhibit C2 -- Form of Officers' Certificate - Company Exhibit D1 -- Form of Secretary's Certificate - Parent Exhibit D2 -- Form of Secretary's Certificate - Company iii 5 ALLEGHANY CORPORATION ALLEGHANY PROPERTIES, INC. NOTE PURCHASE AGREEMENT $40,000,000 6.83% SENIOR NOTES DUE DECEMBER 11, 2004 Dated as of December 11, 1998 UNITED OF OMAHA LIFE INSURANCE COMPANY MUTUAL OF OMAHA PLAZA OMAHA, NE 68175-1011 Ladies and Gentlemen: ALLEGHANY CORPORATION (together with its successors and assigns, the "Parent"), a Delaware corporation, and ALLEGHANY PROPERTIES, INC. (together with its successors and assigns, the "Company"), a Delaware corporation, hereby agree with you as follows: 1. PURCHASE AND SALE OF NOTES 1.1 ISSUE OF NOTES. The Company will authorize the issuance of Forty Million Dollars ($40,000,000) in aggregate principal amount of its six and eighty-three one-hundredths percent (6.83%) Senior Notes due December 11, 2004 (the "Notes"). Each Note shall be in the form of the Note set out in Exhibit A. The term "Note" as used herein shall include each Note delivered pursuant to this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to Section 6.2 or Section 6.3. 1.2 THE CLOSING. (a) PURCHASE AND SALE OF NOTES. The Company hereby agrees to sell to you and you hereby agree to purchase from the Company, in accordance with the provisions hereof, the aggregate principal amount of Notes set forth below your name on Annex 1 at one hundred percent (100%) of the principal amount thereof. (b) THE CLOSING. The closing (the "Closing") of the Company's sale of Notes 1 6 shall be held on December 11, 1998 (the "Closing Date") at 10:00 a.m., Hartford, Connecticut time, at the office of your special counsel, Hebb & Gitlin, a Professional Corporation (the "Special Counsel"), One State Street, Hartford, Connecticut 06103. At the Closing, the Company shall deliver to you one or more Notes (as set forth below your name on Annex 1), in the denominations indicated on Annex 1, in the aggregate principal amount of your purchase, dated the Closing Date and payable to you or payable as indicated on Annex 1, against payment by federal funds wire transfer in immediately available funds of the purchase price thereof, as directed by the Company on Annex 2. All transactions contemplated by this Agreement will be considered to have taken place simultaneously on the Closing Date and no delivery of documents or payments will be considered to have been made until all such transactions are completed. (c) OTHER PURCHASERS. Contemporaneously with the execution and delivery hereof, the Company is entering into a separate Note Purchase Agreement identical (except for the name and signature of the purchaser) hereto (this Agreement and such other separate Note Purchase Agreements being herein sometimes referred to collectively as the "Note Purchase Agreement") with each other purchaser (the "Other Purchasers") listed on Annex 1, providing for the sale to each Other Purchaser of Notes in the aggregate principal amount set forth below its name on such Annex. The sales of the Notes to you and to each Other Purchaser are to be separate sales. 1.3 PURCHASE FOR INVESTMENT. (a) PURCHASE FOR INVESTMENT. You represent to the Company that you are purchasing the Notes listed on Annex 1 below your name for your own account for investment and with no present intention of distributing the Notes or any part thereof, but without prejudice to your right at all times to (i) sell or otherwise dispose of all or any part of the Notes under a registration statement filed under the Securities Act, or in a transaction exempt from the registration requirements of the Securities Act, and (ii) have control over the disposition of all of your assets to the fullest extent required by any applicable insurance law. It is understood that, in making the representations set out in Section 2.15(a) and Section 2.16, the Company is relying, to the extent applicable, upon your representation in the immediately preceding sentence. (b) ERISA. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder. (i) the Source is an "insurance company general account" as defined in Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (60 FR 2 7 35925, July 12, 1995) and in respect thereof you represent that there is no "employee benefit plan" (as defined in section 3(3) of ERISA and section 4975(e)(1) of the IRC, treating as a single plan all plans maintained by the same employer or employee organization or affiliate thereof) with respect to which the amount of the general account reserves and liabilities of all contracts held by or on behalf of such plan exceed ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement filed with your state of domicile and that such acquisition is eligible for and satisfies the other requirements of such exemption; or (ii) the Source is either (A) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (B) a bank collective investment fund, within the meaning of the PTE 1-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (ii), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (iii) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (A) the identity of such QPAM and (B) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (iii); or (iv) the Source is a governmental plan; or (v) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (v); or (vi) the Source is an insurance company separate account maintained solely in connection with fixed contractual obligations of the insurance company under which the amounts payable, or credited, to any employee benefit plan (or its related trust) and to any participant or beneficiary of such plan (including any 3 8 annuitant) are not affected in any manner by the investment performance of the separate account; or (vii) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. As used in this Section 1.3(b), the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL PLAN" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 1.4 FAILURE TO DELIVER, FAILURE OF CONDITIONS. If at the Closing the Company fails to tender to you the Notes to be purchased by you thereat, or if the conditions specified in Section 0 to be fulfilled at the Closing have not been fulfilled, you may thereupon elect to be relieved of all further obligations hereunder. Nothing in this Section 0 shall operate to relieve the Parent or the Company from any of its obligations hereunder or to waive any of your rights against the Parent or the Company. 1.5 EXPENSES. (a) GENERALLY. Whether or not the Notes are sold, the Company shall promptly (and in any event within thirty (30) days of receiving any statement or invoice therefor) pay all reasonable fees, expenses and costs relating hereto, including but not limited to: (i) the cost of reproducing this Agreement and the Notes; (ii) the reasonable fees and disbursements of the Special Counsel; (iii) the cost of delivering to your home office or custodian bank, insured to your satisfaction, the Notes purchased by you at the Closing; (iv) the reasonable fees, expenses and costs incurred complying with each of the conditions to closing set forth in Section 0; and (v) the expenses relating to the consideration, negotiation, preparation or execution of any amendments, waivers or consents pursuant to the provisions hereof (including, without limitation, the reasonable allocated cost of your counsel who are your employees or your affiliates' employees), whether or not any such amendments, waivers or consents are executed. (b) COUNSEL. Without limiting the generality of the foregoing, it is agreed and understood that the Company will pay, at the Closing, the statement for reasonable fees and disbursements of the Special Counsel presented at the Closing and the Company will also pay upon receipt of any statement thereof, each additional statement for reasonable fees and disbursements of the Special Counsel rendered after the Closing in connection 4 9 with the issuance of the Notes or of your other counsel rendered after the Closing in connection with the matters referred to in Section 0(a)(v). (c) SURVIVAL. The obligations of the Company under this Section 0 shall survive the payment or prepayment of the Notes and the termination hereof. 2. WARRANTIES AND REPRESENTATIONS To induce you to enter into this Agreement and to purchase the Notes listed on Annex 1 below your name, each of the Parent and the Company warrants and represents, as of the Closing Date, as follows: 2.1 NATURE OF BUSINESS. The Placement Memorandum (together with all exhibits and annexes thereto, the "Placement Memorandum"), dated October 1998 and prepared by NationsBanc Montgomery Securities LLC (a copy of which previously has been delivered to you), correctly describes the general nature of the business and principal Properties of the Parent, the Company and the Subsidiaries as of the Closing Date, other than the sale, paydown or repayment of certain of the Real Estate Assets as described in Part 2.1 of Annex 3. The Company received net proceeds from such sale, paydown or repayment of Real Estate Assets in the aggregate amount of approximately Five Hundred Seventy-One Thousand Dollars ($571,000), all of which was retained by the Company in cash or Permitted Investments or used for Operating Expenses. 2.2 FINANCIAL STATEMENTS; INDEBTEDNESS; MATERIAL ADVERSE CHANGE. (a) FINANCIAL STATEMENTS. The following financial statements (copies of which have been delivered to you): (i) the consolidated balance sheets of the Parent and its consolidated subsidiaries as of December 31 in the years 1997, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the fiscal years ended on such dates, all accompanied by opinions thereon by KPMG Peat Marwick, independent certified public accountants, and (ii) the unaudited consolidated balance sheet of the Parent and its consolidated subsidiaries as of June 30, 1998, and the related unaudited consolidated statements of earnings and cash flows for the six (6) months ended on such date, have been prepared in accordance with GAAP consistently applied, as at the end of, and for, each such period (with respect to the financial statements referenced in Section 2.2(a)(ii) above, subject to normal year-end adjustments) and present fairly, in all material respects, the consolidated financial position of the Parent and its consolidated subsidiaries as of such dates and the results of their operations and cash flows for such periods. 5 10 (b) INDEBTEDNESS. Part 2.2(b) of Annex 3 correctly lists all outstanding Indebtedness of the Parent, the Company and SPHI as of the Closing Date, and provides the following information with respect to each item of such Indebtedness: (i) the type thereof, (ii) the holder thereof, (iii) the outstanding amount, (iv) the current portion, if any, and (v) the collateral securing such Indebtedness, if any. (c) MATERIAL ADVERSE CHANGE. Since December 31, 1997, other than the spin-off of Chicago Title Corporation, excluding Alleghany Asset Management, Inc., there has been no material change in the business, profits, Properties or condition (financial or otherwise) of the Parent, the Company or any of the Subsidiaries except changes in the ordinary course of business that, in the aggregate, have not had a Material Adverse Effect. 2.3 SUBSIDIARIES AND AFFILIATES. Part 2.3 of Annex 3 sets forth: (a) the name of each of the Significant Subsidiaries, its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Parent and each other Subsidiary, and (b) the name of each of the Affiliates that are corporations, partnerships or joint ventures (other than Subsidiaries) and the nature of the affiliation. Each of the Parent and the Company has good and marketable title to all of the shares it purports to own of the stock of each Significant Subsidiary, free and clear in each case of any Lien except as described in Part 2.3 of Annex 3, and all such shares have been duly issued and are fully paid and nonassessable. To the best of the Parent's knowledge, each of the Parent and the Subsidiaries has good and marketable title to all of the shares it purports to own of the stock of each other Subsidiary and all such shares have been duly issued and are fully paid and nonassessable. 6 11 2.4 PENDING LITIGATION. There are no proceedings, actions or investigations pending or, to the knowledge of the Parent or the Company, threatened against or affecting the Parent, the Company or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal that, in the aggregate, could reasonably be expected to have a Material Adverse Effect. None of the Parent, the Company or any Subsidiary is in default with respect to any judgment, order, writ, injunction, or decree of any court, Governmental Authority or arbitration board or tribunal that, in the aggregate, could reasonably be expected to have a Material Adverse Effect. 2.5 TITLE TO PROPERTIES. Each of the Parent, the Company and the Subsidiaries has good and marketable title, of a quality commensurate with prudent standards of business practice, to all of the Property reflected in the most recent audited statement of financial condition referred to in Section 0(a) (except Chicago Title Corporation which was disposed of by the Parent in a spin-off and such other Properties which were sold or otherwise disposed of in the ordinary course of business), free from Liens not otherwise permitted by Section 7.13. Each Real Estate Property owned of record and beneficially by the Company (and not held through or on behalf of a joint venture or other contracting parties) is covered by an owners title insurance policy insuring the Company's title in fee simple to such Real Estate Property in substantially the amount of the Designated Disposition Value of such Real Estate Property. 2.6 PATENTS, TRADEMARKS, LICENSES, ETC. Each of the Parent, the Company and the Subsidiaries owns, possesses or has the right to use all of the patents, trademarks, service marks, trade names, copyrights, licenses, and rights with respect thereto, necessary for the present and currently planned future conduct of its business, without any known conflict with the rights of others, except where the failure to own, possess or have such right, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 7 12 2.7 TAXES. (a) RETURNS FILED; TAXES PAID. All federal and state income tax returns and all other material tax returns required to be filed by each of the Parent and the Company and all federal and material state income tax returns and all other material tax returns required to be filed by each Subsidiary in any jurisdiction have in fact been filed on a timely basis (giving effect to any timely extensions), and all taxes, assessments, fees and other governmental charges in respect of such returns upon each of the Parent, the Company and such Subsidiary, and upon any of their respective Properties, income or franchises, that are due and payable have been paid, except for any taxes, proposed assessments, fees or charges (i) the amount of which is not individually or in the aggregate material in relation to the business, profits, Properties or condition (financial or otherwise) of the Parent, the Company and the Subsidiaries, taken as a whole, or (ii) that are being contested in good faith and by appropriate proceedings and for which adequate reserves have been established and exist. Neither the Parent nor the Company knows of any other proposed additional tax assessment against it or any such Person. All liabilities of the Parent, the Company and such Subsidiaries with respect to federal income taxes have been finally determined for the fiscal years ending prior to December 31, 1992. (b) BOOK PROVISIONS ADEQUATE. The amount of the liability for taxes reflected in the consolidated balance sheet of the Parent and its consolidated subsidiaries as of June 30, 1998 referred to in Section 0(a) is an adequate provision for taxes (including, without limitation, any payment due pursuant to any tax sharing agreement) as are or may become payable by any one or more of the Parent and its consolidated subsidiaries in respect of all tax periods ending on or prior to such date. 2.8 FULL DISCLOSURE. The financial statements referred to in Section 0(a) do not, nor does this Agreement, the Placement Memorandum or any written statement furnished by or on behalf of the Parent or the Company to you in connection with the negotiation of the sale of the Notes, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact known to the Parent or the Company that the Parent or the Company has not disclosed to you in writing that has had or, so far as the Parent or the Company can now reasonably foresee, will have a Material Adverse Effect. 2.9 CORPORATE ORGANIZATION AND AUTHORITY. Each of the Parent, the Company and the Significant Subsidiaries: (a) is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has all legal and corporate power and authority to own and operate its 8 13 Properties and to carry on its business as now conducted and as presently proposed to be conducted, (c) has all licenses, certificates, permits, franchises and other governmental authorizations necessary to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, except where the failure to have such licenses, certificates and permits, in the aggregate, could not reasonably be expected to have a Material Adverse Effect, and (d) has duly qualified or has been duly licensed, and is authorized to do business and is in good standing, as a foreign corporation, in each state where the failure to be so qualified or licensed and authorized and in good standing could reasonably be expected to have a Material Adverse Effect. 2.10 RESTRICTIONS ON PARENT, COMPANY AND SPHI. None of the Parent, the Company or SPHI: (a) is a party to any contract or agreement, or subject to any charter or other corporate restriction that could reasonably be expected to have a Material Adverse Effect, (b) is a party to any contract or agreement that restricts the right or ability of such corporation to incur Indebtedness, other than this Agreement and the agreements listed in Part 2.10(b) of Annex 3, the terms of none of which is violated by the issuance and sale of the Notes or the execution and delivery of, or compliance with, this Agreement by the Parent and the Company, and true, correct and complete copies of each of which have been provided to you, and (c) has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of the Property of the Company or SPHI, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 7.13. 9 14 2.11 COMPLIANCE WITH LAW. None of the Parent, the Company or any Subsidiary is in violation of any law, ordinance, governmental rule or regulation to which it is subject, which violations, in the aggregate, could reasonably be expected to have a Material Adverse Effect. 2.12 PENSION PLANS. (a) DISCLOSURE. (i) MATERIAL EVENTS. There are no events or circumstances under ERISA or the IRC relating to any Pension Plan or Multiemployer Plan that currently exist that the Parent or the Company has not disclosed to you in writing, except for events and circumstances that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (ii) PLANS AND ERISA AFFILIATES. There are no Pension Plans maintained by any one or more of the Parent, the Company or any ERISA Affiliate whose assets, in whole or in part, are currently managed or invested by any one or more of the Purchasers. (b) PROHIBITED TRANSACTIONS. Neither the execution of this Agreement nor the purchase of the Notes by you will constitute a "prohibited transaction" (as such term is defined in section 406 of ERISA or section 4975 of the IRC). The representation by the Parent and the Company in the immediately preceding sentence is made in reliance upon and subject to the accuracy of the representations in Section 1.3(b) as to the source of funds used by you. (c) COMPLIANCE WITH ERISA. The Parent, the Company and the ERISA Affiliates and each Pension Plan are in compliance with ERISA, except for such failures to comply that in the aggregate for all such failures could not reasonably be expected to have a Material Adverse Effect. (d) PENSION PLAN FUNDING STATUS AND LIABILITIES. (i) FUNDING STATUS. The present value of all benefits, as reflected in the most recent actuarial valuation report issued in accordance with Section 7.4, vested under each Pension Plan does not exceed, by more than Five Hundred Thousand Dollars ($500,000), the value of the assets of such Pension Plan allocable to such vested benefits, as reflected in such report. (ii) CLOSING DATE LIABILITIES. All contributions to all Pension Plans arising under the terms of such Pension Plans that are due and payable by the plan sponsor as of the Closing Date have been paid. Neither the Parent, the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or Title IV of 10 15 ERISA or the penalty or excise tax or security provisions of the IRC relating to "employee benefit plans" (as defined in section 3 of ERISA), and no event, transaction, or condition has occurred or exists that could result in the imposition of any Lien on any of the Properties of the Parent, the Company or any ERISA Affiliate, in either case pursuant to Title I or Title IV of ERISA or pursuant to such penalty, excise tax or security provisions of the IRC, except for such liabilities and Liens that, in the aggregate for all such liabilities and Liens, could not reasonably be expected to have a Material Adverse Effect. (iii) PBGC. No circumstance exists that constitutes grounds under section 4042 of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, any Pension Plan or trust created thereunder, nor has the PBGC instituted any such proceeding. (e) REPORTABLE EVENTS. No Pension Plan or trust created thereunder has been terminated, and there have been no "reportable events" (as such term is defined in section 4043 of ERISA) with respect to any Pension Plan or trust created thereunder, which reportable event or events will or could result in the termination of such Pension Plan and give rise to a material liability of the Parent, the Company or any ERISA Affiliate in respect thereof. (f) MULTIEMPLOYER PLANS. Neither the Parent, the Company nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability with respect to any Multiemployer Plan. (g) MULTIPLE EMPLOYER PENSION PLANS. Neither the Parent, the Company nor any ERISA Affiliate has ever been a "contributing sponsor" (as such term is defined in section 4001 of ERISA) in any Multiple Employer Pension Plan. (h) FOREIGN PENSION PLANS. Neither the Parent nor the Company has any Foreign Pension Plans. 2.13 CERTAIN LAWS. (a) INVESTMENT COMPANY ACT. None of the Parent, the Company or SPHI is, or is directly or indirectly controlled by, or acting on behalf of any Person which is, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (b) HOLDING COMPANY STATUS. None of the Parent, the Company or SPHI is a "holding company" or an "affiliate" of a "holding company," or a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 11 16 2.14 ENVIRONMENTAL COMPLIANCE. (a) COMPLIANCE. Each of the Parent, the Company and the Subsidiaries is in compliance with all Environmental Protection Laws in effect in each jurisdiction where it is presently doing business, and with which the failure so to comply, in the aggregate for all such failures, could reasonably be expected to have a Material Adverse Effect. (b) LIABILITY. None of the Parent, the Company or any of the Subsidiaries is subject to any liability under any Environmental Protection Law that, in the aggregate for all such liabilities, could reasonably be expected to have a Material Adverse Effect. (c) NOTICES. None of the Parent, the Company or any Subsidiary has received any (i) notice from any Governmental Authority by which any of its present or previously-owned or leased Properties has been designated, listed, or identified in any manner by any Governmental Authority charged with administering or enforcing any Environmental Protection Law as a Hazardous Substance disposal or removal site, "Super Fund" clean-up site, or candidate for removal or closure pursuant to any Environmental Protection Law, (ii) notice of any Lien arising under or in connection with any Environmental Protection Law that has attached to any revenues of, or to, any of its owned or leased Properties, or (iii) summons, citation, notice, directive, letter, or other communication, written or oral, from any Governmental Authority concerning any intentional or unintentional action or omission by the Parent, the Company or such Subsidiary in connection with its ownership or leasing of any Property resulting in the releasing, spilling, leaking, pumping, pouring, emitting, emptying, dumping, or otherwise disposing of any Hazardous Substance into the environment resulting in any material violation of any Environmental Protection Law, where the effect of which, in the aggregate for all such notices and communications, could reasonably be expected to have a Material Adverse Effect. 2.15 SALE IS LEGAL AND AUTHORIZED; OBLIGATIONS ARE ENFORCEABLE. (a) SALE IS LEGAL AND AUTHORIZED. Each of the issuance, sale and delivery of the Notes by the Company, the execution and delivery hereof by the Parent and the Company and compliance by the Parent and the Company with all of the provisions hereof and of the Notes: (i) is within the corporate powers of the Parent and the Company; and 12 17 (ii) is legal and does not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Parent, the Company or SPHI under the provisions of, any agreement, charter instrument, bylaw or other instrument to which they are a party or by which they or any of their Property may be bound. (b) OBLIGATIONS ARE ENFORCEABLE. Each of this Agreement and the Notes has been duly authorized by all necessary action on the part of the Parent and the Company, has been executed and delivered by duly authorized officers of the Parent and the Company, and constitutes a legal, valid and binding obligation of the Parent and the Company, enforceable in accordance with its terms, except that the enforceability hereof and of the Notes may be: (i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium, or other similar laws affecting the enforceability of creditors' rights generally; and (ii) subject to the availability of equitable remedies. 2.16 GOVERNMENTAL CONSENT. Neither the nature of the Parent, the Company or any Subsidiary, or of any of their respective businesses or Properties, nor any relationship between the Parent, the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offer, issuance, sale or delivery of the Notes and the execution and delivery of this Agreement, is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any Governmental Authority on the part of the Parent or the Company as a condition to the execution and delivery of this Agreement or the offer, issuance, sale or delivery of the Notes. 2.17 PRIVATE OFFERING. None of the Parent, the Company or NationsBanc Montgomery Securities LLC (the only Person authorized or employed by the Parent or the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Notes or any similar Security of the Company, other than employees of the Parent and the Company) has offered any of the Notes or any similar Security (other than the 1995 Notes) of the Company for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than the Purchasers and three (3) other institutional investors, each of whom was offered all or a portion of the Notes at private sale for investment. 13 18 2.18 NO DEFAULTS. (a) THE NOTES. No event has occurred and no condition exists that, upon the issuance of the Notes and the execution and delivery of this Agreement, would constitute a Default or an Event of Default. (b) CHARTER INSTRUMENT, OTHER AGREEMENTS. None of the Parent, the Company or SPHI is in violation in any respect of any term of any charter instrument or bylaw. No other Subsidiary is in violation in any respect of any term of any charter instrument or bylaw and none of the Parent, the Company or any Subsidiary is in violation in any respect of any term in any agreement or other instrument to which it is a party or by which it or any of its Property may be bound, which violations, in the aggregate, could reasonably be expected to have a Material Adverse Effect. 2.19 USE OF PROCEEDS. (a) USE OF PROCEEDS. The Company will apply the proceeds from the sale of the Notes in the manner specified in Part 2.19(a) of Annex 3. (b) MARGIN SECURITIES. None of the transactions contemplated herein and in the Notes (including, without limitation, the use of the proceeds from the sale of the Notes) violates, will violate or will result in a violation of section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. None of the Parent, the Company or SPHI owns, or with the proceeds of the sale of the Notes intends to own, carry or purchase, or refinance borrowings that were used to own, carry or purchase, any Margin Security, including Margin Securities originally issued by the Parent, the Company or SPHI. The respective obligations of the Parent and the Company under the Financing Documents are not and will not be secured by any Margin Security, and no Notes are being sold on the basis of any such collateral. (c) ABSENCE OF FOREIGN OR ENEMY STATUS. Neither the Parent, the Company nor any Subsidiary is an "enemy" or an "ally of the enemy" within the meaning of section 2 of the Trading with the Enemy Act (50 U.S.C. App. Sec. 1 et seq.), as amended. Neither the Parent, the Company nor any Subsidiary is in violation of, and neither the issuance and sale of the Notes by the Company nor its use of the proceeds thereof as contemplated by this Agreement, will violate, the Trading with the Enemy Act, as amended, or any executive orders, proclamations or regulations issued pursuant thereto, including, without limitation, regulations administered by the Office of Foreign Asset Control of the Department of the Treasury (31 C.F.R., Subtitle B, Chapter V). 14 19 2.20 YEAR 2000 COMPLIANT. Each of the Parent's, the Company's and the Significant Subsidiaries' has reviewed their material internal computer systems and expect such systems to be year 2000 compliant in a timely manner and the advent of the year 2000 and its impact on such computer systems is not expected to have a Material Adverse Effect. 3. CLOSING CONDITIONS Your obligation to purchase and pay for the Notes to be delivered to you at the Closing is subject to the following conditions precedent: 3.1 OPINIONS OF COUNSEL. You shall have received from (a) Robert M. Hart, Esq., Senior Vice President and General Counsel of the Parent and counsel to the Company, and (b) Hebb & Gitlin, a Professional Corporation, your special counsel, closing opinions, each dated as of the Closing Date, and substantially in the respective forms set forth in Exhibit B1 and Exhibit B2, and as to such other matters as you may reasonably request. This Section 3.1 shall constitute direction by the Parent and the Company to such counsel named in the foregoing clause (a) to deliver such closing opinion to you. 3.2 WARRANTIES AND REPRESENTATIONS TRUE. The warranties and representations contained in Section 0 shall be true on the Closing Date with the same effect as though made on and as of that date. 3.3 OFFICERS' CERTIFICATES. You shall have received (a) a certificate dated the Closing Date and signed by the President or a Vice-President and the Treasurer or an Assistant Treasurer of the Parent, substantially in the form of Exhibit C1, certifying that the conditions specified in Section 0 and Section 0 have been fulfilled, (b) a certificate dated the Closing Date and signed by the President or a Vice-President and the Treasurer or an Assistant Treasurer of the Company, substantially in the form of Exhibit C2, certifying that the conditions specified in Section 0 and Section 0 have been fulfilled, 15 20 (c) a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Parent, substantially in the form of Exhibit D1, with respect to the matters therein set forth, and (d) a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, substantially in the form of Exhibit D2, with respect to the matters therein set forth. 3.4 LEGALITY. The Notes shall on the Closing Date qualify as a legal investment for you under applicable insurance law (without regard to any "basket" or "leeway" provisions) and you shall have received such evidence as you may reasonably request to establish compliance with this condition. 3.5 PRIVATE PLACEMENT NUMBER. The Company shall have obtained or caused to be obtained a private placement number for the Notes from the CUSIP Service Bureau of Standard & Poor's, a division of McGraw-Hill, Inc., and you shall have been informed of such private placement number. 3.6 EXPENSES. All fees and disbursements required to be paid pursuant to Section 0(b) shall have been paid in full. 3.7 OTHER PURCHASERS. None of the Purchasers other than you shall have failed to execute and deliver a Note Purchase Agreement or to accept delivery of or make payment for the Notes to be purchased by it on the Closing Date. 3.8 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with the issuance and sale of the Notes and all documents and papers relating thereto shall be satisfactory to you and the Special Counsel. You and the Special Counsel shall have received copies of such documents and papers as you or they may reasonably request in connection therewith or in connection with the Special Counsel's closing opinion, all in form and substance satisfactory to you and the Special Counsel. 16 21 3.9 COMPLIANCE WITH THIS AGREEMENT. Each of the Parent and the Company shall have performed and complied with all agreements and conditions contained herein that are required to be performed or complied with by the Parent and the Company on or prior to the Closing Date, and such performance and compliance shall remain in effect on the Closing Date. 4. PURCHASERS' SPECIAL RIGHTS 4.1 DIRECT PAYMENT. Notwithstanding anything to the contrary herein or in the Notes, the Company shall pay all amounts payable to any Institutional Investor with respect to each Note held by such Institutional Investor (without any presentment of such Notes and without any notation of such payment being made thereon) by crediting, by federal funds bank wire transfer, the account of such Institutional Investor in any bank in the United States of America as may be designated in writing by such Institutional Investor, or in such other manner as may be reasonably directed or to such other address in the United States of America as may be reasonably designated in writing by such Institutional Investor. Your address on Annex 1 shall be deemed to constitute notice, direction or designation (as appropriate) to the Company with respect to direct payments as aforesaid. In all other cases, all amounts payable with respect to each Note shall be made by check mailed and addressed to the registered holder of each Note at the address shown in the register maintained by the Company pursuant to Section 0. Each holder of Notes agrees that in the event it shall sell or transfer any Note (a) it shall, prior to the delivery of such Note (unless it shall have already done so), make a notation thereon of all principal, if any, prepaid on such Note and shall also note thereon the date to which interest shall have been paid on such Note, and (b) it shall promptly notify the Company of the name and address of the transferee of any such Note so transferred (or, if such holder does not have such information, the name and address of the Person effecting such transfer) and the effective date of such transfer. 4.2 DELIVERY EXPENSES. If any holder of Notes surrenders any Note to the Company pursuant hereto, the Company shall pay the cost of delivering to or from such holder's home office or custodian bank from or to the Company, insured to the reasonable satisfaction of such holder, the surrendered Note and any Note issued in substitution or replacement for the surrendered Note. 17 22 4.3 ISSUANCE TAXES. The Company shall pay all taxes in connection with the issuance and sale of the Notes and in connection with any modification of this Agreement and the Notes and shall save each holder of Notes harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company under this Section 0 shall survive the payment or prepayment of the Notes and the termination hereof. 5. PREPAYMENTS 5.1 REQUIRED PREPAYMENTS. In addition to paying the entire principal amount and the interest due on the Notes outstanding on the maturity date thereof, the Company shall prepay, and there shall become due and payable, Eight Million Dollars ($8,000,000) principal amount of the Notes on December 11th in each year beginning on December 11, 2000 and ending on December 11, 2004, inclusive. Each such prepayment shall be at one hundred percent (100%) of the principal amount prepaid, together with interest accrued thereon to the date of prepayment. Without limitation of the foregoing, all of the principal of the Notes remaining outstanding on December 11, 2004 (if any), together with interest accrued thereon, shall become due and payable on December 11, 2004. 5.2 OPTIONAL PREPAYMENTS. (a) OPTIONAL PREPAYMENTS. The Company may prepay the principal amount of the Notes in whole or in part, at any time, in multiples of One Million Dollars ($1,000,000) (or, if the aggregate outstanding principal amount of the Notes is less than One Million Dollars ($1,000,000) at such time, then such principal amount), together with (i) an amount equal to the Make-Whole Amount at such time in respect of the principal amount of the Notes being so prepaid, and (ii) interest on such principal amount then being prepaid accrued to the prepayment date. (b) NOTICE OF OPTIONAL PREPAYMENT. The Company will give notice of any optional prepayment of the Notes to each holder of the Notes not less than thirty (30) days or more than sixty (60) days before the date fixed for prepayment, specifying: (i) such date; (ii) the Section hereof under which the prepayment is to be made; (iii) the principal amount of each Note to be prepaid on such date; 18 23 (iv) the interest to be paid on each such Note, accrued to the date fixed for payment; and (v) a reasonably detailed calculation of an estimated Make-Whole Amount for such Notes, if any (calculated as if the date of such notice were the date of prepayment), due in connection with such prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes specified in such notice, together with the Make-Whole Amount, if any, and accrued interest thereon shall become due and payable on the specified prepayment date. Contemporaneously with such prepayment the Company shall deliver to each holder of Notes a certificate of the President, a Vice President or the Treasurer of the Company specifying the calculation of such Make-Whole Amount as of the specified prepayment date, accompanied by a copy of the Applicable H.15 used in determining the Make-Whole Discount Rate (as both such terms are defined in the definition of Make-Whole Amount) in respect of such prepayment. (c) EFFECT OF PARTIAL PREPAYMENTS. Each prepayment of the Notes pursuant to this Section 5.2 shall be applied to reduce ratably each of the then unpaid mandatory principal prepayments required by Section 0 remaining after the date of such prepayment. 5.3 PREPAYMENT UPON A DOWNGRADE EVENT. (a) NOTICE AND OFFER. In the event a Downgrade Event shall occur or exist, the Parent and the Company will, within three (3) Business Days of the first occurrence or existence of such Downgrade Event, give written notice of such Downgrade Event to each holder of Notes by registered mail and, simultaneously with the sending of such written notice, send a copy of such notice to each such holder via an overnight courier of national reputation. Such written notice shall contain, and such written notice shall constitute, an irrevocable offer by the Company to prepay all, but not less than all, the Notes held by such holder on a date specified in such notice (the "Downgrade Prepayment Date") that is not less than thirty (30) days and not more than sixty (60) days after the date of such notice. If the Downgrade Prepayment Date shall not be specified in such notice, the Downgrade Prepayment Date shall be the thirtieth (30th) day after the date of such holder's receipt of such notice. (b) ACCEPTANCE AND PAYMENT. To accept such offered prepayment, a holder of Notes shall cause a notice of such acceptance to be delivered to the Company not later than twenty (20) days after the date of receipt by such holder of the written offer of such prepayment (it being understood that the failure by a holder to respond to such written offer of prepayment within such period of twenty (20) days shall be deemed to constitute an acceptance of such offer). If so accepted, such offered prepayment shall be due and payable on the Downgrade Prepayment Date. Such offered prepayment shall be made at one hundred percent (100%) of the principal amount of such Notes, together with any Make-Whole Amount as of the Downgrade Prepayment Date with respect thereto and 19 24 interest on the Notes then being prepaid accrued to the Downgrade Prepayment Date. Contemporaneously with the making of any such prepayment, the Company shall deliver to each holder of such Notes by facsimile transmission a certificate of the President, a Vice President or the Treasurer of the Company specifying the details of the calculation of such Make-Whole Amount as of the specified Downgrade Prepayment Date, together with a copy of the Applicable H.15 used in determining the Make-Whole Discount Rate (as both such terms are defined in the definition of Make-Whole Amount) in respect of such prepayment. (c) OFFICER'S CERTIFICATE. Each offer to prepay the Notes pursuant to this Section 5.3 shall be accompanied by a certificate, executed by the President or a Vice President of the Company and dated the date of such offer, specifying: (i) the Downgrade Prepayment Date; (ii) the Section hereof under which such offer is made; (iii) the principal amount of each Note offered to be prepaid; (iv) the unpaid interest that would be due on each such Note offered to be prepaid, accrued to the date fixed for payment; (v) a reasonably detailed calculation of an estimated Make-Whole Amount, if any (calculated as if the date of such notice was the date of prepayment), that would be due in connection with such offered prepayment; and (vi) in reasonable detail, the cause of the Downgrade Event. (d) EFFECT OF PREPAYMENT. Each prepayment of the Notes pursuant to this Section 5.3 shall be applied to reduce ratably each of the then unpaid mandatory principal prepayments required by Section 0 remaining after the date of such prepayment. 5.4 PARTIAL PREPAYMENT PRO RATA. If at the time any required or optional prepayment under Section 5.1 or Section 5.2 is due there is more than one Note outstanding, the aggregate principal amount of each required or optional partial prepayment of the Notes shall be allocated among the holders of the Notes at the time outstanding in proportion to the respective unpaid principal amounts of the Notes then outstanding. 5.5 NOTATION OF NOTES ON PREPAYMENT. Upon any partial prepayment of a Note, such Note may, at the option of the holder thereof, be 20 25 (a) surrendered to the Company pursuant to Section 0 in exchange for a new Note in a principal amount equal to the principal amount remaining unpaid on the surrendered Note, (b) made available to the Company for notation thereon of the portion of the principal so prepaid, or (c) marked by such holder with a notation thereon of the portion of the principal so prepaid, provided that such holder shall notify the Company that it has made such notation. In case the entire principal amount of any Note is prepaid, such Note shall be surrendered to the Company for cancellation and shall not be reissued, and no Note shall be issued in lieu of the prepaid principal amount of any Note. 5.6 NO OTHER OPTIONAL PREPAYMENTS. Except as provided in Section 5.2, neither the Parent, the Company, any Subsidiary nor any Affiliate may make any optional prepayment (whether directly or indirectly by purchase or other acquisition) in respect of the Notes. 6. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES 6.1 REGISTRATION OF NOTES. The Company shall cause to be kept at its office, maintained pursuant to Section 7.3, a register for the registration and transfer of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in the register. The Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. 21 26 6.2 EXCHANGE OF NOTES. Upon surrender of any Note at the office of the Company maintained pursuant to Section 7.3 duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney-in-fact duly authorized in writing, the Company shall execute and deliver, at the Company's expense (except as provided below), new Notes in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable, in accordance with the terms of this Agreement, to such Person as such holder may request and shall be substantially in the form of Exhibit A. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. As a condition precedent to any such transfer of Notes, the Company may require the transferee to disclose the source of funds with which it is acquiring Notes and, if such transfer would constitute a "prohibited transaction" (as provided for in section 406(a) of ERISA or section 4975 of the IRC), the Company shall not be obligated to effect such transfer. 6.3 REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation) and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is an Institutional Investor, such holder's own agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 22 27 7. COVENANTS Each of the Parent and the Company covenants that on and after the Closing Date and so long as any of the Notes shall be outstanding: 7.1 PAYMENT OF TAXES AND CLAIMS. Each of the Parent and the Company will, and the Company will cause SPHI to, pay before they become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or its Property, and (b) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons that, if unpaid, might result in the creation of a Lien upon its Property, provided, that items of the foregoing description need not be paid (i) while being contested in good faith and by appropriate proceedings as long as adequate book reserves have been established and maintained and exist with respect thereto, and (ii) so long as the title of the Parent, the Company or SPHI, as the case may be, to, and its right to use, such Property, is not materially adversely affected thereby. 7.2 MAINTENANCE OF PROPERTIES; CORPORATE EXISTENCE; ETC. Each of the Parent and the Company will, and the Company will cause SPHI to, (a) PROPERTY -- maintain, preserve and keep its Property in good condition, ordinary wear and tear excepted, and make all necessary renewals, replacements, additions, betterments and improvements thereto, except where the failure to do so (i) could not reasonably be expected to have a Material Adverse Effect and (ii) is in conformity with the marketing strategy of the Company (A) to maximize proceeds from the sale of Real Estate Assets or (B) to sell the Real Estate Assets on an "as is" basis; (b) INSURANCE -- maintain, with financially sound and reputable insurers, insurance with respect to its Property and business against such casualties and contingencies, of such types (including, without limitation, insurance with respect to losses arising out of Property loss or damage, public liability, business interruption, larceny, workers' compensation, embezzlement or other criminal misappropriation) and in such amounts as is customary in the case of corporations of established reputations engaged in 23 28 the same or a similar business and similarly situated, it being understood that the Parent, the Company and SPHI may self-insure against hazards and risks with respect to which, and in such amounts as, the Parent, the Company or SPHI in good faith determines to be prudent and consistent with sound financial and business practice; (c) FINANCIAL RECORDS -- keep accurate and complete books of records and accounts in which full and correct entries shall be made of all its business transactions and which will permit the provision of accurate and complete financial statements in accordance with GAAP, and the Parent will cause each other Subsidiary to keep accurate and complete books of records and accounts in which full and correct entries shall be made of all its business transactions and which will permit the provision of accurate and complete financial statements in accordance with GAAP, to the extent required by the provisions of Section 8.1(a); (d) CORPORATE EXISTENCE AND RIGHTS -- do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises, subject to Section 7.9, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; and (e) COMPLIANCE WITH LAW -- be in compliance with all laws, ordinances or governmental rules or regulations to which it is subject (including, without limitation, any Environmental Protection Law) and obtain any licenses, certificates, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business if such non-compliance or failure to obtain could reasonably be expected to have a Material Adverse Effect or materially adversely affect the ability of the Parent, the Company or SPHI to conduct in the future the business it conducts at the time of such violation or failure to obtain. 7.3 PAYMENT OF NOTES AND MAINTENANCE OF OFFICE. The Company will punctually pay, or cause to be paid, the principal of and interest (and Make-Whole Amount, if any) on, the Notes, as and when the same shall become due according to the terms hereof and of the Notes, and will maintain an office at the address of the Company set forth in Section 0 where notices, presentations and demands in respect hereof or of the Notes may be made upon it. Such office will be maintained at such address until such time as the Company shall notify the holders of the Notes in writing of any change of location of such office, which will in any event be located within the United States of America. 7.4 PENSION PLANS. (a) COMPLIANCE. Each of the Parent and the Company will, and will cause each ERISA Affiliate to, at all times with respect to each Pension Plan, make timely payment of contributions required to meet the minimum funding standard set forth in ERISA or the IRC with respect thereto, and to comply with all other applicable material provisions of ERISA and the IRC. 24 29 (b) RELATIONSHIP OF VESTED BENEFITS TO PENSION PLAN ASSETS. The Parent or an ERISA Affiliate will contribute sufficient amounts to each Pension Plan so that the present value of all employee benefits vested under each Pension Plan at any time will not exceed, by more than Two Million Five Hundred Thousand Dollars ($2,500,000), the assets of such Pension Plan allocable to such vested benefits at such time, in each case determined pursuant to Section 7.4(c). (c) VALUATIONS. All assumptions and methods used to determine the actuarial valuation of vested employee benefits under Pension Plans and the present value of assets of Pension Plans will be reasonable in the good faith judgment of the Parent, the Company or the actuary engaged by the Parent or the Company, as the case may be, and will comply with all requirements of law. (d) PROHIBITED ACTIONS. Each of the Parent and the Company will not, and will not permit any ERISA Affiliate to: (i) engage in any "prohibited transaction" (as such term is defined in section 406 of ERISA or section 4975 of the IRC) that would result in the imposition of a material tax or penalty; (ii) incur with respect to any Pension Plan any material "accumulated funding deficiency" (as such term is defined in section 302 of ERISA), whether or not waived; (iii) terminate any Pension Plan in a manner that could result in the imposition of a Lien on the Property of the Parent, the Company or any Subsidiary pursuant to section 4068 of ERISA or the creation of any liability under section 4062 of ERISA; (iv) fail to make any payment required by section 515 of ERISA; or (v) at any time be an "employer" (as such term is defined in section 3 of ERISA) required to contribute to any Multiemployer Plan or a "substantial employer" (as such term is defined in section 4001 of ERISA) required to contribute to any Multiple Employer Pension Plan if, at such time, it could reasonably be expected that the Parent, the Company or any Subsidiary will incur withdrawal liability in respect of such Multiemployer Plan or Multiple Employer Pension Plan if the aggregate amount of the taxes, penalties, funding deficiencies, interest or other amounts and any other liabilities in respect of any of the foregoing could reasonably be expected to have a Material Adverse Effect. 25 30 7.5 LINE OF BUSINESS. The Company will not, and will not permit SPHI to, engage in any business other than the ownership, operation and disposition of Real Estate Assets and activities reasonably related thereto. 7.6 INDEBTEDNESS. (a) TOTAL INDEBTEDNESS. The Company will not, and will not permit SPHI to, incur or in any manner be or become liable in respect of any Indebtedness, on and after the Closing Date, except (i) Indebtedness evidenced by the Notes, (ii) Indebtedness evidenced by the 1995 Notes, and (iii) an additional amount of Indebtedness of the Company and SPHI, determined on a consolidated basis for such Persons, not exceeding Ten Million Dollars ($10,000,000) in the aggregate at any time outstanding. (b) INDEBTEDNESS COVERAGE. The Company will not at any time permit the ratio of (i) Qualified Indebtedness Coverage Assets at such time to (ii) the sum of (A) the aggregate of all Indebtedness of the Company and SPHI at such time, determined on a consolidated basis for such Persons, plus (B) Scheduled Interest Payments at such time, plus (C) the amount of Operating Expenses that the Company and SPHI would be permitted to incur on such date pursuant to Section 7.8, plus (D) if such time is on or after the date the last Real Estate Asset is sold and prior to the first date of the establishment of the Defeasance Trust pursuant to Section 7.15, the Make-Whole Amount in respect of the Notes and the 1995 Notes at such time to be less than 1.0 to 1.0. 26 31 7.7 RESTRICTED INVESTMENTS AND RESTRICTED PAYMENTS The Company will not, and will not permit SPHI to, make any Restricted Investment and the Company will not declare or make, or become obligated to declare or make, any Restricted Payment (except for the Permitted Extraordinary Dividend), unless: (a) immediately after, and after giving effect to, such Restricted Investment or such Restricted Payment, as the case may be, the aggregate amount of all Restricted Investments of the Company and SPHI at such time plus all Restricted Payments declared, made or obligated to be declared or made by the Company on and after the Closing Date would not exceed the sum of (i) Excess Cumulative Net Proceeds at such time, plus (ii) the greater of (A) Zero Dollars ($0) and (B) the result of (1) Cumulative Non-Essential Contributions at such time minus (2) the Transfer Contribution Amount at such time; (b) immediately prior to, immediately after, and after giving effect to, such Restricted Investment or such Restricted Payment, as the case may be, the ratio of (i) Qualified Restricted Payment Assets at such time to (ii) the aggregate of all Indebtedness of the Company and SPHI at such time would not be less than 2.0 to 1.0; and (c) at the time of such declaration, making or becoming obligated and immediately before, and after giving effect to, such Restricted Investment or such Restricted Payment and any concurrent transactions, no Default or Event of Default exists or would exist. Notwithstanding the requirements of clause (b) above and provided that the requirements of clauses (a) and (c) above have been satisfied, a cash dividend may be declared by the Company in respect of its capital stock in an amount, when added to the aggregate of other cash dividends made by the Company after the Closing Date (other than the Permitted Extraordinary Dividend) that does not exceed the aggregate amount of Cumulative Non-Essential Contributions 27 32 at such time minus the Transfer Contribution Amount at such time. 7.8 OPERATING EXPENSES The Company will not, and will not permit SPHI to: (a) incur any Operating Expense unless Cumulative Operating Expenses at such time would not exceed the sum of (i) Forty Million Dollars ($40,000,000), plus (ii) Operating Expense Contributions at such time; or (b) permit, at any time, the sum of (i) Cumulative Operating Expenses at such time minus Operating Expense Contributions at such time, plus (ii) the aggregate amount outstanding on all Seller Notes at such time to exceed Ninety Million Dollars ($90,000,000). 7.9 MERGER AND CONSOLIDATION. The Company will not, and will not permit SPHI to, merge into, consolidate with, or sell, lease, transfer or otherwise dispose of all or substantially all of its Property (except as permitted under Section 7.10) to, any other Person or permit any other Person to consolidate with or merge into it (except that SPHI may merge into or consolidate with the Company if the Company is the surviving corporation); provided that the foregoing restriction does not apply to the merger or consolidation of the Company with, or the sale, lease, transfer or other disposition by the Company of all or substantially all of its Property to, another corporation, if: (a) the Company is the surviving corporation that results from such merger or consolidation; and (b) immediately prior to, and immediately after the consummation of the transaction, and after giving effect thereto, no Default or Event of Default exists or would exist. 7.10 TRANSFERS OF PROPERTY The Company will not, and will not permit SPHI to, sell, lease as lessor, transfer or otherwise dispose of any Property (collectively, "Transfers") (provided that "Transfers" shall not include transfers of cash for the purpose of paying Operating Expenses, interest, principal or Make-Whole Amount, if any, relating to the Notes and any other Indebtedness, Restricted 28 33 Payments to the Parent and Permitted Investments), except: (a) Transfers of Property, other than Real Estate Assets, if the sum of (i) the book value of such Property at the time of such Transfer, plus (ii) the aggregate book value of all other Property of the Company and SPHI, other than Real Estate Assets, that has been the subject of a Transfer (in each case measured at the time of the Transfer of such Property) during the period commencing on the Closing Date and ended at the time of such Transfer, would be less than Two Hundred Thousand Dollars ($200,000), provided that the Company will not Transfer any shares of the stock (or any warrants, rights or options to purchase stock or other Securities exchangeable for or convertible into stock) of SPHI; (b) any Transfer of Real Estate Assets for cash consideration or Seller Notes, or a combination of cash consideration and Seller Notes, so long as the aggregate amount outstanding with respect to all Seller Notes does not exceed Fifty Million Dollars ($50,000,000) and if either of the following conditions would be satisfied with respect to such Transfer: (i) the Transfer Consideration with respect to such Transfer is at least equal to the Designated Disposition Value of the Real Estate Asset which is the subject of such Transfer, or (ii) the sum of (A) the Transfer Consideration with respect to such Transfer, plus (B) the aggregate Transfer Consideration received by the Company and SPHI with respect to all other Real Estate Assets that have been the subject of a Transfer on and after the Closing Date, plus (C) Cumulative Non-Essential Contributions at such time would exceed the aggregate Designated Disposition Values of all Real Estate Assets that have been the subject of Transfers (in each case measured at the time of such Transfer) on and after the Closing Date; and (c) immediately prior to, and immediately after the consummation of any such Transfer, and after giving effect thereto, no Default or Event of Default exists or would exist. 29 34 7.11 PURCHASE OBLIGATION OF THE PARENT The Parent will purchase Real Estate Assets, selected by the Parent and for cash consideration equal to the Designated Disposition Value of such Real Estate Assets, in an amount sufficient to provide the Company with net cash proceeds, as necessary, to pay (a) the principal of and interest (and Make-Whole Amount, if any) on, the Notes, and any amounts due under Section 9.2(e) as and when the same shall become due according to the terms hereof and of the Notes (including, without limitation, the terms of Section 5.3), or (b) Operating Expenses due and payable at such time. 7.12 TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit SPHI to, enter into any material transaction or material arrangement, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate, except the sales contemplated by Section 7.11 or in the ordinary course of and pursuant to the reasonable requirements of the Company's or SPHI's business and upon fair and reasonable terms no less favorable to the Company or SPHI than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. 7.13 LIENS. (a) NEGATIVE PLEDGE. The Company will not, and will not permit SPHI to, cause or permit to exist, or agree or consent to cause or permit to exist in the future (upon the happening of a contingency or otherwise), any of its Property, whether now owned or hereafter acquired, to be subject to a Lien except: (i) Liens described in Part 7.13(a)(i) of Annex 3; (ii) Liens (A) arising from judicial attachments and judgments, (B) securing appeal bonds or supersedeas bonds, and (C) arising in connection with court proceedings (including, without limitation, surety bonds and letters of credit or any other instrument serving a similar purpose), provided that (1) such Liens are fully released within sixty (60) days of their creation or the execution or other enforcement of such Liens is effectively stayed, (2) the claims secured thereby are being contested in good faith and by appropriate 30 35 proceedings and (3) adequate book reserves in accordance with GAAP shall have been established and maintained and shall exist with respect thereto; (iii) Liens incurred or deposits made in the ordinary course of business to secure the performance of letters of credit, bids, tenders, sales contracts, leases, statutory obligations, construction obligations, bonds and assessments or improvements, surety and performance bonds (of a type other than set forth in Section 7.13(a)(ii)) and other similar obligations not incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property, provided that, after giving effect to any enhancement in value and use of other Property related to such Property as a result of such Lien, (1) such Liens do not in the aggregate materially detract from the value of such Property and (2) the title of the Company or SPHI to, and its right to use, such Property, is not materially adversely affected thereby; (iv) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other like laws; (v) Liens securing Property taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, vendors, landlords and other like Persons, provided that the payment thereof is not at the time required by Section 7.1; and (vi) Liens in the nature of reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions or encumbrances affecting real Property, provided that such exceptions and encumbrances do not in the aggregate detract from the value of such Property or interfere with the use of such Property in the ordinary conduct of the business of the Company and SPHI in a manner that has or could reasonably be expected to have a Material Adverse Effect. (b) EQUAL AND RATABLE LIEN; EQUITABLE LIEN. In case any Property shall be subjected to a Lien in violation of this Section 7.13 the Company will forthwith make or cause to be made, to the fullest extent permitted by applicable law, provision whereby the Notes will be secured equally and ratably with all other obligations secured thereby pursuant to such agreements and instruments as shall be approved by the Required Holders, and the Company will cause to be delivered to each holder of a Note an opinion of independent counsel to the effect that such agreements and instruments are enforceable in accordance with their terms, and in any such case the Notes shall have the benefit, to the full extent that, and with such priority as, the holders of Notes may be entitled under applicable law, of an equitable Lien on such Property securing the Notes. Such violation of this Section 7.13 will constitute an Event of Default hereunder, whether or not any such provision is made pursuant to this Section 7.13(b). 31 36 (c) FINANCING STATEMENTS. The Company will not, and will not permit SPHI to, sign or file a financing statement under the Uniform Commercial Code of any jurisdiction that names the Company or SPHI as debtor, or sign any security agreement authorizing any secured party thereunder to file any such financing statement, except, in any such case, a financing statement filed or to be filed to perfect or protect a security interest that the Company or SPHI is entitled to create, assume or incur, or permit to exist, under the foregoing provisions of this Section 7.13 or to evidence for informational purposes a lessor's interest in Property leased to the Company or SPHI. 7.14 PRIVATE OFFERING. Neither the Parent nor the Company will, nor will they permit any Person acting on their behalf to, offer the Notes or any part thereof or any similar Securities for issue or sale to, or solicit any offer to acquire any of the same from, any Person so as to bring the issuance and sale of the Notes within the provisions of section 5 of the Securities Act. 7.15 DEFEASANCE. (a) ESTABLISHMENT OF DEFEASANCE TRUST. If at any time neither the Company nor SPHI holds any Real Estate Assets, the Company shall contemporaneously with the sale of last Real Estate Asset and upon written notice (the "Trust Notice") to the holders of Notes then outstanding, establish a trust (the "Defeasance Trust"), solely in favor of all holders of Notes then outstanding, and irrevocably and absolutely assign, transfer, and convey to, and deposit into, said Defeasance Trust an amount of United States Governmental Obligations having interest and principal payments sufficient, in the opinion of independent certified public accountants of the Company expressed in a written certification thereof delivered to the holders of the Notes, to pay in full all remaining principal and interest payments, as the same shall fall due, in respect of all Notes then outstanding. Anything to the contrary contained herein notwithstanding, the Company may, at its sole discretion and at any time upon the delivery of a Trust Notice to the holders of Notes then outstanding, elect to establish a Defeasance Trust. (b) DISCHARGE. Provided that (i) the Defeasance Trust, the trustee thereof and the terms and conditions (as well as the form and substance) of the indenture whereby the Defeasance Trust shall have been established shall be reasonably satisfactory to all holders of Notes then outstanding (as evidenced by their written consent thereto), (ii) the purchase price of the United States Governmental Obligations to be deposited into the Defeasance Trust shall have been fully paid by the Company, and such United States Governmental Obligations shall have been so deposited into the Defeasance Trust (and each holder of Notes then outstanding shall have received written verification thereof by the trustee of the Defeasance Trust) and 32 37 shall, as so deposited, be unencumbered by any Lien and sufficient to pay all principal and interest to fall due on the Notes then outstanding as provided in Section 5.1 and in the Notes, (iii) the Company shall have (1) paid in full all fees, costs and expenses of the trustee of the Defeasance Trust and of all holders of Notes then outstanding incurred in connection with the preparation of the trust indenture and the establishment of the Defeasance Trust, including, without limitation, all reasonable attorney's fees and disbursements, and (2) prepaid in full any and all fees, costs and expenses of the trustee of the Defeasance Trust for the entire term of the Defeasance Trust, (iv) the Company shall have no continuing legal or equitable interest in the Defeasance Trust or the United States Governmental Obligations deposited into the Defeasance Trust (other than a reversionary interest in any such United States Governmental Obligations, or the proceeds therefrom, remaining after the full, final and indefeasible payment of all Notes and all interest thereon) and shall have no right to direct or instruct the trustee of the Defeasance Trust, or to remove such trustee, or to otherwise require such trustee to take any action with respect to such United States Governmental Obligations or otherwise, (v) no Event of Default shall have occurred and be continuing at the time of such deposit, (vi) the Company shall have delivered the Trust Notice to all holders of Notes then outstanding and a legal opinion of counsel to the Company, reasonably satisfactory to all holders of Notes then outstanding (as evidenced by their written approval thereof), stating, among other things which any holder of Notes then outstanding may reasonably request, that (1) the Defeasance Trust is validly created and duly constituted and that the sole beneficiaries thereof are the holders of Notes then outstanding, (2) the United States Governmental Obligations deposited therein were validly contributed to the Defeasance Trust and constitute a legal and valid res of the Defeasance Trust, (3) the Company's actions in creating the Defeasance Trust and contributing the United States Governmental Obligations thereto were duly authorized and valid, (4) the Company, as the settlor of the Defeasance Trust, has no right, title or interest in and to the Defeasance Trust or the res thereof (other than a reversionary interest in any United States Governmental Obligations or the proceeds thereof remaining after the full, final and indefeasible payment of all Notes and all interest thereon) and has no power of direction, or right of removal, with respect to the trustee of the Defeasance Trust, (5) all fees, costs and expenses of the trustee for the entire term of the Defeasance Trust have been prepaid in full and (6) the creation of the Defeasance Trust and the depositing of the United States Governmental Obligations therein shall not, for IRC purposes with respect to any holder of Notes then outstanding, result in a taxable event whereby (x) such holder may become liable to pay a tax on any gain deemed 33 38 to have arisen with respect to such transaction or (y) such holder shall have been deemed to have suffered a loss with respect to such transaction and (7) such holder will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if the Notes were paid in the accordance with their terms and the terms of this Agreement and such defeasance and discharge were not to occur; (vii) all principal, interest costs, expenses and other sums due and payable under the this Agreement to the holders of Notes outstanding on the date the Defeasance Trust is created shall have been paid in full; and (viii) the Company shall have delivered to the holders of Notes then outstanding an opinion of independent certified public accountants of the Company, reasonably satisfactory to such holders, stating that (i) the amount of United States Government Obligations deposited in the Defeasance Trust are sufficient to pay in full all remaining principal and interest payments, as the same shall fall due, in respect of all Notes then outstanding and (ii) under GAAP the creation of the Defeasance Trust and the depositing of the United States Governmental Obligations therein shall not result, with respect to any such holder, in an exchange of the Note or Notes of such holder for all or part of such United States Governmental Obligations which exchange would result in a gain or loss being realized by such holder under GAAP in respect of such transaction, then and in that case, all financial and restrictive covenants in respect of the Company set forth in Section 7 (other than this Section 7.15) of this Agreement shall be discharged; provided, however, if the contribution to the Defeasance Trust of any United States Governmental Obligations is invalidated, declared to be fraudulent or preferential, set aside, or if any such United States Governmental Obligations are required to be returned or redelivered to the Company, or any custodian, trustee, receiver or any other Person under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such invalidation, return or redelivery, the financial and restrictive covenants set forth in Section 7 of this Agreement shall be revived and restored. As used in this Section 7.15, the term "United States Governmental Obligations" shall mean any direct obligation of, or obligation guaranteed by, the United States of America, or any agency controlled or supervised by or acting as instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, so long as such obligation or guarantee shall have the benefit of the full faith and credit of the United States of America which shall have been pledged pursuant to authority granted by the Congress of the United States of America. 7.16 PERFORMANCE OF AGREEMENT. The Parent shall not cause or permit the Company or SPHI to take any action, or fail to take any action, which would result in a violation of any term or condition of this Agreement. 34 39 8. INFORMATION AS TO PARENT AND COMPANY 8.1 FINANCIAL AND BUSINESS INFORMATION. (a) INFORMATION AS TO THE PARENT. The Parent shall deliver to each holder of Notes: (i) Quarterly Statements -- as soon as practicable after the end of each quarterly fiscal period in each fiscal year of the Parent (other than the last quarterly fiscal period of each such fiscal year), and in any event within ninety (90) days thereafter: (A) an unaudited consolidated balance sheet of the Parent and its consolidated subsidiaries as at the end of such quarter, and (B) unaudited consolidated statements of earnings and cash flows of the Parent and its consolidated subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods in the previous fiscal year, and certified by a principal financial officer of the Parent that said financial statements fairly present the consolidated financial condition and results of operations and cash flows of the Parent and its consolidated subsidiaries, in accordance with GAAP consistently applied, as at the end of, and for, such period (subject to normal year-end adjustments), and accompanied by the certificate required by Section 0; and (ii) Annual Statements -- as soon as practicable after the end of each fiscal year of the Parent, and in any event within one hundred twenty (120) days thereafter: (A) a consolidated balance sheet of the Parent and its consolidated subsidiaries, as at the end of such year, and (B) consolidated statements of earnings, changes in stockholders' equity and cash flows of the Parent and its consolidated subsidiaries for such year, setting forth in each case in comparative form the corresponding figures for the previous fiscal year, and accompanied by 35 40 (1) an opinion thereon of the accountants named in Section 0(a) or other independent certified public accountants of recognized national standing selected by the Parent, which opinion shall, without qualification, state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion, (2) a certification by a principal financial officer of the Parent that such consolidated statements are complete and correct in all material respects, and (3) the certificate required by Section 0. (b) INFORMATION AS TO THE COMPANY. The Company shall deliver to each holder of Notes: (i) Quarterly Statements -- as soon as practicable after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), and in any event within ninety (90) days thereafter: (A) an unaudited consolidated balance sheet of the Company and its consolidated subsidiaries as at the end of such quarter, and (B) unaudited consolidated statements of earnings and cash flows of the Company and its consolidated subsidiaries for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods in the previous fiscal year, and certified by a principal financial officer of the Company that said financial statements fairly present the consolidated financial condition and results of operations and cash flows of the Company and its consolidated subsidiaries, in accordance with GAAP consistently applied, as at the end of, and for, such period (subject to normal year-end adjustments), and accompanied by the certificate required by Section 0; and (ii) Annual Statements -- as soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter: 36 41 (A) a consolidated balance sheet of the Company and its consolidated subsidiaries as at the end of such year, and (B) consolidated statements of earnings, changes in stockholders' equity and cash flows of the Company and its consolidated subsidiaries for such year, setting forth in each case in comparative form the corresponding figures for the previous fiscal year, and accompanied by (1) an opinion thereon of the accountants named in Section 0(a) or other independent certified public accountants of recognized national standing selected by the Company, which opinion shall, without qualification, state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion, (2) a certification by a principal financial officer of the Company that such consolidated statements are complete and correct in all material respects, (3) the certificates required by Section 0 and Section 0, and (4) such other information as may be reasonably be requested by any holder of Notes. (c) INFORMATION AS TO THE PARENT AND THE COMPANY. The Parent and the Company shall deliver to each holder of Notes: (i) AUDIT REPORTS -- promptly upon receipt thereof, a copy of each report submitted to the Company or SPHI by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or SPHI; (ii) SEC AND OTHER REPORTS -- promptly upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Parent, the Company or any Subsidiary to stockholders generally, and of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters), and each amendment thereto, in 37 42 respect thereof filed by the Parent, the Company or any Subsidiary with, or received by, such Person in connection therewith from, the National Association of Securities Dealers, any securities exchange or the Securities and Exchange Commission or any successor agency; (iii) ERISA -- promptly upon becoming aware of the occurrence of any (A) "reportable event" (as such term is defined in section 4043 of ERISA) and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations, or (B) "prohibited transactions" (as such term is defined in section 406 or section 4975 of the IRC) in connection with any Pension Plan or any trust created thereunder if the liability to the Parent, the Company or any ERISA Affiliate, taken together with any other such liabilities could reasonably be expect to have a Material Adverse Effect, a written notice specifying the nature thereof, what action the Parent or the Company, as the case may be, is taking or proposes to take with respect thereto, and, when known, any action taken by the IRS, the DOL or the PBGC with respect thereto; (iv) ERISA WAIVERS -- prompt written notice of and a description of any request pursuant to section 303 of ERISA or section 412 of the IRC for, or notice of the granting pursuant to said section 303 or section 412 of, a waiver in respect of all or part of the minimum funding standard set forth in ERISA or the IRC, as the case may be, of any Pension Plan, and, in connection with the granting of any such waiver, the amount of any waived funding deficiency (as such term is defined in said section 303 or said section 412) and the terms of such waiver, in each of the cases specified in this clause (iv), where the effect of such conditions or events or of events or conditions related thereto would reasonably be expected to have a Material Adverse Effect; (v) OTHER ERISA NOTICES -- prompt written notice of and, where applicable, a description of (A) any notice from the PBGC in respect of the commencement of any proceedings pursuant to section 4042 of ERISA to terminate any Pension Plan or for the appointment of a trustee to administer any Pension Plan, (B) any distress termination notice delivered to the PBGC under section 4041 of ERISA in respect of any Pension Plan, and any determination of the PBGC in respect thereof, (C) the placement of any Multiemployer Plan in reorganization 38 43 status under Title IV of ERISA, (D) any Multiemployer Plan becoming "insolvent" (as such term is defined in section 4245 of ERISA) under Title IV of ERISA, (E) the whole or partial withdrawal of the Parent or the Company or any ERISA Affiliate from any Multiemployer Plan and the withdrawal liability incurred in connection therewith, and (F) the withdrawal of the Parent or the Company or any ERISA Affiliate from any Multiple Employer Pension Plan and the withdrawal liability under ERISA incurred in connection therewith; and, in each of the cases specified in this clause (v), where the effect of any such notice, condition or event or of any event or condition related thereto would reasonably be expected to have a Material Adverse Effect; (vi) NOTICE OF DEFAULT OR EVENT OF DEFAULT -- within five (5) Business Days of becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and what action the Parent or the Company, as the case may be, is taking or proposes to take with respect thereto; (vii) NOTICE OF CLAIMED DEFAULT -- within five (5) Business Days of becoming aware that the holder of any Note, or of any evidence of Indebtedness or other Security of the Parent, the Company or SPHI, shall have given notice or taken any other action with respect to a claimed Default, Event of Default, default or event of default, a written notice specifying the notice given or action taken by such holder and the nature of the claimed Default, Event of Default, default or event of default and what action the Parent or the Company, as the case may be, is taking or proposes to take with respect thereto; (viii) ACTIONS, PROCEEDINGS -- promptly after the commencement thereof, notice of any action or proceeding relating to the Parent, the Company or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, would have a Material Adverse Effect; (ix) CERTAIN ENVIRONMENTAL MATTERS -- prompt written notice of and a description of any event or circumstance that, had such event or circumstance occurred or existed immediately prior to the Closing Date, would have been required to be disclosed as an exception to any statement set forth in Section 2.14; and 39 44 (x) REQUESTED INFORMATION -- with reasonable promptness, such other data and information as from time to time may be reasonably requested by any holder of Notes, including, without limitation, (A) copies of any statement, report or certificate furnished to any holder of any Indebtedness or any Security of the Parent, the Company or SPHI, (B) information requested to comply with any request of the National Association of Insurance Commissioners in respect of the designation of the Notes, (C) information requested to comply with 17 C.F.R. Section 230.144A, as amended from time to time, (D) information regarding the impact of the occurrence of the year 2000 on the Parent, the Company and its Significant Subsidiaries and plans of the Company to address any such impact; provided that any such request with respect to any of the data and information referred to in the foregoing clauses (A), (B), (C) and (D) shall be deemed to be reasonable for purposes of this Section 8.1(c)(x). 8.2 OFFICERS' CERTIFICATES. Each set of financial statements delivered to each holder of Notes pursuant to Section 0(a) or Section 0(b) shall be accompanied by a certificate of the President or a Vice-President and the Treasurer or an Assistant Treasurer of the Parent (in the case of statements delivered pursuant to Section 8.1(a)) or the Company (in the case of statements delivered pursuant to Section 8.1(b)), setting forth: (a) COVENANT COMPLIANCE -- the information (including detailed calculations) required in order to establish whether the Parent or the Company, as the case may be, was in compliance with the requirements of Section 7.6 through Section 7.10, inclusive, during the period covered by the earnings statement then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amounts, ratio or percentage then in existence); (b) EVENT OF DEFAULT -- a statement that the signers have reviewed the relevant terms hereof and have made, or caused to be made, under their supervision, a review of the transactions and conditions of the Parent, the Company and SPHI from the beginning of the accounting period covered by the earnings statements being delivered therewith to the date of the certificate and that such review did not disclose the existence during such period of any condition or event which constitutes a Default or an Event of Default or, if any 40 45 such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Parent or the Company, as the case may be, has taken or proposes to take with respect thereto; and (c) REAL ESTATE ASSETS -- in the case of certificates of the officers of the Company, a complete and correct list of each of the Real Estate Assets and the Designated Disposition Value with respect thereto, in each case as at the date of such certificate, together with a detailed calculation and explanation of each reduction in the Designated Disposition Value of any Real Estate Asset effected during such period and the "Pro-Rata Basis" on which such reduction shall have been made. If, at any time within sixty (60) days after receipt by the holders of the Notes of any certificate containing information required by this clause (c), the holders of at least fifty percent (50%) in principal amount of the Notes (exclusive of Notes held by any one or more of the Parent, the Company, any Subsidiary and any Affiliate) at the time outstanding shall disagree with the reduction in the Designated Disposition Value of any Real Estate Asset effected during the period covered by such certificate, the Company shall, in its discretion, either (i) adjust such reduction to the satisfaction of such holders or (ii) employ, at the expense of the Company, an independent appraiser satisfactory to such holders to determine the appropriate Pro-Rata Basis of such reduction. Any such determination by an independent appraiser shall be binding upon the Company and the holders of the Notes. 8.3 ACCOUNTANTS' CERTIFICATES. Each set of annual financial statements delivered pursuant to Section 0(b)(ii) shall be accompanied by a certificate of the accountants who certify such financial statements, stating that they have reviewed Section 7.1 through Section 7.14, inclusive, of this Agreement insofar as such Sections relate to accounting matters and stating further, whether, in making their audit, such accountants have become aware of any condition or event which then constitutes a Default or an Event of Default, and, if such accountants are aware that any such condition or event then exists, specifying the nature and period of existence thereof, provided that nothing in this Section 8.3 shall obligate such accountants to review any Section of this Agreement other than the aforesaid Section 7.1 through Section 7.14 and the related definitions. 8.4 INSPECTION. (a) PARENT, COMPANY AND SPHI. The Parent and the Company shall permit the representatives of each holder of Notes, at the expense of such holder (or, if a Default or Event of Default shall exist at such time, at the expense of the Company) to visit and inspect any of the Properties of the Parent, the Company or SPHI to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants (and by this provision the Parent and the Company authorize said accountants to discuss the finances and affairs of the Parent, the Company and SPHI) all at such reasonable times and as often as may be reasonably requested. 41 46 (b) OTHER SUBSIDIARIES. The Parent shall use its best efforts to provide the representatives of each holder of Notes, at the expense of such holder (or, if a Default or Event of Default shall exist at such time, at the expense of the Company) access to and inspection of the Properties of each other Subsidiary to examine such Subsidiary's books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss such Subsidiary's affairs, finances and accounts with such Subsidiary's officers, employees and independent public accountants (and by this provision the Parent authorizes said accountants to discuss the finances and affairs of the Subsidiaries) all at such reasonable times and as often as may be reasonably requested. 8.5 CONFIDENTIAL INFORMATION. For the purposes of this Section 8.5, "Confidential Information" means information delivered to you by or on behalf of the Parent, the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Parent, the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any Person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Parent, the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 8.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes) who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 8.5 to the extent contemplated by such confidentiality procedures, (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 8.5, 42 47 (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell your Notes or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 8.5), (v) any Person from which you offer to purchase any Security of the Parent, the Company or any Subsidiary (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 8.5), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (A) to effect compliance with any law, rule, regulation or order applicable to you, (B) in response to any subpoena or other legal process, (C) in connection with any litigation to which you are a party or (D) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 8.5 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Parent and the Company embodying the provisions of this Section 8.5. 9. EVENTS OF DEFAULT 43 48 9.1 NATURE OF EVENTS. An "Event of Default" shall exist if any of the following occurs and is continuing: (a) PRINCIPAL OR MAKE-WHOLE AMOUNT PAYMENTS -- the Company shall fail to make any payment of principal or Make-Whole Amount on any Note on or before the date such payment is due or the Company shall fail to comply with any of its obligations set forth in Section 5.3; (b) INTEREST PAYMENTS -- the Company shall fail to make any payment of interest on any Note on or before five (5) Business Days after the date such payment is due; (c) PARTICULAR COVENANT DEFAULTS -- the Parent, the Company or SPHI shall fail to perform or observe any covenant contained in Section 7.6 through Section 7.13, inclusive, or in Section 0(c)(vi) or Section 0(c)(vii); (d) OTHER DEFAULTS -- the Parent, the Company or SPHI shall fail to comply with any other provision hereof and such failure shall continue for more than thirty (30) days after the date on which such failure shall first become known to any officer of the Parent or the Company; (e) WARRANTIES OR REPRESENTATIONS -- any warranty, representation or other statement by or on behalf of the Parent or the Company contained herein or in any document or instrument furnished in compliance with or in reference hereto shall have been false or misleading in any material respect when made; (f) DEFAULT ON INDEBTEDNESS OR SECURITY -- (i) the Parent, the Company or SPHI shall fail to make any payment on any Indebtedness or any Security at final maturity, or (ii) any event shall occur or any condition shall exist in respect of any Indebtedness or any Security of the Parent, the Company or SPHI, or under any agreement securing or relating to any such Indebtedness or Security, that has caused the holders of such Indebtedness or Security, or a portion thereof, to accelerate the payment of such Indebtedness or Security prior to its stated maturity or prior to its regularly scheduled date or dates of payment, provided that the aggregate amount of all obligations in respect of all such Indebtedness and Securities referred to in this clause (f) exceeds at such time Five Million Dollars ($5,000,000); (g) INVOLUNTARY BANKRUPTCY PROCEEDINGS -- 44 49 (i) a receiver, liquidator, custodian or trustee of the Parent, the Company, or SPHI, or of all or any of the Property of any of the foregoing, shall be appointed by court order and such order remains in effect for more than thirty (30) days; or an order for relief shall be entered with respect to the Parent, the Company or SPHI, or the Parent, the Company or SPHI shall be adjudicated a bankrupt or insolvent; or (ii) any of the Real Estate Assets shall be sequestered by court order and such order remains in effect for more than thirty (30) days (provided that the temporary inability of the Company or SPHI to enforce its rights with respect to any Real Estate Loan resulting from the operation of the automatic stay in connection with bankruptcy proceedings of the related obligor on such Real Estate Loan shall not be deemed to be a sequestration of such Real Estate Loan), or any other Property of the Parent, the Company or SPHI shall be sequestered by court order and such order remains in effect for more than thirty (30) days and the sequestration of such Property could reasonably be expected to have a Material Adverse Effect; or (iii) a petition shall be filed against the Parent, the Company or SPHI under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and shall not be dismissed within thirty (30) days after such filing; (h) VOLUNTARY PETITIONS -- the Parent, the Company or SPHI shall file a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or shall consent to the filing of any petition against it under any such law, excluding any such filing for the purpose of a reconstruction, reorganization, merger, consolidation or other arrangement on terms approved, prior to such filing, by the holders of at least fifty percent (50%) in principal amount of the Notes (exclusive of Notes held by any one or more of the Parent, the Company, any Subsidiary and any Affiliate) at the time outstanding; (i) ASSIGNMENTS FOR BENEFIT OF CREDITORS, ETC. -- the Parent, the Company or SPHI shall make an assignment for the benefit of its creditors, or shall admit in writing its inability, or fails, to pay its debts generally as they become due, or shall consent to the appointment of a receiver, liquidator or trustee of the Parent, the Company or SPHI or of all or any part of the Property of the Parent, the Company or SPHI; or (j) UNDISCHARGED FINAL JUDGMENTS -- a final judgment or final judgments for the payment of money aggregating in excess of One Million Dollars ($1,000,000) shall be outstanding against one or more of the Parent, the Company and SPHI and any one of such judgments shall have been outstanding for more than sixty (60) days from the date of its entry and shall not have been stayed or discharged in full, provided that the calculation 45 50 of the aforesaid One Million Dollars ($1,000,000) shall exclude any final judgment to the extent, but only to the extent, such judgment will be covered by payments from insurance maintained by the Parent, the Company or SPHI and (i) the issuer of such insurance has agreed, in writing, to make such payment in respect of such judgment or (ii) if the issuer of such insurance has not agreed to make such payment in respect of such judgment, (A) the liability of such issuer to make such payment is being contested in good faith by appropriate proceedings, (B) adequate reserves have been established in respect of such judgment and (C) nonpayment of such judgment could not reasonably be expected to have a Material Adverse Effect. 9.2 DEFAULT REMEDIES. (a) ACCELERATION ON EVENT OF DEFAULT. (i) If an Event of Default specified in clause (g), clause (h) or clause (i) of Section 0 shall exist, all of the Notes at the time outstanding shall automatically become immediately due and payable together with interest accrued thereon and, to the extent permitted by law, the Make-Whole Amount at such time with respect to the principal amount of such Notes, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. (ii) If an Event of Default other than those specified in clause (g), clause (h) and clause (i) of Section 0 shall exist, the Required Holders may exercise any right, power or remedy permitted to such holder or holders by law, and shall have, in particular, without limiting the generality of the foregoing, the right to declare the entire principal of, and all interest accrued on, all the Notes then outstanding to be, and such Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith pay to the holder or holders of all the Notes then outstanding the entire principal of, and interest accrued on, the Notes and, to the extent permitted by law, the Make-Whole Amount at such time with respect to such principal amount of such Notes. (b) ACCELERATION ON PAYMENT DEFAULT. During the existence of an Event of Default described in Section 0(a) or Section 0(b), and irrespective of whether the Notes then outstanding shall have been declared to be due and payable pursuant to Section 46 51 0(a)(ii), any holder of Notes that shall have not consented to any waiver with respect to such Event of Default may, at such holder's option, by notice in writing to the Company, declare the Notes then held by such holder to be, and such Notes shall thereupon become, forthwith due and payable together with all interest accrued thereon, without any presentment, demand, protest or other further notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith pay to such holder the entire principal of and interest accrued on such Notes and, to the extent permitted by law, the Make-Whole Amount at such time with respect to such principal amount of such Notes. (c) VALUABLE RIGHTS. The Company acknowledges, and the parties hereto agree, that the right of each holder to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) is a valuable right and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. (d) OTHER REMEDIES. During the existence of an Event of Default and irrespective of whether the Notes then outstanding shall have been declared to be due and payable pursuant to Section 0(a)(ii) and irrespective of whether any holder of Notes then outstanding shall otherwise have pursued or be pursuing any other rights or remedies, any holder of Notes may proceed to protect and enforce its rights hereunder and under such Notes by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any agreement contained herein or in aid of the exercise of any power granted herein, provided that the maturity of such holder's Notes may be accelerated only in accordance with Section 0(a) and Section 0(b). (e) NONWAIVER AND EXPENSES. No course of dealing on the part of any holder of Notes nor any delay or failure on the part of any holder of Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. If the Company shall fail to pay when due any principal of, or Make-Whole Amount or interest on, any Note, or shall fail to comply with any other provision hereof, the Company shall pay to each holder of Notes, to the extent permitted by law, (i) such further amounts as shall be sufficient to cover the costs and expenses, including but not limited to reasonable attorneys' fees and expenses, incurred by such holder in collecting any sums due on such Notes, and (ii) all expenses incurred by any holder of Notes in connection with the enforcement, assessment or analysis of any rights under this Agreement and the Notes and any rights or remedies that are or may be available to such holder (including in each such case, without limitation, all reasonable attorneys' and financial advisors' fees and expenses and the allocated reasonable cost of such holder's counsel who are its employees or its affiliates' employees). 47 52 9.3 ANNULMENT OF ACCELERATION OF NOTES. If a declaration is made pursuant to Section 0(a)(ii), then and in every such case, the Required Holders may, by written instrument filed with the Company, rescind and annul such declaration, and the consequences thereof, provided that at the time such declaration is annulled and rescinded: (a) no judgment or decree shall have been entered for the payment of any moneys due on or pursuant hereto or the Notes; (b) all arrears of interest upon all the Notes and all other sums payable hereunder and under the Notes (except any principal of, or interest or Make-Whole Amount on, the Notes which shall have become due and payable by reason of such declaration under Section 0(a)(ii)) shall have been duly paid; and (c) each and every other Default and Event of Default shall have been waived pursuant to Section 0 or otherwise made good or cured, and provided further that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereon. 10. INTERPRETATION OF THIS AGREEMENT 10.1 TERMS DEFINED. As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: AFFILIATE -- means, at any time, the Parent and any other Person (other than SPHI) (a) for the purposes of Section 5.6, Section 8.2(c), Section 9.1(h), the definition of "Required Holders" in Section 10.1, Section 11.5(a) and Section 11.5(b)(iii), (i) that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Parent or the Company, (ii) that beneficially owns or holds five percent (5%) or more of any class of the Voting Stock of the Parent or the Company, or (iii) five percent (5%) or more of the Voting Stock (or in the case of a Person that is not a corporation, five percent (5%) or more of the equity interest) of which is beneficially owned or held by the Parent, the Company or a Subsidiary, 48 53 at such time, and (b) for the purposes of Section 2.3, Section 7.12 and as otherwise used in this Agreement, (i) that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company, (ii) that beneficially owns or holds five percent (5%) or more of any class of the Voting Stock of the Company, or (iii) five percent (5%) or more of the Voting Stock (or in the case of a Person that is not a corporation, five percent (5%) or more of the equity interest) of which is beneficially owned or held by the Company, at such time. As used in this definition, Control -- means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. AGREEMENT, THIS -- means this agreement, as it may be amended and restated from time to time. BUSINESS DAY -- means, at any time, a day other than a Saturday, a Sunday or, in the case of any Note with respect to which the provisions of Section 0 are applicable, a day on which the bank designated (by the holder of such Note) to receive (for such holder's account) payments on such Note is required by law (other than a general banking moratorium or holiday for a period exceeding four (4) consecutive days) to be closed. CAPITAL LEASE -- means, at any time, a lease with respect to which the lessee is required to recognize the acquisition of an asset and the incurrence of a liability at such time. CLOSING -- Section 0. CLOSING DATE -- Section 0. COMPANY -- has the meaning specified in the introductory sentence. CONFIDENTIAL INFORMATION -- Section 8.5. 49 54 CONSOLIDATED NET WORTH -- means, at any time, total stockholders' equity as would be shown on a consolidated balance sheet of the Parent and the Subsidiaries at such time, determined on a consolidated basis for such Persons in accordance with GAAP. CONTRIBUTIONS -- means cash contributions made by the Parent to the capital of the Company after the Closing Date. CUMULATIVE NON-ESSENTIAL CONTRIBUTIONS -- means, at any time, the aggregate of all Contributions (other than Operating Expense Contributions or Contributions directly or indirectly utilized to enable the Company to pay principal, interest, Make-Whole Amount or other amounts due in respect of the Notes) at or prior to such time. CUMULATIVE OPERATING EXPENSES -- means, at any time, the aggregate amount of Operating Expenses of the Company and SPHI, determined on a consolidated basis for such Persons, paid, or due and payable, from and including the Closing Date to such time. DEFAULT -- means an event or condition the occurrence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. DESIGNATED DISPOSITION VALUE -- means, at any time, with respect to each Real Estate Asset, the amount set forth on Annex 4 pertaining to such Real Estate Asset, adjusted as follows: the Designated Disposition Value shall, subject to the provisions of Section 8.2(c), be reduced (a) with respect to any Real Estate Property, on a Pro-Rata Basis in the event that a portion or portions of such Real Estate Property shall have been sold at or prior to such time, or (b) with respect to any Real Estate Loan, on a dollar-for-dollar basis to the extent that principal reductions shall have been made on such Real Estate Loan at or prior to such time; provided that in the case of any Real Estate Loan made by the Company or SPHI in the form of a Seller Note, the net book value (determined in accordance with GAAP) of such Seller Note shall in all cases be deemed to be its Designated Disposition Value. As used herein, the term "Pro-Rata Basis" means, with respect to any portion of any Real Estate Property sold, the relationship of such portion sold to the portion retained by the Company on a basis which is reasonably related to the respective fair market values of the portions sold and retained at the time of such sale, provided that the sum of the Designated Disposition Value assigned to the portion sold plus the Designated Disposition Value assigned the portion retained shall equal the Designated Disposition Value of such Real Estate Property prior to adjustment. DOL -- means the Department of Labor and any successor agency. 50 55 DOWNGRADE EVENT -- means the existence or occurrence of any one or more of the following conditions: (a) the Parent shall have senior unsecured debt obligations with an actual credit rating of lower than "BBB-" by S&P or lower than "Baa3" by Moody's, (b) the Parent shall have subordinated unsecured debt obligations with an actual credit rating of lower than "BB+" by S&P or lower than "Ba1" by Moody's or (c) the Parent shall fail to have any unsecured debt obligations with a credit rating issued by S&P or Moody's, unless (i) the Company shall have obtained, and shall maintain on an ongoing basis, at its expense, private letter ratings of the Notes of at least "BBB-" from S&P and of at least "Baa3" from Moody's, or an Issuer Credit Rating (or a comparable rating) of the Parent of at least "BBB-" from S&P and an Issuer Rating (or a comparable rating) of the Parent of at least "Baa3" from Moody's and (ii) Consolidated Net Worth shall, at all times, be at least Eight Hundred Million Dollars ($800,000,000). DOWNGRADE PREPAYMENT DATE -- Section 5.3(a). ENVIRONMENTAL PROTECTION LAW -- means any federal, state, county, regional or local law, statute, or regulation (including, without limitation, CERCLA, RCRA and SARA) enacted in connection with or relating to the protection or regulation of the environment, including, without limitation, those laws, statutes, and regulations regulating the disposal, removal, production, storing, refining, handling, transferring, processing, or transporting of Hazardous Substances, and any regulations, issued or promulgated in connection with such statutes by any Governmental Authority and any orders, decrees or judgments issued by any court of competent jurisdiction in connection with any of the foregoing. As used in this definition: CERCLA -- means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended from time to time (by SARA or otherwise), and all rules and regulations promulgated in connection therewith; RCRA -- means the Resource Conservation and Recovery Act of 1976, as amended, and any rules and regulations issued in connection therewith; and SARA -- means the Superfund Amendments and Reauthorization Act of 1986, as amended from time to time, and all rules and regulations promulgated 51 56 in connection therewith. ERISA -- means the Employee Retirement Income Security Act of 1974, as amended from time to time. ERISA AFFILIATE -- means any corporation or trade or business that (a) is a member of the same controlled group of corporations (within the meaning of section 414(b) of the IRC) as the Parent or the Company, (b) is under common control (within the meaning of section 414(c) of the IRC) with the Parent or the Company, (c) is a member of the same affiliated service group (within the meaning of section 414(m) of the IRC) as the Parent or the Company, or (d) is combined or otherwise aggregated with the Parent or the Company pursuant to regulations issued under section 414(o) of the IRC. EVENT OF DEFAULT -- Section 0. EXCESS CUMULATIVE NET PROCEEDS -- means, at any time, an amount equal to the result of (a) the aggregate net cash proceeds received by the Company and SPHI from all Real Estate Assets sold, paid down or repaid at or prior to such time minus (b) the aggregate of the Designated Disposition Values for such Real Estate Assets, in each case determined as of the date of sale, pay down or repayment of such Real Estate Asset. FINANCING DOCUMENTS -- means the Note Purchase Agreements, the Notes, and any other agreements and instruments to be executed pursuant to the terms of each of such documents, as each may be amended from time to time. FOREIGN PENSION PLAN -- means any plan, fund or other similar program (a) established or maintained outside of the United States of America by any one or more of the Parent, the Company or the Subsidiaries primarily for the benefit of the employees (substantially all of whom are aliens not residing in the United States of America) of the Parent, the Company or such Subsidiaries which plan, fund or other similar program provides for retirement income for such employees or results in a deferral of income for such employees in contemplation of retirement and 52 57 (b) not otherwise subject to ERISA. GAAP -- means accounting principles as promulgated from time to time in statements, opinions and pronouncements by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board and in such statements, opinions and pronouncements of such other entities with respect to financial accounting of for-profit entities as shall be accepted by a substantial segment of the accounting profession in the United States. GOVERNMENTAL AUTHORITY -- means (a) the government of (i) the United States of America and any state or other political subdivision thereof, or (ii) any jurisdiction (y) in which the Parent, the Company or any Subsidiary conducts all or any part of its business or (z) that asserts jurisdiction over the conduct of the affairs or Properties of the Parent, the Company or any Subsidiary, and (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. GUARANTY -- means with respect to any Person (for the purposes of this definition, the "Guarantor") any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing (including, without limitation, by means of a surety bond, letter of credit or other similar instrument, whether or not designated as a "guaranty") any indebtedness, dividend or other obligation of any other Person (the "Primary Obligor") in any manner, whether directly or indirectly, including, without limitation, obligations incurred through an agreement, contingent or otherwise, by the Guarantor: (a) to purchase such indebtedness or obligation or any Property or assets constituting security therefor; (b) to advance or supply funds (i) for the purpose of payment of such indebtedness or obligation, or (ii) to maintain working capital or other balance sheet condition, statement of financial condition or any income statement condition of the Primary Obligor or otherwise to advance or make available funds for the 53 58 purchase or payment of such indebtedness or obligation; (c) to lease Property or to purchase Securities or other Property or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of the Primary Obligor to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of the indebtedness or obligation of the Primary Obligor against loss in respect thereof. For purposes of computing the amount of any Guaranty, in connection with any computation of indebtedness or other liability, it shall be assumed that the indebtedness or other liabilities that are the subject of such Guaranty are direct obligations of the issuer of such Guaranty. HAZARDOUS SUBSTANCES -- means any and all pollutants, contaminants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which is required, or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). INDEBTEDNESS -- with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money (whether or not evidenced by a Security); (b) any liabilities for borrowed money secured by any Lien existing on Property owned by such Person (whether or not such liabilities have been assumed); (c) its liabilities in respect of Capital Leases; (d) the present value of all its liabilities for payments due under any arrangement for retention of title or any conditional sale agreement (other than a Capital Lease) discounted at the implicit rate, if known, with respect thereto or, if unknown, at eight percent (8%) per annum; and (e) all obligations of such Person in respect of Guaranties, letters of credit or instruments serving a similar function and endorsements, in each case in respect of or in support of the obligations of any other Person of the type set forth in clause (a) through clause (d) of this definition. 54 59 INSTITUTIONAL INVESTOR -- means the Purchasers, any affiliate of any of the Purchasers, and any holder of Notes that is an "accredited investor" as defined in section 2(15) of the Securities Act. INVESTMENT -- means any investment, made in cash or by delivery of Property, by the Parent, the Company or SPHI: (a) in any Person, whether by acquisition of stock, indebtedness or other obligation or Security, or by loan, Guaranty, advance, capital contribution or otherwise, or (b) in any Property. Investments shall be valued at cost less any net return of capital through the sale or liquidation thereof or other return of capital thereon. IRC -- means the Internal Revenue Code of 1986, together with all rules and regulations promulgated pursuant thereto, as amended from time to time. IRS -- means the Internal Revenue Service and any successor agency. LIEN -- means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a consignment or bailment for security purposes, and the filing of any financing statement under the Uniform Commercial Code of any jurisdiction, or an agreement to give any of the foregoing. The term "Lien" includes reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting real property. For the purposes hereof, the Parent, the Company and each Subsidiary is deemed to be the owner of any Property that it shall have acquired or holds subject to a conditional sale agreement, Capital Lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes, and such retention or vesting is deemed a Lien. The term "Lien" does not include negative pledge clauses in agreements relating to the borrowing of money. MAKE-WHOLE AMOUNT -- means, with respect to any date (a "Prepayment Date") and any principal amount ("Prepaid Principal") of Notes required or desired for any reason to be paid prior to the regularly scheduled maturity thereof on such Prepayment Date, the greater of (a) Zero Dollars ($0), or (b) (i) the sum of the present values of the then remaining 55 60 scheduled payments of principal and interest that would be payable in respect of such Prepaid Principal but for such prepayment or acceleration, minus (ii) the sum of (A) the amount of such Prepaid Principal, plus (B) the amount of interest accrued on such Prepaid Principal since the scheduled interest payment date immediately preceding such Prepayment Date. In determining such present values, a discount rate equal to the Make-Whole Discount Rate with respect to such Prepayment Date and Prepaid Principal divided by two (2), and a discount period of six (6) months of thirty (30) days each, shall be used. As used in this definition: Make-Whole Discount Rate -- means, with respect to any Prepayment Date and Prepaid Principal, the sum of (a) the per annum percentage rate (rounded to the nearest three (3) decimal places) equal to the bond equivalent yield to maturity derived from the annual yield to maturity of the United States Treasury obligation listed in the Applicable H.15 as of such Prepayment Date for the then most recently available day in such Applicable H.15 with a Treasury Constant Maturity (as defined in such Applicable H.15) equal to the Weighted Average Life to Maturity of such Prepaid Principal determined as of such Prepayment Date, plus (b) fifty one-hundredths percent (0.50%) per annum. For purposes of clause (a) of the preceding sentence, if no United States Treasury obligation with a Treasury Constant Maturity corresponding exactly to the Weighted Average Life to Maturity of such Prepaid Principal is listed, the yields for the two (2) published United States Treasury obligations with Treasury Constant Maturities most closely corresponding to such Weighted Average Life to Maturity (one (1) with a longer maturity and one (1) with a shorter maturity, if available) shall be calculated pursuant to the immediately preceding sentence and the Make-Whole Discount Rate shall be interpolated or extrapolated from such yields on a straight-line basis. Applicable H.15 -- means, at any time, United States Federal Reserve Statistical Release H.15(519) or its successor publication then most recently published and available to the public or, if no such successor publication is available, then any other source of current information in respect of interest rates 56 61 on securities of the United States of America that is generally available and, in the judgment of the Required Holders, provides information reasonably comparable to the H.15(519) report. Weighted Average Life to Maturity -- means, with respect to any Prepayment Date and Prepaid Principal, the number of years obtained by dividing the Remaining Dollar-Years of such Prepaid Principal determined on such Prepayment Date by such Prepaid Principal. Remaining Dollar-Years -- means, with respect to any Prepayment Date and Prepaid Principal, the result obtained by (a) multiplying, in the case of each required payment of principal (including payment at maturity) that would be payable in respect of such Prepaid Principal but for such prepayment, (i) an amount equal to such required payment of principal, by (ii) the number of years (calculated to the nearest one-twelfth (1/12) that will elapse between such Prepayment Date and the date such required principal payment would be due if such Prepaid Principal had not been so prepaid, and (b) calculating the sum of each of the products obtained in the preceding subsection (a). MARGIN SECURITY -- means "margin stock" within the meaning of Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II, as amended from time to time. MATERIAL ADVERSE EFFECT -- means a material adverse effect on the business, profits, Properties or condition (financial or otherwise) of the Parent, the Company and the Subsidiaries, taken as a whole, or the ability of the Parent or the Company to perform their respective obligations under the Financing Documents. MOODY'S -- Section 10.1 (in the definition of "Nationally Recognized Rating Agency"). MULTIEMPLOYER PLAN -- means any multiemployer plan (as defined in section 3(37) of ERISA) in respect of which the Parent, the Company or any ERISA Affiliate is an "employer" (as such term is defined in section 3 of ERISA). MULTIPLE EMPLOYER PENSION PLAN -- means any employee benefit plan within the meaning of section 3(3) of ERISA (other than a Multiemployer Plan), subject to Title IV of 57 62 ERISA, constituting a "single-employer plan" (as defined in section 4001 of ERISA) which has two (2) or more "contributing sponsors" (as defined in section 4001 of ERISA), at least two (2) of which are not under "common control" (as defined in section 4001 of ERISA) and to which the Parent, the Company or any ERISA Affiliate contribute; provided that for purposes of this Agreement the Chicago Title & Trust Pension Plan shall be deemed not to be a Multiple Employer Pension Plan. NATIONALLY RECOGNIZED RATING AGENCY -- means either Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. ("S&P"), or Moody's Investors Service ("Moody's"), or Duff & Phelps Credit Rating Co. 1995 NOTES -- means the Company's 8.62% Senior Notes due February 23, 2000 issued pursuant to those certain Note Purchase Agreements, each dated January 15, 1995, between the Company and each of the purchasers identified on Annex 1 thereto, as amended by the Amendment to Note Purchase Agreement, dated as of June 23, 1995, the Amendment No. 2 to Note Purchase Agreement, dated as of November 6, 1995, and the Third Amendment to Note Purchase Agreement, dated as of the date hereof. NOTE PURCHASE AGREEMENT -- Section 0(c). NOTES -- Section 0. OPERATING EXPENSE CONTRIBUTIONS -- means, at any time, the aggregate amount of Contributions (a) directly applied by the Company or SPHI to the payment of Operating Expenses after the Closing Date and prior to such time and (b) which the Company is under no obligation to repay to the Parent. OPERATING EXPENSES -- means any and all expenses and other amounts incurred or expended by the Company or SPHI in the operation of its business, including, without limitation, property taxes, construction bonds and assessments, legal expenses, rental and lease payments, employee salaries, telephone and utility costs and similar items. OTHER PURCHASERS -- Section 0(c). NORTH NATOMAS PROPERTIES -- means the Real Estate Properties identified on Part 10.1 of Annex 3. PARENT -- has the meaning specified in the introductory sentence. PBGC -- means the Pension Benefit Guaranty Corporation and any successor corporation or governmental agency. 58 63 PENSION PLAN -- means, at any time, any "employee pension benefit plan" (as defined in section 3 of ERISA) maintained at such time by the Parent, the Company or any ERISA Affiliate for employees of the Parent, the Company or such ERISA Affiliate, excluding any Multiemployer Plan, but including, without limitation, any Multiple Employer Pension Plan; provided that for purposes of this Agreement the Chicago Title & Trust Pension Plan shall be deemed not to be a Pension Plan. PERMITTED EXTRAORDINARY DIVIDEND -- means the dividend by the Company to the Parent, on or about the Closing Date, in the amount of up to Thirty-Nine Million Five Hundred Thousand Dollars ($39,500,000). PERMITTED INVESTMENTS -- means, at any time, the following: (a) Investments in direct obligations of, or obligations guarantied by, the United States of America or any agency of the United States of America the obligations of which agency carry the full faith and credit of the United States of America, provided that such obligations mature within three (3) years from the date of acquisition thereof; (b) Investments in commercial paper of corporations that at the time of acquisition thereof have an assigned rating in one of the top two rating classifications by a Nationally Recognized Rating Agency, provided that such commercial paper matures within two hundred seventy (270) days from the date of acquisition thereof; (c) Investments in any open-ended money market mutual fund that invests solely in so-called "money market" instruments maturing not more than one (1) year after the acquisition thereof, which fund has total assets in excess of One Billion Dollars ($1,000,000,000) and which is regulated by the Investment Company Act of 1940, as amended, and which Investments would be classified as a current asset under GAAP; (d) Investments in any mutual fund that invests solely in preferred stocks of corporations that have an assigned rating in one of the top two rating categories by a Nationally Recognized Rating Agency and which fund is regulated by the Investment Company Act of 1940, as amended; (e) Investments in certificates of deposit, eurodollar deposits, repurchase agreements and bankers' acceptances maturing within one (1) year from the date of acquisition, issued by a commercial bank organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits aggregating at least One Hundred Million Dollars ($100,000,000); (f) Investments in any obligation of any state of the United States of America, or municipality thereof, that at the time of acquisition thereof have an 59 64 assigned rating in one of the top two rating categories by a Nationally Recognized Rating Agency; provided that such obligations mature within three (3) years of the date of acquisition thereof; (g) Investments in local deposit accounts maintained for operating funds of the Company and SPHI; and (h) Investments existing on the Closing Date and disclosed in Part 10.1 of Annex 3. Investments shall be valued at cost less any net return of capital through the sale or liquidation thereof or other return of capital thereon, in any case without giving effect to any write-down in the value thereof. PERSON -- means an individual, partnership, corporation, limited liability company, trust, unincorporated organization, or a government or agency or political subdivision thereof. PLACEMENT MEMORANDUM -- Section 0. PROPERTY -- means any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible. PURCHASER -- means the Persons listed as purchasers of Notes on Annex 1. QUALIFIED INDEBTEDNESS COVERAGE ASSETS -- means (a) at any time, when the Company or SPHI holds Real Estate Assets, the sum (without duplication) of (i) the aggregate Allowable Value of all Real Estate Assets held by the Company and SPHI at such time, plus (ii) cash of the Company and SPHI at such time, plus (iii) Permitted Investments (other than cash and Real Estate Assets) of the Company and SPHI at such time, and (b) at any time, when neither the Company nor SPHI holds any Real Estate Assets, cash of the Company and SPHI at such time. As used in this definition: Allowable Value -- means, 60 65 (i) with respect to each North Natomas Property, the Designated Disposition Value of such Real Estate Property at such time, (ii) with respect to each Real Estate Loan which is a Seller Note, the net book value (determined in accordance with GAAP) of such Seller Note at such time, and (iii) with respect to each of the other Real Estate Assets not covered by subclause (i) or subclause (ii) above, the lesser of (A) the Designated Disposition Value of such Real Estate Asset at such time and (B) the net book value (determined in accordance with GAAP) of such Real Estate Asset at such time. QUALIFIED RESTRICTED PAYMENT ASSETS -- means, at any time, the sum (without duplication) of (a) the lesser of (i) the aggregate Designated Disposition Value of all Real Estate Assets held by the Company and SPHI at such time and (ii) the Reserve for Disposition at such time plus (A) in the case of all Real Estate Assets held by the Company and SPHI at such time other than the North Natomas Properties, the aggregate net book value (each as determined in accordance with GAAP) of such Real Estate Assets, and (B) in the case of the North Natomas Properties, the aggregate Designated Disposition Value of such Real Estate Properties at such time, plus (b) cash of the Company and SPHI at such time, plus (c) Permitted Investments (other than cash and Real Estate Assets) of the Company and SPHI at such time. 61 66 As used in this definition: Reserve for Disposition -- means, at any time, the lesser of (i) Four Million Five Hundred Thirty-One Thousand Three Hundred Seventy-Nine Dollars ($4,531,379) and (ii) the aggregate amount of reserves for disposition reflected on Annex 4 and attributable to Real Estate Assets other than the North Natomas Properties owned by the Company and SPHI at such time. "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. REAL ESTATE ASSETS -- means the collective reference to Real Estate Properties, Real Estate Loans and, without duplication, the Seller Notes. REAL ESTATE LOANS -- means loans to be repaid to the Company or SPHI, including, without limitation, loans in the form of Seller Notes, that are secured by unimproved or improved land with no significant building improvements, which loans are available for sale by the Company or SPHI. REAL ESTATE PROPERTIES -- means real Properties or investments in real Properties (other than Real Estate Loans) owned by the Company or SPHI and available for sale by the Company or SPHI. REQUIRED HOLDERS -- means, at any time, the holders of at least sixty-six and two-thirds percent (66"%) in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by any one or more of the Parent, the Company, any Subsidiary and any Affiliate). RESTRICTED INVESTMENTS -- means, at any time, all Investments except Permitted Investments. RESTRICTED PAYMENT -- means: (a) any dividend or other distribution, direct or indirect, on account of any shares of capital stock of the Company now or hereafter outstanding, whether in cash or other Property, except a dividend or other distribution payable solely in shares of common stock of the Company, and (b) any redemption, retirement, purchase or other acquisition, direct or indirect, of any shares of capital stock of the Company now or hereafter outstanding, or of any warrants, rights or options to acquire any shares of such 62 67 stock. S&P -- Section 10.1 (in the definition of "Nationally Recognized Rating Agency"). SCHEDULED INTEREST PAYMENTS -- means, at any time, the sum of (a) all future unpaid scheduled payments of interest in respect of the Notes and the 1995 Notes at such time plus (b) the aggregate amount of all future unpaid scheduled payments of interest in respect of all other Indebtedness of the Company and SPHI outstanding at such time, in each case without application of any "present value" discount thereto and assuming for such calculation that all principal payments on the Notes and such other Indebtedness will be paid in accordance with the regularly scheduled terms. SECURITIES ACT -- means the Securities Act of 1933, as amended. SECURITY -- means "security" as defined by section 2(1) of the Securities Act. SELLER NOTE -- means a promissory note received by the Company or SPHI in connection with, and as consideration for, a Transfer of Real Estate Assets and (a) naming the Company or SPHI as the payee, (b) requiring a monthly or a quarterly payment of interest at a per annum rate equal to or greater than the lesser of (i) nine percent (9%), or (ii) the rate of interest publicly announced by Bank of America from time to time as its prime rate at the time of such Transfer, and (c) secured by a perfected first priority Lien in favor of the Company or SPHI in the Real Estate Assets that are the subject of the Transfer related to the delivery of such promissory note. SIGNIFICANT SUBSIDIARY -- means a Subsidiary which is a "Significant Subsidiary" of the Parent within the meaning set forth in Regulation S-X of the Securities and Exchange Commission. SPECIAL COUNSEL -- Section 1.2(b). SPHI -- means Sacramento Properties Holdings, Inc., a California corporation and 63 68 a wholly-owned subsidiary of the Company. SUBSIDIARY -- means, at any time, a corporation of which the Parent owns, directly or indirectly, more than fifty percent (50%) (by number of votes) of each class of Voting Stock at such time. TRANSFER CONSIDERATION -- means, with respect to any Transfer of any Real Estate Asset, an amount equal to the sum of (a) cash received by the Company or SPHI at the time of such Transfer plus (b) the principal amount of Seller Notes issued to the Company or SPHI at the time of such Transfer. TRANSFER CONTRIBUTION AMOUNT -- means, at any time, an amount equal to the greater of (a) Zero Dollars ($0) and (b) the result of (i) the Designated Disposition Value of all Real Estate Assets which shall have been the subject of a Transfer on and after the Closing Date and prior to such time minus (ii) the aggregate Transfer Consideration received by the Company or SPHI in respect of all Real Estate Assets which shall have been the subject of a Transfer on and after the Closing Date and prior to the time of such Transfer. TRANSFERS -- Section 7.10. VOTING STOCK -- means capital stock of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect corporate directors (or Persons performing similar functions). 10.2 GAAP. Where the character or amount of any asset or liability or item of income or expense, or any consolidation or other accounting computation is required to be made for any purpose hereunder, it shall be done in accordance with GAAP as in effect on the date of, or at the end of the period covered by, the financial statements from which such asset, liability, item of income, or item of expense, is derived, or, in the case of any such computation, as in effect on the date as of which such computation is required to be determined, provided, that if any term defined herein 64 69 includes or excludes amounts, items or concepts that would not be included in or excluded from such term if such term were defined with reference solely to GAAP, such term will be deemed to include or exclude such amounts, items or concepts as set forth herein. 10.3 DIRECTLY OR INDIRECTLY. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person, including actions taken by or on behalf of any partnership in which such Person is a general partner. 10.4 SECTION HEADINGS AND TABLE OF CONTENTS AND CONSTRUCTION. (a) SECTION HEADINGS AND TABLE OF CONTENTS, ETC.. The titles of the Sections and the Table of Contents appear as a matter of convenience only, do not constitute a part hereof and shall not affect the construction hereof. The words "herein," "hereof," "hereunder" and "hereto" refer to this Agreement as a whole and not to any particular Section or other subdivision. (b) CONSTRUCTION. Each covenant contained herein shall be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants. 10.5 GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, NEW YORK LAW, WITHOUT REFERENCE TO NEW YORK LAW REGARDING CHOICE OF LAW. 11. MISCELLANEOUS 11.1 COMMUNICATIONS. (a) METHOD; ADDRESS. All communications hereunder or under the Notes (i) shall be in writing, (ii) shall be either (A) hand delivered, (B) deposited into the United States mail (registered or certified mail), postage prepaid, (C) sent by overnight courier or (D) electronically transmitted by way of "telecopy" or "fax transmission" and, on the date of such electronic transmission, sent by overnight courier and (iii) shall be addressed, (1) if to the Parent, Alleghany Corporation 375 Park Avenue, Suite 3201 65 70 New York, New York 10152 Attention: Robert M. Hart, Esq. Facsimile: (212) 759-8149 (2) if to the Company, Alleghany Properties, Inc. 2150 River Plaza Drive Suite 155 Sacramento, California 95833 Attention: Mr. Eric B. Olsen Facsimile: (916) 648-7739 with a copy to: Alleghany Corporation 375 Park Avenue, Suite 3201 New York, New York 10152 Attention: Robert M. Hart, Esq. Facsimile: (212) 759-8149 or at such other address as the Parent and/or the Company, as the case may be, shall have furnished in writing to all holders of the Notes at the time outstanding, and (3) if to any of the holders of the Notes, (y) if such holders are the Purchasers, at their respective addresses set forth on Annex 1, and further including any parties referred to on such Annex 1 that are required to receive notices in addition to such holders of the Notes, and (z) if such holders are not the Purchasers, at their respective addresses set forth in the register for the registration and transfer of Notes maintained pursuant to Section 6.1, or to any such party at such other address as such party may designate by notice duly given in accordance with this Section 0 to the Company (which other address shall be entered in such register). (b) WHEN GIVEN. Any communication so addressed and deposited in the United States mail, postage prepaid, by registered or certified mail (in each case, with return receipt requested) shall be deemed to be received on the third (3rd) succeeding Business Day after the day of such deposit (not including the date of such deposit). Any notice so addressed and otherwise delivered shall be deemed to be received when actually received at the address of the addressee. 66 71 11.2 REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating hereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the closing of your purchase of the Notes (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you or any other holder of Notes, may be reproduced by any holder of Notes by any photographic, photostatic, microfilm, micro-card, miniature photographic, digital or other similar process and each holder of Notes may destroy any original document so reproduced. The Parent and the Company agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such holder of Notes in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. Nothing in this Section 0 shall prohibit the Parent, the Company or any holder of Notes from contesting the accuracy of any such reproduction. 11.3 SURVIVAL. All warranties, representations, certifications and covenants made by the Parent and the Company herein or in any certificate or other instrument delivered by it or on its behalf hereunder shall be considered to have been relied upon by you and shall survive the delivery to you of the Notes regardless of any investigation made by you or on your behalf. All statements in any such certificate or other instrument shall constitute warranties and representations by the Parent and the Company hereunder. 11.4 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. The provisions hereof are intended to be for the benefit of all holders, from time to time, of Notes, and shall be enforceable by any such holder, whether or not an express assignment to such holder of rights hereunder shall have been made by you or your successor or assign. 67 72 11.5 AMENDMENT AND WAIVER. (a) REQUIREMENTS. This Agreement may be amended, and the observance of any term hereof may be waived, with (and only with) the written consent of the Parent, the Company and the Required Holders; provided that no such amendment or waiver of any of the provisions of Section 0 through Section 5, inclusive, or any defined term used therein, shall be effective as to any holder of Notes unless consented to by such holder in writing; and provided further that no such amendment or waiver shall, without the written consent of the holders of all Notes (exclusive of Notes held by the Parent, the Company, any Subsidiary or any Affiliate) at the time outstanding, (i) subject to Section 9, change the amount or time of any prepayment or payment of principal or Make-Whole Amount or the rate or time of payment of interest, (ii) amend Section 0, (iii) amend the definition of Required Holders, or (iv) amend this Section 0. The holder of any Note may specify that any such written consent executed by it shall be effective only with respect to a portion of the Notes held by it (in which case it shall specify, by dollar amount, the aggregate principal amount of Notes with respect to which such consent shall be effective) and in the event of any such specification such holder shall be deemed to have executed such written consent only with respect to the portion of the Notes so specified. (b) SOLICITATION OF NOTEHOLDERS. (i) SOLICITATION. Neither the Parent nor the Company shall solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions hereof or the Notes unless each holder of the Notes (irrespective of the amount of Notes then owned by it) shall be provided by the Parent or the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Section 0 shall be delivered by the Parent or the Company to each holder of outstanding Notes immediately following the date on which the same shall have been executed and delivered by all holders of outstanding Notes required to consent or agree to such waiver or consent. (ii) PAYMENT. The Parent and the Company shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of 68 73 supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to the holders of all Notes then outstanding. (iii) SCOPE OF CONSENT. Any consent made pursuant to this Section 0 by a holder of Notes that has transferred or has agreed to transfer its Notes to the Parent, the Company, any Subsidiary or any Affiliate and has provided or has agreed to provide such written consent as a condition to such transfer shall be void and of no force and effect except solely as to such holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent (and the consents of all other holders of Notes that were acquired under the same or similar conditions) shall be void and of no force and effect, retroactive to the date such amendment or waiver initially took or takes effect, except solely as to such holder. (c) BINDING EFFECT. Except as provided in Section 0(b), any amendment or waiver consented to as provided in this Section 0 shall apply equally to all holders of Notes and shall be binding upon them and upon each future holder of any Note and upon the Parent and the Company whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. 11.6 PAYMENTS, WHEN RECEIVED. (a) PAYMENTS DUE ON HOLIDAYS. If any payment due on, or with respect to, any Note shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall be deemed to have been originally due on such first following Business Day, such interest shall accrue and be payable to (but not including) the actual date of payment, and the amount of the next succeeding interest payment shall be adjusted accordingly. (b) PAYMENTS, WHEN RECEIVED. Any payment to be made to the holders of Notes hereunder or under the Notes shall be deemed to have been made on the Business Day such payment actually becomes available to such holder at such holder's bank prior to 1:00 p.m. (Eastern time). 69 74 11.7 ENTIRE AGREEMENT. This Agreement constitutes the final written expression of all of the terms hereof and is a complete and exclusive statement of those terms. 11.8 DUPLICATE ORIGINALS, EXECUTION IN COUNTERPART. Two or more duplicate originals hereof may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party hereto, and each set of counterparts which, collectively, show execution by each party hereto shall constitute one duplicate original. [REMAINDER OF PAGE INTENTIONALLY BLANK. NEXT PAGE IS SIGNATURE PAGE.] 70 75 If this Agreement is satisfactory to you, please so indicate by signing the acceptance at the foot of a counterpart hereof and returning such counterpart to the Parent and the Company, whereupon this Agreement shall become binding between us in accordance with its terms. Very truly yours, ALLEGHANY CORPORATION By: /s/ David B. Cuming --------------------------- Name: David B. Cuming Title: Senior Vice President ALLEGHANY PROPERTIES, INC. By: /s/ David B. Cuming --------------------------- Name: David B. Cuming Title: President Accepted: UNITED OF OMAHA LIFE INSURANCE COMPANY By: /s/ Edwin H. Garrison, Jr. --------------------------- Name: Edwin H. Garrison, Jr. Title: First Vice President EX-10.18.B 4 LIST OF EXHIBITS TO THE NOTE PURCHASE AGREEMENT 1 Exhibit 10.18(b) List of Contents of Annexes and Exhibits to the Alleghany Properties 1998 Note Purchase Agreement Annex 1 - Information as to Purchasers Annex 2 - Payment Instructions at Closing Annex 3 - Information as to Parent and Company Annex 4 - Designated Disposition Values and Reserves for Disposition Exhibit A - Form of 6.83% Senior Note Due December 11, 2004 Exhibit B1 - Form of Company Counsel's Closing Opinion Exhibit B2 - Form of Special Counsel's Closing Opinion Exhibit C1 - Form of Officers' Certificate - Parent Exhibit C2 - Form of Officers' Certificate - Company Exhibit D1 - Form of Secretary's Certificate - Parent Exhibit D2 - Form of Secretary's Certificate - Company EX-10.27.A 5 AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.27(a) ================================================================================ $43,000,000 AMENDED AND RESTATED CREDIT AGREEMENT AMONG UNDERWRITERS RE GROUP, INC., as Borrower, THE LENDERS NAMED HEREIN and THE FIRST NATIONAL BANK OF CHICAGO, as Agent DATED AS OF December 31, 1998 ================================================================================ 2 TABLE OF CONTENTS Article I DEFINITIONS..............................................................................................1 Article II THE FACILITY............................................................................................20 2.1 The Facility...................................................................................20 2.1.1 Description of Facility...............................................................20 2.1.2 Facility Amount.......................................................................20 2.1.3 Availability of Facility..............................................................20 2.2 Ratable Advances...............................................................................20 2.2.1 Ratable Advances......................................................................20 2.2.2 Ratable Advance Rate Options..........................................................21 2.2.3 Method of Selecting Types and Interest Periods for Ratable Advances......................................................................21 2.2.4 Conversion and Continuation of Outstanding Ratable Advances...........................21 2.3 Competitive Bid Advances.......................................................................22 2.3.1 Competitive Bid Option................................................................22 2.3.2 Competitive Bid Quote Request.........................................................22 2.3.3 Invitation for Competitive Bid Quotes.................................................23 2.3.4 Submission and Contents of Competitive Bid Quotes.....................................23 2.3.5 Notice to Borrower....................................................................24 2.3.6 Acceptance and Notice by Borrower.....................................................25 2.3.7 Allocation by Agent...................................................................25 2.4 Availability of Funds..........................................................................25 2.5 Facility Fee; Reductions in Aggregate Commitment...............................................26 2.6 Minimum Amount of Each Advance.................................................................26 2.7 Optional Principal Payments....................................................................26 2.8 Changes in Interest Rate, etc..................................................................26 2.9 Rates Applicable After Default.................................................................27 2.10 Method of Payment..............................................................................27 2.11 Notes; Telephonic Notices......................................................................27 2.12 Interest Payment Dates; Interest and Fee Basis.................................................28 2.13 Notification of Advances, Interest Rates, Prepayments and Commitment Reductions..........................................................................28 2.14 Lending Installations..........................................................................28 2.15 Non-Receipt of Funds by the Agent..............................................................28 2.16 Taxes..........................................................................................29 2.17 Agent's Fees...................................................................................30
-i- 3 Article III CHANGE IN CIRCUMSTANCES.................................................................................30 3.1 Yield Protection...............................................................................30 3.2 Changes in Capital Adequacy Regulations........................................................31 3.3 Availability of Types of Advances..............................................................31 3.4 Funding Indemnification........................................................................31 3.5 Lender Statements; Survival of Indemnity.......................................................32 3.6 Substitution of Lenders........................................................................32 3.7 Survival.......................................................................................32 Article IV CONDITIONS PRECEDENT....................................................................................33 4.1 Initial Loans..................................................................................33 4.2 Each Future Advance............................................................................34 Article V REPRESENTATIONS AND WARRANTIES..........................................................................35 5.1 Corporate Existence and Standing...............................................................35 5.2 Authorization and Validity.....................................................................35 5.3 Compliance with Laws and Contracts.............................................................35 5.4 Governmental Consents..........................................................................36 5.5 Financial Statements...........................................................................36 5.6 Material Adverse Change........................................................................36 5.7 Taxes..........................................................................................36 5.8 Litigation.....................................................................................37 5.9 Capitalization.................................................................................37 5.10 ERISA..........................................................................................37 5.11 Defaults.......................................................................................38 5.12 Federal Reserve Regulations....................................................................38 5.13 Investment Company; Public Utility Holding Company Act.........................................38 5.14 Certain Fees...................................................................................38 5.15 Solvency.......................................................................................39 5.16 Ownership of Properties........................................................................39 5.17 Indebtedness...................................................................................39 5.18 Material Agreements............................................................................39 5.19 Environmental Laws.............................................................................39 5.20 Insurance......................................................................................40 5.21 Insurance Licenses.............................................................................40 5.22 Reserves.......................................................................................40 5.23 Disclosure.....................................................................................41
-ii- 4 5.24 Year 2000 Compliance...........................................................................41 5.25 Use of Proceeds................................................................................41 5.26 Permits, Licenses and Rights...................................................................41 Article VI COVENANTS...............................................................................................41 6.1 Financial Reporting............................................................................42 6.2 Use of Proceeds................................................................................44 6.3 Notice of Default..............................................................................44 6.4 Conduct of Business............................................................................45 6.5 Taxes..........................................................................................45 6.6 Insurance......................................................................................46 6.7 Compliance with Laws...........................................................................46 6.8 Maintenance of Properties; Year 2000 Compliance................................................46 6.9 Inspection.....................................................................................46 6.10 Capital Stock and Dividends....................................................................47 6.11 Indebtedness...................................................................................47 6.12 Merger.........................................................................................47 6.13 Sale of Assets.................................................................................47 6.14 Investments and Purchases......................................................................48 6.15 Contingent Obligations.........................................................................50 6.16 Liens..........................................................................................50 6.17 Affiliates.....................................................................................51 6.18 Other Indebtedness.............................................................................51 6.19 Environmental Matters..........................................................................51 6.20 Change in Corporate Structure; Fiscal Year.....................................................51 6.21 Inconsistent Agreements........................................................................52 6.22 Financial Covenants............................................................................52 6.22.1 Minimum Statutory Surplus.............................................................52 6.22.2 Leverage Ratio........................................................................52 6.22.3 Adjusted Leverage Ratio...............................................................52 6.22.4 URC Risk Based Capital Ratio..........................................................52 6.23 Tax Consolidation..............................................................................52 6.24 ERISA Compliance...............................................................................53 Article VII DEFAULTS................................................................................................53
-iii- 5 Article VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES..........................................................56 8.1 Acceleration...................................................................................56 8.2 Amendments.....................................................................................57 8.3 Preservation of Rights.........................................................................57 Article IX GENERAL PROVISIONS......................................................................................58 9.1 Survival of Representations....................................................................58 9.2 Governmental Regulation........................................................................58 9.3 Taxes..........................................................................................58 9.4 Headings.......................................................................................58 9.5 Entire Agreement...............................................................................58 9.6 Several Obligations; Benefits of this Agreement................................................58 9.7 Expenses; Indemnification......................................................................58 9.8 Numbers of Documents...........................................................................59 9.9 Accounting.....................................................................................59 9.10 Severability of Provisions.....................................................................59 9.11 Nonliability of Lenders........................................................................59 9.12 Choice of Law..................................................................................60 9.13 Consent to Jurisdiction........................................................................60 9.14 Waiver of Jury Trial...........................................................................60 9.15 Disclosure.....................................................................................60 9.16 Counterparts...................................................................................61 9.17 Confidentiality................................................................................61 9.18 Restatement Date...............................................................................61 9.19 Departing Lender...............................................................................62 Article X THE AGENT...............................................................................................62 10.1 Appointment....................................................................................62 10.2 Powers.........................................................................................62 10.3 General Immunity...............................................................................62 10.4 No Responsibility for Loans, Recitals, etc.....................................................63 10.5 Action on Instructions of Lenders..............................................................63 10.6 Employment of Agents and Counsel...............................................................63 10.7 Reliance on Documents; Counsel.................................................................63 10.8 Agent's Reimbursement and Indemnification......................................................63 10.9 Notice of Default..............................................................................64 10.10 Rights as a Lender.............................................................................64
-iv- 6 10.11 Lender Credit Decision.........................................................................64 10.12 Successor Agent................................................................................64 Article XI SETOFF; RATABLE PAYMENTS................................................................................65 11.1 Setoff.........................................................................................65 11.2 Ratable Payments...............................................................................65 Article XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS.......................................................66 12.1 Successors and Assigns.........................................................................66 12.2 Participations.................................................................................66 12.2.1 Permitted Participants; Effect........................................................66 12.2.2 Voting Rights.........................................................................66 12.2.3 Benefit of Setoff.....................................................................66 12.3 Assignments....................................................................................67 12.3.1 Permitted Assignments.................................................................67 12.3.2 Effect; Effective Date................................................................67 12.4 Dissemination of Information...................................................................67 12.5 Tax Treatment..................................................................................67 Article XIII NOTICES.................................................................................................68 13.1 Giving Notice..................................................................................68 13.2 Change of Address..............................................................................68
-v- 7 EXHIBITS Exhibit A - Ratable Notes Exhibit B - Competitive Bid Note Exhibit C - Competitive Bid Quote Request Exhibit D - Invitation for Competitive Bid Quotes Exhibit E - Competitive Bid Quote Exhibit F - Compliance Certificate Exhibit G - Assignment Agreement SCHEDULES Schedule 5.3 - Approvals and Consents Schedule 5.4 - Governmental Consents Schedule 5.7 - Taxes Schedule 5.9 Capitalization Schedule 5.10 - ERISA Schedule 5.16 - Owned Properties Schedule 5.17 - Indebtedness Schedule 5.19 - Environmental Schedule 5.21 - Insurance Licenses Schedule 6.11 - Closing Date Indebtedness Schedule 6.14 - Investments Schedule 6.16 - Liens -vi- 8 AMENDED AND RESTATED CREDIT AGREEMENT This Amended and Restated Credit Agreement, dated as of December 31, 1998, is among UNDERWRITERS RE GROUP, INC., a Delaware corporation, the Lenders and THE FIRST NATIONAL BANK OF CHICAGO, as Agent and in its individual capacity as a Lender. R E C I T A L S: A. The Borrower (formerly URC Holdings Corp.) previously entered into that certain Credit Agreement dated as of October 23, 1996 with the lenders named therein and the Agent (the "Existing Credit Agreement"), pursuant to which such lenders agreed to make financial accommodations to it in the aggregate principal amount of $50,000,000, the proceeds of which were to be used for the general corporate needs of the Borrower and its Subsidiaries. B. The Borrower, the Lenders and the Agent wish to make certain amendments to the Existing Credit Agreement, including the termination of a $7,000,000 commitment of one of the lenders under the Existing Credit Agreement. C. Lenders are willing to continue to extend such financial accommodations on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and undertakings herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the Agent hereby agree that the Existing Credit Agreement is hereby amended and restated, effective as of the Restatement Date, as follows: Article I DEFINITIONS As used in this Agreement: "Absolute Rate" means, with respect to an Absolute Rate Loan made by a given Lender for the relevant Absolute Rate Interest Period, the rate of interest per annum (rounded to the nearest 1/100 of 1%) offered by such Lender and accepted by the Borrower. 9 "Absolute Rate Advance" means a borrowing hereunder consisting of the aggregate amount of the several Absolute Rate Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. "Absolute Rate Auction" means a solicitation of Competitive Bid Quotes setting forth Absolute Rates pursuant to Section 2.3. "Absolute Rate Interest Period" means, with respect to an Absolute Rate Advance, a period of not less than 7 and not more than 180 days commencing on a Business Day selected by the Borrower pursuant to this Agreement. If such Absolute Rate Interest Period would end on a day which is not a Business Day, such Absolute Rate Interest Period shall end on the next succeeding Business Day. "Absolute Rate Loan" means a Loan which bears interest at the Absolute Rate. "Adjusted Leverage Ratio" means "Leverage Ratio"; provided, that each reference to "Indebtedness" therein shall be deemed to exclude Indebtedness on account of undrawn amounts of Letters of Credit provided to beneficiaries in the ordinary course of business. "Advance" means a borrowing hereunder consisting of the aggregate amount of the several Loans made by some or all of the Lenders to the Borrower on the same Borrowing Date, of the same Type (or on the same interest basis in the case of Competitive Bid Advances) and, when applicable, for the same Interest Period and includes a Competitive Bid Advance. "Affected Lender" is defined in Section 3.6. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purposes of this Agreement, a Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" means First Chicago in its capacity as agent for the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders hereunder. The initial Aggregate Commitment is $43,000,000. "Agreement" means this Credit Agreement, as it may be amended, modified or restated and in effect from time to time. -2- 10 "Agreement Accounting Principles" means generally accepted accounting principles as in effect in the United States from time to time, applied in a manner consistent with those used in preparing the financial statements referred to in Section 5.5(a) and (b); provided, that with respect to the financial covenants contained in Section 6.22 hereof, the related definitions, and the computations required thereby, such term means generally accepted accounting principles (except where SAP is applicable) in effect in the United States on the date hereof, applied in a manner consistent with those used in preparing the financial statements referred to in Section 5.5(a) and (b). "Alleghany" means Alleghany Corporation, a Delaware corporation. "Annual Statement" means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary's jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing annual statutory financial statements and shall contain the type of information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Applicable Eurodollar Margin" means, on any date, subject to the following sentence of this definition, the applicable of the following percentages:
Applicable Debt Rating on Such Date Eurodollar Margin ------------------------ ----------------- Level I Status .36% Level II Status .425% Level III Status .475% Level IV Status .50% Level V Status .575%
Any change in the Applicable Eurodollar Margin shall be effective as of the date on which the Borrower has received official notification of the change in the Debt Rating giving rise thereto and shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. "Applicable Facility Fee Percentage" means, on any date, subject to the following sentence of this definition, the applicable of the following percentages: -3- 11
Applicable Debt Rating on Such Date Eurodollar Margin ------------------------ ----------------- Level I Status .09% Level II Status .10% Level III Status .125% Level IV Status .15% Level V Status .175%
Any change in the Applicable Facility Fee Percentage shall be effective as of the date on which the Borrower has received official notification of the change in the Debt Rating giving rise thereto and shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. "Arranger" means First Chicago Capital Markets, Inc., and its successors and assigns. "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means any of the chief executive officer or chief financial officer of the Borrower, acting singly. "Bankruptcy Code" means Title 11, United States Code, sections 1 et seq., as the same may be amended from time to time, and any successor thereto or replacement therefor which may be hereafter enacted. "Borrower" means Underwriters Re Group, Inc., a Delaware corporation, and its successors and assigns. "Borrowing Date" means a date on which an Advance is made hereunder. "Business Day" means (a) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market, and (b) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities. -4- 12 "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Cash Equivalents" means Investments maturing within one year from the date of investment (excluding (x) Investments as to which the principal amount to be repaid may be subject to fluctuation and (y) mortgage backed securities consisting of principal only or interest only strips) in (a) certificates of deposit, Eurodollar time deposits and other interest bearing deposits or accounts with United States commercial banks having a combined capital and surplus of at least $500,000,000 and rated C or better by Thomson BankWatch or with any Lender, (b) certificates of deposit, other interest bearing accounts or deposits and demand deposits with other United States commercial banks, which deposits and accounts are in amounts fully insured by the Federal Deposit Insurance Corporation, (c) obligations issued or unconditionally guaranteed by the United States government or issued by an agency thereof and backed by the full faith and credit of the United States, (d) direct obligations issued by any state of the United States or any political subdivision thereof which have the highest rating obtainable from S&P on the date of investment, (e) commercial paper rated A-1 or better by S&P and P-1 or better by Moody's or (f) money market mutual funds identified by the valuation office of the NAIC as requiring no investment reserve. "Change" is defined in Section 3.2. "Change in Control" means (a) Alleghany shall fail to maintain beneficial ownership, directly or indirectly, free and clear of any Lien, of at least 51% of the outstanding voting stock of the Borrower (unless such failure arises from a Public Offering and no Person (other than Alleghany) or Persons acting in concert acquire (either in such Public Offering or thereafter) beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 10% or more of the outstanding voting stock of the Borrower), (b) during any period of 25 consecutive calendar months, commencing on the date of this Agreement, the ceasing of those individuals (the "Continuing Directors") who (i) were directors of the Borrower on the first day of each such period or (ii) subsequently became directors of the Borrower and whose initial election or initial nomination for election subsequent to that date was approved by a majority of the Continuing Directors then on the board of directors of the Borrower, to constitute a majority of the board of directors of the Borrower, or (c) any "Credit Party" (as defined in the Venton Credit Agreement) other than the Borrower shall cease to be a Wholly-Owned Subsidiary of the Borrower (it being understood that a merger of a Credit Party into an entity which is a Wholly-Owned Subsidiary of the Borrower, to the extent otherwise permitted under this Agreement, will not be deemed to cause such Credit Party to cease to be a Wholly-Owned Subsidiary of the Borrower for purposes of this definition). -5- 13 "Closing Date" means October 23, 1996. "Closing Transactions" is defined in Section 4.1(d). "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Commitment" means, for each Lender, the obligation of such Lender to make Ratable Loans not exceeding the amount set forth opposite its signature below and as set forth in any Notice of Assignment relating to any assignment which has become effective pursuant to Section 12.3.2, as such amount may be modified from time to time pursuant to the terms hereof. "Competitive Bid Advance" means a borrowing hereunder consisting of the aggregate amount of the several Competitive Bid Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. "Competitive Bid Borrowing Notice" is defined in Section 2.3.6. "Competitive Bid Loan" means a Eurodollar Bid Rate Loan or an Absolute Rate Loan, or both, as the case may be. "Competitive Bid Margin" means the margin above or below the applicable Eurodollar Base Rate offered for a Eurodollar Bid Rate Loan, expressed as a percentage (rounded to the nearest 1/100 of 1%) to be added or subtracted from such Eurodollar Base Rate. "Competitive Bid Note" means a promissory note in substantially the form of Exhibit B hereto, with appropriate insertions, duly executed and delivered to the Agent by the Borrower for the account of a Lender and payable to the order of such Lender, including any amendment, modification, renewal or replacement of such promissory note. "Competitive Bid Quote" means a Competitive Bid Quote substantially in the form of Exhibit E hereto completed and delivered by a Lender to the Agent in accordance with Section 2.3.4. "Competitive Bid Quote Request" means a Competitive Bid Quote Request substantially in the form of Exhibit C hereto completed and delivered by the Borrower to the Agent in accordance with Section 2.3.2. "Condemnation" is defined in Section 7.8. -6- 14 "Consolidated" or "consolidated", when used in connection with any calculation, means a calculation to be determined on a consolidated basis for the Borrower and its Subsidiaries in accordance with Agreement Accounting Principles. "Consolidated Person" means, for the taxable year of reference of Alleghany, each Person which has joined or which is required to join in the filing of a consolidated federal income tax return with Alleghany. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement or take-or-pay contract. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Conversion/Continuation Notice" is defined in Section 2.2.4. "Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. The Corporate Base Rate is a reference rate and does not necessarily represent the lowest or best rate of interest actually charged to any customer. First Chicago may make commercial loans or other loans at rates of interest at, above or below the Corporate Base Rate. "Debt Rating" means the credit rating assigned to the Borrower's senior, unsecured long term Indebtedness (without credit enhancement) as publicly announced by Moody's or S&P, as the case may be. If the rating system of Moody's or S&P shall materially change from that in effect on the date of this Agreement, then the parties hereto shall negotiate in good faith to amend the references to such ratings in this Agreement to fairly reflect such changes. "Default" means an event described in Article VII. "Departing Lender" means Union Bank of California, N.A. "Environmental Laws" is defined in Section 5.19. "Environmental Permits" is defined in Section 5.19. -7- 15 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Advance" means a Eurodollar Bid Rate Advance or a Eurodollar Ratable Advance, or both, as the case may be. "Eurodollar Auction" means a solicitation of Competitive Bid Quotes setting forth Eurodollar Bid Rates pursuant to Section 2.3. "Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the relevant Eurodollar Interest Period, the rate determined by the Agent to be the rate at which deposits in U.S. dollars are offered by First Chicago to first-class banks in the London interbank market at approximately 11 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Ratable Loan (or in the case of a Eurodollar Bid Rate Advance, in an amount comparable to the amount of such Advance) and having a maturity approximately equal to such Eurodollar Interest Period. "Eurodollar Bid Rate" means, with respect to a Eurodollar Bid Rate Loan made by a given Lender for the relevant Eurodollar Interest Period, the sum of (a) the Eurodollar Base Rate and (b) the Competitive Bid Margin offered by such Lender and accepted by the Borrower. "Eurodollar Bid Rate Advance" means a Competitive Bid Advance which bears interest at a Eurodollar Bid Rate. "Eurodollar Bid Rate Loan" means a Loan which bears interest at the Eurodollar Bid Rate. "Eurodollar Interest Period" means, with respect to a Eurodollar Ratable Advance or a Eurodollar Bid Rate Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two, three or six months thereafter; provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day; provided, however, that if said next succeeding Business Day falls in a new month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. "Eurodollar Loan" means a Eurodollar Ratable Loan or Eurodollar Bid Rate Loan, or both, as the case may be. -8- 16 "Eurodollar Ratable Advance" means an Advance which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3. "Eurodollar Ratable Loan" means a Loan which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2.3. "Eurodollar Rate" means, with respect to a Eurodollar Ratable Advance for the relevant Eurodollar Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by (ii) one minus the Reserve Requirement (expressed as a decimal) applicable to such Eurodollar Interest Period, plus (b) the Applicable Eurodollar Margin or Margins, as applicable, for such Eurodollar Interest Period. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Existing Credit Agreement" is defined in the Recitals to this Agreement. "Facility Termination Date" means December 30, 1999. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "Financial Statements" is defined in Section 5.5. "First Chicago" means The First National Bank of Chicago in its individual capacity as a Lender and not in its capacity as Agent, and its successors. "Fiscal Quarter" means one of the four three-month accounting periods comprising a Fiscal Year. "Fiscal Year" means the twelve-month accounting period ending December 31 of each year. "Floating Rate" means, for any day, a rate per annum equal to the higher of (a) the Corporate Base Rate for such day, or (b) the sum of the Federal Funds Effective Rate for such day plus one-half percent (.50%) per annum. -9- 17 "Floating Rate Advance" means an Advance which bears interest at the Floating Rate. "Floating Rate Loan" means a Ratable Loan which bears interest at the Floating Rate. "Governmental Authority" means any government (foreign or domestic) or any state or other political subdivision thereof or any governmental body, agency, authority, department or commission (including without limitation any board of insurance, insurance department or insurance commissioner or any taxing authority or political subdivision) or any instrumentality or officer thereof (including without limitation any court or tribunal) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation, partnership or other entity directly or indirectly owned or controlled by or subject to the control of any of the foregoing. "Guaranty" means that certain Guaranty dated as of the Restatement Date by URC in favor of the Agent and the Lenders. "Hazardous Materials" is defined in Section 5.19. "Indebtedness" of a Person means such Person's (a) obligations for borrowed money, (b) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (c) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Property now or hereafter owned or acquired by such Person, (d) obligations which are evidenced by notes, acceptances, or similar instruments, (e) Capitalized Lease Obligations, (f) Rate Hedging Obligations, (g) Contingent Obligations, (h) obligations for which such Person is obligated (contingently, including with respect to undrawn amounts of issued Letters of Credit, or otherwise) pursuant to or in respect of a Letter of Credit and (i) repurchase obligations or liabilities of such Person with respect to accounts or notes receivable sold by such Person. "Insurance Subsidiary" means any direct or indirect present or future Subsidiary which is engaged in the insurance business (and shall in any event include URC), but excluding each of the Venton Entities. "Interest Period" means a Eurodollar Interest Period or an Absolute Rate Interest Period. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade), deposit account or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition of, the stock, partnership interests, notes, debentures or other securities of any other Person made by such Person. -10- 18 "Invitation for Competitive Bid Quotes" means an Invitation for Competitive Bid Quotes substantially in the form of Exhibit D hereto, completed and delivered by the Agent to the Lenders in accordance with Section 2.3.3. "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Agent, any office, branch, subsidiary or affiliate of such Lender or the Agent. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "Level I Status" exists at any date if at such date the Debt Rating is (a) A2 (or the equivalent) or higher by Moody's or A (or the equivalent) or higher by S&P and (b) not lower than Baa3 (or the equivalent) by Moody's or BBB- (or the equivalent) by S&P. "Level II Status" exists at any date if at such date (a) the Debt Rating is A3 (or the equivalent) or higher by Moody's or A- (or the equivalent) or higher by S&P, (b) the Debt Rating is not lower than Baa3 (or the equivalent) by Moody's or BBB- (or the equivalent) by S&P and (c) Level I Status does not exist. "Level III Status" exists at any date if at such date (a) the Debt Rating is Baa1 (or the equivalent) or higher by Moody's or BBB+ (or the equivalent) or higher by S&P, (b) the Debt Rating is not lower than Baa3 (or the equivalent) by Moody's or BBB- (or the equivalent) by S&P and (c) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if at such date (a) the Debt Rating is Baa3 (or the equivalent) or higher by Moody's and BBB- (or the equivalent) or higher by S&P and (b) none of Level I Status, Level II Status or Level III Status exists. "Level V Status" exists at any date if at such date (a) the Debt Rating is lower than Baa3 (or the equivalent) by Moody's or lower than BBB- (or the equivalent) by S&P or (b) the Borrower's senior, unsecured long term Indebtedness (without credit enhancement) is unrated by both Moody's and S&P. "Leverage Ratio" means, with respect to the Borrower on a consolidated basis with its Subsidiaries, at any time, the ratio of (a) Indebtedness to (b) the sum of (i) Indebtedness and (ii) Net Worth, excluding the impact of Statement of Financial Accounting Standards No. 115. For the purpose of determining this ratio, Contingent Obligations shall be excluded from -11- 19 Indebtedness to the extent that they relate to underlying obligations which are included in Indebtedness with respect to the Borrower on a consolidated basis with its Subsidiaries. "License" means any license, certificate of authority, permit or other authorization which is required to be obtained from any Governmental Authority in connection with the operation, ownership or transaction of insurance business. "Lien" means any security interest, lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). "Loan" means, with respect to a Lender, such Lender's portion of any Advance and "Loans" means, with respect to the Lenders, the aggregate of all Advances. "Loan Documents" means this Agreement, the Notes, the Guaranty and the other documents and agreements contemplated hereby and executed by the Borrower or any Subsidiary in favor of the Agent or any Lender. "Margin Stock" has the meaning assigned to that term under Regulation U. "Material Adverse Effect" means a material adverse effect on (a) the business, Property, condition (financial or other), performance, operations, or prospects of the Borrower and its Subsidiaries, taken as a whole, (b) the ability of the Borrower to perform its obligations under the Loan Documents, or (c) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder. "Moody's" means Moody's Investors Service, Inc., a Delaware corporation, together with any Person succeeding thereto by merger, consolidation or acquisition of all or substantially all of its assets, including substantially all of its business of rating securities. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement which is subject to Title IV of ERISA to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "NAIC" means the National Association of Insurance Commissioners or any successor thereto, or in lieu thereof, any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissioners and similar Governmental Authorities of the various states of the United States toward the promotion of uniformity in the practices of such Governmental Authorities. -12- 20 "Net Worth" means at any date the stockholders' equity of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with Agreement Accounting Principles. "Notes" means, collectively, the Competitive Bid Notes and the Ratable Notes; and "Note" means any one of the Notes. "Notice of Assignment" is defined in Section 12.3.2. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent or any indemnified party hereunder arising under any of the Loan Documents and any Rate Hedging Obligations or foreign exchange contracts of the Borrower owing to the Agent or any Lender. "Participants" is defined in Section 12.2.1. "Payment Date" means the last day of each March, June, September and December. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Person" means any natural person, corporation, firm, limited liability company, joint venture, partnership, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan, as defined in Section 3(2) of ERISA, as to which the Borrower or any member of the Controlled Group may have any liability. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "pro-rata" means, when used with respect to a Lender, and any described aggregate or total amount, an amount equal to such Lender's pro-rata share or portion based on its percentage of the Aggregate Commitment or if the Aggregate Commitment has been terminated, its percentage of the aggregate principal amount of outstanding Loans. "Public Offering" means any public offering after the date hereof of shares of the Borrower's common stock, or options, warrants or securities convertible into or exchangeable for, or rights to acquire, shares of such common stock, which is registered pursuant to an effective registration statement filed by the Borrower under the Securities Act (other than (a) a registration statement filed on Form S-4 (or any successor form thereto) or (b) a registration -13- 21 statement filed on Form S-8 (or any successor form thereto), or any other applicable form with respect to the issuance of shares of such common stock, or options, warrants or securities convertible into or exchangeable for, or rights to acquire, such shares of common stock, issued or to be issued or granted to directors, officers or employees of the Borrower and its Subsidiaries). "Purchase" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Subsidiaries (a) acquires any going business or all or substantially all of the assets of any firm, corporation or division or line of business thereof, whether through purchase of assets, merger or otherwise, or (b) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership interests of a partnership or membership interests of a limited liability company. "Purchasers" is defined in Section 12.3.1. "Quarterly Statement" means the quarterly statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing quarterly statutory financial statements and shall contain the type of financial information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Ratable Advance" means a borrowing hereunder consisting of the aggregate amount of the several Ratable Loans made by the Lenders to the Borrower at the same time, of the same Type and for the same Interest Period. "Ratable Borrowing Notice" is defined in Section 2.2.3. "Ratable Loan" means a Loan made by a Lender pursuant to Section 2.2 hereof. "Ratable Note" means a promissory note in substantially the form of Exhibit A hereto, duly executed and delivered to the Agent by the Borrower for the account of each Lender and payable to the order of a Lender in the amount of its Commitment, including any amendment, modification, renewal or replacement of such promissory note. "Rate Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions -14- 22 therefor), under (a) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, and (b) any and all cancellations, buybacks, reversals, terminations or assignments of any of the foregoing. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to depositary institutions. "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System as from time to time in effect and shall include any successor or other regulation or official interpretation of such Board of Governors relating to the extension of credit by securities brokers and dealers for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and shall include any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by the specified lenders for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Release" is defined in the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. 39601 et seq. "Replacement Lender" is defined in Section 3.6. "Reportable Event" means a reportable event as defined in Section 4043(a) of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation unconditionally or conditionally waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver -15- 23 of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Required Lenders" means Lenders in the aggregate having at least 66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 66-2/3% of the aggregate unpaid principal amount of the outstanding Loans. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "Restatement Date" means December 31, 1998. "Risk-Based Capital Guidelines" is defined in Section 3.2. "S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., together with any Person succeeding thereto by merger, consolidation or acquisition of all or substantially all of its assets, including substantially all of its business of rating securities. "SAP" means, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority, including the Council of Lloyd's) in the jurisdiction of such Insurance Subsidiary for the preparation of annual statements and other financial reports by insurance companies of the same type as such Insurance Subsidiary in effect from time to time, applied in a manner consistent with those used in preparing the financial statements referred to in Section 5.5(c) and (d); provided, that with respect to the financial covenants contained in Section 6.22 hereof, the related definitions, and the computations required thereby, "SAP" means such statutory accounting practices (except where Agreement Accounting Principles are applicable) in effect on the date hereof, applied in a manner consistent with those used in preparing the financial statements referred to in Section 5.5(c) and (d). "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Single Employer Plan" means a Plan subject to Title IV of ERISA maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group, other than a Multiemployer Plan. "Solvent" means, when used with respect to a Person, that (a) the fair saleable value of the assets of such Person is in excess of the total amount of the present value of its liabilities (including for purposes of this definition all liabilities (including loss reserves as determined by -16- 24 such Person), whether or not reflected on a balance sheet prepared in accordance with Agreement Accounting Principles and whether direct or indirect, fixed or contingent, secured or unsecured, disputed or undisputed), (b) such Person is able to pay its debts or obligations in the ordinary course as they mature and (c) such Person does not have unreasonably small capital to carry on its business as conducted and as proposed to be conducted. "Solvency" shall have a correlative meaning. "Statutory Authorized Control Level Risk-Based Capital" means, with respect to any Insurance Subsidiary at any time, the statutory authorized control level risk-based capital of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Five Year Historical Data", Line 26 of the Annual Statement), based on methodology of the NAIC in effect on the date hereof. "Statutory Net Income" means, with respect to any Insurance Subsidiary for any computation period, the net income earned by such Person during such period, as determined in accordance with SAP ("Underwriting and Investment" exhibit, "Statement of Income", Line 16 of the Annual Statement). "Statutory Risk-Based Capital Ratio" means, with respect to URC and its Insurance Subsidiaries, determined on a combined basis for URC and all of its Insurance Subsidiaries (without double counting), the ratio of (a) Statutory Total Adjusted Capital to (b) Statutory Authorized Control Level Risk-Based Capital. "Statutory Surplus" means, with respect to any Insurance Subsidiary at any time, the surplus as regards policyholders of such Insurance Subsidiary at such time, as determined in accordance with SAP ("Liabilities, Surplus and Other Funds" statement, Page 3, Line 25, Column 1 of the Annual Statement). "Statutory Total Adjusted Capital" means, with respect to any Insurance Subsidiary at any time, the statutory total adjusted capital of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Five Year Historical Data," Line 25 of the Annual Statement). "Subsidiary" of a Person means (a) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (b) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. -17- 25 "Substantial Portion" means, with respect to the Property of the Borrower and its Subsidiaries, Property which (a) represents more than 10% of the consolidated assets of the Borrower and its Subsidiaries, as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the end of the Fiscal Quarter next preceding the date on which such determination is made, or (b) is responsible for more than 10% of the consolidated net revenues or of the consolidated Net Income of the Borrower and its Subsidiaries for the 12-month period ending as of the end of the Fiscal Quarter next preceding the date of determination. "Tax Sharing Agreements" means, collectively, that certain Amendment to Agreement dated as of August 18, 1995 between Alleghany and the Borrower, that certain Amendment to Agreement dated as of December 1, 1995 between the Borrower and URC, that certain Amendment to Agreement dated as of December 1, 1995 between the Borrower and URC Risk Managers, Inc., that certain Agreement dated as of December 1, 1995 between the Borrower and The Underwriting Center, Inc., that certain Agreement dated as of December 1, 1995 between The Underwriting Center, Inc. and The Underwriting Center of Georgia, Inc. (now known as The Center E&S Insurance Services, Inc.), that certain Amendment to Agreement dated as of December 1, 1995 between URC and Commercial Underwriters Insurance Company, and that certain Agreement dated as of December 1, 1995 between URC and Underwriters Insurance Company, as each is in effect on the date of this Agreement, together with any other agreements entered into pursuant to Section 6.23, and as any such agreement may be hereafter amended, subject to compliance with the terms hereof. "Termination Event" means, with respect to a Plan which is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of the Borrower or any other member of the Controlled Group from such Plan during a plan year in which the Borrower or such member of the Controlled Group was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) the termination of such Plan, the filing of a notice of intent to terminate such Plan or the treatment of an amendment of such Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings to terminate such Plan or (e) any event or condition which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or appointment of a trustee to administer, such Plan. "Transferee" is defined in Section 12.4. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance, Eurodollar Advance or Absolute Rate Advance. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations. -18- 26 "Unmatured Default" means an event or condition which but for the lapse of time or the giving of notice, or both, would constitute a Default. "URC" means Underwriters Reinsurance Company, a New Hampshire insurance company and a Wholly-Owned Subsidiary of the Borrower. "Venton" means Venton Holdings Ltd., a Bermuda corporation. "Venton Credit Agreement" means that certain Letter of Credit Facility and Reimbursement Agreement dated as of October 23, 1998 and amended as of November 25, 1998 and December 31, 1998, among Venton Underwriting Group Limited, Venton Underwriting Limited and Talbot Underwriting Limited, as Account Parties, the Borrower and URC, as guarantors, Mellon Bank, N.A., as Administrative Agent and Issuing Bank and as a Co-Arranger, Dresdner Bank AG, New York and Grand Cayman Branches, as Documentation Agent, and Dresdner Kleinwort Benson North America LLC, as Co-Arranger, as further amended, supplemented or modified from time to time. "Venton Entities" means, collectively, Venton, Venton Underwriting Group Limited, an English company, Venton Underwriting Limited, Talbot Underwriting Limited and each company which is a Subsidiary of Venton on the date of this Agreement, together with each permitted successor thereto which does not engage in any business other than the businesses engaged in by the Venton Entities on the date of this Agreement. "Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (b) any partnership, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. "Year 2000 Problem" means any significant risk that computer hardware, software or equipment containing embedded microchips of the Borrower or any of its Subsidiaries which is essential to its business or operations will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of times or time periods occurring before January 1, 2000, including the making of accurate leap year calculations. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. References herein to particular columns, lines or sections of any Person's Annual Statement shall be deemed, where appropriate, to be references to the corresponding column, line or section of such Person's Quarterly Statement, or if no such corresponding -19- 27 column, line or section exists or if any report form changes, then to the corresponding item referenced thereby. ARTICLE II THE FACILITY 2.1 The Facility. 2.1.1 Description of Facility. The Lenders hereby establish in favor of the Borrower a revolving credit facility pursuant to which, and upon the terms and subject to the conditions herein set out: (a) each Lender severally agrees to make Ratable Loans to the Borrower in accordance with Section 2.2 in amounts not to exceed in the aggregate at any one time outstanding the amount of such Lender's Commitment less the amount of such Lender's pro-rata share of the outstanding principal amount of all Competitive Bid Advances (regardless of which Lender or Lenders made such Competitive Bid Advances) exclusive of Competitive Bid Advances being repaid substantially contemporaneously with the making of any such Ratable Loans (but not later than the close of business on the same day); and (b) each Lender may, in its sole discretion, make bids to make Competitive Bid Loans to the Borrower, and make such Loans, in accordance with Section 2.3. 2.1.2 Facility Amount. In no event may the aggregate principal amount of all outstanding Advances (including both the Ratable Advances and the Competitive Bid Advances) at any time exceed the Aggregate Commitment. 2.1.3 Availability of Facility. Subject to the terms of this Agreement, from and including the date hereof to, but not including, the Facility Termination Date, the Borrower may borrow, repay and reborrow Advances hereunder. All outstanding Advances and all other unpaid Obligations shall be due and payable in full by the Borrower on the Facility Termination Date. 2.2 Ratable Advances. 2.2.1 Ratable Advances. Each Ratable Advance hereunder shall consist of borrowings made from the several Lenders ratably in proportion to the amounts of their respective Commitments. The Borrower's obligation to pay the principal of, and interest on, the Ratable Advances shall be evidenced by the Ratable Notes. Although the Ratable Notes shall be dated the date of the initial Advance, interest in respect thereof shall be payable only for the periods during which the Loans evidenced thereby are outstanding and, although the stated amount of each Ratable Note shall be equal to the applicable Lender's Commitment, each Ratable Note shall be enforceable, with respect to the Borrower's obligation to pay the principal -20- 28 amount thereof, only to the extent of the unpaid principal amount of the Ratable Loans at the time evidenced thereby. 2.2.2 Ratable Advance Rate Options. The Ratable Advances may be Floating Rate Advances or Eurodollar Ratable Advances, or a combination thereof, selected by the Borrower in accordance with Section 2.2.3 or 2.2.4. No Ratable Advance may mature after, or have an Interest Period which extends beyond, the Facility Termination Date. 2.2.3 Method of Selecting Types and Interest Periods for Ratable Advances. The Borrower shall select the Type of each Ratable Advance and, in the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period applicable to such Ratable Advance. The Borrower shall give the Agent irrevocable notice (a "Ratable Borrowing Notice") not later than 11:00 a.m. (Chicago time) on the Borrowing Date of each Floating Rate Advance and three Business Days before the Borrowing Date for each Eurodollar Ratable Advance. Notwithstanding the foregoing, a Ratable Borrowing Notice for a Floating Rate Advance may be given not later than 30 minutes after the time which the Borrower is required to reject one or more bids offered in connection with an Absolute Rate Auction pursuant to Section 2.3.6 and a Ratable Borrowing Notice for a Eurodollar Ratable Advance may be given not later than 30 minutes after the time the Borrower is required to reject one or more bids offered in connection with a Eurodollar Auction pursuant to Section 2.3.6. A Ratable Borrowing Notice shall specify: (a) the Borrowing Date, which shall be a Business Day, of such Ratable Advance; (b) the aggregate amount of such Ratable Advance, which, when added to the aggregate amount of all outstanding Ratable Advances and Competitive Bid Advances and after giving effect to the repayment of any such outstanding Advances out of the proceeds of the requested Ratable Advance, shall not exceed the Aggregate Commitment; (c) the Type of Advance selected; and (d) in the case of each Eurodollar Ratable Advance, the Eurodollar Interest Period applicable thereto (which may not end after the Facility Termination Date). 2.2.4 Conversion and Continuation of Outstanding Ratable Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Ratable Advances pursuant to this Section 2.2.4. Each Eurodollar Ratable Advance shall continue as a Eurodollar Ratable Advance until the end of the then applicable Eurodollar Interest Period therefor, at which time such Eurodollar Ratable Advance shall be automatically converted into a Floating Rate Advance unless the Borrower shall have given the Agent a Conversion/Continuation Notice requesting that, at the end of such Eurodollar Interest Period, such Eurodollar Ratable Advance continue as a Eurodollar Ratable Advance for the same or another Eurodollar Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Ratable Advance of any Type into any other Type or Types of Ratable Advances; provided that any conversion of any -21- 29 Eurodollar Ratable Advance shall be made on, and only on, the last day of the Eurodollar Interest Period applicable thereto. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Ratable Advance or continuation of a Eurodollar Ratable Advance not later than 11:00 a.m. (Chicago time) (x) on the date of the requested conversion, in the case of a conversion to a Floating Rate Advance, or (y) at least three Business Days, in the case of a conversion into or continuation of a Eurodollar Ratable Advance, prior to the date of the requested conversion or continuation, specifying: (a) the requested date, which shall be a Business Day, of such conversion or continuation; (b) the aggregate amount and Type of Ratable Advance which is to be converted or continued; and (c) the amount and Type(s) of Ratable Advance(s) into which such Ratable Advance is to be converted or continued and, in the case of a conversion into or continuation of a Eurodollar Ratable Advance, the duration of the Eurodollar Interest Period applicable thereto. 2.3 Competitive Bid Advances. 2.3.1 Competitive Bid Option. In addition to Ratable Advances pursuant to Section 2.2, but subject to the terms and conditions of this Agreement (including, without limitation, the limitation set forth in Section 2.1.2 as to the maximum aggregate principal amount of all outstanding Advances hereunder, provided that a Lender may make Competitive Bid Advances in an amount in excess of its Commitment), prior to the Facility Termination Date the Borrower may, as set forth in this Section 2.3, request the Lenders to make offers to make Competitive Bid Advances to the Borrower. Each Lender may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.3. The Borrower's obligation to pay the principal of, and interest on, the Competitive Bid Advances shall be evidenced by the Competitive Bid Notes. Although the Competitive Bid Notes shall be dated the date of the initial Advance, interest in respect thereof shall be payable only for the periods during which the Loans evidenced thereby are outstanding. 2.3.2 Competitive Bid Quote Request. When the Borrower wishes to request offers to make Competitive Bid Loans under this Section 2.3, it shall transmit to the Agent by telecopy a Competitive Bid Quote Request substantially in the form of Exhibit C hereto so as to be received no later than (a) 11:00 a.m. (Chicago time) at least four Business Days prior to the Borrowing Date proposed therein, in the case of a Eurodollar Auction or (b) 11:00 a.m. (Chicago time) at least one Business Day prior to the Borrowing Date proposed therein, in the case of an Absolute Rate Auction specifying: (a) the proposed Borrowing Date, which shall be a Business Day, for the proposed Competitive Bid Advance; -22- 30 (b) the aggregate principal amount of such Competitive Bid Advance; (c) whether the Competitive Bid Quotes requested are to set forth a Eurodollar Bid Rate, an Absolute Rate, or both; and (d) the Interest Period applicable thereto (which may not end after the Facility Termination Date). The Borrower may request offers to make Competitive Bid Loans for more than one Interest Period in a single Competitive Bid Quote Request. No Competitive Bid Quote Request shall be given within 5 Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Competitive Bid Quote Request. A Competitive Bid Quote Request that does not conform substantially to the format of Exhibit C hereto shall be rejected, and the Agent shall promptly notify the Borrower of such rejection by telecopy. 2.3.3 Invitation for Competitive Bid Quotes. Promptly and in any event before 3:00 p.m. (Chicago time) on the same Business Day of receipt of a Competitive Bid Quote Request that is not rejected pursuant to Section 2.3.2, the Agent shall send to each of the Lenders by telecopy an Invitation for Competitive Bid Quotes substantially in the form of Exhibit D hereto, which shall constitute an invitation by the Borrower to each Lender to submit Competitive Bid Quotes offering to make the Competitive Bid Loans to which such Competitive Bid Quote Request relates in accordance with this Section 2.3. 2.3.4 Submission and Contents of Competitive Bid Quotes. (a) Each Lender may, in its sole discretion, submit a Competitive Bid Quote containing an offer or offers to make Competitive Bid Loans in response to any Invitation for Competitive Bid Quotes. Each Competitive Bid Quote must comply with the requirements of this Section 2.3.4 and must be submitted to the Agent by telecopy at its offices specified in or pursuant to Article XIII not later than (i) 9:00 a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (ii) 9:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree); provided that Competitive Bid Quotes submitted by First Chicago may only be submitted if the Agent or First Chicago notifies the Borrower of the terms of the offer or offers contained therein not later than 30 minutes prior to the latest time at which the relevant Competitive Bid Quotes must be submitted by the other Lenders. Subject to Articles IV and VIII, any Competitive Bid Quote so made shall be irrevocable except with the written consent of the Agent given on the written instructions of the Borrower. (b) Each Competitive Bid Quote shall be in substantially the form of Exhibit E hereto and shall in any case specify: (i) the proposed Borrowing Date, which shall be the same as that set forth in the applicable Invitation for Competitive Bid Quotes; -23- 31 (ii) the principal amount of the Competitive Bid Loan for which each such offer is being made, which principal amount (a) may be greater than, less than or equal to the Commitment of the quoting Lender, (b) must be at least $2,000,000 and an integral multiple of $250,000, and (c) may not exceed the principal amount of Competitive Bid Loans for which offers were requested; (iii) in the case of a Eurodollar Auction, the Competitive Bid Margin offered for each such Competitive Bid Loan for each Interest Period requested; (iv) the minimum amount, if any, of the Competitive Bid Loan which may be accepted by the Borrower; (v) in the case of an Absolute Rate Auction, the Absolute Rate offered for each such Competitive Bid Loan for each Interest Period requested; and (vi) the identity of the quoting Lender. (c) The Agent shall reject any Competitive Bid Quote that: (i) is not substantially in the form of Exhibit E hereto or does not specify all of the information required by Section 2.3.4(b); (ii) contains qualifying, conditional or similar language, other than any such language contained in Exhibit E hereto; (iii) proposes terms other than or in addition to those set forth in the applicable Invitation for Competitive Bid Quotes; or (iv) arrives after the time set forth in Section 2.3.4(a). If any Competitive Bid Quote shall be rejected pursuant to this Section 2.3.4(c), then the Agent shall promptly notify the relevant Lender of such rejection. (d) No Lender shall disclose any Competitive Bid Quote (or any part thereof) to any other Lender (other than the Agent), and the Agent shall not disclose the Competitive Bid Quote (or any part thereof) of any Lender to any other Lender. 2.3.5 Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (a) of any Competitive Bid Quote submitted by a Lender that is in accordance with Section 2.3.4 and (b) of any Competitive Bid Quote that amends, modifies or is otherwise inconsistent with a previous Competitive Bid Quote submitted by such Lender with respect to the same Competitive Bid Quote Request. Any such subsequent Competitive Bid Quote shall be disregarded by the Agent unless such subsequent Competitive Bid Quote specifically states that it is submitted solely to correct a manifest error in such former Competitive Bid Quote. The Agent's notice to the Borrower shall specify the aggregate principal amount of Competitive Bid -24- 32 Loans for which offers have been received for each Interest Period specified in the related Competitive Bid Quote Request and the respective principal amounts and Eurodollar Bid Rates or Absolute Rates, as the case may be, so offered. 2.3.6 Acceptance and Notice by Borrower. Not later than (a) 11:00 a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (b) 11:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree), the Borrower shall notify the Agent of its acceptance or rejection of the offers so notified to it pursuant to Section 2.3.5; provided, however, that the failure by the Borrower to give such notice to the Agent shall be deemed to be a rejection of all such offers. In the case of acceptance, such notice (a "Competitive Bid Borrowing Notice") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Competitive Bid Quote in whole or in part (subject to the terms of Section 2.3.4(b)(iv)); provided that: (a) the aggregate principal amount of each Competitive Bid Advance may not exceed the applicable amount set forth in the related Competitive Bid Quote Request, (b) acceptance of offers may only be made on the basis of ascending Eurodollar Bid Rates or Absolute Rates, as the case may be, in respect of each Interest Period for which Competitive Bid Quotes were requested, and (c) the Borrower may not accept any offer that is described in Section 2.3.4(c) or that otherwise fails to comply with the requirements of this Agreement. 2.3.7 Allocation by Agent. If offers are made by two or more Lenders with the same Eurodollar Bid Rates or Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which offers are accepted for the related Interest Period, the principal amount of Competitive Bid Loans in respect of which such offers are accepted shall be allocated by the Agent among such Lenders as nearly as possible (in such multiples, not greater than $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amount of such offers; provided, however, that no Lender shall be allocated a portion of any Competitive Bid Advance which is less than the minimum amount which such Lender has indicated that it is willing to accept. Allocations by the Agent of the amounts of Competitive Bid Loans shall be conclusive in the absence of manifest error. The Agent shall promptly, but in any event on the same Business Day, notify each Lender of its receipt of a Competitive Bid Borrowing Notice and the aggregate principal amount of such Competitive Bid Advance allocated to each participating Lender. 2.4 Availability of Funds. Not later than noon (Chicago time) on each Borrowing Date, each Lender (or in the case of a Competitive Bid Advance, each Lender making a portion of such Advance) shall make available its Loan or Loans in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII. The Agent will promptly -25- 33 make such funds, in the form received from the Lenders, available to the Borrower at the Agent's aforesaid address. 2.5 Facility Fee; Reductions in Aggregate Commitment. (a) The Borrower agrees to pay to the Agent for the ratable account of each Lender a facility fee at a rate per annum equal to the Applicable Facility Fee Percentage times such Lender's Commitment (whether used or unused) from the date hereof to and including the Facility Termination Date, payable in arrears on each Payment Date hereafter and on the Facility Termination Date; provided, that such facility fee shall not accrue with respect to the Commitment of any Lender during any period in which such Lender has failed to make any Advance required hereunder. (b) The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders, in a minimum amount of $2,000,000 (and in multiples of $250,000 if in excess thereof), upon at least three Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction; provided, however, that the amount of the Aggregate Commitment may not be reduced below the aggregate principal amount of the outstanding Advances. All accrued facility fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Loans hereunder and no facility fees shall accrue thereafter. 2.6 Minimum Amount of Each Advance. Each Advance shall be in the minimum amount of $2,000,000 (and in multiples of $250,000 if in excess thereof); provided, however, that (a) any Floating Rate Advance may be in the amount of the unused Aggregate Commitment and (b) in no event shall more than five (5) Eurodollar Advances be permitted to be outstanding at any time. 2.7 Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, all outstanding Advances (other than Competitive Bid Advances, which may not be voluntarily prepaid unless a Lender has given notice in respect of such Competitive Bid Loan that additional material amounts are payable to such Lender pursuant to Section 2.16(a), 3.1 or 3.2), or, in a minimum aggregate amount of $2,000,000 or any integral multiple of $250,000 in excess thereof, any portion of the outstanding Advances (other than Competitive Bid Advances) upon notice to the Agent not later than 11:00 a.m. (Chicago time) on the date of such payment; provided, that any prepayment of a Eurodollar Advance prior to the last day of the applicable Eurodollar Interest Period shall require three Business Days' prior notice to the Agent and shall be subject to the indemnity provisions of Section 3.4. 2.8 Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest at the Floating Rate from and including the date of such Advance or the date on which such Advance was converted into a Floating Rate Advance to (but not including) the date on which such Floating Rate Advance is paid or converted to a Eurodollar Ratable Advance. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Floating Rate. Each Eurodollar Ratable -26- 34 Advance and Absolute Rate Advance shall bear interest from and including the first day of the Interest Period applicable thereto to, but not including, the last day of such Interest Period at the interest rate determined as applicable to such Eurodollar Ratable Advance or Absolute Rate Advance. No Interest Period may end after the Facility Termination Date. 2.9 Rates Applicable After Default. Notwithstanding anything to the contrary contained in Section 2.2.3 and 2.2.4, no Advance may be made as, converted into or continued as a Eurodollar Ratable Advance (except with the consent of the Agent and the Required Lenders) when any Default or Unmatured Default has occurred and is continuing. During the continuance of a Default the Required Lenders may, at their option, by notice to the Borrower, declare (which declaration may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates) that each Eurodollar Advance, Absolute Rate Advance and Floating Rate Advance shall bear interest (for the remainder of the applicable Interest Period in the case of Eurodollar Advances and Absolute Rate Advances) at the rate otherwise applicable plus two percent (2.0%) per annum; provided, however, that such increased rate shall automatically and without action of any kind by the Lenders become and remain applicable in the event of a Default described in Section 7.6 or 7.7 until revoked by the Required Lenders. 2.10 Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by noon (Chicago time) on the date when due and shall be applied ratably by the Agent among the Lenders. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender. The Agent is hereby authorized to charge the account of the Borrower maintained with First Chicago for each payment of principal, interest and fees as it becomes due hereunder. 2.11 Notes; Telephonic Notices. Each Lender is hereby authorized to record the principal amount of each of its Loans and each repayment on the schedule attached to its Note; provided, however, that neither the failure to so record nor any error in such recordation shall affect the Borrower's obligations under such Note. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances, submit Competitive Bid Quotes and to transfer funds based on telephonic notices made by any person or persons the Agent or any Lender in good faith believes to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error. -27- 35 2.12 Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof, on any date on which a Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Ratable Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance or Absolute Rate Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance or Absolute Rate Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance or Absolute Rate Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Facility fees and interest on Floating Rate Advances and Absolute Rate Advances shall be calculated for actual days elapsed on the basis of a 365/366-day year. Interest on Eurodollar Advances shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to noon (Chicago time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.13 Notification of Advances, Interest Rates, Prepayments and Commitment Reductions. Promptly after receipt thereof, the Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Ratable Borrowing Notice, Conversion/Continuation Notice, Invitation for Competitive Quotes and repayment notice received by it hereunder. The Agent will notify the Borrower and each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give the Borrower and each Lender prompt notice of each change in the Floating Rate. 2.14 Lending Installations. Subject to Section 3.5, each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Lender for the benefit of such Lending Installation. Each Lender may, by written or telecopy notice to the Agent and the Borrower, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. 2.15 Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (a) in the case of a Lender, the proceeds of a Loan, or (b) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If the Borrower has not in fact made such -28- 36 payment to the Agent, the Lenders shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Effective Rate for such day. If any Lender has not in fact made such payment to the Agent, such Lender or the Borrower shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (a) in the case of payment by a Lender, the Federal Funds Effective Rate for such day, or (b) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. 2.16 Taxes. (a) Any payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes or any other tax based upon any income imposed on the Agent or any Lender by the jurisdiction in which the Agent or such Lender is incorporated or has its principal place of business. If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Agent or any Lender hereunder, the amounts so payable to the Agent or such Lender shall be increased to the extent necessary to yield to the Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in or pursuant to this Agreement; provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the U.S. or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this Section 2.16. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as practicable thereafter the Borrower shall send to the Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by any Agent or any Lender as a result of any such failure. The agreements in this Section 2.16 shall survive the termination of this Agreement and the payment of all other amounts payable hereunder. (b) At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to -29- 37 receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. 2.17 Agent's Fees. The Borrower shall pay to the Agent those fees owing to it in its capacity as Agent, in addition to the facility fees referenced in Section 2.5(a), in the amounts and at the times separately agreed to between the Agent and the Borrower. ARTICLE III CHANGE IN CIRCUMSTANCES 3.1 Yield Protection. If, after the Closing Date, the adoption of or any change in any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof or the compliance of any Lender therewith, (a) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding net income taxes and franchise taxes or any other tax based upon any income of any Lender or applicable Lending Installation imposed by the jurisdiction in which such Lender or Lending Installation is incorporated or has its principal place of business), or changes the basis of taxation of principal, interest or any other payments to any Lender or Lending Installation in respect of its Loans or other amounts due it hereunder, or (b) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or -30- 38 (c) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining Loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with any Loans, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of Loans held, or interest received by it, in each case, by an amount reasonably deemed material by such Lender, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender that portion of such increased expense incurred or resulting in an amount received which such Lender reasonably determines is attributable to making, funding and maintaining its Loans and its Commitment. 3.2 Changes in Capital Adequacy Regulations. If a Lender reasonably determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any material shortfall in the rate of return on the portion of such increased capital which such Lender reasonably determines is attributable to this Agreement, its Loans or its obligation to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy). "Change" means (a) any change after the Closing Date in the Risk-Based Capital Guidelines, or (b) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the Closing Date which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Risk-Based Capital Guidelines" means (a) the risk-based capital guidelines in effect in the United States on the Closing Date and (b) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices entitled "International Convergence of Capital Measurements and Capital Standards" and any amendments to such regulations adopted prior to the Closing Date. 3.3 Availability of Types of Advances. If (a) any Lender determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or (b) the Required Lenders determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available, or (ii) the interest rate applicable to a Eurodollar Advance does not accurately or fairly reflect the cost of making or maintaining such Eurodollar Advance, then the Agent shall suspend the availability of the affected Type of Advance until such circumstance no longer exists and require any such Eurodollar Advances to be repaid or converted into a Floating Rate Advance at the option of the Borrower, in each case subject to Section 3.4. 3.4 Funding Indemnification. If any payment of a Eurodollar Advance or Absolute Rate Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance or Absolute -31- 39 Rate Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify the Agent and each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Advance or Absolute Rate Advance. 3.5 Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Advances to minimize any liability of the Borrower to such Lender under Sections 3.1 and 3.2 or to avoid the unavailability of a Type of Advance under Section 3.3, so long as such designation is not disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under Section 3.1, 3.2 or 3.4. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Advance shall be calculated as though each Lender funded its Eurodollar Advances through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of the written statement. The obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and termination of this Agreement. 3.6 Substitution of Lenders. Upon the receipt by the Borrower from any Lender (an "Affected Lender") of a claim for compensation under Section 2.16(a), 3.1 or 3.2 or a notice in accordance with Section 3.3 regarding the unavailability of a Type of Advance, the Borrower may: (a) request the Affected Lender to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Borrower to acquire and assume all or a ratable part of all of such Affected Lender's Loans and Commitment at the face amount thereof (a "Replacement Lender"); (b) request one or more of the other Lenders to acquire and assume all or part of such Affected Lender's Loans and Commitment (which request each such other Lender may decline or agree to in its sole discretion); or (c) designate a Replacement Lender. Any such designation of a Replacement Lender under clause (a) or (c) shall be subject to the prior written consent of the Agent (which consent shall not unreasonably be withheld). Any transfer of Loans or Commitment pursuant to this Section shall be made in accordance with Section 12.3 and Section 3.4, if applicable. 3.7 Survival. The agreements and obligations of the Borrower in Section 2.16(a) and this Article III shall survive the payment of all other Obligations, and the Borrower will have no obligation to pay any amount pursuant to Section 2.16(a), 3.1, or 3.2 if a demand is not made within 180 days of the date on which the Lender's right to reimbursement arises. -32- 40 ARTICLE IV CONDITIONS PRECEDENT 4.1 Initial Loans. The Lenders shall not be required to make the initial Advance hereunder unless the Borrower has furnished the following to the Agent with one copy for each of the Lenders and the other conditions set forth below have been satisfied. (a) Charter Documents; Good Standing Certificates. Copies of the certificate of incorporation of each of the Borrower and URC, together with all amendments thereto, both certified by the appropriate governmental officer in its jurisdiction of incorporation, together with a good standing certificate issued by the Secretary of State of its state of incorporation or formation and the Secretary of State of California. (b) By-Laws and Resolutions. Copies, certified by the Secretary or Assistant Secretary of the Borrower and URC, of its by-laws and of its Board of Directors' resolutions authorizing the execution, delivery and performance of the Loan Documents to which such Person is a party. (c) Secretary's Certificate. An incumbency certificate, executed by the Secretary or Assistant Secretary of the Borrower and URC, which shall identify by name and title and bear the signature of the officers of the Borrower and URC authorized to sign the Loan Documents and, with respect to the Borrower, to make borrowings hereunder, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower. (d) Officer's Certificate. A certificate, dated the date of this Agreement, signed by an Authorized Officer of the Borrower, in form and substance satisfactory to the Agent, to the effect that: (i) on such date (both before and after giving effect to the consummation of the transactions contemplated hereby (collectively, the "Closing Transactions")) no Default or Unmatured Default has occurred and is continuing (with such representation, with respect to Section 6.22 for the period ending December 31, 1998 and as of such date, to the best of such Person's knowledge); (ii) no injunction or temporary restraining order which would prohibit the making of the Loans or the consummation of any of the Closing Transactions, or other litigation which could reasonably be expected to have a Material Adverse Effect is pending or, to the best of such Person's knowledge, threatened; (iii) all orders, consents, approvals, licenses, authorizations, or validations of, or filings, recordings or registrations with, or exemptions by, any governmental or public body or authority, or any subdivision thereof, required to make or consummate the Closing Transactions have been or, prior to the time required, will have been, obtained, given, filed or taken and are or will be in full force and effect (or the Borrower has obtained effective judicial relief with respect to the application thereof) and all applicable waiting periods have expired; (iv) neither the Borrower nor any Subsidiary has failed to perform any material obligation or covenant required in connection with any Closing Transaction to be performed or complied with by it on or before such date; (v) each of the representations and warranties set forth in Article V of this Agreement is true and correct on and 33 41 as of such date; and (viii) since December 31, 1997 no event or change has occurred that has caused or evidences a Material Adverse Effect. (e) Legal Opinions. Written opinions of Dewey Ballantine LLP and of Orr & Reno, counsel for the Borrower and URC, addressed to the Agent and the Lenders in form and substance acceptable to the Agent and its counsel. (f) Notes. Notes payable to the order of each of the Lenders duly executed by the Borrower. (g) Loan Documents. Executed originals of the Agreement, together with all schedules, exhibits, certificates, instruments, opinions, documents and financial statements required to be delivered pursuant hereto and thereto. (h) Regulatory Matters. Receipt of any required regulatory approvals from any Governmental Authority with respect to the transactions contemplated by the Loan Documents. (i) Departing Lender. The Departing Lender shall have consented to this Agreement and the reduction to $0 of its Commitment hereunder, such consent to be in form and substance satisfactory to the Agent. 4.2 Each Future Advance. The Lenders shall not be required to make any Advance unless on the applicable Borrowing Date: (a) There exists no Default or Unmatured Default and none would result from such Advance; (b) The representations and warranties contained in Article V are true and correct in all material respects as of such Borrowing Date; (c) A Borrowing Notice shall have been properly submitted; and (d) All legal matters incident to the making of such Advance shall be reasonably satisfactory to the Lenders and their counsel. Each Ratable Borrowing Notice and Competitive Bid Quote Request with respect to each such Advance shall constitute a representation and warranty by the Borrower that the conditions contained in Section 4.2 have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of Exhibit F hereto as a condition to making an Advance. 34 42 ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lenders that, both before and after giving effect to the Closing Transactions: 5.1 Corporate Existence and Standing. Each of the Borrower and each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its respective jurisdiction of incorporation, has the power and authority to own its properties and assets, and to carry on its business as presently conducted, and is duly qualified to conduct business as a foreign corporation in each jurisdiction in which such qualification is required, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. 5.2 Authorization and Validity. Each of the Borrower and URC has all requisite corporate power and authority and legal right to execute and deliver (or file, as the case may be) each of the Loan Documents to which it is a party and to perform its obligations thereunder. The execution and delivery (or filing, as the case may be) by the Borrower and URC of such Loan Documents and the performance of their obligations thereunder have been duly authorized by proper corporate proceedings and such Loan Documents constitute the legal, valid and binding obligations of the Borrower and URC, as applicable, enforceable against the Borrower and URC in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 5.3 Compliance with Laws and Contracts. The Borrower and its Subsidiaries have complied in all material respects with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof, having jurisdiction over the conduct of their respective businesses or the ownership of their respective properties, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Neither the execution and delivery by the Borrower and URC of the Loan Documents, the application of the proceeds of the Loans, the consummation of the Closing Transactions nor compliance with the provisions of the Loan Documents will, or at the relevant time did, (a) violate any law, rule, regulation (including Regulations T, U and X), order, writ, judgment, injunction, decree or award binding on the Borrower or any Subsidiary or the Borrower's or any Subsidiary's charter, articles or certificate of incorporation or by-laws, (b) violate the provisions of or require the approval or consent of any party to any indenture, instrument or agreement to which the Borrower or any Subsidiary is a party or is subject, or by which it, or its property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien (other than Liens permitted by the Loan Documents) in, of or on the property of the Borrower or any Subsidiary pursuant to the terms of any such indenture, instrument or agreement, or (c) require any consent of the stockholders of any Person, except for approvals or consents which will be obtained on or before the initial Advance and are disclosed 35 43 on Schedule 5.3, except for any violation of, or failure to obtain an approval or consent required under, any such law, rule, regulation, order, writ, judgment, injunction, decree, award, indenture, instrument or agreement that could not reasonably be expected to have a Material Adverse Effect. 5.4 Governmental Consents. Except as set forth in Schedule 5.4 hereto, no order, consent, approval, qualification, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of, a Governmental Authority, or any subdivision thereof, any securities exchange or any other Person is or at the relevant time was required to authorize, or is or at the relevant time was required in connection with the execution, delivery, consummation or performance of, or the legality, validity, binding effect or enforceability of, any of the Loan Documents the application of the proceeds of the Loans or the consummation of any transaction contemplated in the Loan Documents. 5.5 Financial Statements. The Borrower has heretofore furnished to each of the Lenders (a) the December 31, 1997 audited consolidated financial statements of the Borrower and its Subsidiaries, (b) the unaudited consolidated financial statements of the Borrower and its Subsidiaries through June 30, 1998, (c) the December 31, 1997 audited Annual Statement of each Insurance Subsidiary and (d) the June 30, 1998 Quarterly Statement of each Insurance Subsidiary (collectively, the "Financial Statements"). Each of the Financial Statements was prepared in accordance with generally accepted accounting principles or SAP, as applicable, and, together with the related notes, fairly presents the consolidated financial condition and operations of the Borrower and its Subsidiaries, or such Insurance Subsidiary, as applicable, at such dates and the consolidated results of their operations for the respective periods then ended (except, in the case of such unaudited statements, for normal year-end audit adjustments). 5.6 Material Adverse Change. No material adverse change in the business, Property, condition (financial or otherwise), performance, prospects or operations of the Borrower and its Subsidiaries, taken as a whole, or of URC and its Subsidiaries, taken as a whole, has occurred since December 31, 1997. 5.7 Taxes. Except as set forth in Schedule 5.7 hereto, the Borrower and its Subsidiaries have filed or caused to be filed on a timely basis and in correct form all United States federal and applicable state tax returns and all other material tax returns which are required to be filed by it, each of Alleghany and each other Consolidated Person has filed or caused to be filed all United States federal and material applicable state tax returns which are required to be filed by it on a consolidated or combined basis and which include the Borrower or any Subsidiary, and each of the Borrower, the Subsidiaries, Alleghany and each other Consolidated Person has paid all taxes due pursuant to said returns or pursuant to any assessment received by such person, except, in each case, such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles or SAP, as applicable, and as to which no Lien exists. From and after October 7, 1993, each of the Borrower and each Subsidiary has joined in the filing of a consolidated federal income tax return with Alleghany. No tax liens have been filed and no 36 44 claims are being asserted with respect to any taxes for which any Consolidated Person may be liable which could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves (a) on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges and (b) on the books of Alleghany and such other Consolidated Person in respect of any taxes or other governmental charges owing with respect to any tax year beginning after December 31, 1992 are in accordance with Agreement Accounting Principles or SAP, as applicable. 5.8 Litigation. There is no litigation, arbitration, proceeding, inquiry or governmental investigation pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any Subsidiary or any of their respective properties which could reasonably be expected to have a Material Adverse Effect or to prevent, enjoin or unduly delay the making of the Loans under this Agreement or the consummation of any other Closing Transaction. 5.9 Capitalization. Schedule 5.9 hereto contains (a) an accurate description of the Borrower's capitalization as of September 30, 1998 after giving effect to the Closing Transactions and (b) an accurate list of all of the existing Subsidiaries as of the date of this Agreement, setting forth their respective jurisdictions of incorporation and the percentage of their capital stock owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock of the Borrower and of each Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, and are free and clear of all Liens. Except as set forth on Schedule 5.9, no authorized but unissued or treasury shares of capital stock of the Borrower or any Subsidiary are subject to any option, warrant, right to call or commitment of any kind or character. Except as set forth on Schedule 5.9, neither the Borrower nor any Subsidiary has any outstanding stock or securities convertible into or exchangeable for any shares of its capital stock, or any right issued to any Person (either preemptive or other) to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to any of its capital stock or any stock or securities convertible into or exchangeable for any of its capital stock other than as expressly set forth in the certificate or articles of incorporation of the Borrower or such Subsidiary. Neither the Borrower nor any Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding sentence except as otherwise set forth on Schedule 5.9. Except as set forth on Schedule 5.9, as of the date hereof the Borrower does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity or partnership interest in any Person other than such Subsidiaries. 5.10 ERISA. The Unfunded Liabilities of all Single Employer Plans maintained by the Borrower or any of its Subsidiaries do not in the aggregate exceed $1,000,000 and the Unfunded Liabilities of all Single Employer Plans maintained by the other members of the Controlled Group do not in the aggregate exceed an amount which could reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 5.10, neither the Borrower nor any other member of the Controlled Group maintains, or is obligated to contribute to, any 37 45 Multiemployer Plan. Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan maintained by the Borrower or any of its Subsidiaries, no Reportable Event has occurred with respect to any Plan maintained by any other member of the Controlled Group that could reasonably be expected to have a Material Adverse Effect, neither the Borrower nor any Subsidiary has withdrawn from any Multiemployer Plan or initiated steps to do so, no other member of the Controlled Group has withdrawn from any Multiemployer Plan resulting in any withdrawal liability that could reasonably be expected to have a Material Adverse Effect or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan by any member of the Controlled Group or, to the Borrower's knowledge, by any other Person. 5.11 Defaults. No Default or Unmatured Default has occurred and is continuing. 5.12 Federal Reserve Regulations. Neither the Borrower nor any Subsidiary is engaged, directly or indirectly, principally, or as one of its important activities, in the business of extending, or arranging for the extension of, credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of any Loan will be used in a manner which would violate, or result in a violation of, Regulation T, Regulation U or Regulation X. Neither the making of any Advance hereunder nor the use of the proceeds thereof will violate or conflict with the provisions of Regulation T, Regulation U or Regulation X. Following the application of the proceeds of the Loans, less than 25% of the value (as determined by any reasonable method) of the assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder taken as a whole have been, and will continue to be, represented by Margin Stock. 5.13 Investment Company; Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is, or after giving effect to any Advance will be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Neither the Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.14 Certain Fees. No broker's or finder's fee or commission was, is or will be payable by the Borrower or any Subsidiary with respect to any of the transactions contemplated by this Agreement. The Borrower hereby agrees to indemnify the Agent and the Lenders against and agrees that it will hold each of them harmless from any claim, demand or liability for broker's or finder's fees or commissions alleged to have been incurred by the Borrower in connection with any of the transactions contemplated by this Agreement and any expenses (including, without limitation, attorneys' fees and time charges of attorneys for the Agent or any Lender, which attorneys may be employees of the Agent or any Lender) arising in connection with any such claim, demand or liability. No other similar fee or commissions will be payable by the Borrower or any Subsidiary for any other services rendered to the Borrower or any Subsidiary ancillary to any of the transactions contemplated by this Agreement. 38 46 5.15 Solvency. As of the date hereof, before and after giving effect to the consummation of the transactions contemplated by the Loan Documents and the payment of all fees, costs and expenses payable by the Borrower or its Subsidiaries with respect to the transactions contemplated by the Loan Documents, the Borrower (individually and on a consolidated basis) is Solvent. 5.16 Ownership of Properties. Except as set forth on Schedule 5.16 hereto, the Borrower and its Subsidiaries own, free of all Liens, other than those permitted by Section 6.16 or by any of the other Loan Documents, all of the properties and assets reflected in the Financial Statements as being owned by it, except for assets sold, transferred or otherwise disposed of in the ordinary course of business since the date thereof. To the knowledge of the Borrower, there are no actual, threatened or alleged defaults with respect to any leases of real property under which the Borrower or any Subsidiary is lessee or lessor which could reasonably be expected to have a Material Adverse Effect. The Borrower and its Subsidiaries own or possess rights to use all licenses, patents, patent applications, copyrights, service marks, trademarks and trade names necessary to continue to conduct their business as heretofore conducted, and no such license, patent or trademark has been declared invalid or been limited by order of any court or by agreement or is the subject of any infringement, interference or similar proceeding or challenge, except for proceedings and challenges which could not reasonably be expected to have a Material Adverse Effect. 5.17 Indebtedness. Attached hereto as Schedule 5.17 is a complete and correct list of all Indebtedness of the Borrower and its Subsidiaries outstanding on the date of this Agreement (other than Indebtedness in a principal amount not exceeding $1,000,000 for a single item of Indebtedness and $5,000,000 in the aggregate for all such Indebtedness), showing the aggregate principal amount which was outstanding on such date after giving effect to the Closing Transactions. The Borrower has delivered or caused to be delivered to the Lenders a true and complete copy of each instrument evidencing Indebtedness in a principal amount of $5,000,000 or more and of each document pursuant to which any of such Indebtedness was issued. 5.18 Material Agreements. Neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter, bylaw or other restriction set forth in a similar governing document which could reasonably be expected to have a Material Adverse Effect or which restricts or imposes conditions upon the ability of any Subsidiary to (a) pay dividends or make other distributions on its capital stock, (b) make loans or advances to the Borrower or (c) repay loans or advances from the Borrower. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. 5.19 Environmental Laws. There are no claims, investigations, litigation, administrative proceedings, notices, requests for information (each a "Proceeding"), whether pending or, to the Borrower's knowledge, threatened, or judgments or orders asserting violations of applicable federal, state and local environmental, health and safety statutes, regulations, 39 47 ordinances, codes, rules, orders, decrees, directives and standards ("Environmental Laws") or relating to any toxic or hazardous waste, substance or chemical or any pollutant, contaminant, chemical or other substance defined or regulated pursuant to any Environmental Law, including, without limitation, asbestos, petroleum, crude oil or any fraction thereof ("Hazardous Materials") asserted against the Borrower or any of its Subsidiaries which, in any case, could reasonably be expected to have a Material Adverse Effect. As of the date hereof, there are no such Proceedings pending, or to the Borrower's knowledge threatened, except as disclosed on Schedule 5.19. The Borrower and each of its Subsidiaries have obtained and are in compliance in all material respects with all permits, certificates, licenses, approvals and other authorizations ("Environmental Permits") required for the operation of their business and have filed all required notifications or reports relating, in each case, to chemical substances, air emissions, effluent discharges and the storage, treatment, transport and disposal of Hazardous Materials. As of the date hereof, the Borrower and its Subsidiaries do not have liabilities exceeding $100,000 in the aggregate for all of them with respect to compliance with applicable Environmental Laws and Environmental Permits or related to the generation, treatment, storage, disposal, release, investigation or cleanup of Hazardous Materials, and, to the knowledge of the Borrower, no facts or circumstances exist which could give rise to such liabilities with respect to compliance with applicable Environmental Laws and Environmental Permits and the generation, treatment, storage, disposal, release, investigation or cleanup of Hazardous Materials. 5.20 Insurance. The Borrower and its Subsidiaries maintain insurance on their Property with such companies, in such amounts and covering such risks as is, in each case, consistent with sound business practice. 5.21 Insurance Licenses. No License, the loss of which could reasonably be expected to have a Material Adverse Effect, is the subject of a proceeding for suspension or revocation. To the Borrower's knowledge, there is no sustainable basis for such suspension or revocation, and no such suspension or revocation has been threatened by any Governmental Authority. No Insurance Subsidiary has received written notice from any Governmental Authority that it is deemed to be "commercially domiciled" for insurance regulatory purposes in any jurisdiction other than that indicated on Schedule 5.21. Schedule 5.21 also indicates the state or states in which such Insurance Subsidiary is licensed to engage in any line of insurance, in each case as of the date of this Agreement. 5.22 Reserves. Each reserve and other liability amount in respect of the insurance business, including, without limitation, reserve and other liability amounts in respect of insurance policies, established or reflected in the SAP Financial Statements for the year ended December 31, 1997 of each Insurance Subsidiary, was determined in accordance with generally accepted actuarial standards consistently applied, was fairly stated in accordance with sound actuarial principles and was in compliance with the requirements of the insurance laws, rules and regulations of its state of domicile as of the date thereof. Each Insurance Subsidiary owns assets that qualify as admitted assets under applicable law in an amount at least equal to the sum of all such reserves and liability amounts and its minimum statutory capital and surplus as required by the insurance laws, rules and regulations of its state of domicile. 40 48 5.23 Disclosure. None of the (a) information, exhibits or reports furnished by or on behalf of the Borrower to the Agent or to any Lender in connection with the negotiation of the Loan Documents and the transactions contemplated hereby or thereby, or (b) representations or warranties of the Borrower contained in this Agreement, the other Loan Documents or any other document, certificate or written statement furnished to the Agent or the Lenders by or on behalf of the Borrower for use in connection with the transactions contemplated by this Agreement contained, contains or will contain any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made and on the date as of which the same were made; provided, that this Section 5.23 shall not apply to any plan, forecast, projection or pro forma financial information contained in such materials that is based upon good faith estimates and assumptions believed to be reasonable at the time made. The pro forma financial information contained in such materials is based upon good faith estimates and assumptions believed by the Borrower to be reasonable at the time made. There is no fact known to the Borrower (other than matters of a general economic or political nature) that has had since December 31, 1997 or could reasonably be expected to have a Material Adverse Effect and that has not been disclosed herein or in such other documents, certificates and statements furnished to the Lenders for use in connection with the transactions contemplated by this Agreement. 5.24 Year 2000 Compliance. The Borrower has reviewed its operations and those of its Subsidiaries with a view to assessing whether its businesses, or the businesses of any of its Subsidiaries, will be vulnerable to a Year 2000 Problem or will be vulnerable to the effects of a Year 2000 Problem suffered by any of the Borrower's or any of its Subsidiaries' major commercial counter-parties. The Borrower represents and warrants that it has a reasonable basis to believe that no Year 2000 Problem will cause a Material Adverse Effect. 5.25 Use of Proceeds. Neither the Borrower nor any of its Subsidiaries is engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 5.26 Permits, Licenses and Rights. The Borrower and its Subsidiaries own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties and to carry on their respective businesses as presently conducted and presently planned to be conducted without, to the best knowledge of the Borrower, conflict with the rights of others, except where failure to do so could not reasonably be expected to have a Material Adverse Effect. ARTICLE VI COVENANTS During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 41 49 6.1 Financial Reporting. The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, consistently applied, and furnish to the Lenders: (a) As soon as practicable and in any event within 90 days after the close of each of its Fiscal Years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in generally accepted accounting principles and required or approved by the independent certified public accountants of the Borrower or of Venton, as the case may be) audit report certified by independent certified public accountants, acceptable to the Lenders, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and its Subsidiaries and for Venton and its Subsidiaries, including balance sheets as of the end of such period and related statements of income, retained earnings and cash flows accompanied by (i) any control letter prepared by said accountants addressed to the audit committee of the board of directors of the Borrower or Venton, as the case may be, (ii) a certificate of said accountants that, in the course of the examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default, or if, in the opinion of such accountants, any Default or Unmatured Default shall exist, stating the nature and status thereof, and (iii) a letter from said accountants addressed to the Lenders acknowledging that the Lenders are relying on such certificate as part of their credit consideration of the transactions contemplated hereby and authorizing such reliance. (b) As soon as practicable and in any event within 45 days after the close of the first three Fiscal Quarters of each of its Fiscal Years, for itself and its Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating statements of income, retained earnings and cash flows for the period from the beginning of such Fiscal Year to the end of such quarter, all certified by its chief financial officer. (c) (i) Upon the earlier of (A) fifteen days after the regulatory filing date or (B) 75 days after the close of each Fiscal Year of each Insurance Subsidiary, copies of the unaudited Annual Statement of such Insurance Subsidiary, certified by the chief financial officer of such Insurance Subsidiary, all such statements to be prepared in accordance with SAP and (ii) no later than each June 15, copies of such Annual Statements audited and certified by independent certified public accountants of recognized annual standing. (d) Upon the earlier of (i) ten (10) days after the regulatory filing date or (ii) 60 days after the close of each of the first three Fiscal Quarters of each Fiscal Year of each Insurance Subsidiary, copies of the Quarterly Statement of each of the Insurance Subsidiaries, certified by the chief financial officer of such Insurance Subsidiary, all such statements to be prepared in accordance with SAP. (e) Promptly and in any event within ten days after (i) learning thereof, notification of any changes after the date hereof in the rating given by (A) A.M. Best & Co. or S&P in respect of any Insurance Subsidiary or (B) S&P or Moody's in respect of the 42 50 senior Indebtedness of the Borrower or any Subsidiary and (ii) receipt thereof, copies of any ratings analysis by (A) A.M. Best & Co. or S&P relating to any Insurance Subsidiary or (B) S&P or Moody's in respect of the senior Indebtedness of the Borrower or any Subsidiary. (f) Copies of any actuarial certificates prepared with respect to any Insurance Subsidiary by an employee of or an actuary engaged by such Insurance Subsidiary, promptly after the receipt thereof. (g) As soon as available, but in any event not later than the last Business Day in February of each year, a copy of the plan and forecast (including a projected consolidated and consolidating balance sheet, income statement and funds flow statement) of the Borrower and its Subsidiaries for such Fiscal Year. (h) Together with the financial statements required by clauses (a) and (b) above, a compliance certificate in substantially the form of Exhibit F hereto signed by its chief financial officer showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof. (i) Within 270 days after the close of each Fiscal Year, a statement of the Unfunded Liabilities of each Single Employer Plan, if any, certified as correct by an actuary enrolled under ERISA. (j) As soon as possible and in any event within 10 days after the Borrower knows that any Termination Event has occurred with respect to any Plan, a statement, signed by the chief financial officer of the Borrower, describing said Termination Event and the action which the Borrower proposes to take with respect thereto and as soon as possible and in any event within ten (10) days after learning thereof, notification of any lien imposed by the PBGC or the IRS on the assets of any member of the Controlled Group in respect of any Plan maintained by any such member (or any other employee pension benefit plan as to which any such member may be liable) which relates to liabilities in excess of ten percent of the net worth (determined according to generally accepted accounting principles and without reduction for any reserve for such liabilities) of Alleghany and its Subsidiaries. (k) As soon as possible and in any event within 10 days after receipt by the Borrower, a copy of (i) any notice, claim, complaint or order to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any Hazardous Materials into the environment or requiring that action be taken to respond to or clean up a Release of Hazardous Materials into the environment, and (ii) any notice, complaint or citation alleging any violation of any Environmental Law or Environmental Permit by the Borrower or any of its Subsidiaries. Within ten days of the Borrower or any Subsidiary having knowledge of the proposal, enactment or promulgation of any Environmental Law which could reasonably be expected to have a Material Adverse Effect, the Borrower shall provide the Agent with written notice thereof. 43 51 (l) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which the Borrower or any of its Subsidiaries files with the NAIC or any insurance commission or department or analogous Governmental Authority (including without limitation, any filing made by the Borrower or any Subsidiary pursuant to any insurance holding company act or related rules or regulations), but excluding routine or non-material filings with the NAIC, any insurance commissioner or department or analogous Governmental Authority. (m) Promptly and in any event within ten (10) days after learning thereof, notification of (i) any tax assessment, demand, notice of proposed deficiency or notice of deficiency received by Alleghany or any other Consolidated Person or (ii) the filing of any tax Lien or commencement of any judicial proceeding by or against any such Consolidated Person, if any such assessment, demand, notice, Lien or judicial proceeding relates to tax liabilities in excess of ten percent (10%) of the net worth (determined according to generally accepted accounting standards and without reduction for any reserve for such liabilities) of Alleghany and its Subsidiaries taken as a whole. (n) Such other information (including, without limitation, the annual Best's Advance Report Service report prepared with respect to each Insurance Subsidiary rated by A.M. Best & Co.) as the Agent or any Lender may from time to time reasonably request. 6.2 Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the proceeds of the Advances to meet the general corporate needs of the Borrower and its Subsidiaries. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any Margin Stock or to finance the Purchase of any Person which has not been approved and recommended by the board of directors (or functional equivalent thereof) of such Person. 6.3 Notice of Default. The Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Lenders of (a) the occurrence of any Default or Unmatured Default, (b) the occurrence of any other development, financial or other, relating specifically to the Borrower or any of its Subsidiaries (and not of a general economic or political nature) which could reasonably be expected to have a Material Adverse Effect, (c) the receipt of any notice from any Governmental Authority of the expiration without renewal, revocation or suspension of, or the institution of any proceedings to revoke or suspend, any License now or hereafter held by any Insurance Subsidiary which is required to conduct insurance business in compliance with all applicable laws and regulations and the expiration, revocation or suspension of which could reasonably be expected to have a Material Adverse Effect, (d) the receipt of any notice from any Governmental Authority of the institution of any disciplinary proceedings against or in respect of any Insurance Subsidiary, or the issuance of any order, the taking of any action or any request for an extraordinary audit for cause by any Governmental Authority which, if adversely determined, could reasonably be expected to have a Material Adverse Effect, (e) any judicial or administrative order limiting or controlling the insurance business of any Insurance Subsidiary (and not the insurance industry generally) which has been issued or adopted and which has had, 44 52 or could reasonably be expected to have, a Material Adverse Effect, or (f) the commencement of any litigation which could reasonably be expected to create a Material Adverse Effect. 6.4 Conduct of Business. The Borrower will, and will cause each Subsidiary to, (a) carry on and conduct its business only in substantially the same manner as it is presently conducted, (b) (i) with respect to the Borrower, only engage in the business of a holding company owning entities engaged in the business of insurance or reasonably incidental activities, (ii) with respect to each Insurance Subsidiary, only engage in the insurance business in which it is engaged or licensed as of the date hereof, if it is an Insurance Subsidiary as of such date, or as of the date of its Purchase, if hereafter acquired, or only engage in the insurance business for which it is formed, if hereafter formed, and (iii) with respect to each other Subsidiary, only engage in the business in which it is engaged as of the date hereof, if it is a Subsidiary as of such date, or as of the date of its Purchase if hereafter acquired, or only engage in the business for which it is formed, if hereafter formed, (c) do all things necessary to remain duly incorporated, validly existing and in good standing in its jurisdiction of incorporation and its jurisdiction of domicile and maintain all requisite qualification to conduct business in each other jurisdiction in which such qualification is required, except where the failure to maintain such qualification could not reasonably be expected to have a Material Adverse Effect, and (d) do all things necessary to renew, extend and continue in effect all Licenses which may at any time and from time to time be necessary for any Insurance Subsidiary to operate its insurance business in compliance with all applicable laws and regulations; provided, that (i) any Insurance Subsidiary may withdraw from one or more states (other than its state of domicile) as an admitted insurer if such withdrawal is determined by the board of directors or management of such Insurance Subsidiary to be in the best interest of such Insurance Subsidiary and could not reasonably be expected to have a Material Adverse Effect and (ii) any Subsidiary that is not actively engaged in business may be dissolved, if such dissolution is determined by the Borrower's board of directors to be in the best interest of the Borrower and could not reasonably be expected to have a Material Adverse Effect. No Insurance Subsidiary shall change its state of domicile or incorporation without the prior written consent of the Required Lenders. Each Wholly-Owned Subsidiary in existence as of the date of this Agreement shall continue to be a Wholly-Owned Subsidiary except as permitted by Section 6.12. It is understood that a merger of a Subsidiary of URC into an entity which is a Wholly-Owned Subsidiary of URC, to the extent otherwise permitted by this Agreement, will not be deemed to violate this Section 6.4. It is also understood that a merger of a Subsidiary of the Borrower (which is not a Subsidiary of URC) into an entity which is a Wholly-Owned Subsidiary of the Borrower, to the extent otherwise permitted by this Agreement, will not be deemed to violate this Section 6.4. 6.5 Taxes. The Borrower will, and will cause each Subsidiary to, timely file United States federal and applicable foreign, state and local tax returns required to be filed by it that are true and correct in all material respects, and each of the Borrower, the Subsidiaries, Alleghany and each other Consolidated Person will pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except, in each case, those which are being contested in good faith by appropriate proceedings and with respect to which adequate 45 53 reserves have been set aside in accordance with generally accepted accounting principles or SAP, as applicable. 6.6 Insurance. The Borrower will, and will cause each Subsidiary to, maintain, insurance on all their Property with such companies, in such amounts and covering such risks as is, in each case, consistent with sound business practice, and the Borrower will furnish to the Agent and any Lender upon request full information as to the insurance carried. 6.7 Compliance with Laws. The Borrower will, and will cause each Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, the failure to comply with which could reasonably be expected to have a Material Adverse Effect. 6.8 Maintenance of Properties; Year 2000 Compliance. (a) The Borrower will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, except for ordinary wear and tear, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times; provided, that the Borrower or any Subsidiary may, subject to Section 6.13, dispose of any Property that such Person deems unnecessary for the conduct of its business. (b) The Borrower will take all actions necessary and commit adequate resources to assure that its computer-based and other systems (and those of all Subsidiaries) are able to effectively process data, including dates before, on and after January 1, 2000, without experiencing any Year 2000 Problem that could reasonably be expected to cause a Material Adverse Effect. At the request of the Agent, the Borrower will provide the Agent with assurances and substantiations (including, but not limited to, the results of internal or external audit reports prepared in the ordinary course of business) reasonably acceptable to the Required Lenders as to the capability of the Borrower and its Subsidiaries to conduct its and their businesses and operations before, on and after January 1, 2000 without experiencing a Year 2000 Problem causing a Material Adverse Effect. 6.9 Inspection. The Borrower will, and will cause each Subsidiary to, permit the Agent and the Lenders, by their respective representatives and agents, to inspect any of the Property, corporate books and financial records of the Borrower and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Lenders may designate. The Borrower will keep or cause to be kept, and cause each Subsidiary to keep or cause to be kept, appropriate records and books of account in which complete entries are to be made reflecting its and their business and financial transactions, such entries to be made in accordance with Agreement Accounting Principles or SAP, as applicable, consistently applied. 46 54 6.10 Capital Stock and Dividends. The Borrower will not, nor will it permit any Subsidiary to, (a) issue any capital stock or equity securities of any kind if, as a result thereof, a Change in Control would occur, or (b) declare or pay any dividends or make any distributions on its capital stock (other than dividends payable in its own capital stock) or redeem, repurchase or otherwise acquire or retire any of its capital stock or any options or other rights in respect thereof at any time outstanding if a Default or Unmatured Default has occurred and is continuing or would occur after giving effect thereto (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter), except that any Subsidiary may declare and pay dividends or make distributions to the Borrower or any Wholly-Owned Subsidiary. 6.11 Indebtedness. The Borrower will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: (a) the Loans; (b) Outstanding Indebtedness existing on the Closing Date and described in Schedule 6.11 hereto; (c) Rate Hedging Obligations related to the Loans; (d) Contingent Obligations permitted pursuant to Section 6.15; (e) Indebtedness under the Venton Credit Agreement consisting of Letters of Credit with an aggregate face amount not to exceed $225,000,000 at any one time outstanding; and (f) additional Indebtedness of the Borrower in an aggregate principal amount not to exceed $25,000,000, so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to the incurrence of such Indebtedness (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter). 6.12 Merger. The Borrower will not, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person, except that (a) a Wholly-Owned Subsidiary of URC may merge into URC or any Wholly-Owned Subsidiary of URC and (b) any Subsidiary formed for the purpose of effecting a transaction permitted under Section 6.14(a)(iv) or (b)(v) may merge with another entity if required to consummate such transaction. 6.13 Sale of Assets. The Borrower will not, nor will it permit any Subsidiary to, lease, sell, transfer or otherwise dispose of its Property to any other Person except for (a) sales of Investments in the ordinary course of business by the Borrower or any Insurance Subsidiary, including without limitation, transactions undertaken for the purpose of restructuring all or a part of the portfolio of Investments owned by the Borrower or such Insurance Subsidiary, and (b) leases, sales, transfers or other dispositions of its Property that, together with all other Property 47 55 of its Subsidiaries previously leased, sold or disposed of (other than Investments sold in the ordinary course of business by Insurance Subsidiaries) as permitted by this Section 6.13 since the date hereof do not constitute a Substantial Portion of the Property of the Borrower and its Subsidiaries. 6.14 Investments and Purchases. (a) The Borrower will not, and will not permit any Subsidiary which is not an Insurance Subsidiary to, make or suffer to exist any Investments (including, without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Purchases, except: (i) Cash and Cash Equivalents; (ii) Investments in existence as of September 30, 1996 (including Investments in Subsidiaries as of September 30, 1996) and described in Schedule 6.14 hereto; (iii) Investments in debt securities rated BBB- or better by S&P, Baa-3 or better by Moody's or NAIC-2 or better by the NAIC; provided, that any such Investment which, at any time after which it is made, ceases to meet such rating requirements shall (A) cease to be permitted hereby if then permitted by Section 6.14(a)(vi) and (B) if not then permitted by Section 6.14(a)(vi) remain permitted hereby until the earlier of the time it is permitted under Section 6.14(a)(vi) and the date which is 30 days after the date on which such rating requirement is no longer met; (iv) Purchases of businesses or entities engaged in the insurance business or businesses reasonably incident thereto which do not constitute hostile takeovers (including the creation of Subsidiaries in connection therewith) so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Purchase or creation (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); (v) Other Investments by the Borrower in any Subsidiary which was a Subsidiary as of the Closing Date, so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); and (vi) Other Investments by the Borrower made after the Closing Date in an aggregate amount not exceeding $40,000,000 (including the creation of Subsidiaries and Investments therein and Investments in any partnership or joint venture) so long as at the time of such Investment no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter). 48 56 (b) The Borrower will not permit any Insurance Subsidiary to make or suffer to exist any Investments (including, without limitation, loans and advances to and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Purchases, except: (i) Cash and Cash Equivalents; (ii) Investments in debt securities rated BBB- or better by S&P, Baa-3 or better by Moody's or NAIC-2 or better by the NAIC; provided, that any such Investment which, at any time after which it is made, ceases to meet such rating requirements shall (A) cease to be permitted hereby if then permitted by Section 6.14(b)(vi) and (B) if not then permitted by Section 6.14(b)(vi) remain permitted hereby until the earlier of the time it is permitted under Section 6.14(b)(vi) and the date which is 30 days after the date on which such rating requirement is no longer met; (iii) Investments in Subsidiaries as of the Closing Date and other Investments in existence on the Closing Date; (iv) Other Investments in any Subsidiary which was a Subsidiary as of the Closing Date so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); (v) Purchases of businesses or entities engaged in the insurance business which do not constitute hostile takeovers (including the creation of Subsidiaries in connection therewith) made after the Closing Date for an aggregate consideration not to exceed $50,000,000, so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect thereto (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); provided, that the consideration paid in connection with the Purchase of Venton Holdings Ltd. and its Subsidiaries shall not count toward such $50,000,000 limitation; and (vi) Other Investments (including the creation of Subsidiaries and Investments therein and Investments in any partnership or joint venture but excluding any Investment of the type described in clause (b)(v) above) of a type acceptable to the insurance commissioner in the respective domiciliary state of such Insurance Subsidiary; provided, that such Investments do not exceed, in the aggregate at any one time outstanding, an amount equal to the Total Admitted Assets (as presented on the "Assets" statement, currently Page 2, Line 21 of the Annual Statement) of all Insurance Subsidiaries (determined, where applicable, on a combined basis by reference to the comparable line in the combined Annual Statement) less 125% of the aggregate Total Required Liabilities (as presented on the "Liabilities, Surplus and Other Funds" statement, currently Page 3, Line 22 of the Annual Statement) of all Insurance Subsidiaries (determined, where applicable, on a combined basis by reference to the comparable line in the combined Annual Statement); provided, further, that the fair market value of the 49 57 Investment in Burlington Northern Santa Fe Corporation held by the Borrower and its Insurance Subsidiaries shall be subtracted from such amount for so long as such Investment exists. 6.15 Contingent Obligations. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Contingent Obligation (including, without limitation, any Contingent Obligation with respect to the obligations of a Subsidiary), except (a) the Contingent Obligations described on Schedule 5.17, (b) Contingent Obligations incurred under insurance contracts or policies or reinsurance contracts or policies issued in the ordinary course of business, (c) Contingent Obligations in respect of the extension of guaranties in the ordinary course of business to insureds of the obligations of insurers under insurance policies or contracts or reinsurance contracts or policies, (d) Contingent Obligations in respect of the endorsement of instruments for deposit or collection in the ordinary course of business and (e) Contingent Obligations consisting of (i) a guaranty by the Borrower and URC of obligations under the Venton Credit Agreement and (ii) the Guaranty. 6.16 Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Borrower or any of its Subsidiaries, except: (a) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted principles of accounting or SAP, as applicable, shall have been set aside on its books; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure the payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books; (c) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation; (d) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or the Subsidiaries; (e) Deposits made by any Insurance Subsidiary with the insurance regulatory authority in its jurisdiction of domicile or other statutory liens or liens or claims imposed or required by applicable insurance law or regulation against the assets of any Insurance Subsidiary, in each case in favor of all policyholders of such Insurance Subsidiary and in the ordinary course of such Insurance Subsidiary's business; 50 58 (f) Rights of third parties with respect to amounts deposited with or for the benefit of any Insurance Subsidiary in trust to secure obligations owed to any Insurance Subsidiary under contracts of reinsurance entered into in the ordinary course of such Insurance Subsidiary's business; (g) Outstanding Liens existing on the Closing Date and described in Schedule 6.16 hereto; (h) Liens on cash deposited in cash collateral accounts securing the obligations under the Venton Credit Agreement to the extent required under the Venton Credit Agreement as the provisions of Section 7.02 of the Venton Credit Agreement requiring the posting of cash collateral are in effect on the date hereof; and (i) Other Liens securing Indebtedness or obligations with an aggregate principal amount not in excess of $1,000,000 at any time outstanding. 6.17 Affiliates. The Borrower will not, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate (other than Accra Holdings Corp. and entities owned by it) except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arm's-length transaction. 6.18 Other Indebtedness. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any Indebtedness prior to the date when due (other than the Loans) while a Default or Unmatured Default has occurred and is continuing. 6.19 Environmental Matters. The Borrower shall and shall cause each of its Subsidiaries to (a) at all times comply in all material respects with all applicable Environmental Laws and (b) promptly take any and all commercially reasonable remedial actions in response to the presence, storage, use, disposal, transportation or Release of any Hazardous Materials on, under or about any real property owned, leased or operated by the Borrower or any of its Subsidiaries. 6.20 Change in Corporate Structure; Fiscal Year. The Borrower shall not, nor shall it permit any Subsidiary to, (a) permit any amendment or modification to be made to its certificate or articles of incorporation or by-laws which is materially adverse to the interests of the Lenders (provided that the Borrower shall notify the Agent of any other amendment or modification thereto as soon as practicable thereafter) or (b) change its Fiscal Year to end on any date other than December 31 of each year, except that the Venton Entities may change their fiscal year to the twelve month period ending September 30. 51 59 6.21 Inconsistent Agreements. The Borrower shall not, nor shall it permit any Subsidiary to, enter into any indenture, agreement, instrument or other arrangement which, (a) directly or indirectly prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence of the Obligations, the amending of the Loan Documents or the ability of any Subsidiary to (i) pay dividends or make other distributions on its capital stock, (ii) make loans or advances to the Borrower or (iii) repay loans or advances from the Borrower or (b) contains any provision which would be violated or breached by the making of Advances or by the performance by the Borrower of any of its obligations under any Loan Document, other than the restriction on dividends payable by URC to the Borrower set forth in Section 6.10 of the Venton Credit Agreement, as in effect on the date hereof. 6.22 Financial Covenants. The Borrower shall: 6.22.1 Minimum Statutory Surplus. At all times after the date hereof, cause URC and its Insurance Subsidiaries, as determined on a combined basis for URC and all of the Insurance Subsidiaries (without double counting) as of the last day of each Fiscal Quarter, to maintain a minimum Statutory Surplus at least equal to the sum of (a) $555,000,000, plus (b) 100% of any capital contributions made to URC or any of its Insurance Subsidiaries after June 30, 1998 (without double counting), plus (c) 35% of positive Statutory Net Income, if any, for each Fiscal Quarter ending after January 1, 1999 and on or prior to the time of determination. 6.22.2 Leverage Ratio. At all times after the date hereof, determined as of the end of each Fiscal Quarter, maintain a Leverage Ratio of not more than .50 to 1.0. 6.22.3 Adjusted Leverage Ratio. At all times after the date hereof, determined as of the end of each Fiscal Quarter, maintain an Adjusted Leverage Ratio of not more than .35 to 1.0. 6.22.4 URC Risk Based Capital Ratio. At all times after the date hereof, determined as of the end of each Fiscal Quarter, cause URC and its Insurance Subsidiaries to maintain a Statutory Risk-Based Capital Ratio of not less than 3.15 to 1.0. 6.23 Tax Consolidation. The Borrower will not and will not permit any of its Subsidiaries to file or consent to the filing of any consolidated, combined or unitary income tax return with any Person (other than any of the Borrower's Subsidiaries, Alleghany or any other Consolidated Person), except as required by law. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any tax sharing agreement with any Person (other than Alleghany, the Borrower or any of its Subsidiaries) without the written consent of the Required Lenders. The Borrower shall cause each Subsidiary (including any newly acquired or newly created Subsidiary) to enter into a tax sharing agreement with such Subsidiary's immediate parent corporation, which tax sharing agreement shall obligate such Subsidiary to pay to such Subsidiary's immediate parent corporation an amount of tax substantially equal to the amount of tax such parent corporation is required to pay to Alleghany (or to a Subsidiary of Alleghany) by reason of the taxable income of such Subsidiary. No Tax Sharing Agreement or other agreement 52 60 described above may be amended to provide for any payments to be made to Alleghany in an amount substantially in excess of the amount of tax which Alleghany is required to pay by reason of the taxable income of the Borrower and its Subsidiaries. 6.24 ERISA Compliance. With respect to any Plan, neither the Borrower nor any Subsidiary shall: (a) engage in any "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) for which a civil penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section 4975 of the Code in excess of $1,000,000 could be imposed; (b) permit to be incurred any "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA) in excess of $1,000,000, whether or not waived; (c) permit the occurrence of any Termination Event which could result in a liability to the Borrower or any other member of the Controlled Group in excess of $1,000,000; (d) be an "employer" (as such term is defined in Section 3(5) of ERISA) required to contribute to any Multiemployer Plan or a "substantial employer" (as such term in defined in Section 4001(a)(2) of ERISA) required to contribute to any Multiemployer Plan; or (e) permit the establishment or amendment of any Plan or fail to comply with the applicable provisions of ERISA and the Code with respect to any Plan which could reasonably be expected to result in liability to the Borrower or any other member of the Controlled Group which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. ARTICLE VII DEFAULTS The occurrence of any one or more of the following events shall constitute a Default: 7.1. Any representation or warranty made or deemed made by or on behalf of the Borrower to the Lenders or the Agent under or in connection with this Agreement, any other Loan Document, any Loan, or any certificate or material information delivered in connection with this Agreement or any other Loan Document shall prove to have been false in any material respect on the date as of which made or deemed made. 53 61 7.2. Nonpayment of (a) any principal of any Note when due, or (b) any interest upon any Note or any commitment fee or other fee or obligations under any of the Loan Documents within five days after the same becomes due. 7.3. The breach by the Borrower of any of the terms or provisions of Section 6.2, Section 6.3(a) or Sections 6.10 through 6.24. 7.4. The breach by the Borrower (other than a breach which constitutes a Default under Section 7.1, 7.2 or 7.3) of any of the terms or provisions of this Agreement which is not remedied within thirty (30) days after written notice from the Agent or any Lender. 7.5. The default by the Borrower or any of its Subsidiaries in the performance of any term, provision or condition contained in any agreement or agreements under which any Indebtedness aggregating in excess of $5,000,000 was created or is governed, or the occurrence of any other event or existence of any other condition, the effect of any of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity; or any such Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof. 7.6. The Borrower or any of its Subsidiaries shall (a) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (b) make an assignment for the benefit of creditors, (c) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (d) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (e) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 7.6, (f) fail to contest in good faith any appointment or proceeding described in Section 7.7 or (g) become unable to pay, not pay, or admit in writing its inability to pay, its debts generally as they become due. 7.7. Without the application, approval or consent of the Borrower or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.6(d) shall be instituted against the Borrower or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of forty-five (45) consecutive days. 54 62 7.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of (each a "Condemnation"), all or any portion of the Property of the Borrower and its Subsidiaries which, when taken together with all other Property of the Borrower and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such Condemnation occurs, constitutes a Substantial Portion. 7.9. The Borrower or any of its Subsidiaries shall fail within thirty days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $500,000 (or multiple judgments or orders for the payment of an aggregate amount in excess of $1,000,000), which is not stayed on appeal or otherwise being appropriately contested in good faith and as to which no enforcement actions have been commenced. 7.10. Any Change in Control shall occur. 7.11. Nonpayment by the Borrower of any Rate Hedging Obligation owed to any Lender or the breach by the Borrower of any term, provision or condition contained in any agreement, device or arrangement giving rise to any such Rate Hedging Obligation. 7.12. Any material License of any Insurance Subsidiary (a) shall be revoked by the Governmental Authority which issued such License, or any action (administrative or judicial) to revoke such License shall have been commenced against such Insurance Subsidiary and shall not have been dismissed within 60 days after the commencement thereof, (b) shall be suspended by such Governmental Authority for a period in excess of 60 days or (c) shall not be reissued or renewed by such Governmental Authority upon the expiration thereof following application for such reissuance or renewal of such Insurance Subsidiary. 7.13. Any Insurance Subsidiary shall be the subject of a final non-appealable order imposing a fine in an amount in excess of $250,000 in any single instance or other such orders imposing fines in excess of $1,000,000 in the aggregate after the date of this Agreement by or at the request of any state insurance regulatory agency as a result of the violation by such Insurance Subsidiary of such state's applicable insurance laws or the regulations promulgated in connection therewith. 7.14. Any Insurance Subsidiary shall become subject to (a) any conservation or liquidation order, directive or mandate issued by any Governmental Authority or (b) any other directive or mandate issued by any Governmental Authority which could reasonably be expected to have a Material Adverse Effect, which in either case is not stayed within thirty (30) days. 7.15. The Borrower, any of its Subsidiaries, Alleghany or any other Consolidated Person shall receive any tax assessment, demand or notice of deficiency or have any tax liens filed or any judicial proceeding relating to any tax matter commenced against it which, in any 55 63 such case, could reasonably be expected to have a Material Adverse Effect or any tax lien shall be filed against any property of the Borrower or any Subsidiary relating to the tax liabilities of any Person if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted principles of accounting or SAP, as applicable, shall have been set aside on its books. 7.16. (a) The Unfunded Liabilities of all Single Employer Plans maintained by the Borrower and its Subsidiaries shall exceed in the aggregate $1,000,000 or a Reportable Event shall occur in connection with any Plan maintained by the Borrower or any of its Subsidiaries, (b) the Unfunded Liabilities of all Single Employer Plans maintained by other members of the Controlled Group shall exceed an amount which could reasonably be expected to have a Material Adverse Effect or any Reportable Event shall occur in connection with any Plan maintained by other members of the Controlled Group which could reasonably be expected to have a Material Adverse Effect or (c) any Lien shall be imposed by the PBGC or the IRS against any assets of the Borrower or any of its Subsidiaries with respect to a Plan maintained by any other member of the Controlled Group (or any other employee pension benefit plan as to which any such member may be liable). 7.17. The Guaranty shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of URC, or URC or any Person acting for or on behalf of URC contests such validity or binding nature of such guarantee, or any other Person shall assert any of the foregoing. 7.18. URC shall fail to maintain a claims paying rating by A.M. Best & Co. of at least A-. ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 8.1 Acceleration. If any Default described in Section 7.6 or 7.7 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives. If, within ten Business Days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans hereunder as a result of any Default 56 64 (other than any Default as described in Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2 Amendments. Subject to the provisions of this Article VIII, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of each Lender: (a) Extend the final maturity of any Loan or Note or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon; (b) Reduce the percentage specified in the definition of Required Lenders; (c) Increase the amount of the Commitment of any Lender hereunder; (d) Extend the Facility Termination Date; (e) Amend this Section 8.2; (f) Permit any assignment by the Borrower of its Obligations or its rights hereunder; or (g) Terminate the Guaranty. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. The Agent may waive payment of the fee required under Section 12.3.2 without obtaining the consent of any other party to this Agreement. 8.3 Preservation of Rights. No delay or omission of the Lenders or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Loan notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full. 57 65 ARTICLE IX GENERAL PROVISIONS 9.1 Survival of Representations. All representations and warranties of the Borrower contained in this Agreement or of the Borrower or any Subsidiary contained in any Loan Document shall survive the delivery of the Notes and the making of the Loans herein contemplated. 9.2 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3 Taxes. Any stamp, documentary or similar taxes, assessments or charges payable or ruled payable by any governmental authority in respect of the Loan Documents shall be paid by the Borrower, together with interest and penalties, if any. 9.4 Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.5 Entire Agreement. The Loan Documents embody the entire agreement and understanding among the Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent and the Lenders relating to the subject matter thereof other than the fee letter dated August 5, 1996 in favor of First Chicago. 9.6 Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and the Arranger and their respective successors and assigns. 9.7 Expenses; Indemnification. The Borrower shall reimburse the Agent and the Arranger for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent and the Arranger, which attorneys may be employees of the Agent or the Arranger) paid or incurred by the Agent or the Arranger in connection with the preparation, negotiation, execution, delivery, review, amendment, modification, and administration of the Loan Documents. The Borrower also agrees to reimburse the Agent, the Arranger and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, the Arranger and the Lenders, which attorneys may be employees of the Agent, the Arranger or the Lenders) paid or incurred by the Agent, the Arranger or any Lender in connection with the collection and enforcement of the Loan Documents. The Borrower further agrees to indemnify the Agent, the Arranger and each 58 66 Lender, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent, the Arranger or any Lender is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement or the other Loan Documents the transactions contemplated hereby or thereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder except to the extent that they arise (a) out of the gross negligence or willful misconduct of the party seeking indemnification, (b) from any dispute of or any litigation or other proceeding instituted by any Lender against the Agent or any other Lender or (c) from any breach by the party seeking indemnification of its obligations under this Agreement. The obligations of the Borrower under this Section shall survive the termination of this Agreement. 9.8 Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders. 9.9 Accounting. Except as provided to the contrary or otherwise defined herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles. 9.10 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.11 Nonliability of Lenders. The relationship between the Borrower and the Lenders and the Agent shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to the Borrower by the Agent or the Lenders is for the protection of the Agent and the Lenders and neither the Borrower nor any other Person is entitled to rely thereon. The Borrower agrees that neither the Agent nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined by a judgment of a court that is binding on the Agent, or such Lender, final and not subject to review on appeal, that such losses were the result of acts or omissions on the part of the Agent or such Lender, as the case may be, constituting gross negligence or willful misconduct of the party from which recovery is sought. Whether or not such damages are related to a claim that is subject to the waiver effected above and whether or not such waiver is effective, neither the Agent nor any Lender shall have any 59 67 liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby or the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith. 9.12 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 9.13 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS; PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT IN OTHER COURTS IF JURISDICTION MAY NOT BE OBTAINED IN A COURT IN CHICAGO, ILLINOIS. 9.14 WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. 9.15 Disclosure. The Borrower and each Lender hereby (a) acknowledge and agree that First Chicago and/or its Affiliates from time to time may hold other investments in, make other loans to or have other relationships with the Borrower, including, without limitation, in connection with any interest rate hedging instruments or agreements or swap transactions, and (b) waive any liability arising out of or resulting from any conflict of interest arising from such investments, loans or relationships. 60 68 9.16 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders and each party has notified the Agent that it has taken such action. 9.17 Confidentiality. Each of the Agent and each Lender agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Borrower and provided to it by the Borrower or any Subsidiary, or by the Agent on the Borrower's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Borrower or any Subsidiary, except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Lender, or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower, provided that such source is not bound by a confidentiality agreement with the Borrower known to the Agent or such Lender; provided, however, that the Agent or any Lender may disclose such information (a) at the request or pursuant to any requirement of any Governmental Authority to which the Agent or such Lender is subject or in connection with an examination of the Agent or such Lender by any such authority; (b) pursuant to subpoena or other court process, provided that if not prohibited by law, the Agent or such Lender will use its best efforts to provide notice to the Borrower of the receipt of such subpoena and give the Borrower reasonable opportunity to seek a protective order with respect to such information prior to delivering confidential material in response thereto; (c) when required to do so in accordance with the provisions of any applicable requirement of law; (d) to the extent reasonably required in connection with any litigation or proceeding with respect to the transactions contemplated hereby to which the Agent or any Lender or their respective Affiliates may be party; (e) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (f) to the Agent's or such Lender's independent auditors and other professional advisors with a need to know and who agree to keep such information confidential to the extent required of the Agent or such Lender hereunder; (g) to any Participant or Purchaser, actual or potential, provided that such Person agrees to keep such information confidential to the same extent required of the Agent or the Lenders hereunder; (h) as to the Agent or any Lender or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Borrower or any Subsidiary is party or is deemed party with the Agent or such Lender or such Affiliate; and (i) to its Affiliates, provided that any such Affiliate agrees in writing to keep such information confidential to the same extent required of the Agent or such Lender hereunder. 9.18 Restatement Date. The Borrower, each Lender and the Agent agree that on the Restatement Date the following transactions shall be deemed to occur automatically, without further action by any party hereto (except as set forth below): 61 69 (a) The Existing Credit Agreement shall be deemed to be amended and restated in its entirety in the form of this Agreement. (b) The Agent shall, promptly after receipt of the Notes reflecting the amendments to the Existing Credit Agreement effected hereunder, cancel and return to the Borrower (upon receipt from the Lenders) the promissory notes being replaced by such Notes. The Borrower, each Lender and the Agent agree that (i) the restatement transactions provided in the foregoing sentence shall not be effective until the execution of this Agreement by all of the parties hereto and the satisfaction of the conditions precedent set forth in Section 4.1 hereof; (ii) all terms and conditions of the Existing Credit Agreement which are amended and restated by this Agreement shall remain effective until such amendment and restatement becomes effective hereunder and thereafter shall continue to be effective only as amended and restated by this Agreement and (iii) the representations, warranties and covenants set forth herein shall become effective on the Restatement Date. 9.19 Departing Lender. Upon the effectiveness of this Agreement and the payment to the Departing Lender of the Obligations due it, (a) the Departing Lender shall have no further Commitment hereunder and (b) the Departing Lender shall cease to have any rights or duties as Lender hereunder; provided, that the Departing Lender shall remain entitled to indemnities under the Existing Credit Agreement which by their terms survive the termination of the Existing Credit Agreement. ARTICLE X THE AGENT 10.1 Appointment. First Chicago is hereby appointed Agent hereunder and under each other Loan Document, and each of the Lenders authorizes the Agent to act as the agent of such Lender. The Agent agrees to act as such upon the express conditions contained in this Article X. The Agent shall not have a fiduciary relationship in respect of the Borrower or any Lender by reason of this Agreement. 10.2 Powers. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder, except any action specifically provided by the Loan Documents to be taken by the Agent. 10.3 General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. 62 70 10.4 No Responsibility for Loans, Recitals, etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder, (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered to the Agent and not waived at closing, or (d) the validity, effectiveness, sufficiency, enforceability or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity). 10.5 Action on Instructions of Lenders. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders (or, to the extent required by Section 8.2, all Lenders), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders and on all holders of Notes. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 10.6 Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document. 10.7 Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 10.8 Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (a) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (b) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents, and (c) for any 63 71 liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents; provided, that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement. 10.9 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders. 10.10 Rights as a Lender. In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Lender. 10.11 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent and, if no Default or Unmatured Default has occurred and is continuing, the Borrower's prior written consent, or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. Upon any such resignation, the Required Lenders shall have the right to appoint, on behalf of the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. If the Agent has resigned and no successor Agent has been 64 72 appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment and the Borrower has given its consent if required hereunder. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $50,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent and such consent by the Borrower, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent. Upon the effectiveness of the resignation of the Agent, the resigning Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation of an Agent, the provisions of this Article X shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. ARTICLE XI SETOFF; RATABLE PAYMENTS 11.1 Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default or Unmatured Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender to or for the credit or account of the Borrower or any Subsidiary may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part hereof, shall then be due. 11.2 Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Loans (other than payments received pursuant to Section 2.16(a), 3.1, 3.2 or 3.4) in a greater proportion than its pro-rata share of such Loans, such Lender agrees, promptly upon demand, to purchase a portion of the Loans held by the other Lenders so that after such purchase each Lender will hold its ratable proportion of Loans. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. If an amount to be offset is to be applied to Indebtedness of the Borrower to a Lender, other than Indebtedness evidenced by any of the Notes held by such Lender, such amount shall be applied ratably to such other Indebtedness and to the Indebtedness evidenced by such Notes. 65 73 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.1 Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (a) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents, and (b) any assignment by any Lender must be made in compliance with Section 12.3. Notwithstanding clause (b) of this Section, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment to a Federal Reserve Bank shall release the transferor Lender from its obligations hereunder. The Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 12.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 12.2 Participations. 12.2.1 Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.2.2 Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver which effects any of the modifications referenced in clauses (a) through (f) of Section 8.2. 12.2.3 Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents; provided, 66 74 that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. 12.3 Assignments. 12.3.1 Permitted Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents; provided, however, that in the case of an assignment to an entity which is not a Lender or an Affiliate of a Lender, such assignment shall be in a minimum amount of $5,000,000. Such assignment shall be substantially in the form of Exhibit G hereto or in such other form as may be agreed to by the parties thereto. The consent of the Agent and, so long as no Default is continuing, the Borrower shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof. Such consent shall not be unreasonably withheld. 12.3.2 Effect; Effective Date. Upon (a) delivery to the Agent by the transferor Lender of a notice of assignment, substantially in the form attached as Exhibit I to Exhibit G hereto (a "Notice of Assignment"), together with any consents required by Section 12.3.1, and (b) payment by the transferor Lender of a $3,000 fee to the Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. On and after the effective date of such assignment, (a) such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and (b) the transferor Lender shall be released with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser without any further consent or action by the Borrower, the Lenders or the Agent. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.2, the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. 12.4 Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries. 12.5 Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or 67 75 any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.16(b). ARTICLE XIII NOTICES 13.1 Giving Notice. Except as otherwise permitted by Section 2.11 with respect to borrowing notices, all notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing, by facsimile, first class U.S. mail or overnight courier and addressed or delivered to such party at its address set forth below its signature hereto or at such other address as may be designated by such party in a notice to the other parties given pursuant to this Section 13.1. Any notice, if mailed and properly addressed with first class postage prepaid, return receipt requested, shall be deemed given three (3) Business Days after deposit in the U.S. mail; any notice, if transmitted by facsimile, shall be deemed given when transmitted; and any notice given by overnight courier shall be deemed given when received by the addressee. 13.2 Change of Address. The Borrower, the Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto. [signature pages to follow] 68 76 IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written. UNDERWRITERS RE GROUP, INC. By: /s/ Stephen C. Kolakowski ------------------------------------------ Senior Vice President and Title: Chief Financial Officer --------------------------------------- Address: 26050 Mureau Road Calabasas, California 91302 Attn: Stephen C. Kolakowski Telecopy: (818) 878-9500 Telephone: (818) 878-9535 Commitment $10,000,000 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By: /s/ Thomas W. Doddridge ------------------------------------------ Title: First Vice President -------------------------------------- Address: One First National Plaza Mail Suite 0085 Chicago, Illinois 60670 Attn: Thomas W. Doddridge Telecopy: (312) 732-4033 Telephone: (312) 732-3881 69 77 Commitment $10,000,000 FIRST UNION NATIONAL BANK By: /s/ Thomas L. Stitchberry ------------------------------------------ Title: Senior Vice President -------------------------------------- Address: 301 South College Street, PW5 Charlotte, North Carolina 28288 Attn: Dan Norton Telecopy: (704) 383-7611 Telephone: (704) 374-4279 Commitment $ 9,000,000 MELLON BANK, N.A. By: /s/ Susan M. Whitewood ------------------------------------------ Title: Vice President -------------------------------------- Address: One Mellon Bank Center Room 370 Pittsburgh, Pennsylvania 15258 Attn: Susan M. Whitewood Telecopy: (412) 234-8087 Telephone: (412) 234-7112 70 78 Commitment $7,000,000 THE NORTHERN TRUST COMPANY By: /s/ John E. Burda ------------------------------------------ Title: Second Vice President -------------------------------------- Address: 50 S. LaSalle Street Chicago, Illinois 60675 Attn: Marcia P. Saper Telecopy: (312) 557-2673 Telephone: (312) 444-3416 Commitment $7,000,000 SANWA BANK CALIFORNIA By: /s/ Dirk Price ------------------------------------------ Title: Vice President -------------------------------------- Address: 601 South Figueroa Street (W8-6) Los Angeles, California 90017 Attn: Dirk Price Telecopy: (213) 896-7282 Telephone: (213) 896-7850 Initial Aggregate $43,000,000 Commitment 71 EX-10.27.B 6 LIST OF EXHIBITS TO THE UNDERWRITERS CREDIT AGMT. 1 EXHIBIT 10.27(b) LIST OF EXHIBITS TO THE UNDERWRITERS CREDIT AGREEMENT EXHIBIT NUMBER DESCRIPTION -------------- ----------- A Ratable Note B Competitive Bid Note C Competitive Bid Quote Request D Invitation for Competitive Bid Quotes E Competitive Bid Quote F Compliance Certificate G Assignment Agreement 5.3 Approvals and Consents 5.4 Governmental Consents 5.7 Taxes 5.9 Capitalization 5.10 ERISA 5.16 Owned Properties 5.17 Indebtedness 5.19 Environmental 5.21 Insurance Licenses 6.11 Closing Debt Indebtedness 6.14 Investments 6.16 Liens EX-10.27.C 7 GUARANTY DATED AS OF DECEMBER 31, 1998 1 Exhibit 10.27(c) GUARANTY This Guaranty is made as of the 31st day of December, 1998 by Underwriters Reinsurance Company, a New Hampshire insurance company (the "Guarantor"), in favor of the Agent and the Lenders (as hereinafter defined). RECITALS: A. Underwriters Re Group, Inc. (formerly, URC Holdings Corp.; the "Borrower"), the financial institutions named therein (the "Lenders") and The First National Bank of Chicago, as Agent (the "Agent"), are parties to that certain Credit Agreement dated as of October 23, 1996, as amended as of the date hereof (as from time to time further modified, supplemented or amended, the "Credit Agreement"). Each term used but not otherwise defined herein shall have the meaning ascribed to such term by the Credit Agreement. B. The Guarantor is a direct wholly-owned subsidiary of the Borrower and will receive substantial and direct benefits from the extensions of credit contemplated by the Credit Agreement and is entering into this Guaranty to induce the Agent and the Lenders to enter into an amendment to the Credit Agreement and to continue to extend credit to the Borrower thereunder. C. The execution and delivery of this Guaranty is a condition precedent to the obligation of the Lenders to continue to extend credit to the Borrower pursuant to the Credit Agreement. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration and as an inducement to the Lenders to enter into the Credit Agreement and to continue to extend credit to the Borrower, the Guarantor hereby agrees as follows: 1. The Guarantor hereby absolutely, irrevocably and unconditionally guarantees prompt, full and complete payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of (a) the principal of and interest on the Loans made by the Lenders to, and any Notes held by the Lenders of, the Borrower and (b) all other amounts from time to time owing to the Lenders or the Agent by the Borrower under the Credit Agreement, the Notes and the other Loan Documents, including without limitation all "Obligations", as defined in the Credit Agreement (collectively, the "Guaranteed Obligations"). This is a guaranty of payment, not a guaranty of collection. 2. The Guarantor waives notice of the acceptance of this Guaranty and of the extension or incurrence of the Guaranteed Obligations or any part thereof. The Guarantor further waives all setoffs and counterclaims and presentment, protest, notice, filing of claims with a court in the event of receivership, bankruptcy or reorganization of the Borrower, demand or action on delinquency in respect of the Guaranteed Obligations or any part thereof, including any right to require the Agent or the Lenders to sue the Borrower, any other guarantor 2 or any other person obligated with respect to the Guaranteed Obligations or any part thereof, or otherwise to enforce payment thereof against any collateral securing the Guaranteed Obligations or any part thereof. 3. The Guarantor hereby agrees that, to the fullest extent permitted by law, its obligations hereunder shall be continuing, absolute and unconditional under any and all circumstances and not subject to any reduction, limitation, impairment, termination, defense (other than indefeasible payment in full), setoff, counterclaim or recoupment whatsoever (all of which are hereby expressly waived by it to the fullest extent permitted by law), whether by reason of any claim of any character whatsoever, including, without limitation, any claim of waiver, release, surrender, alteration or compromise. The validity and enforceability of this Guaranty shall not be impaired or affected by any of the following: (a) any extension, modification or renewal of, or indulgence with respect to, or substitution for, the Guaranteed Obligations or any part thereof or any agreement relating thereto at any time; (b) any failure or omission to perfect or maintain any lien on, or preserve rights to, any security or collateral or to enforce any right, power or remedy with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto, or any collateral securing the Guaranteed Obligations or any part thereof; (c) any waiver of any right, power or remedy or of any default with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto or with respect to any collateral securing the Guaranteed Obligations or any part thereof; (d) any release, surrender, compromise, settlement, waiver, subordination or modification, with or without consideration, of any collateral securing the Guaranteed Obligations or any part thereof, any other guaranties with respect to the Guaranteed Obligations or any part thereof, or any other obligations of any person or entity with respect to the Guaranteed Obligations or any part thereof; (e) the enforceability or validity of the Guaranteed Obligations or any part thereof or the genuineness, enforceability or validity of any agreement relating thereto or with respect to any collateral securing the Guaranteed Obligations or any part thereof; (f) the application of payments received from any source to the payment of indebtedness other than the Guaranteed Obligations, any part thereof or amounts which are not covered by this Guaranty even though the Lenders might lawfully have elected to apply such payments to any part or all of the Guaranteed Obligations or to amounts which are not covered by this Guaranty; (g) any change of ownership of the Borrower or the insolvency, bankruptcy or any other change in the legal status of the Borrower; (h) any change in, or the imposition of, any law, decree, regulation or other governmental act which does or might impair, delay or in any way affect the validity, enforceability or the payment when due of the Guaranteed Obligations; (i) the failure of the Borrower to maintain in full force, validity or effect or to obtain or renew when required all governmental and other approvals, licenses or consents required in connection with the Guaranteed Obligations or this Guaranty, or to take any other action required in connection with the performance of all obligations pursuant to the Guaranteed Obligations or this Guaranty; (j) the existence of any claim, setoff or other rights which the Guarantor may have at any time against the Borrower or any other guarantor in connection herewith or with any unrelated transaction; (k) the Lenders' election, in any case or proceeding instituted under chapter 11 of the United States Bankruptcy Code, of the application of section 1111(b)(2) of the United States Bankruptcy Code; (l) any borrowing, use of cash collateral, or grant of a security interest by the Borrower, as debtor in possession, under section 363 or 364 of the United States Bankruptcy Code; (m) the disallowance of all or any portion of any of the Lenders' claims for repayment of the Guaranteed Obligations under section 502 or 506 of the United States Bankruptcy Code; or 2 3 (n) any other fact or circumstance which might otherwise constitute grounds at law or equity for the discharge or release of the Guarantor from its obligations hereunder, all whether or not the Guarantor shall have had notice or knowledge of any act or omission referred to in the foregoing clauses (a) through (n) of this paragraph. It is agreed that the Guarantor's liability hereunder is independent of any other guaranties or other obligations at any time in effect with respect to the Guaranteed Obligations or any part thereof and that the Guarantor's liability hereunder may be enforced regardless of the existence, validity, enforcement or non-enforcement of any such other guaranties or other obligations or any provision of any applicable law or regulation purporting to prohibit payment by the Borrower of the Guaranteed Obligations in the manner agreed upon among the Agent, the Lenders and the Borrower. 4. Credit may be granted or continued from time to time by the Lenders to the Borrower without notice to or authorization from the Guarantor regardless of the Borrower's financial or other condition at the time of any such grant or continuation. Neither the Agent nor any Lender shall have an obligation to disclose or discuss with the Guarantor its assessment of the financial condition of the Borrower. 5. Until the irrevocable payment in full of the Obligations and termination of all commitments which could give rise to any Obligation, the Guarantor shall have no right of subrogation with respect to the Guaranteed Obligations and hereby waives any right to enforce any remedy which the Agent or the Lenders now have or may hereafter have against the Borrower, any endorser or any other guarantor of all or any part of the Guaranteed Obligations, and the Guarantor hereby waives any benefit of, and any right to participate in, any security or collateral given to the Agent or the Lenders to secure payment of the Guaranteed Obligations or any part thereof or any other liability of the Borrower to the Agent or the Lenders. 6. The Guarantor authorizes the Lenders to take any action or exercise any remedy with respect to any collateral from time to time securing the Guaranteed Obligations, which the Lenders in their sole discretion shall determine, without notice to the Guarantor. Notwithstanding any reference herein to any collateral securing any of the Guaranteed Obligations, it is acknowledged that, on the date hereof, neither the Guarantor nor any of its Subsidiaries has granted, or has any obligation to grant, any security interest in or other lien on any of its property as security for the Guaranteed Obligations. 7. In the event the Lenders in their sole discretion elect to give notice of any action with respect to any collateral securing the Guaranteed Obligations or any part thereof, ten (10) days' written notice mailed to the Guarantor by ordinary mail at the address shown hereon shall be deemed reasonable notice of any matters contained in such notice. The Guarantor consents and agrees that neither the Agent nor the Lenders shall be under any obligation to marshall any assets in favor of the Guarantor or against or in payment of any or all of the Guaranteed Obligations. 8. In the event that acceleration of the time for payment of any of the Guaranteed Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, or otherwise, all such amounts shall nonetheless be payable by the Guarantor forthwith upon demand by the Agent or the Lenders. The Guarantor further agrees that, to the extent that the Borrower makes a payment or payments to any of the Lenders on the Guaranteed Obligations, or the Agent or the Lenders receive any proceeds of collateral securing the 3 4 Guaranteed Obligations, which payment or receipt of proceeds or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be returned or repaid to the Borrower, its estate, trustee, receiver, debtor in possession or any other party, including, without limitation, the Guarantor, under any insolvency or bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment, return or repayment, the obligation or part thereof which has been paid, reduced or satisfied by such amount shall be reinstated and continued in full force and effect as of the date when such initial payment, reduction or satisfaction occurred. 9. No delay on the part of the Agent or the Lenders in the exercise of any right, power or remedy shall operate as a waiver thereof, and no single or partial exercise by the Agent or the Lenders of any right, power or remedy shall preclude any further exercise thereof; nor shall any amendment, supplement, modification or waiver of any of the terms or provisions of this Guaranty be binding upon the Agent or the Lenders, except as expressly set forth in a writing duly signed and delivered on the Lenders' behalf by the Agent. The failure by the Agent or the Lenders at any time or times hereafter to require strict performance by the Borrower or the Guarantor of any of the provisions, warranties, terms and conditions contained in any promissory note, security agreement, agreement, guaranty, instrument or document now or at any time or times hereafter executed pursuant to the terms of, or in connection with, the Credit Agreement by the Borrower or the Guarantor and delivered to the Agent or the Lenders shall not waive, affect or diminish any right of the Agent or the Lenders at any time or times hereafter to demand strict performance thereof, and such right shall not be deemed to have been waived by any act or knowledge of the Agent or the Lenders, their agents, officers or employees, unless such waiver is contained in an instrument in writing duly signed and delivered on the Lenders' behalf by the Agent. No waiver by the Agent or the Lenders of any default shall operate as a waiver of any other default or the same default on a future occasion, and no action by the Agent or the Lenders permitted hereunder shall in any way affect or impair the Agent's or the Lenders' rights or powers, or the obligations of the Guarantor under this Guaranty. Any determination by a court of competent jurisdiction of the amount of any Guaranteed Obligations owing by the Borrower to the Lenders shall be conclusive and binding on the Guarantor irrespective of whether the Guarantor was a party to the suit or action in which such determination was made. 10. Subject to the provisions of Section 8, this Guaranty shall continue in effect until the Credit Agreement has terminated, the Guaranteed Obligations has been paid in full and the other conditions of this Guaranty have been satisfied. 11. In addition to and without limitation of any rights, powers or remedies of the Agent or the Lenders under applicable law, any time after maturity of the Guaranteed Obligations, whether by acceleration or otherwise, the Agent or the Lenders may, in their sole discretion, with notice after the fact to the Guarantor and regardless of the acceptance of any security or collateral for the payment hereof, appropriate and apply toward the payment of the Guaranteed Obligations (a) any indebtedness due or to become due from any of the Lenders to the Guarantor, and (b) any moneys, credits or other property belonging to the Guarantor (including all account balances, whether provisional or final and whether or not collected or available) at any time held by or coming into the possession of any of the Agent or any Lender whether for deposit or otherwise. 4 5 12. The Guarantor agrees to pay all costs, fees and expenses (including reasonable attorneys' fees and time charges, which attorneys may be employees of the Agent or a Lender) incurred by the Agent or any Lender in collecting or enforcing the obligations of the Guarantor under this Guaranty. 13. This Guaranty shall bind the Guarantor and its successors and assigns and shall inure to the benefit of the Agent, the Lenders and their successors and assigns. All references herein to the Lenders shall for all purposes also include all Purchasers and Participants (as such terms are defined in the Credit Agreement). All references herein to the Borrower shall be deemed to include their successors and assigns including, without limitation, a receiver, trustee or debtor in possession of or for the Borrower. 14. THIS GUARANTY SHALL BE DEEMED TO HAVE BEEN MADE AT CHICAGO, ILLINOIS, AND SHALL BE CONSTRUED AND THE RIGHTS AND LIABILITIES OF THE AGENT, THE LENDERS AND THE GUARANTOR DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. THE GUARANTOR CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN COOK COUNTY, ILLINOIS, WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MESSENGER OR BY REGISTERED MAIL DIRECTED TO THE GUARANTOR AT THE ADDRESS INDICATED BELOW, AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED AS AFORESAID. THE GUARANTOR WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER. NOTHING CONTAINED HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR THE LENDERS TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE AGENT OR THE LENDERS TO BRING ANY ACTION OR PROCEEDING AGAINST THE GUARANTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 15. EACH OF THE GUARANTOR AND, BY THEIR ACCEPTANCE HEREOF, THE AGENT AND EACH LENDER, WAIVES TRIAL BY JURY WITH RESPECT TO DISPUTES ARISING HEREUNDER. 16. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Guaranty. 17. Except as otherwise expressly provided herein, any notice required or desired to be served, given or delivered to any party hereto under this Guaranty shall be in writing by facsimile, U.S. mail or overnight courier and addressed or delivered to such party (a) if to the Agent or the Lenders, at their respective addresses set forth in the Credit Agreement, or 5 6 (b) if to the Guarantor, at its address indicated on Exhibit A hereto, or to such other address as the Agent or the Lenders or the Guarantor designates to the Agent in writing. All notices by United States mail shall be sent registered mail, return receipt requested. Except as otherwise expressly provided herein, all notices hereunder shall be effective upon delivery or refusal of receipt; provided, that any notice transmitted by facsimile shall be deemed given when transmitted. 6 7 IN WITNESS WHEREOF, the Guarantor has entered into this Guaranty as of the date first above written. UNDERWRITERS REINSURANCE COMPANY By: /s/ Stephen C. Kolakowski -------------------------------------- Stephen C. Kolakowski Senior Vice President and Its: Chief Financial Officer ------------------------------------- 7 8 EXHIBIT A TO GUARANTY Underwriters Reinsurance Company 26050 Mureau Road Calabasas, California 91302 Attn.: Stephen C. Kolakowski Telephone: (818) 878-9500 Telecopy: (818) 878-9355 EX-10.28.A 8 AGREEMENT AND PLAN OF AMALGAMATION 1 Exhibit 10.28(a) - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF AMALGAMATION dated as of July 30, 1998 by and among UNDERWRITERS REINSURANCE COMPANY, UNDERWRITERS ACQUISITION COMPANY LTD. and VENTON HOLDINGS LTD. - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE ONE CERTAIN DEFINITIONS Section 1.01. Certain Definitions.......................................................................... 2 Section 1.02. Terms Generally ............................................................................. 6 ARTICLE TWO THE AMALGAMATION Section 2.01. The Amalgamation............................................................................. 6 Section 2.02. Effective Time of the Amalgamation; Closing.................................................. 6 Section 2.03. Effect of the Amalgamation................................................................... 7 Section 2.04. Memorandum of Association and Bye-laws of the Amalgamated Company; Registration Number; Directors......................................................................... 7 Section 2.05. Consideration. .............................................................................. 7 Section 2.06. Surrender and Payment........................................................................ 8 Section 2.07. Dividends; Voting; Etc....................................................................... 8 Section 2.08. No Further Rights............................................................................ 9 Section 2.09. Cash-Out of Warrants......................................................................... 9 Section 2.10. Cash-Out of Options.......................................................................... 10 ARTICLE THREE REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 3.01. Corporate Organization....................................................................... 10 Section 3.02. Authority, Execution, Enforceability......................................................... 11 Section 3.03. Capital Structure............................................................................ 12 Section 3.04. Financial Statements......................................................................... 13 Section 3.05. Absence of Certain Changes................................................................... 15 Section 3.06. No Conflicts ................................................................................ 15 Section 3.07. Consents .................................................................................... 15 Section 3.08. Compliance with Applicable Law; Permits...................................................... 16 Section 3.09. Tax Matters ................................................................................. 17 Section 3.10. Litigation .................................................................................. 18 Section 3.11. Employees ................................................................................... 19 Section 3.12. Takeover Statutes............................................................................ 20 Section 3.13. Certain Fees ................................................................................ 20 Section 3.14. Investment Company........................................................................... 20 Section 3.15. Insurance Matters............................................................................ 21 Section 3.16. Admitted Assets ............................................................................. 21 Section 3.17. Rights to Name .............................................................................. 21 Section 3.18. Letters of Credit............................................................................ 22
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Page ---- Section 3.19. Capital Contribution Obligations............................................................. 22 Section 3.20. Investments ................................................................................. 22 Section 3.21. Year 2000 ................................................................................... 22 Section 3.22. Interests of Officers, Directors and Shareholders............................................ 23 Section 3.23. Material Contracts........................................................................... 23 ARTICLE FOUR REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION Section 4.01. Corporate Organization....................................................................... 24 Section 4.02. Authority, Execution, Enforceability......................................................... 24 Section 4.03. No Conflicts ................................................................................ 25 Section 4.04. Consents .................................................................................... 25 Section 4.05. Compliance with Applicable Law............................................................... 25 Section 4.06. Sufficient Funds and Assets.................................................................. 26 ARTICLE FIVE COVENANTS Section 5.01. Reasonable Best Efforts...................................................................... 26 Section 5.02. Public Announcements......................................................................... 26 Section 5.03. Supplemental Information..................................................................... 26 Section 5.04. Shareholders' Meeting........................................................................ 27 Section 5.05. Indemnification ............................................................................. 27 Section 5.06. Release of Capital Contribution Obligations.................................................. 28 Section 5.07. Replacement of Obligation Owed to Lloyd's and Mellon Bank.................................... 28 Section 5.08. Takeover Statutes............................................................................ 28 Section 5.09. Conduct of Business of the Company........................................................... 28 Section 5.10. Acquisition Proposals........................................................................ 31 Section 5.11. Information, etc. ........................................................................... 32 Section 5.12. Lloyd's Auction. ............................................................................ 32 ARTICLE SIX CONDITIONS TO THE AMALGAMATION Section 6.01. Conditions to Each Party's Obligation to Effect the Amalgamation................................................................ 32 Section 6.02. Additional Conditions to the Company's Obligation to Effect the Amalgamation..................................................... 33 Section 6.03. Additional Conditions to Parent and Acquisition's Obligation to Effect the Amalgamation.............................................................................. 34
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Page ---- ARTICLE SEVEN TERMINATION AND ABANDONMENT Section 7.01. Termination by the Company, Parent or Acquisition............................................ 35 Section 7.02. Effect of Termination........................................................................ 36 ARTICLE EIGHT MISCELLANEOUS PROVISIONS Section 8.01. Amendment and Modification................................................................... 37 Section 8.02. Waiver of Compliance; Consents............................................................... 37 Section 8.03. Severability and Validity.................................................................... 37 Section 8.04. Expenses and Obligations..................................................................... 37 Section 8.05. Parties in Interest.......................................................................... 38 Section 8.06. Notices ..................................................................................... 38 Section 8.07. Governing Law ............................................................................... 39 Section 8.08. Counterparts ................................................................................ 40 Section 8.09. Headings .................................................................................... 40 Section 8.10. Entire Agreement; Assignment................................................................. 40
-iii- 5 AGREEMENT AND PLAN OF AMALGAMATION This Agreement and Plan of Amalgamation, dated as of July 30, 1998 (this "Agreement"), is made by and among UNDERWRITERS REINSURANCE COMPANY, a New Hampshire insurance company ("Parent"), UNDERWRITERS ACQUISITION COMPANY LTD., a Bermuda company and a Subsidiary of Parent ("Acquisition") and VENTON HOLDINGS LTD., a Bermuda company (the "Company"). WHEREAS, prior to the date hereof, the Board of Directors of the Company has determined that it is in the best interests of the shareholders of the Company for Acquisition to be amalgamated with and into the Company (the "Amalgamation") upon the terms and subject to the conditions set forth herein; WHEREAS, prior to the date hereof, the Boards of Directors of Parent and Acquisition have determined that it is in the best interests of their respective shareholders for Acquisition to be amalgamated with and into the Company upon the terms and subject to the conditions set forth herein; WHEREAS, as a condition and inducement to Parent and Acquisition entering into this Agreement and incurring the obligations set forth herein, on the date hereof each of X.L. INSURANCE COMPANY, LTD., a Bermuda company ("Exel"), RISK CAPITAL REINSURANCE COMPANY, a Nebraska corporation ("RCRe"), and TRYCO III LTD., a Bermuda company ("Tryco III"), have granted to Parent an irrevocable proxy to vote all Shares owned by each on the date hereof or hereafter acquired, to attend all meetings of the shareholders of the Company and to represent and otherwise to act for each in the same manner and with the same effect as if done by each, with respect to the approval of the Amalgamation, when the same is submitted to shareholders of the Company for approval. NOW, THEREFORE, in consideration of the promises and of the mutual covenants, representations, warranties and agreements herein contained, the parties hereto agree as follows: 6 -2- ARTICLE ONE CERTAIN DEFINITIONS Section 1.01. Certain Definitions. Certain capitalized terms used in this Agreement shall have the meanings set forth below: "Class A Shares" means Class A Common Shares, par value $1.00 per share, of the Company. "Class A Warrants" means warrants to purchase Class A Shares. "Class B Shares" means Class B Common Shares, par value $1.00 per share, of the Company. "Class B Warrants" means warrants to purchase Class B Shares. "Class C Shares" means Class C Common Shares, par value $1.00 per share, of the Company. "Class C Warrants" means warrants to purchase Class C Shares. "Company Disclosure Letter" means the Disclosure Letter dated the date hereof from the Company to Parent and Acquisition. "Employee Benefit Plan" means each benefit plan maintained or contributed to by the Company or any of its Subsidiaries or with respect to which the Company or any of its Subsidiaries may have any liability which provides (or is intended to provide) benefits to the employees of the Company or any of its Subsidiaries (or other service providers to the Company or any of its Subsidiaries), including each pension, retirement or deferred compensation plan, incentive compensation plan, stock plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance, medical or hospitalization program, sickness, accident, disability or death benefit program or any other fringe benefit. "Expiration Date" has the meaning set forth in the Warrant Agreement. 7 -3- "GAAP" means generally accepted accounting principles as in effect in the United States of America (as such principles may change from time to time). "Governmental Authority" means any governmental, quasi-governmental, judicial or regulatory agency or entity or subdivision thereof, including without limitation Lloyd's, with jurisdiction over the Company, Parent or Acquisition or any of their respective Subsidiaries or any of the transactions contemplated by this Agreement. "Instruments," with respect to any Person, means all material agreements, mortgages, indentures, debentures, trusts, leases, licenses and other instruments and obligations to or by which such Person or any of its Subsidiaries or any of their respective properties is subject or bound. "Liabilities" means liabilities, debts, claims or obligations of any nature, whether accrued, absolute, direct or indirect, contingent or otherwise, whether due or to become due, whether or not of a kind required by GAAP to be set forth in a financial statement. "Lien" means any mortgage, lien, security interest, pledge, lease or other charge or encumbrance of any kind, including the lien or retained security title of a purchase money creditor or conditional vendor, and any easement, right of way or other encumbrance on title to real property, and any agreement to give any of the foregoing. "Material Adverse Effect" means, with respect to the Company or Parent (as the case may be), any change, event, condition or development that is materially adverse to the business, assets, liabilities, properties, results of operations or financial or operating condition of such specified party and its Subsidiaries, taken as a whole, except for any such change, event, condition or development resulting from or arising in connection with (i) changes applicable to participants in one or more of the businesses of the Company or Parent (as the case may be) generally, (ii) changes in economic, regulatory or political conditions generally (including without limitation changes in the financial markets) or (iii) the transactions contemplated by this Agreement. "Options" means options to purchase Class C Shares granted under the Rules of the Venton Holdings Ltd. 1997 Unapproved Executive Share Option Scheme and similar grants. 8 -4- "Permitted Liens" means Liens that would, individually or in the aggregate, not have a Material Adverse Effect on the Company. "Person" shall mean an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization or other entity. "Shareholders' Meeting" means the meeting of the Company's shareholders to approve this Agreement and the Amalgamation and the related transactions contemplated hereby. "Shares" means Class A Shares, Class B Shares and Class C Shares, collectively. "Subsidiary" means, with respect to any Person, each corporation, partnership or other entity in which such Person owns or controls, directly or indirectly through one or more intermediaries, a majority of the stock or other interests having general voting power in the election of directors or Persons performing similar functions or rights to a majority of any distributions (it being understood that the Syndicates are not Subsidiaries). "Taxes" means any federal, state, county, local or foreign taxes, charges, fees, levies, or other assessments, including all net income, gross income, sales and use, ad valorem, transfer, gains, profits, excise, premium, franchise, real and personal property, gross receipts, capital stock, production, business and occupation, disability, employment, payroll, license, estimated, stamp, custom duties, severance or withholding taxes or charges imposed by any governmental entity, and includes any interest and penalties (civil or criminal) on or additions to any such taxes and any expenses incurred in connection with the determination, settlement or litigation of any tax liability. "Tax Return" means a report, return or other information which is necessary or required for the conduct of its business to be supplied to a governmental entity with respect to Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes the Company or any of its Subsidiaries. "Voting Debt" of any Person means bonds, debentures, notes or other indebtedness having the right to vote (or convertible into or exercisable for securities having the right to 9 -5- vote) on any matters on which shareholders of such Person may vote. "VUG" means Venton Underwriting Group Ltd., an English company. "Warrants" means Class A Warrants, Class B Warrants and Class C Warrants, collectively. In addition, each of the following terms has the meaning set forth in the Section set forth opposite such term: Term Section - ---- ------- Acquisition........................................................ preamble Advisors Act....................................................... 3.18 Agreement.......................................................... preamble Amalgamated Company................................................ 2.01 Amalgamation....................................................... preamble Closing............................................................ 2.02 Closing Date....................................................... 2.02 Companies Act...................................................... 2.01 Company............................................................ preamble Company Actuarial Analyses......................................... 3.15(b) Company Financial Statements....................................... 3.04(a) Company Insurance Subsidiaries..................................... 3.01(b) Company Options.................................................... 3.03(b) Confidentiality Letter............................................. 5.11 Consent............................................................ 3.07 D&O Insurance...................................................... 5.05(b) Effective Time..................................................... 2.02 Exchange Agent..................................................... 2.06(b) Exchange Act....................................................... 3.14 Exel............................................................... preamble Indemnified Parties................................................ 5.05(a) Letter of Credit................................................... 5.07 Lloyd's............................................................ 3.07 Minister........................................................... 3.07 1940 Act........................................................... 3.14 New Shares......................................................... 2.05(b) Parent............................................................. preamble Permits............................................................ 3.08(b) RCRe............................................................... preamble Registrar.......................................................... 2.02 Stockholders Agreement............................................. 3.03(b) Syndicates......................................................... 3.10 10 -6- Term Section - ---- ------- Takeover Law....................................................... 3.12 Tryco III.......................................................... preamble Unpaid Class C Shares.............................................. 2.05(a) VUL................................................................ 3.09 Section 1.02. Terms Generally. (a) The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." (b) Unless the context shall otherwise require, all references herein to (i) Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (ii) Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons, (iii) agreements and other contractual instruments include subsequent amendments, assignments, and other modifications thereto to the date hereof, (iv) statutes and related regulations include any amendments of same and any successor statutes and regulations, (v) time shall be deemed to be Bermuda time and (vi) "$" shall be to United States Dollars. ARTICLE TWO THE AMALGAMATION Section 2.01. The Amalgamation. At the Effective Time, and upon the terms and subject to the conditions set forth herein, Acquisition shall be amalgamated with and into the Company in accordance with the provisions of the Companies Act 1981 of Bermuda (the "Companies Act"). At and after the Effective Time, the Company and Acquisition shall continue in the form of the amalgamated company and shall operate under the name "Venton Holdings Ltd." (the "Amalgamated Company"). Section 2.02. Effective Time of the Amalgamation; Closing. As soon as practicable after satisfaction or waiver of the conditions set forth in Article Six, Parent and Acquisition will cause an application for the registration of an amal- 11 -6- gamated company and such other documents as are required by the Companies Act in connection with the Amalgamation to be duly filed with the Registrar of Companies of Bermuda (the "Registrar"). The Amalgamation shall become effective upon the issuance of the certificate of amalgamation by the Registrar (the time of such issuance being the "Effective Time"). Prior to such filing, a closing shall be held, at Conyers, Dill & Pearman at 9:00 a.m. or such other place and/or time as the parties shall agree, for the purpose of confirming the satisfaction or waiver of the conditions set forth in Article Six (the "Closing"). The date upon which the Closing shall occur is referred to herein as the "Closing Date." Section 2.03. Effect of the Amalgamation. The Amalgamation shall have the effects set forth in Section 109 of the Companies Act. Section 2.04. Memorandum of Association and Bye-laws of the Amalgamated Company; Registration Number; Directors. The memorandum of association of the Company shall become the memorandum of association of the Amalgamated Company and thereafter may be amended as provided therein and by law. The bye-laws of the Company shall become the bye-laws of the Amalgamated Company and thereafter may be amended as provided therein and by law. The registration number of the Amalgamated Company in Bermuda after the Effective Time shall be the same registration number as that of the Company immediately prior to the Effective Time. The initial directors of the Amalgamated Company shall be: (i) Jeremy Venton; (ii) Graham Collis; (iii) D. Martin Slade; (iv) Steven H. Newman; (v) Russell T. John; and (vi) Robert M. Hart; and their addresses shall be in care of the Company at the address set forth in Section 8.06. Section 2.05. Consideration. (a) Except as otherwise provided in Section 106 of the Companies Act, at the Effective Time, each Share that is issued and outstanding immediately prior to the Effective Time shall be canceled, and the holder thereof shall be entitled to receive, pursuant to the procedures set forth in Section 2.06, $3,081.69 (except as provided in clause (v)) per Share, without interest thereon, with such consideration to consist of: (i) for each Class A Share $1,678.94 in cash and the cancellation of $1,402.75 in capital contribution obligations; (ii) for each Class B Share held by Exel $1,679.11 in cash and the cancellation of $1,402.58 in capital contribution obligations; (iii) for each Class B Share held by RCRe $1,673.42 in cash and the cancellation of $1,408.27 in capital contribution obligations; (iv) for each Class C Share (other than the 996 Class C Shares held by Alec 12 -7- Sharp on which no amount has been paid (the "Unpaid Class C Shares")) $3,081.69 in cash; and (v) for each Unpaid Class C Share $1,832.06 in cash. (b) At the Effective Time, by virtue of the Amalgamation and without any action on the part of Parent, Acquisition, the Company or the holder thereof, each common share of Acquisition issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable common share, par value $1.00 per share, of the Amalgamated Company (the "New Shares"). (c) At the Effective Time, by virtue of the Amalgamation and without any action on the Part of Parent, Acquisition, the Company or the holder thereof, each Share which is issued and outstanding immediately prior to the Effective Time and held by Parent immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable New Share. Section 2.06. Surrender and Payment. (a) Parent shall enter into arrangements so that all Shareholders who surrender certificates or other satisfactory evidence representing Shares on or prior to the Effective Time will be paid at the Effective Time directly by wire transfer to accounts designated by such Shareholders. (b) Prior to the Effective Time, Parent shall (i) appoint an agent (the "Exchange Agent") for the purpose of exchanging certificates representing Shares for the consideration specified in Section 2.05(a) and (ii) irrevocably instruct and authorize such Exchange Agent to make immediately available funds sufficient to make all payments in accordance with this Agreement to all Shareholders, holders of Warrants and holders of Options who surrender certificates or other satisfactory evidence representing such Shares, Warrants or Options to such Exchange Agent after the Effective Time. (c) Parent shall have the right to make rules, not inconsistent with the terms of this Agreement, governing the payment of cash pursuant to this Article Two. Section 2.07. Dividends; Voting; Etc. (a) After the Effective Time, there shall be no further registration of transfers of Shares. If, after the Effective Time, certificates representing Shares are presented to the Amalgamated Company or, subject to the provisions of Section 2.07(b), the Exchange Agent, they shall be canceled and exchanged for the pay- 13 -9- ment of the consideration specified in Section 2.05(a) in accordance with the procedures set forth in this Article Two. (b) Any portion of the consideration deposited with the Exchange Agent pursuant to Section 2.06(a) that remains unclaimed by the holders of Shares twelve months after the Effective Time shall be returned to Parent or an affiliate designated by Parent, upon demand, and any such holder who has not exchanged his Shares for the consideration specified in Section 2.05(a) in accordance with this Article Two prior to that time shall thereafter look only to Parent for his claim for the Amalgamation Consideration. Notwithstanding the foregoing, Parent shall not be liable to any holder of Shares for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of Shares immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Authority shall, to the extent permitted by applicable law, become the property of Parent, free and clear of any claim or interest of any Person previously entitled thereto. Section 2.08. No Further Rights. At and after the Effective Time, each holder of a certificate or certificates that represented issued and outstanding Shares immediately prior to the Effective Time shall cease to have any rights as a shareholder of the Company, except for the right to receive the consideration specified in Section 2.05(a) upon surrender of its certificate or certificates. Section 2.09. Cash-Out of Warrants. At the Effective Time, by virtue of the Amalgamation and without any action on the part of any holder thereof, the Company shall pay (with the proceeds of the capital contribution required by the last sentence of this Section 2.09) for each Warrant that is outstanding immediately prior to the Effective Time, to the holder thereof, an amount in cash equal to the difference between (a) the consideration per Class A Share, Class B Share or Class C Share specified in Section 2.05(a) multiplied by the number of Class A Shares, Class B Shares or Class C Shares subject to such Warrant and (b) the exercise price of such Warrant. Upon such payment therefor, such Warrant will no longer be outstanding, and neither the Company nor any other Person shall have any obligation with respect thereto. At the Effective Time, Parent shall make a capital contribution to the Company in an amount equal to $11,419,229.98, which the parties hereto agree is sufficient to make all payments pursuant to this Section 2.09. 14 -10- Section 2.10. Cash-Out of Options. At the Effective Time, by virtue of the Amalgamation and without any action on the part of any holder thereof, the Company shall pay (with the proceeds of the capital contribution required by the last sentence of this Section 2.10), for each Option that is outstanding immediately prior to the Effective Time, to the holder thereof, an amount in cash equal to the difference between (a) the consideration per Class C Share specified in Section 2.05(a) multiplied by the number of Class C Shares subject to such Option (or by the number of Class C Shares subject to the Class C Warrant subject to such Option) and (b) the exercise price of such Option. Upon such payment therefor, such Option will no longer be outstanding, and neither the Company nor any other Person shall have any obligation with respect thereto. At the Effective Time, Parent shall make a capital contribution to the Company in an amount equal to $6,649,427.97, which the parties hereto agree is sufficient to make all payments pursuant to this Section 2.10. ARTICLE THREE REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Acquisition that except as set forth in the Company Disclosure Letter: Section 3.01. Corporate Organization. (a) Each of the Company and its Subsidiaries is a company duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each of the Company and its Subsidiaries (i) is qualified, licensed or domesticated as a foreign corporation in all jurisdictions where such qualification, license or domestication is required to own and operate its properties and conduct its businesses in the manner and at the places presently conducted; (ii) holds all franchises, grants, licenses, certificates, permits, consents and orders, all of which are valid and in full force and effect, from all applicable Bermuda and foreign Governmental Authorities necessary to own and operate its properties and to conduct its businesses in the manner and at the places presently conducted; and (iii) has full power and authority (corporate and other) to own, lease and operate its properties and to carry on its businesses as presently conducted and as proposed to be conducted, except where the failure to be so qualified, licensed or domesticated, or to hold such franchises, grants, licenses, certifi- 15 -11- cates, permits, consents and orders and have such power and authority could not, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect on the Company. Neither the Company nor any of its Subsidiaries is required to be authorized, qualified, licensed or domesticated as a foreign corporation under any federal, state or local law in the United States. The Company has furnished to Parent and Acquisition complete and correct copies of the memorandum of association and bye-laws of the Company and each of its Subsidiaries as in effect on the date hereof. Such memoranda of association and bye-laws are in full force and effect and no other organizational documents are applicable to or binding upon the Company or any of its Subsidiaries. (b) The Company conducts its operations through the Subsidiaries set forth in the Company Disclosure Letter (collectively, the "Company Subsidiaries"). Each of the Company Subsidiaries and VUG is (i) duly licensed or authorized to conduct the business it now conducts in its jurisdiction of incorporation and (ii) duly licensed or authorized in each other jurisdiction where it is required to be so licensed or authorized except, in any such case, where the failure to be so licensed or authorized, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect on the Company. The Company and its Subsidiaries and VUG have made all filings required by Governmental Authorities except where the failure to file, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect on the Company. Section 3.02. Authority, Execution, Enforceability. The Company has all requisite corporate power and authority to enter into this Agreement and, subject to the shareholder approval described below, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company (including approval by the necessary vote of all members of its Board of Directors, which approval includes a resolution recommending that this Agreement and the transactions contemplated hereby be approved by the shareholders of the Company), subject only to the approval of the provisions of this Agreement (which are the terms and means of effecting the Amalgamation) by the affirmative vote of Persons holding or representing by 16 -12- proxy not less than three-fourths of the Shares voting at the Shareholders' Meeting at which two or more Persons holding or representing by proxy more than one-third of the issued and outstanding Shares shall constitute a quorum. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject with respect to enforceability to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter affecting the enforcement of creditors' rights generally and to the availability of equitable remedies. Section 3.03. Capital Structure. (a) As of the date hereof and as of the Closing, the authorized share capital of the Company is $120,000 comprised of 120,000 ordinary shares with a par value of $1.00 per share. As of the date hereof and, except to the extent Options or Warrants are exercised, as of the Closing, (i) 58,180 Class A Shares were issued and outstanding, (ii) 29,408 Class B Shares were issued and outstanding and (iii) 6,205 Class C Shares were issued and outstanding. There is no Voting Debt of the Company issued and outstanding. All of the issued and outstanding securities of the Company have been duly authorized and validly issued, are fully paid and non-assessable, and were issued in compliance with all applicable Bermuda, United States federal, state and other foreign laws regulating the offer, sale or issuance of such securities. (b) There are no options, warrants, calls, rights, commitments and agreements of any character to which the Company is a party or by which it is bound obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or any Voting Debt of the Company or obligating the Company to grant, extend or enter into any such option, warrant, call, right, commitment or agreement (collectively, "Company Options"), except, as of the date hereof and, except to the extent Options or Warrants are exercised, as of the Closing, for (i) Class A Warrants to purchase an aggregate of 5,086 Class A Shares, (ii) Class B Warrants to purchase an aggregate of 643 Class B Shares, (iii) Class C Warrants to purchase an aggregate of 504 Class C Shares and (iv) Options to purchase (x) an aggregate of 3,359 Class C Shares and (y) Class C Warrants to purchase an aggregate 328 Class C Shares. The Company is not subject to any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire or retire any of its securities, except as set forth in the Second Amended and Restated Stockholders Agreement dated May 21, 1997, among the Trident Partnership, L.P., Tryco III, RCRe, Exel, the Management Investors signatory thereto and the Company (the "Stockholders Agreement"). The Company has 17 -13- delivered a true and correct copy of the Stockholders Agreement to Parent and Acquisition. The Stockholders Agreement shall, if necessary, be amended at or prior to the Effective Time so that the Company shall have no obligations thereunder and so that the Syndicate 1207 Option (as defined therein) shall not be in effect without having been exercised. (c) Since December 31, 1997, the Company has not (i) made or agreed to make any stock split or stock dividend, or issued or permitted to be issued any shares of capital stock, or securities exercisable for or convertible into shares of capital stock, of the Company other than pursuant to and as required by the terms of any Company Option outstanding as of the date hereof; (ii) repurchased, redeemed or otherwise acquired any shares of capital stock of the Company; or (iii) declared, set aside, made or paid to the shareholders of the Company dividends or other distributions on the outstanding shares of capital stock of the Company. (d) The Company Disclosure Letter lists each Subsidiary of the Company and, except for the capital stock of such Subsidiaries and the other ownership interests listed in the Company Disclosure Letter, the Company does not own, directly or indirectly, any capital stock or other ownership interest in any corporation, partnership, joint venture or other entity. All the outstanding shares of capital stock of each Subsidiary of the Company have been validly issued and are fully paid and nonassessable and are owned by the Company, by one or more Subsidiaries of the Company or by the Company and one or more such Subsidiaries, free and clear of all Liens. Except as set forth above, there are no securities, options, warrants, rights, commitments or agreements of any kind to which the Company or any Subsidiary is a party or by which any of them is bound obligating any of them to issue, sell or deliver, or repurchase, redeem or otherwise acquire, shares of capital stock or other equity or voting securities of any Subsidiary, or obligating any of them to issue, sell, deliver, grant, extend or enter into any such security, option, warrant, right, commitment or agreement. Section 3.04. Financial Statements. (a) The Company has delivered or made available to Parent a true and complete copy of the audited Consolidated Balance Sheets of the Company and its Subsidiaries as of December 31, 1995, 1996 and 1997 and the related audited Consolidated Statements of Operations, Statements of Shareholders' Equity and Statements of Cash Flows of the Company and its Subsidiaries for the twelve 18 -14- month periods ended December 31, 1995, 1996 and 1997 (collectively, the "Company Financial Statements"). (b) As of their respective dates and for the periods indicated, the Company Financial Statements (i) complied as to form in all material respects with applicable accounting requirements, (ii) are in accordance, in all material respects, with the books and records of the Company, which are complete and accurate in all material respects and which have been maintained in accordance with good business practices, and (iii) present fairly the consolidated financial position of the Company and its Subsidiaries and the related results of operations, changes in shareholders' equity and cash flows as of the dates and for the periods indicated in accordance with GAAP applied on a consistent basis throughout the periods indicated, except as may otherwise be specifically indicated therein. (c) The Company has delivered or prior to the Closing will deliver to Parent true and complete copies of the Consolidated Balance Sheet of the Company and its Subsidiaries as of March 31, 1998 and the related Consolidated Statement of Operations, Statement of Shareholders' Equity and Statement of Cash Flows of the Company and its Subsidiaries for the three months then ended, and true and complete copies of the Consolidated Balance Sheet of the Company and its Subsidiaries as of June 30, 1998 and the related Consolidated Statement of Operations, Statement of Shareholders' Equity and Statement of Cash Flows of the Company and its Subsidiaries for the six months then ended (collectively, the "Company Interim Financial Statements"). (d) As of their respective dates and for the periods indicated, the Company Interim Financial Statements present fairly the consolidated financial position of the Company and its Subsidiaries and the related results of operations, changes in shareholders' equity and cash flows as of the dates and for the periods indicated in accordance with generally accepted accounting principles applied on a basis consistent with the Company Financial Statements. (e) The Company has delivered or prior to the Closing will deliver to Parent true and complete copies of the audited Balance Sheets of each of Yachtsure Ltd. and Venton Risk Services Ltd. as of December 31, 1997 and the related audited Statements of Operations, Statements of Shareholder's Equity and Statements of Cash Flows of each of Yachtsure Ltd. and Venton Risk Services Ltd. for the twelve months then ended. 19 -15- (f) The Company has delivered or prior to the Closing will deliver to Parent true and complete copies of the audited Annual Reports and Accounts of each of the Syndicates as of December 31, 1995, 1996 and 1997 and for the twelve month periods then ended. Section 3.05. Absence of Certain Changes. (a) Except as set forth in the Company Disclosure Letter, neither the Company nor any of its Subsidiaries has any liabilities of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, other than: (i) liabilities provided for in the Company Financial Statements; (ii) liabilities incurred since the date of the Company Financial Statements in the ordinary course of business, in amounts and on terms consistent with past practice; (iii) liabilities disclosed in the Company Disclosure Letter; and (iv) other undisclosed liabilities which, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect on the Company. (b) Since December 31, 1997 there has been no event or circumstance that has had a Material Adverse Effect on the Company. Section 3.06. No Conflicts. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not (i) result in any violation of or be in conflict with or constitute a breach or default (with or without notice or lapse of time or both) or loss of material benefit or acceleration under the memorandum of association, bye-laws or any other Instrument of the Company or any of its Subsidiaries, except for any such violation, conflict, breach or default, loss or acceleration, which, individually on in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company, or (ii) result in the creation of any Lien other than Permitted Liens. Section 3.07. Consents. (a) Except for the filing of the application to register the Amalgamation pursuant to the Companies Act and the consent of the Minister of Finance of Bermuda (the "Minister") to the Amalgamation and the approval by The Corporation and Society of Lloyd's ("Lloyd's") to the Amalgamation and the transactions contemplated by this Agreement, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Authority ("Consent") is required on the part of the Company, any of its Subsidiaries, or any of the 20 -16- shareholders of the Company (including in respect of the Syndicates) in connection with the transactions contemplated by this Agreement, except where failure to obtain such Consent could not reasonably be expected to have a Material Adverse Effect on the Company. (b) The Company (including all entities it controls) does not hold assets located in the United States of America having an aggregate book value of $15.0 million or more, other than investment assets, voting securities and non-voting securities. For the purpose of this representation, investment assets means cash, deposits in financial institutions, other money market instruments and instruments evidencing government obligations. The Company is not incorporated in the United States, is not organized under the laws of the United States, and does not have its principal offices within the United States. Other than as described in this paragraph, the Company (including all entities it controls) did not in its most recent fiscal year make aggregate sales in or into the United States of $25 million or more. Through its wholly owned subsidiary, New Street Holdings, Ltd., the Company provides management services under contract with Syndicates 376, 1183 and 1207 which accept insurance risk placed by London brokers, some of which risk is that of policyholders located in the United States. The Company controls a corporate member of Lloyd's, VUL, which is the sole corporate member of Syndicate 1207. In their most recent fiscal years, none of the Syndicates, the Company, VUL nor any entity controlled by the Syndicates, the Company or VUL, transacted business in the United States or directly with any policyholders or insurance brokers located in the United States. For the purposes of this Section 3.07(b), "United States" shall include all of the States, the territories, possessions and commonwealths of the United States and the District of Columbia. Section 3.08. Compliance with Applicable Law; Permits. (a) Subject to obtaining the Consents referred to in Section 3.07, the execution, delivery and performance of this Agreement and the taking of the other actions contemplated by this Agreement to be performed by the Company will not result in any default or violation of any judgment, decree, order, law, statute, rule or regulation of any Governmental Authority applicable to the Company or any of its Subsidiaries, except for such defaults or violations as are not reasonably likely to have a Material Adverse Effect on the Company. (b) Each of the Company, its Subsidiaries, VUG and the Syndicates is in compliance with all judgments, decrees, 21 -17- orders, statutes, laws, ordinances, rules, regulations and, to the Company's best knowledge, policies of all Governmental Authorities, including, without limitation, those that govern insurance matters, to which it or any of its properties or assets is subject except where such failure to comply is not reasonably likely to have a Material Adverse Effect on the Company. Each of the Company, its Subsidiaries, VUG and the Syndicates has all permits, licenses, orders, certificates, authorizations and approvals of any Governmental Authority (collectively, "Permits") that are material to the conduct of its business as presently conducted and as proposed to be conducted; all such Permits are in full force and effect, and each of the Company, its Subsidiaries, VUG and the Syndicates has fulfilled and performed all obligations necessary to maintain such Permits; except, in each case, for such failures to obtain, to maintain in full force and effect and to fulfill and perform which would not have a Material Adverse Effect on the Company. Venton Underwriting Agencies Limited (and any other Subsidiary to which the Lloyd's solvency tests apply) exceeds as of the date hereof and as of the Effective Time the then applicable minimum standards of solvency established by the Lloyd's solvency tests. There are no defaults under any Instrument of the Company or any of its Subsidiaries, except for such defaults that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect on the Company. Section 3.09. Tax Matters. (a) Filing of Timely Tax Returns. The Company and each of its Subsidiaries have filed all Tax Returns required to be filed by each of them under applicable law. All Tax Returns were in all material respects (and, as to Tax Returns not filed as of the date hereof, will be) true, complete and correct and filed on a timely basis. The Company has made available to Parent a true and correct copy of each income Tax Return of the Company and each of its Subsidiaries for all taxable periods for which the period for assessment or collection of income Tax remains open, and no agreement, waiver or consent to extend the period for the assessment or collection of any Tax is currently in effect. (b) The Company and each of its Subsidiaries have, within the time and in the manner prescribed by law, withheld or paid (and until the Closing Date will withhold or pay within the time and in the manner prescribed by law) all Taxes that are currently due and payable or required to be withheld except for those contested in good faith and for which adequate reserves have been taken. To the knowledge of the Company, there 22 -18- are no investigations or audits with regard to the Company or any of its Subsidiaries with respect to Taxes. (c) The Company and its Subsidiaries have established (and until the Closing Date will maintain) on their books and records reserves adequate to pay all Taxes and reserves for deferred income taxes in accordance with GAAP. (d) There are no Tax liens upon the assets of the Company or any of its Subsidiaries except liens for Taxes not yet due. (e) Neither the Company nor any of its Subsidiaries has any liability, direct or indirect, absolute or contingent, for the Taxes of any other Person. Except for Subsidiaries which are Eligible Corporate Underwriters, within the meaning of the Closing Agreement between the Council of Lloyds and the Internal Revenue Service, dated March 2, 1994 (the "Closing Agreement"), neither the Company nor any of its Subsidiaries in the last ten years has been engaged in trade or business in the United States (within the meaning of Section 864(b) of the Internal Revenue Code of 1986, as amended ("Code")), and in the case of the Subsidiaries which are Non-U.S. Corporate Underwriters (as defined in the Closing Agreement), the only income which is effectively connected with that trade or business in the United States (within the meaning of Section 864(c) of the Code) is its taxable USCI or USCL (as such terms are used in the Closing Agreement). Venton Underwriting Ltd., a Bermuda company and a wholly owned subsidiary of the Company ("VUL"), at all times has been fiscally resident in Bermuda other than its U.K. branch. Section 3.10. Litigation. There are no actions, suits, claims, proceedings or investigations pending against, or, to the knowledge of the Company, threatened against or affecting, the Company, any of its Subsidiaries, VUG or any Syndicate at Lloyd's managed by a Subsidiary ("Syndicates") or any of their respective properties before any Governmental Authority or otherwise other than in the ordinary course of business which (a) individually or in the aggregate, are reasonably likely to have a Material Adverse Effect on the Company; or (b) in any manner challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated hereby. As of the date hereof, to the knowledge of the Company, there are no actions, suits, claims, proceedings or investigations pending or threatened against the Company, any of its Subsidiaries, VUG or any Syndicate or any of their respective properties before any Governmental Authority or otherwise, whether or not in the ordi- 23 -19- nary course of business, which individually or in the aggregate are reasonably likely to have a Material Adverse Effect on the Company. As of the date hereof, neither the Company nor any of its Subsidiaries nor any of their respective properties is subject to any order, writ, judgment, injunction, decree, determination or award having, or reasonably likely to have, a Material Adverse Effect on the Company or which would prevent, enjoin, alter or delay the consummation of the transactions contemplated hereby. Section 3.11. Employees. (a) The Company Disclosure Letter lists all employment contracts and similar arrangements between the Company or any of its Subsidiaries and its employees, and all plans and arrangements pursuant to which the Company or any of its Subsidiaries is obligated to make any payment to confer any benefit upon or accelerate the vesting or exercisability of any benefit for any officer, director, employee or agent of the Company or any of its Subsidiaries, including as a result of or in connection with any of the transactions contemplated by this Agreement or any transaction or transactions resulting in a change of control of the Company (including termination of employment). As of the date hereof, the Company is not aware that any officer, director, executive or key employee of the Company or any of its Subsidiaries or any group of employees of the Company or any of its Subsidiaries has any plans to terminate his, her or its employment. (i) The Company and its Subsidiaries have complied with all laws relating to the employment of labor, including provisions thereof relating to wages, hours, equal opportunity, and collective bargaining except where the failure so to comply is not reasonably likely to have a Material Adverse Effect on the Company, (ii) no labor dispute with employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is threatened, except as are not reasonably likely to have a Material Adverse Effect on the Company, (iii) each Employee Benefit Plan conforms in all material respects to, and its administration is in conformity in all material respects with, all applicable laws, no material liability has been or is expected to be incurred by the Company or any Subsidiary with respect to any Employee Benefit Plan except regular periodic contributions to such plans and full payment has been made of all amounts that the Company or any Subsidiary is required to have paid as contributions to each Employee Benefit Plan, (iv) the current value of accrued benefits of each Employee Benefit Plan does not exceed the current value of such plan's assets, (v) the Company has provided Parent with a true and correct copy of each of the Employee Benefit Plans and all contracts relating thereto, or to the funding thereof, (vi) all Employee Benefit 24 -20- Plans intended to satisfy applicable tax qualification requirements, or other requirements necessary to secure favorable tax or other legal treatment comply in all material respects with such requirements, and (vii) adequate accruals for all obligations under the Employee Benefit Plans are reflected in the financial statements of the Company. (b) There are no pending or, to the knowledge of the Company, threatened claims for indemnification by the Company or any of its Subsidiaries in favor of directors, officers, employees and agents of the Company or any of its Subsidiaries which, individually or in the aggregate, are reasonably likely to have a Material Adverse Effect on the Company. Section 3.12. Takeover Statutes. No "fair price," "moratorium," "control share acquisition" or other similar anti-takeover or change of control statute or regulation enacted under any law (a "Takeover Law") is applicable to the Amalgamation or the other transactions contemplated hereby. The Company has taken all steps necessary to irrevocably exempt the transactions contemplated by this Agreement from any applicable provisions of the Company's or any Subsidiary's memorandum of association or bye-laws. Section 3.13. Certain Fees. No finder, broker, agent, financial advisor or other intermediary has acted on behalf of the Company in connection with this Agreement or the transactions contemplated hereby, where such finder, broker, agent, financial advisor or other intermediary would be entitled to any payment by the Company in connection herewith or therewith, other than obligations owing to Goldman Sachs & Co. referred to in the Company Disclosure Letter. In addition, the Company and its Subsidiaries will not be liable for any fees and expenses incurred in connection with the transactions contemplated hereby in excess of $3,176,633 in the aggregate. Section 3.14. Investment Company. Neither the Company nor any of its Subsidiaries conducts activities of or is otherwise deemed under applicable law to control an "investment advisor" as such term is defined in Section 2(a)(20) of the Investment Company Act of 1940, as amended (the "1940 Act"), whether or not registered under the Investment Advisors Act of 1940, as amended (the "Advisors Act"). Neither the Company nor any of its Subsidiaries is an "investment company" as defined under the 1940 Act, and neither the Company nor any of its Subsidiaries sponsors any Person that is such an investment company nor required to be registered or licensed as a broker- 25 -21- dealer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Section 3.15. Insurance Matters. (a) All reinsurance and coinsurance treaties or agreements, including retrocessional agreements, to which the Company or any of its Subsidiaries or any Syndicate is a party or under which the Company or any of its Subsidiaries or any Syndicate has any existing rights, obligations or liabilities are in full force and effect, except for such treaties or agreements the failure to be in full force and effect of which is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect on the Company. (b) Prior to the date hereof, the Company has delivered or made available to Parent a true and complete copy of any actuarial reports prepared by actuaries, independent or otherwise, with respect to the Company, any of its Subsidiaries or any Syndicate since October 31, 1996, and all attachments, addenda, supplements and modifications thereto (the "Company Actuarial Analyses"). The information and data furnished by the Company or any Company Subsidiary or any Syndicate to its independent actuaries in connection with the preparation of the Company Actuarial Analyses were accurate in all material respects. (c) The reserves carried on the audited financial statements of the Company and its Subsidiaries for future insurance policy benefits, losses, claims and similar purposes were, as of the respective dates of such financial statement, in compliance with the requirements for reserves established by the relevant insurance departments or Lloyd's, are consistent with reserves determined in accordance with generally accepted actuarial standards and principles consistently applied, and were fairly stated in accordance with sound actuarial and statutory accounting principles. Section 3.16. Admitted Assets. The admitted assets of each Subsidiary of the Company, each Syndicate and VUG as determined under applicable laws or under the Lloyd's regulations as presently in effect are in an amount at least equal to the minimum amounts required by applicable laws or regulations. Section 3.17. Rights to Name. One or more of the Company and the Subsidiaries is the owner of all rights, title and interest in and to the trade name "Venton" as used in connection with the business heretofore or currently conducted by the Company and its Subsidiaries free and clear of all Liens. 26 -22- All such rights are valid, subsisting and in full force and effect without infringement or interference by any other Person. Section 3.18. Letters of Credit. The only letters of credit outstanding at the date hereof which support the underwriting activities of the Subsidiaries are (a) irrevocable standby letters of credit on deposit with Lloyd's in the aggregate amount of U.S. $122,913,000 issued by Mellon Bank, London Branch for the benefit of and supporting the underwriting activities of VUL at Lloyd's and (b) a U.S. $10,000,000 letter of credit issued by Mellon Bank, London Branch in favor of Citibank N.A. Trustee for Syndicate 376 Surplus Lines Trust Fund. The Company is not aware of any pending or proposed material increases in the amounts of these letters of credit, or any proposals to require cash in lieu of or in addition to letters of credit or to change the capital requirements of Lloyd's in any material respect. Section 3.19. Capital Contribution Obligations. The only contractual obligations of the shareholders of the Company to make capital contributions to the Company and its Subsidiaries are pursuant to (a) the Fourth Amended and Restated Capital Contribution Agreement dated as of December 29, 1997 between Tryco III and the Company, (b) the Amended and Restated Capital Contribution Agreement dated as of December 29, 1997 between Exel and the Company and (c) the Second Amended and Restated Capital Contribution Agreement dated as of December 29, 1997 between RCRe and the Company. Section 3.20. Investments. The bonds, stocks and other securities ("Investments") owned by the Company and its Subsidiaries comply in all material respects with applicable insurance laws and regulations. All Investments are admitted assets under applicable insurance laws and regulations and statutory accounting practices, except to the extent that failure to be admitted assets, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect on the Company. Section 3.21. Year 2000. To the knowledge of the Company at the date hereof, except to the extent interfaces with third parties are dependent on information, services or software provided by third parties, all information technology presently expected to be used by the Company, its Subsidiaries and the Syndicates following December 31, 1999 in their administration and business operations accurately processes or will process date and time data (including, but not limited to calculating, comparing and sequencing) from, into and between the 27 -23- years 1999 and 2000 and the twentieth century and the twenty-first century, including leap year calculations, and neither performance nor functionality of such technology will be affected by dates prior to, during or after the year 2000. The Company, its Subsidiaries and the Syndicates have no express contractual obligations under warranty, service or similar agreements (excluding insurance policies) that specifically refer to and require the remedy of any information technology defect relating to the year 2000. Section 3.22. Interests of Officers, Directors and Shareholders. Except as set forth in the Company Disclosure Letter and other than in respect of salaries, incentive awards and bonuses or amounts due in respect of ordinary travel and business expenses and Employee Benefit Plans, no present officer, director, employee, agent or shareholder of the Company, any of its Subsidiaries or VUG nor any immediate family member or affiliate thereof has any agreement, loan or other obligation outstanding with, to or from the Company or any of its Subsidiaries or for which the Company or any of its Subsidiaries may be liable, or has any material interest in any firm, person or entity with which the Company or any of its Subsidiaries or VUG does business. From and after the Effective Time the Company will not have any material obligations under (i) the Share Purchase Agreement dated as of March 1, 1996 between the Company and the Management Investors, (ii) the Venton Holdings Ltd. Amended and Restated Stockholders Agreement dated as of April 4, 1996 or (iii) the Purchase Agreement dated as of May 21, 1997 among The Trident Partnership, L.P., the Company and Exel. Section 3.23. Material Contracts. (a) Neither the Company nor any of its Subsidiaries is party to any agreement containing any provision or covenant expressly limiting in any material respect the ability of the Company or any of its Subsidiaries (or the Amalgamated Company) to compete and (b) neither the Company nor any of its Subsidiaries is a party to or bound by any contract, agreement or arrangement which would cause the rights or obligations of any party thereto to change in the event of the Amalgamation, except in each case for any such contract, agreement or arrangement which, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect on the Company. 28 -24- ARTICLE FOUR REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION Parent and Acquisition hereby represent and warrant to the Company as follows (it being understood that representations and warranties with respect to Subsidiaries of Parent relate to such Subsidiaries without giving effect to the Amalgamation): Section 4.01. Corporate Organization. Each of Parent and Acquisition is a company duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. Acquisition is not required to be authorized, qualified, licensed or domesticated as a foreign corporation under any federal, state or local law in the United States. Parent has furnished to the Company complete and correct copies of the charter and bylaws, or the memorandum of association and bye-laws, as the case may be, of each of Parent and Acquisition as in effect on the date hereof. Such documents are in full force and effect and no other organizational documents are applicable to or binding upon the Parent or Acquisition. Section 4.02. Authority, Execution, Enforceability. Each of Parent and Acquisition has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by each of Parent and Acquisition, the performance by Parent and Acquisition of their obligations hereunder and the consummation by Parent and Acquisition of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Acquisition (including the approval by Parent, as sole shareholder of Acquisition, and by the necessary vote of all members of their respective Boards of Directors). This Agreement has been duly executed and delivered by Parent and Acquisition and constitutes a legal, valid and binding obligation of Parent and Acquisition, enforceable against Parent and Acquisition in accordance with its terms, subject with respect to enforceability to the effect of bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter affecting the enforcement of creditors' rights generally and to the availability of equitable remedies. 29 -25- Section 4.03. No Conflicts. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not (i) result in any violation of or be in conflict with or constitute a breach or default (with or without notice or lapse of time or both) under the memorandum of association, bye-laws or any other Instrument of Parent or Acquisition, which violation, conflict, breach or default is reasonably likely to have a Material Adverse Effect on Parent, or (ii) result in the creation of any Lien other than Permitted Liens upon any of the material properties or assets of Parent or Acquisition. Section 4.04. Consents. (a) Except for the filing of the application to register the Amalgamation pursuant to the Companies Act and the consent of the Minister to the Amalgamation, the Consent of Lloyd's to the Amalgamation and the transactions contemplated by this Agreement, and the approval of the Commissioner of Insurance for the State of New Hampshire, no Consent is required on the part of Parent or Acquisition in connection with the transactions contemplated by this Agreement, except where failure to obtain such Consent is not reasonably likely to have a Material Adverse Effect on Parent. (b) Parent and Acquisition have reviewed the requirements for approval of the Amalgamation and the transactions contemplated by this Agreement by Lloyd's which appear in the section entitled "Acquiring Control of a Managing Agent" in Guidance Notes for Applicants published by Lloyd's Regulatory Division and hereby confirm that they can satisfy all requirements set forth therein without the need for any waiver or any other form of relief, and they are not aware of the need for any waiver or any other form of relief with respect to Parent or Acquisition in order to satisfy any other requirements of Lloyd's. Section 4.05. Compliance with Applicable Law. Subject to obtaining the Consents referred to in Section 4.04, the execution, delivery, and performance of this Agreement and the taking of the other actions contemplated by this Agreement to be performed by Parent and Acquisition prior to the date or dates as of which the representations and warranties herein are made or deemed made, will not result in any default or violation of any judgment, decree, order, law, statute, rule or regulation of any Governmental Authority, except for such defaults or violations as are not reasonably likely to have a Material Adverse Effect on Parent. 30 -26- Section 4.06. Sufficient Funds and Assets. Parent and Acquisition have sufficient liquid funds available to pay all cash amounts required to be paid pursuant to this Agreement, and have sufficient funds and other assets available to satisfy Sections 5.06 and 5.07. ARTICLE FIVE COVENANTS Section 5.01. Reasonable Best Efforts. Each of the Company, Parent and Acquisition will use its reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, as soon as practicable after the date hereof, and shall use its reasonable best efforts to obtain all waivers, Permits, Consents and approvals and to effect all registrations, filings and notices with or to third parties or Governmental Authorities which are necessary or desirable in connection with the transactions contemplated by this Agreement, and shall vote all Shares directly or indirectly owned by it in favor of the Amalgamation. Section 5.02. Public Announcements. No party hereto shall issue any press release or otherwise make any public statements with respect to the Amalgamation or this Agreement without the prior written approval of the other party (which shall not be unreasonably withheld) as to the wording, timing and media for such press release or statement, except for any press release or statement as may be required by law in the opinion of counsel for such party which press release or statement shall not be made without prior consultation to the extent practicable with the other party. Section 5.03. Supplemental Information. Except where prohibited by applicable statutes and regulations, each party shall promptly provide the other (or its counsel) with copies of all filings, material notices or material communications made by such party with any Governmental Authority in connection with this Agreement or the transactions contemplated hereby. No information provided to a party pursuant to this Section 5.03 shall be deemed to cure any breach of any representation of or warranty made in this Agreement unless the party receiving such information specifically agrees thereto in writing. 31 -27- Section 5.04. Shareholders' Meeting. The Company shall cause the Shareholders' Meeting to be duly called and will give notice of, convene and hold such meeting as soon as practicable. In connection with the Shareholders' Meeting, the Company shall cause any required information to be mailed to its shareholders. The Board of Directors of the Company shall submit for approval and adoption by its shareholders the matters to be voted upon at the Shareholders' Meeting, and shall recommend that the shareholders vote in favor of the approval of the provisions of this Agreement which are the terms and means of effecting the Amalgamation and the Company shall use its best efforts to secure such approval and adoption. Parent shall vote all proxies obtained by Parent in favor of such approval. Section 5.05. Indemnification. (a) From and after the Effective Time, the Amalgamated Company shall indemnify, defend and hold harmless the officers and directors of the Company (the "Indemnified Parties") against all losses, expenses, claims, damages and liabilities arising out of the transactions contemplated by this Agreement to the fullest extent permitted or required under applicable law (including, without limitation, reasonable attorneys' fees). Subject to any limitations imposed by Bermuda law and public policy, to the extent applicable, the Amalgamated Company agrees that all rights to indemnification existing in favor of the directors and officers of the Company or any Subsidiary of the Company as provided in the Company's or any such Subsidiary's memorandum of association or existing indemnification agreements, as in effect as of the date hereof, with respect to matters occurring through the Effective Time, shall survive the Amalgamation and shall continue in full force and effect, and the Amalgamated Company shall guaranty the obligations of the Company in respect thereof; provided, however, that this shall not limit the ability of Parent to effect any corporate restructuring of its Subsidiaries. (b) Parent shall cause to be maintained for a period of not less than six years from the Effective Time the Company's current directors' and officers' insurance and indemnification policy to the extent that it provides coverage for events occurring prior to the Effective Time (the "D&O Insurance") for any of the Indemnified Parties; provided, however, that Parent may, in lieu of maintaining such existing D&O Insurance as provided above, cause comparable coverage to be provided under any policy maintained for the benefit of the directors and officers of Parent or any of its Subsidiaries, so long as (i) the issuer thereof has an A.M. Best Company rating of A 32 -28- or better and (ii) the material terms thereof are no less advantageous to the Indemnified Parties than the existing D&O Insurance. If the existing D&O Insurance expires, is terminated or canceled during such six-year period, Parent shall cause to be obtained, to the extent commercially available, replacement D&O Insurance on terms and conditions no less advantageous to the Indemnified Parties than the existing D&O Insurance. Section 5.06. Release of Capital Contribution Obligations. At and after the Effective Time, the Company hereby releases all obligations (including any obligations arising prior to the Effective Time) of the shareholders of the Company under (i) the Fourth Amended and Restated Capital Contribution Agreement dated as of December 29, 1997 between Tryco III and the Company, (ii) the Amended and Restated Capital Contribution Agreement dated as of December 29, 1997 between Exel and the Company and (iii) the Second Amended and Restated Capital Contribution Agreement dated as of December 29, 1997 between RCRe and the Company. Section 5.07. Replacement of Obligation Owed to Lloyd's and Mellon Bank. At or prior to the Effective Time, Parent shall (a) cause to be issued (and deposited with Lloyd's) an irrevocable standby letter of credit (the "Letter of Credit"), or cash, in the amount of U.S. $122,913,000 (or such greater amount as shall then be required by Lloyd's), which in the case of a Letter of Credit shall (i) have an effective date as of the Closing Date and (ii) otherwise be satisfactory to Lloyd's, to support the underwriting activities of VUL at Lloyd's and (b) deliver to Mellon Bank a guarantee satisfactory to Mellon Bank of a U.S. $10,000,000 letter of credit issued by Mellon Bank, London Branch, in favor of Citibank N.A. Trustee for Syndicate 376 Surplus Lines Trust Fund or a substitute for or replacement of such letter of credit satisfactory to such Trustee. Section 5.08. Takeover Statutes. The parties shall use their reasonable best efforts to exempt the transactions contemplated by this Agreement from, or if necessary challenge the validity or applicability of, any applicable Takeover Law, and otherwise act to eliminate or minimize the effects of any applicable Takeover Law. Section 5.09. Conduct of Business of the Company. Except as expressly contemplated by this Agreement or set forth in the Company Disclosure Letter or as consented to in writing by Parent, during the period from the date of this Agreement to the Effective Time, the Company and its Subsidiaries will, and 33 -29- will cause VUG and the Syndicates to, conduct their operations only in, and neither the Company nor any of its Subsidiaries shall, or will permit VUG or the Syndicates to, take any action except in, the ordinary and usual course of business and consistent with past practice, and the Company and its Subsidiaries will, and will cause VUG and the Syndicates to, use their reasonable best efforts to preserve intact their business organization, to keep available the services of their officers and employees and to maintain advantageous relationships with customers, business partners and others having business relationships with the Company, its Subsidiaries or VUG or the Syndicates, as the case may be. Without limiting the generality of the foregoing, prior to the Effective Time, neither the Company nor any of its Subsidiaries will, or will permit VUG or the Syndicates to, except as expressly contemplated by this Agreement or set forth in the Company Disclosure Letter, without the prior written consent of Parent: (a) split, combine or reclassify any shares, declare, pay or set aside for payment any dividend or other distribution payable in cash, shares, property or otherwise in respect of its shares, or directly or indirectly redeem, purchase or otherwise acquire any shares, or other securities; (b) authorize for issuance, issue, sell, pledge, dispose of or encumber, deliver or agree or commit to issue, sell, pledge or deliver (whether through the issue or granting of any options, warrants, commitments, subscriptions, rights to purchase or otherwise) any shares of any class of the Company or any securities convertible into or exercisable or exchangeable for shares of any class of the Company, or amend any of the terms of any such securities or agreements outstanding as of the date hereof; (c) (i) incur any debt for borrowed money, or assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for any debt for borrowed money of any other Person, in excess of $10,000,000, (ii) make any loans or advances to any Person other than loans or advances of reasonable out-of-pocket expenses incurred in connection with the business of the Company or its Subsidiaries, or make any capital contributions to, or investments in, any other Person, (iii) pledge or otherwise encumber shares of the Company or its Subsidiaries, or (iv) mortgage or pledge any of its material assets, tangible or intangible, or create any Lien thereupon other than Permitted Liens; 34 -30- (d) except as may be required by law or as contemplated by this Agreement, enter into, adopt, or amend or terminate any bonus, profit sharing, compensation, severance, termination, stock option, share appreciation right, restricted shares, performance unit, share equivalent, share purchase agreement, pension, retirement, deferred compensation, employment, severance or other Employee Benefit Plan; or enter into or amend any employment or severance agreement with, increase in any manner the salary, wages, bonus, commission, or other compensation or benefits of any director or officer (at the level of Vice President or above) of the Company or any of its Subsidiaries; or increase in any manner the salary, wages, bonus, commission, or other compensation or benefits of any director, officer, employee or agent of the Company or any of its Subsidiaries, except for increases in the ordinary course of business and consistent with past practice (which, in the case of directors and officers at the level of Vice President/Managing Director or above, shall only be made after consultation with Parent); or hire employees at the level of Vice President/Managing Director or above except after consultation with Parent; or pay any benefit not required by any plan and arrangement as in effect as of the date hereof (including, without limitation, the granting of stock options, share appreciation rights or performance units); (e) acquire (by merger, amalgamation, consolidation or acquisition of shares or assets) any corporation, partnership or other business organization or division thereof or make any material investment either by purchase of shares or securities, contributions to capital, property transfer, or acquisition (including by lease) of any material amount of properties or assets of any other individual or entity, except for the purchase of investment shares or securities in the ordinary course of business consistent with past practice and in compliance with the requirements of Governmental Authorities except for any non-compliance that, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect on the Company; (f) propose to amend the memorandum of association or bye-laws or any similar document of the Company or any of its Subsidiaries; (g) propose to adopt a plan of complete or partial liquidation or resolutions providing for the complete or 35 -31- partial liquidation, dissolution, amalgamation, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its Subsidiaries; (h) sell (whether by amalgamation, consolidation or otherwise), lease, encumber, transfer, dispose of any material assets or waive any right of substantial value (including without limitation, rights of renewal) outside the ordinary course of business consistent with past practice, or enter into any material commitment or transaction outside the ordinary course of business consistent with past practice and in each case in compliance with the requirements of Governmental Authorities except for any non-compliance that, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect on the Company; (i) except as may be required as a result of a change in law, rule or regulation or in GAAP, change any of the accounting principles or practices used by it; (j) enter into any agreement providing for the acceleration or payment or performance or other consequence as a result of a change in control of the Company or any of its Subsidiaries; (k) resolve, commit or agree to take any of the foregoing actions or take any action which would make any representation or warranty in Article THREE hereof materially untrue or incorrect; or (l) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) against the Company or any of its Subsidiaries except in the ordinary course of business consistent with past practice or where to do so is not reasonably likely to have a Material Adverse Effect on the Company. The provisions of this Section 5.09 insofar as they apply to Syndicates are subject to Lloyd's policy with respect to the management of syndicates. Section 5.10. Acquisition Proposals. Without the prior written consent of Parent, the Company shall not, and shall cause its Subsidiaries and their respective officers, directors, agents, advisors and affiliates not to, solicit or encourage inquiries or proposals with respect to, or engage in any negotiations concerning, or provide any confidential infor- 36 -32- mation to, or have any discussions with, any such Person relating to, any tender offer or exchange offer for, or any proposal for the acquisition of a substantial equity interest in, or a substantial portion of the assets of, or any amalgamation, merger or consolidation with, the Company or any of its Subsidiaries and any such inquiries, proposals or discussions shall be immediately terminated. Section 5.11. Information, etc. Between the date of this Agreement and the Effective Time, the Company shall (and shall cause its Subsidiaries to) afford to authorized representatives (including, without limitation, attorneys, auditors, financial advisors and actuaries) of Parent reasonable access during normal business hours to all of the Company's personnel, offices and other facilities and to its books and records and will permit such party and its authorized representatives to make such inspections of its financial and operating data and other information with respect to its business and properties as such party and its authorized representatives may from time to time reasonably request. No information or knowledge obtained in any investigation pursuant to this Section 5.11 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Amalgamation. The confidentiality of all such documents and information furnished in connection with the transactions contemplated by this Agreement shall be governed by the terms of the Confidentiality Letter dated June 9, 1998 from Parent to the Company (the "Confidentiality Letter"). Section 5.12. Lloyd's Auction. The Company and Parent shall consult in good faith with respect to participation in the Lloyd's auction process and if the Company participates therein it will keep Parent reasonably informed as to the status and results thereof. ARTICLE SIX CONDITIONS TO THE AMALGAMATION Section 6.01. Conditions to Each Party's Obligation to Effect the Amalgamation. The respective obligations of each party to this Agreement to consummate the Amalgamation shall be subject to the following conditions: 37 -33- (a) This Agreement, the Amalgamation and the other transactions contemplated hereby shall have been approved and adopted by the affirmative vote or consent of the Company's shareholders as required by the Companies Act and the Company's bye-laws. (b) No order, decree or injunction of any court or agency of competent jurisdiction shall be in effect, and no law, statute or regulation shall have been enacted or adopted, that enjoins, prohibits or makes illegal consummation of any of the transactions contemplated hereby; provided, however, that each of Parent and the Company shall have used its reasonable best efforts to prevent any such rule, regulation, injunction, decree or other order, and to appeal as promptly as possible any injunction, decree or other order that may be entered. (c) Those regulatory and other approvals required to consummate the Amalgamation and the other transactions contemplated hereby that are specified in Sections 3.07 and 4.04 shall have been obtained. Section 6.02. Additional Conditions to the Company's Obligation to Effect the Amalgamation. The obligation of the Company to consummate the Amalgamation shall be further subject to the following conditions unless waived in accordance with Section 8.02: (a) Parent shall have performed in all material respects the obligations and covenants to be performed by it on or prior to the Effective Time except for any such failure or failures to perform, individually or in the aggregate, as are not reasonably likely to have a Material Adverse Effect on the Company. (b) The representations and warranties of Parent contained in this Agreement that are qualified as to materiality shall be true and correct in all respects, and the representations and warranties of Parent contained in this Agreement that are not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date and except for changes permitted by this Agreement) as of the Closing Date as though made as of and on the Closing Date, except for such failure or failures to be true and correct (or true and correct in all material respects), individu- 38 -34- ally or in the aggregate, as are not reasonably likely to have a Material Adverse Effect on Parent. (c) There shall have been returned to the issuer thereof the irrevocable letters of credit totaling $122,913,000 issued by Mellon Bank, N.A., on behalf of Exel (which are currently on deposit with Lloyd's for the benefit of VUL). (d) Exel shall have been released by Mellon Bank from Exel's obligations with respect to the $10,000,000 letter of credit issued by Mellon Bank in favor of Citibank N.A. Trustee for Syndicate 376 Surplus Lines Trust Fund. (e) The Company shall receive customary closing documents in form and substance reasonably satisfactory to it, including a certificate of an executive officer of Parent certifying compliance with the conditions set forth in Sections 6.02(a) and (b). Section 6.03. Additional Conditions to Parent and Acquisition's Obligation to Effect the Amalgamation. The obligation of the Parent and Acquisition to consummate the Amalgamation shall be further subject to the following conditions unless waived in accordance with Section 8.02: (a) The Company shall have performed in all material respects the obligations and covenants to be performed by it on or prior to the Effective Time except for any such failure or failures to perform, individually or in the aggregate, as are not reasonably likely to have a Material Adverse Effect on the Company. (b) The representations and warranties of the Company contained in this Agreement that are qualified as to materiality shall be true and correct in all respects, and the representations and warranties of the Company contained in this Agreement that are not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date and except for changes permitted by this Agreement) as of the Closing Date, as though made as of and on the Closing Date, except for such failure or failures to be true and correct (or true and correct in all material respects), individually or in the aggregate, as are not rea- 39 -35- sonably likely to have a Material Adverse Effect on the Company. (c) Parent shall receive customary closing documents in form and substance reasonably satisfactory to it, including a certificate of an executive officer of the Company certifying compliance with the conditions set forth in Sections 6.03(a) and (b). (d) Holders of the outstanding capital stock of the Company and Company Options (which shall include Exel, RCRe and Tryco III and may include other such holders) shall have confirmed to Parent the representations and warranties set forth in Section 3.03(a), (b) and (c) provided that the liability of each such holder with respect to such representations and warranties shall be several and shall be allocated among such holders in the same proportion as the consideration to be received by each such holder pursuant to Sections 2.05, 2.09 and 2.10 bears to the aggregate consideration to be received by all such holders and such representation shall survive until the first anniversary of the Effective Time. ARTICLE SEVEN TERMINATION AND ABANDONMENT Section 7.01. Termination by the Company, Parent or Acquisition. This Agreement may be terminated and the Amalgamation contemplated hereby may be abandoned at any time prior to the Effective Time, whether before or after approval of the Amalgamation by the shareholders of the Company or the shareholders of Acquisition: (a) by mutual written consent of Parent and the Company; (b) by the Company at any time after the later of (i) the earlier of (x) November 15, 1998 and (y) the date that is three months after the submission to Lloyd's of an application for the Consent of Lloyd's referred to in Section 4.04(a) and (ii) the date that is four weeks after the delivery to Parent of the Company Interim Financial Statements (or such later date as shall have been agreed to in writing by Parent and the Company) if any of the 40 -36- conditions set forth in Section 6.01 or 6.02 hereof have not been met or waived in writing by the Company; or (c) by Parent at any time after the later of (i) the earlier of (x) November 15, 1998 and (y) the date that is three months after the submission to Lloyd's of an application for the Consent of Lloyd's referred to in Section 4.04(a) and (ii) the date that is four weeks after the delivery to Parent of the Company Interim Financial Statements (or such later date as shall have been agreed to in writing by Parent and the Company) if any of the conditions set forth in Section 6.01 or 6.03 have not been met or waived in writing by Parent. Any party that breaches this Agreement the result of which breach is the failure of a condition specified in (b) or (c) of this Section 7.01 to be met by the date specified may not terminate this Agreement on the basis of such failure. Section 7.02. Effect of Termination. (a) No termination hereof shall relieve any party from liability for any prior breach of this Agreement. The parties hereto agree that irreparable damage would occur to a party in the event any provision of this Agreement was not performed by the other party in accordance with the terms hereof, or was breached by such other party, and that the parties shall be entitled to specific performance of the terms hereof, (which, in the case of such non-performance or breach by Parent or Acquisition shall mean, in consideration for all of the ownership interests in the Company, payment of all amounts on or with respect to the securities of the Company to its securityholders as set forth in Sections 2.05, 2.09 and 2.10, the assumption of the obligations referred to in Section 5.06, and the delivery of the Letter of Credit (or cash) and guarantee referred to in Section 5.07 to Lloyd's and Mellon Bank, respectively) in addition to any other remedy at law or equity (including without limitation the payment of all expenses incurred by the Company referred to in Section 8.04). The parties acknowledge that "time is of the essence." (b) Sections 5.02 (Public Announcements), 8.04 (Expenses) and 8.07 (Governing Law) shall survive any termination and remain in full force and effect notwithstanding any termination. 41 -37- ARTICLE EIGHT MISCELLANEOUS PROVISIONS Section 8.01. Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement signed on behalf of each of the parties hereto at any time prior to the Effective Time with respect to any of the terms contained herein except that after the Shareholders' Meeting, the Amalgamation Consideration to be paid pursuant to this Agreement to the holders of Shares shall in no event be decreased and the form of consideration to be received by the holders of such Shares in the Amalgamation shall in no event be altered without the approval of such holders. Section 8.02. Waiver of Compliance; Consents. Any failure of Parent or Acquisition, on the one hand, or the Company, on the other hand, to comply with any obligation, covenant, agreement or condition herein may be waived in writing by the Company or Parent, respectively, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 8.02. Section 8.03. Severability and Validity. The provisions set forth in this Agreement are severable. If any provision of this Agreement is held invalid or unenforceable in any jurisdiction, the remainder of this Agreement, and the application of such provision to other Persons or circumstances, shall not be affected thereby and shall remain valid and enforceable in such jurisdiction, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 8.04. Expenses and Obligations. Each of the parties hereto shall pay its own expenses incurred in connection with the negotiation and preparation of this Agreement, the performance of the covenants herein, and the effectuation of the transactions contemplated hereby, including all fees and disbursements of its respective legal counsel, advisors, and accountants. 42 -38- Section 8.05. Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement except as specifically set forth in Sections 5.06 and 7.02. Section 8.06. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Parent or Acquisition, to: Underwriters Reinsurance Company 26050 Mureau Road Calabasas, California 91302 Telephone: (818) 878-9500 Facsimile: (818) 878-9817 Attention: Steven H. Newman with a copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Telephone: (212) 259-6570 Facsimile: (212) 259-6333 Attention: Linda E. Ransom, Esq. and to: Alleghany Corporation 375 Park Avenue New York, New York 10152 Telephone: (212) 752-1356 Facsimile: (212) 759-3295 Attention: Robert M. Hart, Esq. 43 -39- (ii) if to the Company, to: Venton Holdings Ltd. Victoria Hall 11 Victoria Street Hamilton HM11, Bermuda Telephone: (441) 292-8370 Facsimile: (441) 292-6313 Attention: Andrew Carr with a copy to: Venton Underwriting Agencies Limited Gracechurch House 55 Gracechurch Street London EC3V OJP Telephone: (171) 550-3500 Facsimile: (171) 550-3555 Attention: D. Martin Slade and to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Telephone: (212) 701-3000 Facsimile: (212) 269-5420 Attention: Immanuel Kohn, Esq. and to: Conyers, Dill & Pearman Claredon House 2 Church Street Hamilton HM CX, Bermuda Telephone: (441) 295-1422 Facsimile: (441) 292-4720 Attention: Graham Collis, Esq. Section 8.07. Governing Law. (a) The Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of laws rules thereof, except that provisions relating to the Amalgamation shall be governed by the laws of Bermuda, and provisions relating to the validity of corporate action shall be governed by the laws of the jurisdiction of incorporation or organization of the relevant corporation. 44 -40- (b) In addition, each of the parties hereto (i) consents to submit itself to the personal jurisdiction of New York state court or the federal courts of the Southern District of New York or the courts of Bermuda in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated hereby in any court other than a federal or state court sitting in the State of New York (or, in the case of a claim arising solely out of the Amalgamation, the courts of Bermuda). Each of Parent and Acquisition hereby irrevocably designates The Corporation Trust Company in New York and the Company hereby irrevocably designates The Corporation Trust Company in New York and Conyers Dill and Pearman in Bermuda, as their respective authorized agents, to accept and acknowledge on its behalf service of any process which may be served in any suit, action or proceeding in New York or Bermuda. Each of Parent and Acquisition and the Company hereby irrevocably (i) consents and agrees to process being served in any suit, action or proceeding brought in the federal court located in the State of New York or any New York state court or any court in Bermuda by serving a copy thereof upon the agent designated in the preceding sentence and to them and their respective counsel at the addresses set forth in Section 8.06, and (ii) agrees that such service of process shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and shall, to the fullest extent permitted by law, be taken and be held to be valid personal service upon and personal delivery to Parent and Acquisition or the Company, as the case may be. Section 8.08. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Section 8.09. Headings. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not affect in any way the meaning or interpretation of this Agreement. Section 8.10. Entire Agreement; Assignment. This Agreement, including the Company Disclosure Letter, and the Confidentiality Letter, embody the entire agreement and understanding of the parties hereto in respect of the subject matter 45 -41- contained herein. There are no agreements, restrictions, promises, representations, warranties, covenants, or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings with respect to such subject matter. This Agreement shall not be assigned by operation of law or otherwise, except with the prior written consent of each other party hereto. This Agreement is not intended to confer upon any other Person except the parties hereto any rights or remedies hereunder, except as provided in Section 8.05 of this Agreement. 46 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be signed on its behalf, all as of the day and year first above written. UNDERWRITERS REINSURANCE COMPANY By: /s/ Russell T. John ---------------------------------------- Name: Russell T. John Title: President By: /s/ Stuart M. de Haaff ---------------------------------------- Name: Stuart M. de Haaff Title: Secretary UNDERWRITERS ACQUISITION COMPANY LTD. By: /s/ Stephen C. Kolakowski ---------------------------------------- Name: Stephen C. Kolakowski Title: President By: /s/ Stuart M. de Haaff ---------------------------------------- Name: Stuart M. de Haaff Title: Assistant Secretary VENTON HOLDINGS LTD. By: /s/ J.H. Venton ---------------------------------------- Name: J.H. Venton Title: Director By: /s/ D.M. Slade ---------------------------------------- Name: D.M. Slade Title: Director EX-10.28.B 9 LIST OF EXHIBITS TO THE AMALGAMATION AGREEMENT 1 EXHIBIT 10.28(b) LIST OF EXHIBITS TO THE AMALGAMATION AGREEMENT EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3.01 Corporate Organization 3.02 Authority, Execution, Enforceability 3.03 Capital Structure 3.04 Financial Statements 3.05 Absence of Certain Changes 3.06 No Conflicts 3.07 Governmental Conflicts 3.08 Compliance with Applicable Law 3.09 Tax Matters 3.10 Litigation 3.11 Employees 3.12 Takeover Statutes 3.13 Certain Fees 3.14 Investment Company 3.18 Letters of Credit 3.22 Interests of Officers, Directors and Shareholders 5.09 Conduct of Business of the Company EX-10.28.C 10 AMENDMENT NO. 1 TO THE AMALGAMATION AGREEMENT 1 Exhibit 10.28(c) AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF AMALGAMATION This Amendment No. 1, dated as of September 24, 1998 (the "Amendment"), to the Agreement and Plan of Amalgamation, dated as of July 30, 1998 (the "Agreement"), is made by and among UNDERWRITERS REINSURANCE COMPANY, a New Hampshire insurance company ("Parent"), UNDERWRITERS ACQUISITION COMPANY LTD., a Bermuda company and a Subsidiary of Parent ("Acquisition") and VENTON HOLDINGS LTD., a Bermuda company (the "Company"). WHEREAS, the parties hereto desire to amend the Agreement. NOW, THEREFORE, in consideration of the promises and of the mutual covenants, representations, warranties and agreements herein contained, the parties hereto agree as follows: 1. Section 2.05(a) of the Agreement is hereby amended to read in its entirety as follows: Section 2.05. Consideration. (a) Except as otherwise provided in Section 106 of the Companies Act, at the Effective Time, each Share that is issued and outstanding immediately prior to the Effective Time shall be canceled, and the holder thereof shall be entitled to receive, pursuant to the procedures set forth in Section 2.06, $3,081.69 (except as provided in clause (v)) per Share, without interest thereon, with such consideration to consist of: (i) for each Class A Share $1,678.94 in cash and the cancellation of $1,402.75 in capital contribution obligations; (ii) for each Class B Share held by Exel $1,679.11 in cash and the cancellation of $1,402.58 in capital contribution obligations; (iii) for each Class B Share held by RCRe $1,673.42 in cash and the cancellation of $1,408.27 in capital contribution obligations; (iv) for each Class C Share (other than the 996 Class C Shares held by Alec Sharp on which no amount has been paid (the "Unpaid Class C Shares")) $3,081.69 in cash; and (v) for each Unpaid Class C Share $1,832.06 in cash; provided, however, that those Shares held by those persons set forth on Schedule 2.05 hereto shall be canceled and the holders thereof shall be entitled to receive, instead of cash, that number of shares of common stock, par value $1.00 per share, of Alleghany Corporation ("Alleghany Common Stock") determined by (i) multiplying the number of Shares listed by the per Share consideration of $3,081.69, and 2 (ii) dividing that result by the Alleghany Share Value. For purposes of this Agreement, the "Alleghany Share Value" shall be the average of the high and low sales prices of the Alleghany Common Stock on each of the ten trading days ending on September 30, 1998 divided by ten. 2. Section 2.09 of the Agreement is hereby amended to read in its entirety as follows: Section 2.09. Cash-Out or Exchange of Warrants. At the Effective Time, by virtue of the Amalgamation and without any action on the part of any holder thereof, the Company shall pay (with the proceeds of the capital contribution required by the last sentence of this Section 2.09) for each Warrant listed on Schedule 2.09 hereto, to the holder thereof, an amount in cash equal to the difference between (a) the consideration per Class A Share, Class B Share or Class C Share specified in Section 2.05(a) multiplied by the number of Class A Shares, Class B Shares or Class C Shares subject to such Warrant and (b) the exercise price of such Warrant. Upon such payment therefor, such Warrant will no longer be outstanding, and neither the Company nor any other Person shall have any obligation with respect thereto. Immediately after the Effective Time, each other Warrant that is outstanding immediately prior to the Effective Time will be exchanged for an option to acquire shares of Alleghany Common Stock (an "Alleghany Option") in accordance with Section 2.11. At the Effective Time, Parent shall make a capital contribution to the Company in an amount equal to $11,450,375, which the parties hereto agree is sufficient to make all cash payments pursuant to the first sentence of this Section 2.09. 3. Section 2.10 of the Agreement is hereby amended to read in its entirety as follows: Section 2.10. Cash-Out or Exchange of Options. At the Effective Time, by virtue of the Amalgamation and without any action on the part of any holder thereof, the Company shall pay (with the proceeds of the capital contribution required by the last sentence of this Section 2.10), for each Option listed on Schedule 2.10 hereto, to the holder thereof, an amount in cash equal to the difference between (a) the consideration per Class C Share specified in Section 2.05(a) multiplied by the number of Class C Shares subject to such Option (or by the number of Class C Shares subject to the Class C Warrant subject to such Option) and (b) the -2- 3 exercise price of such Option. Upon such payment therefor, such Option will no longer be outstanding, and neither the Company nor any other Person shall have any obligation with respect thereto. Immediately after the Effective Time, each other Option that is outstanding immediately prior to the Effective Time will be exchanged for an Alleghany Option in accordance with Section 2.11. At the Effective Time, Parent shall make a capital contribution to the Company in an amount equal to $1,985,953, which the parties hereto agree is sufficient to make all cash payments pursuant to the first sentence of this Section 2.10. 4. A new Section 2.11 is hereby added to the Agreement, which reads in its entirety as follows: Section 2.11. Alleghany Options. The number of shares of Alleghany Common Stock issuable upon exercise of an Alleghany Option received by a holder of Warrants or Options in accordance with Sections 2.09 or 2.10 will be determined by (i) multiplying the number of Shares issuable upon exercise of such Warrant or Option by the per Share consideration of $3,081.69, and (ii) dividing that result by the Alleghany Share Value. Any fractional share of Alleghany Common Stock to which a recipient would be entitled upon exercise of the Alleghany Option will be paid in cash. The per share exercise price of the Alleghany Option will be determined by (i) multiplying the number of Shares issuable upon exercise of a Warrant or Option by the per Share exercise price of such Warrant or Option, and (ii) dividing that result by the number of shares of Alleghany Common Stock issuable upon exercise of the Alleghany Option as determined in the first sentence of this Section 2.11. -3- 4 IN WITNESS WHEREOF, each party hereto has caused this Agreement to be signed on its behalf, all as of the day and year first above written. UNDERWRITERS REINSURANCE COMPANY By: /s/ Russell T. John ------------------------------------------ Name: Russell T. John Title: President By: /s/ Stuart M. de Haaff ------------------------------------------ Name: Stuart M. de Haaff Title: Secretary UNDERWRITERS ACQUISITION COMPANY LTD. By: /s/ Stephen C. Kolakowski ------------------------------------------ Name: Stephen C. Kolakowski Title: President By: /s/ Stuart M. de Haaff ------------------------------------------ Name: Stuart M. de Haaff Title: Assistant Secretary VENTON HOLDINGS LTD. By: /s/ J.H. Venton ------------------------------------------ Name: J.H. Venton Title: Director By: /s/ D.M. Slade ------------------------------------------ Name: D.M. Slade Title: Director EX-10.28.D 11 LIST OF EXHIBIT TO THE AMALGAMATION AMENDMENT 1 EXHIBIT 10.28(d) LIST OF EXHIBITS TO AMALGAMATION AMENDMENT NO. 1 EXHIBIT NUMBER DESCRIPTION 2.05 Venton shareholders to receive consideration in Alleghany common stock 2.09 Venton warrant holders to receive consideration in cash 2.10 Venton option holders to receive consideration in cash EX-10.29.A 12 LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGMT. 1 Exhibit 10.29(a) LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT BETWEEN VENTON UNDERWRITING LIMITED and TALBOT UNDERWRITING LIMITED, as Account Parties, AND UNDERWRITERS RE GROUP, INC. and UNDERWRITERS REINSURANCE COMPANY, as Guarantors, AND THE BANKS PARTIES HERETO FROM TIME TO TIME AND MELLON BANK, N.A., as Issuing Bank, as Administrative Agent and as Co-Arranger AND DRESDNER KLEINWORT BENSON NORTH AMERICA LLC, as Co-Arranger AND DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES as Documentation Agent DATED AS OF October 23, 1998 2 Table of Contents
Section Title Page ARTICLE I DEFINITIONS; CONSTRUCTION................................................ 1 1.01 Certain Definitions...................................................... 1 1.02 Construction............................................................. 13 1.03 Accounting Principles.................................................... 13 ARTICLE II THE LETTER OF CREDIT FACILITY............................................ 13 2.01 Letters of Credit ....................................................... 13 2.02 Commitment Fee; Reduction of the Committed Amounts....................... 15 2.03 Procedure for Issuance and Amendment of Letters of Credit................ 15 2.04 Letter of Credit Participating Interests................................. 16 2.05 Letter of Credit Drawings and Reimbursements............................. 17 2.06 Equalization............................................................. 18 2.07 Obligations Absolute..................................................... 18 2.08 Unacceptable Credit Rating............................................... 19 2.09 Letter of Credit Applications............................................ 19 2.10 Certain Provisions Relating to the Issuing Bank.......................... 19 2.11 Payments Generally; Interest and Interest on Overdue Amounts.................................................................. 21 2.12 Additional Compensation in Certain Circumstances......................... 21 2.13 Taxes.................................................................... 22 2.14 Extensions of Expiration Date............................................ 24 2.15 Tranches................................................................. 25 ARTICLE III REPRESENTATIONS AND WARRANTIES........................................... 27 3.01 Corporate Existence and Standing......................................... 28 3.02 Authorization and Validity............................................... 28 3.03 Compliance with Laws and Contracts....................................... 28 3.04 Governmental Consents.................................................... 28 3.05 Financial Statements..................................................... 28 3.06 Material Adverse Change.................................................. 29 3.07 Taxes.................................................................... 29 3.08 Litigation............................................................... 29 3.09 Insurance Licenses....................................................... 29 3.10 Use of Proceeds.......................................................... 29 3.11 Permits, Licenses and Rights............................................. 29 3.12 Disclosure............................................................... 30 3.13 Environmental Laws....................................................... 30 3.14 Reserves................................................................. 30 3.15 Year 2000 Compliance..................................................... 31 3.16 Capitalization........................................................... 31 3.17 ERISA.................................................................... 31 3.18 Defaults................................................................. 32 3.19 Federal Reserve Regulations.............................................. 32 3.20 Investment Company; Public Utility Holding Company Act................... 32 3.21 Certain Fees............................................................. 32 3.22 Solvency................................................................. 32
3 3.23 Ownership of Properties.................................................. 32 3.24 Indebtedness............................................................. 33 3.25 Material Agreements...................................................... 33 3.26 Insurance................................................................ 33 ARTICLE IV CONDITIONS............................................................... 33 4.01 Effectiveness............................................................ 33 4.02 Issuance of Letters of Credit............................................ 34 ARTICLE V GUARANTEE................................................................ 35 5.01 The Guarantee............................................................ 35 5.02 Obligations Unconditional................................................ 35 5.03 Reinstatement............................................................ 36 5.04 Remedies................................................................. 36 5.05 Continuing Guarantee..................................................... 36 5.06 No Restrictions.......................................................... 37 ARTICLE VI COVENANTS................................................................ 37 6.01 Financial Reporting...................................................... 37 6.02 Use of Proceeds.......................................................... 39 6.03 Notice of Default ....................................................... 39 6.04 Conduct of Business...................................................... 39 6.05 Taxes.................................................................... 40 6.06 Insurance................................................................ 40 6.07 Compliance with Laws..................................................... 40 6.08 Maintenance of Properties; Year 2000 Compliance.......................... 40 6.09 Inspection............................................................... 41 6.10 Capital Stock and Dividends.............................................. 41 6.11 Indebtedness............................................................. 41 6.12 Merger................................................................... 41 6.13 Sale of Assets........................................................... 42 6.14 Investments and Purchases................................................ 42 6.15 Contingent Obligations................................................... 43 6.16 Liens.................................................................... 44 6.17 Affiliates............................................................... 44 6.18 Other Indebtedness....................................................... 45 6.19 Environmental Matters.................................................... 45 6.20 Change in Corporate Structure; Fiscal Year............................... 45 6.21 Inconsistent Agreements.................................................. 45 6.22 Financial Covenants...................................................... 45 6.23 Tax Consolidation........................................................ 45 6.24 ERISA Compliance......................................................... 46 ARTICLE VII EVENTS OF DEFAULT........................................................ 46 7.01 Events of Default........................................................ 46 7.02 Certain Actions in Respect of Letters of Credit upon Default............. 49 ARTICLE VIII THE AGENT................................................................ 49 8.01 Appointment.............................................................. 49
4 8.02 General Nature of Agent's Duties......................................... 50 8.03 Exercise of Powers....................................................... 50 8.04 General Exculpatory Provisions........................................... 50 8.05 Administration by the Agent.............................................. 51 8.06 Bank Not Relying on Agent or Other Banks................................. 52 8.07 Indemnification.......................................................... 52 8.08 Agent in its Individual Capacity......................................... 52 8.09 Successor Agent.......................................................... 53 8.10 Additional Agents........................................................ 53 8.11 Calculations............................................................. 53 8.12 Agent's Fee.............................................................. 53 ARTICLE IX MISCELLANEOUS............................................................ 53 9.01 No Implied Waiver etc.................................................... 53 9.02 Set-Off.................................................................. 54 9.03 Survival of Provisions................................................... 54 9.04 Expenses and Fees; Indemnity............................................. 54 9.05 Severability............................................................. 55 9.06 Holidays................................................................. 55 9.07 Notices, etc............................................................. 55 9.08 Forum Selection and Consent to Jurisdiction.............................. 55 9.09 Waiver of Jury Trial..................................................... 56 9.10 Governing Law............................................................ 56 9.11 Validity and Enforceability.............................................. 56 9.12 Counterparts............................................................. 56 9.13 Successors and Assigns; Participations; Assignments...................... 56 9.14 Amendments and Waivers................................................... 58 9.15 Judgment Currency........................................................ 59 9.16 Records.................................................................. 59 9.17 Confidentiality.......................................................... 60 9.18 Sharing of Collections................................................... 60 9.19 Co-Arrangers............................................................. 60
Exhibit A Form of Continuing Letter of Credit Agreement Exhibit B Form of Transfer Supplement Exhibit C Form of Opinions of Counsel Exhibit D Form of Compliance Certificate Exhibit E List of Existing Letters of Credit Exhibit F Letter of Credit Application Schedule 2.01(b) Form of Evergreen Provision Schedule 3.03 Approvals and Consents Schedule 3.04 Governmental Consents Schedule 3.05 Financial Statements Schedule 3.07 Taxes Schedule 3.09 Insurance Licenses Schedule 3.13 Environmental Laws Schedule 3.16 Capitalization Schedule 3.17 ERISA Schedule 3.23 Ownership of Properties Schedule 3.24 Indebtedness Schedule 6.14 Investments Schedule 6.16 Liens 5 LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of October 23, 1998, by and between VENTON UNDERWRITING LIMITED, a Bermuda exempted limited liability company, and TALBOT UNDERWRITING LIMITED, an English company (each sometimes referred to hereinafter individually as an "Account Party" and collectively as the "Account Parties"), UNDERWRITERS RE GROUP, INC., a Delaware corporation ("URGI"), UNDERWRITERS REINSURANCE COMPANY, a New Hampshire corporation ("URC", URGI and URC being sometimes referred to herein individually as "Guarantor" and collectively as the "Guarantors"), the Banks (as defined further below) parties hereto from time to time, MELLON BANK, N.A., a national banking association ("Mellon"), as Issuing Bank (the "Issuing Bank"), as Administrative Agent for the Banks and the Issuing Bank hereunder (in such capacity, together with successors in such capacity referred to individually as the "Administrative Agent" and collectively with Dresdner Bank as the "Agents"), and as a Co-Arranger, DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, branches of a German banking corporation ("Dresdner Bank"), as Documentation Agent (referred to individually as the "Documentation Agent" and collectively with Mellon as the "Agents") and DRESDNER KLEINWORT BENSON NORTH AMERICA LLC, a Delaware Limited Liability company, as Co-Arranger. PRELIMINARY STATEMENT WHEREAS, the Banks have agreed to make available to the Account Parties a Letter of Credit Facility upon all of the terms and conditions herein set forth; NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Account Parties, the Guarantors, the Agents, the Issuing Bank, the Co-Arrangers and each Bank agree as follows. ARTICLE I DEFINITIONS; CONSTRUCTION 1.01. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Account Parties" and "Account Party" shall mean Venton Underwriting Limited and Talbot Underwriting Limited, together with their respective successors as permitted by this Agreement. "Adjusted Leverage Ratio" means, with respect to URGI on a consolidated basis with its Subsidiaries, at any time, the ratio of (a) Indebtedness (other than Indebtedness on account of undrawn amounts of letters of credit provided to beneficiaries in the ordinary course of business) to (b) the sum of Indebtedness (other than Indebtedness on account of undrawn amounts of letters of credit provided to beneficiaries in the ordinary course of business) plus Net Worth. For the purpose of determining this ratio, Contingent Obligations shall be excluded from Indebtedness to the extent that they relate to underlying obligations which are included in Indebtedness with respect to URGI on a consolidated basis with its Subsidiaries. 6 "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purposes of this Agreement, a Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Aggregate Letter of Credit Undrawn Availability" at any time shall mean the aggregate amount of the Letter of Credit Undrawn Availability for all Letters of Credit at such time. "Aggregate Letter of Credit Unreimbursed Draws" at any time shall mean the aggregate amount of Letter of Credit Unreimbursed Draws for all Letters of Credit at such time. "Agreement" shall mean this Agreement as amended, modified or supplemented from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect in the United States from time to time, applied in a manner consistent with those used in preparing the financial statements referred to in Section 6.01(a) and (b), provided, that with respect to the financial covenants contained in Section 6.22 hereof, the related definitions and the computations required thereby, such term means generally accepted accounting principles (except where SAP is applicable) in effect in the United States on the date hereof applied in a manner consistent with those used in preparing the financial statements referred to in Section 6.01(a) and (b). "Alleghany" means Alleghany Corporation, a Delaware corporation. "Annual Statement" means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary's jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing annual statutory financial statements and shall contain the type of information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Annual Statement-1997" means the Annual Statement of URC for 1997. "Applicable Interest Rate" as used herein, (i) with respect to obligations denominated in Dollars, shall mean the Prime Rate and (ii) with respect to obligations denominated in Pounds, shall mean 0.5% per annum in excess of the seven-day rate appearing on the Telerate Screen page 3750 or any equivalent successor to such page or other page as appropriate on the Telerate Service or such other service as may, from time to time, display the British Bankers' Association Interest Settlement Rate for deposits in Pounds. "Bank Parties" shall mean the Banks, the Issuing Bank and the Agents. "Banks" shall mean the parties listed on the signature pages hereof, subject to the provisions of Section 9.13 hereof pertaining to Persons becoming or ceasing to be Banks, and Bank shall mean any of them. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania or London, England. -5- 7 "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Cash Equivalents" means Investments maturing within one year from the date of investment (excluding (x) Investments as to which the principal amount to be repaid may be subject to fluctuation and (y) mortgage backed securities consisting of principal only or interest only strips) in (a) certificates of deposit, Eurodollar time deposits and other interest bearing deposits or accounts with United States commercial banks having a combined capital and surplus of at least $500,000,000 and rated C or better by Thomson BankWatch or with any Bank, (b) certificates of deposit, other interest bearing accounts or deposits and demand deposits with other United States commercial banks, which deposits and accounts are in amounts fully insured by the Federal Deposit Insurance Corporation, (c) obligations issued or unconditionally guaranteed by the United States government or issued by an agency thereof and backed by the full faith and credit of the United States, (d) direct obligations issued by any state of the United States or any political subdivision thereof which have the highest rating obtainable from Standard & Poor's on the date of investment, (e) commercial paper rated A-1 or better by Standard & Poor's and P-1 or better by Moody's or (f) money market mutual funds identified by the valuation office of the NAIC as requiring no investment reserve. "Change in Control" shall mean (a) any Credit Party (other than URGI) shall cease to be a Wholly-Owned Subsidiary of URGI (it being understood that a merger of a Credit Party into an entity which is a Wholly-Owned Subsidiary of URGI, to the extent otherwise permitted by this Agreement, will not be deemed to cause such Credit Party to cease to be a Wholly-Owned Subsidiary of URGI for purposes of this definition) or (b) Alleghany shall fail to maintain beneficial ownership, directly or indirectly, free and clear of any Lien, of at least 51 % of the outstanding voting stock of URGI (unless such failure arises from a Public Offering and no Person (other than Alleghany) or Persons acting in concert acquire (either in such Public Offering or thereafter) beneficial ownership (within the meaning of Rule l3d-3) of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 10% or more of the outstanding voting stock of URGI), or (c) during any period of 25 consecutive calendar months, commencing on the date of this Agreement, the ceasing of those individuals (the "Continuing Directors") who (i) were directors of URGI on the first day of each such period or (ii) subsequently became directors of URGI and whose initial election or initial nomination for election subsequent to that date was approved by a majority of the Continuing Directors then on the board of directors of URGI, to constitute a majority of the board of directors of the URGI. "Closing Transactions" shall mean the acquisition by URC of all of the issued and outstanding capital stock of Venton and the execution and delivery of this Agreement. "Closing Date" shall mean October 23, 1998 or such later date as may be specified by the Account Parties by one day's written notice to the Administrative Agent. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "Commitment Fee" shall have the meaning assigned to that term in Section 2.02(a) hereof. -6- 8 "Consolidated" or "consolidated", when used in connection with any calculation means a calculation to be determined on a consolidated basis for a Credit Party (and, if no Credit Party is specified, URGI) and its Subsidiaries in accordance with Agreement Accounting Principles. "Consolidated Person" means, for the taxable year of reference of Alleghany, each Person which has joined or which is required to join in the filing of a consolidated federal income tax return with Alleghany. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement or take-or-pay contract. "Controlled Group" mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the URGI or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Consolidated Subsidiaries" of a Person shall mean those Subsidiaries of such Person the accounts of which are consolidated with the accounts of such Person in accordance with generally accepted accounting principles in effect in the United States. "Continuing Letter of Credit Agreement" shall mean the letter of credit agreement executed and delivered by the Account Parties substantially in the form of Exhibit A hereto. "Conversion to Tranche System" shall have the meaning assigned to that term in Section 2.15 hereof. "Credit Parties" means the Account Parties and the Guarantors and "Credit Party" means any of them. "Current Expiration Date" shall have the meaning assigned to that term in Section 2.14 hereof. "Default" and "Event of Default" shall have the same meaning and shall mean an event or condition described in Article VII hereof. "Dollar," "Dollars" and the symbol $ shall mean lawful money of the United States of America. "Dollar Equivalent" of an amount of a currency other than Dollars shall mean the amount of Dollars which such amount of such currency could purchase at 11:00 o'clock A.M., Pittsburgh time on the date of determination, based upon the quoted spot rates of the Issuing Bank at which its applicable branch or office offers to exchange Dollars for such currency in the London foreign exchange market and "Dollar Equivalent" of an amount denominated in Dollars shall mean such amount of Dollars. "Environmental Laws" shall have the meaning ascribed to that term in Section 3.13 hereof. "Environmental Permits" shall have the meaning ascribed to that term in Section 3.13 hereof. "Existing Letters of Credit" shall mean the four letters of credit listed on Exhibit E hereto, which have been issued before the date of this Agreement, which are stated to have been issued for the account of Venton Underwriting Limited (or, in one case, for the account of X.L. Insurance Company, Ltd.), and which will be deemed to be issued hereunder for the account of Venton Underwriting Limited. -7- 9 "Expiration Date" shall mean the Business Day immediately preceding the first anniversary of the Closing Date, as the same may be extended in accordance with Section 2.14 hereof. "Extension Request" shall have the meaning set forth in Section 2.14 hereof. "Financial Statements" shall have the meaning set forth in Section 3.05 hereof. "Fiscal Year" means the twelve-month accounting period ending December 31 of each year. "Governmental Authority" shall mean any government (foreign or domestic) or any state or other political subdivision thereof or any governmental body, agency, authority, department or commission (including without limitation any board of insurance, insurance department or insurance commissioner or any taxing authority or political subdivision) or any instrumentality or officer thereof (including without limitation any court or tribunal) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation, partnership or other entity directly or indirectly owned or controlled by or subject to the control of any of the foregoing. "Guaranteed Obligations" shall have the meaning assigned to that term in Section 5.01 hereof. "Guarantors" and "Guarantor" shall have the meaning assigned to those terms in the preamble to this Agreement. "Guaranty Equivalents" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Equivalent hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Equivalent is made. "Hazardous Materials" shall have the meaning ascribed thereto in Section 3.13. "Indebtedness" of a Person means such Person's (a) obligations for borrowed money, (b) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (c) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Property now or hereafter owned or acquired by such Person, (d) obligations which are evidenced by notes, acceptances, or similar instruments, (e) Capitalized Lease Obligations, (f) Rate Hedging Obligations, (g) Contingent Obligations, (h) obligations for which such Person is obligated (contingently, including with respect to undrawn amounts of issued letters of credit, or otherwise) pursuant to or in respect of a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable and (i) repurchase obligations or liabilities of such Person with respect to accounts or notes receivable sold by such Person. -8- 10 "Insurance Subsidiary" shall mean any direct or indirect present or future Subsidiary of URGI which is engaged in the insurance business (and shall in any event include URC), but excluding each of the Venton Entities. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade), deposit account or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition, of the stock, partnership interests, notes, debentures or other securities of any other Person made by such Person. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "Letter of Credit" shall mean each Letter of Credit issued by the Issuing Bank for the account of one or more of the Account Parties pursuant to this Agreement and each of the Existing Letters of Credit, each as amended, modified or supplemented from time to time. "Letter of Credit Application" shall have the meaning given that term in Section 2.03(a)(ii) hereof. "Letter of Credit Exposure" at any time shall mean the sum at such time of (a) the Aggregate Letter of Credit Unreimbursed Draws (determined as a Dollar Equivalent), (b) the Aggregate Letter of Credit Undrawn Availability and (c) the aggregate Stated Amount (determined as a Dollar Equivalent) of Letters of Credit which have been requested by an Account Party to be issued hereunder but are not yet so issued. "Letter of Credit Fee" shall have the meaning given that term in Section 2.01(d) hereof. "Letter of Credit Participating Interest" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Committed Amount" shall have the meaning given that term in Section 2.01(a) hereof. "Letter of Credit Participating Interest Commitment" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Percentage" and "Letter of Credit Participating Interest Commitment Percentage" for each Bank shall mean a fraction, expressed as percentage, the numerator of which is such Bank's Letter of Credit Participating Interest Committed Amount and the denominator of which is the aggregate Letter of Credit Participating Interest Committed Amounts of all of the Banks. "Letter of Credit Reimbursement Obligation" with respect to a Letter of Credit means the obligation of the applicable Account Party to reimburse the Issuing Bank for drawings on a Letter of Credit, together with interest thereon, and "Letter of Credit Reimbursement Obligations" shall mean all such obligations with respect to all Letters of Credit. "Letter of Credit Undrawn Availability" with respect to a Letter of Credit at any time shall mean the maximum amount (determined as a Dollar Equivalent) available to be drawn under such Letter of Credit at such time or thereafter, regardless of the existence or satisfaction of any conditions or limitations on drawing. -9- 11 "Letter of Credit Unreimbursed Draw" with respect to a Letter of Credit at any time shall mean the amount at such time of a payment made by the Issuing Bank under such Letter of Credit, to the extent not repaid by the applicable Account Party. "Level One Day" shall mean each day on which URC has a Standard & Poor's claims paying rating and has at least one Tier I Rating and no rating below a Tier II Rating; "Level Two Day" shall mean each day (which is not a Level One Day) on which URC has a Standard & Poor's claims paying rating and has at least one rating which is a Tier III Rating, a Tier II Rating or a Tier I Rating, and no rating below a Tier IV Rating; "Level Three Day" shall mean each day (which is not a Level Two Day or a Level One Day) on which URC has a Standard & Poor's claims paying rating and has at least one Tier V Rating and no rating below a Tier VI Rating; "Level Four Day" shall mean each day which is not a Level Three Day, a Level Two Day or a Level One Day. "Leverage Ratio" means, with respect to URGI on a consolidated basis with its Subsidiaries, at any time, the ratio of (a) Indebtedness to (b) the sum of Indebtedness plus Net Worth. For the purpose of determining this ratio, Contingent Obligations shall be excluded from Indebtedness to the extent that they relate to underlying obligations which are included in Indebtedness with respect to URGI on a consolidated basis with its Subsidiaries. "License" means any license, certificate of authority, permit or other authorization which is required to be obtained from any Governmental Authority in connection with the operation, ownership or transaction of insurance business. "Lien" means any security interest, lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). "Material Adverse Effect" shall mean a material adverse effect on (a) the business, Property, condition (financial or other), performance, operations, or prospects of URGI and its Subsidiaries, taken as a whole, (b) the ability of any Credit Party to perform its obligations under the Loan Documents, or (c) the validity or enforceability of any of the Transaction Documents or the rights or remedies of the Agents, the Issuing Bank or the Banks thereunder. "Moody's" means Moody's Investors Service, Inc., a Delaware corporation, together with any Person succeeding thereto by merger, consolidation or acquisition of all or substantially all of its assets, including substantially all of its business of rating securities. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement which is subject to Title IV of ERISA to which URGI or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "NAIC" means the National Association of Insurance Commissioners or any successor thereto, or in lieu thereof any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissioners and similar Governmental Authorities of the various states of the United States toward the promotion of uniformity in the practices of such Governmental Authorities. "Net Worth" means at any date the stockholders' equity of URGI and its Subsidiaries determined on a consolidated basis in accordance with Agreement Accounting Principles. "Nonextending Bank" shall have the meaning assigned to that term in Section 2.14 hereof. -10- 12 "Obligations" shall mean, collectively, the Letter of Credit Reimbursement Obligations and the obligations of each and every Account Party to pay all fees, indemnities and all other liabilities of such Account Party arising pursuant to the terms of this Agreement or the other Transaction Documents (including without limitation under Section 7.02 hereof). "Office," when used in connection with the Administrative Agent, shall mean its office located at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, or at such other office or offices of the Administrative Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Administrative Agent to the Account Parties. "Official Body" shall have the same meaning as Governmental Authority. "Permitted Liens" shall mean the Liens described in paragraphs (a) through (h) of Section 6.16. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), official body or agency, or any other entity. "Plan" means an employee pension benefit plan as defined in Section 3(2) of ERISA, as to which URGI or any member of the Controlled Group may have any liability. "Potential Default" shall mean any event or condition referenced in Article VII hereof which with notice, passage of time or both would constitute an Event of Default. "Pound," "Pounds" and the symbol "pound sterling" shall mean the lawful money of the United Kingdom. "Prime Rate" shall mean the interest rate per annum announced from time to time by the Administrative Agent as its prime rate, such rate to change automatically effective as of the effectiveness of each announced change in such prime rate (it being understood that such Prime Rate may be greater or less than other interest rates charged by the Administrative Agent to other borrowers and is not solely based or dependent upon the interest rate which the Administrative Agent may charge any particular borrower or class of borrower). "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Pro Rata" shall have the meaning assigned to that term in Section 2.15 hereof. "Purchase" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement by which URGI or any of its Subsidiaries (a) acquires any going business or all or substantially all of the assets of any firm, corporation or division or line of business thereof whether through purchase of assets, merger or otherwise, or (b) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership interests of a partnership or membership interests of a limited liability company. "Purchasing Bank" shall have the meaning assigned to that term in Section 9.13(c) hereof. "Quarterly Statement" means the quarterly statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing quarterly statutory financial -11- 13 statements and shall contain the type of financial information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Rate Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and however and whenever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (a) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, and (b) any and all cancellations, buybacks, reversals, terminations or assignments of any of the foregoing. "Regular Payment Date" shall mean the last day of each March, June, September and December after the date hereof, or, if such last day is not a Business Day, the next succeeding Business Day. "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System as from time to time in effect and shall include any successor or other regulation or official interpretation of such Board of Governors relating to the extension of credit by securities brokers and dealers for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and shall include any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by the specified lenders for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Release" is defined in the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. 39601 et seq. "Replacement Bank" shall have the meaning assigned to that term in Section 2.14 hereof. "Reportable Event" means a reportable event as defined in Section 4043(a) of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation unconditionally or conditionally waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Required Banks" shall mean at any time Banks which have at least 51% of the aggregate Letter of Credit Participating Interests in Letters of Credit outstanding at such time. "Required Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "SAP" shall mean, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority, including the Council of Lloyd's) in the jurisdiction of such Insurance Subsidiary for the preparation of annual statements and other financial reports by insurance companies of the same type as such Insurance Subsidiary in effect -12- 14 from time to time, applied in a manner consistent with those used in preparing the financial statements referred to in Section 3.05; provided, that with respect to the financial covenants contained in Section 6.22 hereof the related definitions, and the computations required thereby, "SAP" means such statutory accounting practices (except where Agreement Accounting Principles are applicable) in effect on the date hereof applied in a manner consistent with those used in preparing the financial statements referred to in Section 3.05. "Single Employer Plan" means a Plan subject to Title IV of ERISA maintained by any member of the Controlled Group for employees of any member of the Controlled Group, other than a Multiemployer Plan. "Solvent" means, when used with respect to a Person, that (a) the fair saleable value of the assets of such Person is in excess of the total amount of the present value of its liabilities (including for purposes of this definition all liabilities (including loss reserves as determined by such Person), whether or not reflected on a balance sheet prepared in accordance with Agreement Accounting Principles and whether direct or indirect, fixed or contingent, secured or unsecured, disputed or undisputed), (b) such Person is able to pay its debts or obligations in the ordinary course as they mature and (c) such Person does not have unreasonably small capital to carry on its business as conducted and as proposed to be conducted. "Solvency" shall have a correlative meaning. "Standard Notice" shall mean an irrevocable notice provided to the Administrative Agent at no later than 10:00 o'clock a.m., Pittsburgh time, on a Business Day. Standard Notice shall be in writing (including telex, facsimile or cable communication) or by telephone (to be subsequently confirmed in writing) in any such case, effective upon receipt by the Administrative Agent. "Stated Amount" shall mean, with respect to a Letter of Credit, the maximum face or stated amount of such Letter of Credit, irrespective of whether such maximum amount is available for drawing at the time in question. "Statutory Authorized Control Level Risk-Based Capital" means, with respect to any Insurance Subsidiary at any time, the statutory authorized control level risk-based capital of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Five Year Historical Data", Line 26 of the Annual Statement-1997), based on methodology of NAIC in effect on the date hereof. "Statutory Net Income" means, with respect to any Insurance Subsidiary for any computation period, the net income earned by such Person during such period, as determined in accordance with SAP (currently "Underwriting and Investment" exhibit, "Statement of Income", Line 16 of the Annual Statement-1997). "Statutory Risk-Based Capital Ratio" means, with respect to URC and its Insurance Subsidiaries, determined on a combined basis for URC and all of its Insurance Subsidiaries (without double counting), the ratio of (i) Statutory Total Adjusted Capital to (ii) Statutory Authorized Control Level Risk-Based Capital. "Statutory Surplus" means, with respect to any Insurance Subsidiary at any time, the surplus as regards policyholders of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Liabilities, Surplus and Other Funds" statement, Page 3, Line 25, Column I of the Annual Statement-1997). "Statutory Total Adjusted Capital" means, with respect to any Insurance Subsidiary at any time, the statutory total adjusted capital of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Five Year Historical Data," Line 25 of the Annual Statement-1997). -13- 15 "Subsidiary" of a Person at any time shall mean any corporation of which a majority (by number of shares or number of votes) of any class of outstanding capital stock normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights of such class) is at such time owned directly or indirectly by such Person or one or more Subsidiaries of such Person. "Substantial Portion" means, with respect to the Property of URGI and its Subsidiaries, Property which (a) represents more than 10% of the consolidated assets of URGI and its Subsidiaries, as would be shown in the consolidated financial statements of URGI and its Subsidiaries as at the end of the Fiscal Quarter next preceding the date on which such determination is made, or (b) is responsible for more than 10% of the consolidated net revenues or of the consolidated Net Income of URGI and its Subsidiaries for the 12-month period ending as of the end of the Fiscal Quarter next preceding the date of determination. "Tax Sharing Agreements" means, collectively, that certain Amendment to Agreement dated as of August 18, 1995 between Alleghany and URGI, that certain Amendment to Agreement dated as of December 1, 1995 between URGI and URC, that certain Amendment to Agreement dated as of December 1, 1995 between URGI and URC Risk Managers., Inc., that certain Agreement dated as of December 1, 1995 between URGI and The Underwriting Center, Inc., that certain Agreement dated as of December 1, 1995 between The Underwriting Center, Inc. and The Underwriting Center of Georgia, Inc. (now known as The Center E&S Insurance Services, Inc.), that certain Amendment to Agreement dated as of December 1, 1995 between URC and Commercial Underwriters Insurance Company, and that certain Agreement dated as of December 1, 1995 between URC and Underwriters Insurance Company, as each is in effect on the date of this Agreement, together with any other agreements entered into pursuant to Section 6.23, and as any such agreement may be hereafter amended, subject to compliance with the terms hereof. "Termination Event" means, with respect to a Plan which is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of any member of the Controlled Group from such Plan during a plan year in which such member of the Controlled Group was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) the termination of such Plan, the filing of a notice of intent to terminate such Plan or the treatment of an amendment of such Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings to terminate such Plan or (e) any event or condition which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of or appointment of a trustee to administer, such Plan. "Tier I Rating" with respect to Standard & Poor's shall mean a claims paying rating of at least AA and with respect to Moody's shall mean a solicited insurance financial strength rating of at least Aa2; "Tier II Rating" with respect to Standard & Poor's shall mean a claims paying rating of AA- and with respect to Moody's shall mean a solicited insurance financial strength rating of Aa3; "Tier III Rating" with respect to Standard & Poor's shall mean a claims paying rating of A+ and with respect to Moody's shall mean a solicited insurance financial strength rating of A1; "Tier IV Rating" with respect to Standard & Poor's shall mean a claims paying rating of A and with respect to Moody's shall mean a solicited insurance financial strength rating of A2; "Tier V Rating" with respect to Standard & Poor's shall mean a claims paying rating of A- and with respect to Moody's shall mean a solicited insurance financial strength rating of A3; "Tier VI Rating" with respect to Standard & Poor's shall mean a claims paying rating of BBB+ and with respect to Moody's shall mean a solicited insurance financial strength rating of Baa1. As used in this definition, a Moody's rating shall be deemed to be "solicited" only if such rating was obtained from Moody's upon application by the entity to which such rating relates. "Tranche 1 Bank", "Tranche 1 Letter of Credit", "Tranche 1 Letter of Credit Participating Interest", "Tranche 2 Bank", "Tranche 2 Letter of Credit", "Tranche 2 Letter of Credit Participating Interest", "Tranche 2 Letter of Credit Participating Interest Commitment", "Tranche 2 Letter of Credit Participating Interest Committed Amount", "Tranche 2 Letter of Credit Participating Interest -14- 16 Commitment Percentage", "Tranche 3 Letter of Credit", "Tranche 4 Letter of Credit" and "Tranche X" shall have the respective meanings assigned to those terms in Section 2.15 hereof. "Transaction Document" or "Transaction Documents" shall mean this Agreement, the Continuing Letter of Credit Agreement, each Letter of Credit Application, each Letter of Credit and any other documents or instruments executed and delivered in connection herewith or therewith. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations. "Unmatured Default" means an event or condition which but for the lapse of time or the giving of notice, or both, would constitute a Default. "URC" means Underwriters Reinsurance Company, a New Hampshire insurance company. "Venton" means Venton Holdings Ltd., a Bermuda corporation. "Venton Entities" means, collectively, Venton, Venton Underwriting Group Limited, an English company, Venton Underwriting Limited, Talbot Underwriting Limited and each company which is a Subsidiary of Venton on the date of this Agreement, together with each permitted successor thereto which does not engage in any business other than the businesses engaged in by the Venton Entities on the date of this Agreement. "Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (b) any partnership, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. "Year 2000 Problem" shall mean any significant risk that computer hardware, software or equipment containing embedded microchips of any Credit Party or any of its Subsidiaries which is essential to its business or operations will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of times or time periods occurring before January 1, 2000, including the making of accurate leap year calculations. 1.02. Construction. Unless the context of this Agreement otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or." References in this Agreement to "determination" by any Agent include estimates by such Agent in good faith, without gross negligence and without manifest error (in the case of quantitative determinations) and beliefs held by such Agent in good faith and without gross negligence (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.03. Accounting Principles. Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with Agreement Accounting Principles or SAP, as the context requires (including principles of consolidation where appropriate), and -15- 17 all accounting or financial terms shall have the meanings ascribed to such terms by Agreement Accounting Principles or SAP, as appropriate. ARTICLE II THE LETTER OF CREDIT FACILITY 2.01. Letters of Credit. (a) Letter of Credit Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Issuing Bank agrees to issue Letters of Credit for the account of an Account Party at any time or from time to time on or after the date hereof and to but not including the Expiration Date (it being understood that Letters of Credit may be outstanding for the account of one or more of the Account Parties at any time). The Issuing Bank shall have no obligation to issue any Letter of Credit if, after such Letter of Credit were issued, the Letter of Credit Exposure upon such issuance would exceed the aggregate of the Banks' Letter of Credit Participating Interest Committed Amounts. Each Bank's "Letter of Credit Participating Interest Committed Amount" at any time shall be equal to the amount set forth as its "Initial Letter of Credit Participating Interest Committed Amount" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.02(b) hereof at such time, and subject to transfer to another Bank as provided in Section 9.13 hereof. (b) Terms of Letters of Credit. The Account Parties shall not request to be issued, and the Issuing Bank shall have no obligation to issue, any Letter of Credit except within the following limitations: (i) each Letter of Credit shall have an expiration date no later than five years after the date of issuance thereof (or, in the case of Letters of Credit issued prior to December 31, 1998, no later than December 31, 2003); provided, however, any Letter of Credit may have an "evergreen" provision having substantially the effect set forth on Schedule 2.01(b) hereof, (ii) each Letter of Credit shall be denominated in Dollars or Pounds and (iii) each Letter of Credit shall be payable only against sight drafts (and not time drafts). (c) Form of Letters of Credit. The Issuing Bank shall have no obligation to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to the Issuing Bank in the exercise of its reasonable judgment consistent with its customary practice (it being understood that the standard form of letter of credit required by Lloyd's from time to time will be found satisfactory by the Issuing Bank unless issuance of a letter of credit in such form would violate Law). The Issuing Bank may not object to a letter of credit on account of the fact that it may be presented for drawing at the Issuing Bank's branch in London, England (or, if the Issuing Bank no longer maintains such a branch at the time of issuance of a Letter of Credit, at such other location in London, England as may be commercially reasonable). (d) Letter of Credit Fee. Each Account Party shall pay or cause to be paid to the Administrative Agent for the account of each Bank, in accordance with its Letter of Credit Participating Interest Commitment Percentage, a fee (the "Letter of Credit Fee") (based on a year of 360 days and actual days elapsed), for each Letter of Credit issued for the account of such Account Party for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.45% for each Level One Day, 0.525% for each Level Two Day, 0.60% for each Level Three Day and 0.75% for each Level Four Day. Such Letter of Credit Fee shall be due and payable for the preceding period for which such fee has not been paid on each of the following dates: (i) each Regular Payment Date, (ii) the date of each drawing on such Letter of Credit, and (iii) the date of expiration or termination of such Letter of Credit. For each day on which a Default shall have occurred and be continuing, the rate set forth in the first sentence of this paragraph shall be increased by 2% per annum. -16- 18 (e) Purpose of Letters of Credit. The Account Parties agree that each Letter of Credit shall be used by the Account Party for whom it is issued as a standby letter of credit, to support the Account Party's Lloyds of London underwriting activity and for general corporate purposes, all in the ordinary course of business of such Account Party. The provisions of this Section 2.01(e) represent only an obligation of the Account Parties to the Issuing Bank and the Banks; the Issuing Bank shall have no obligation to the Banks to ascertain the purpose of any Letter of Credit, and, without limiting the generality of the provisions of Section 2.04(b) hereof, the rights and obligations of the Banks and the Issuing Bank among themselves shall not be impaired or affected by a breach of this Section 2.01(e). (f) Fronting Fee; Administration Fees. Each Account Party shall pay to the Administrative Agent, for the sole account of the Issuing Bank, (i) a fronting fee (the "Fronting Fee") for Letters of Credit (based on a year of 360 days and actual days elapsed), for each Letter of Credit issued for the account of such Account Party for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.10%; and (ii) such other administration, issuance, maintenance, amendment, drawing and negotiation fees as are customarily charged by the Issuing Bank to its customers generally at the time in question (a list of which customary charges as of the date of this Agreement has been provided by the Issuing Bank to URC) or are otherwise agreed between the Issuing Bank and URC. (g) Administrative Agent's Annual Fee. The Account Parties shall pay to the Administrative Agent, for its sole account, an annual agent's fee (the "Administrative Agent's Annual Fee") at the times and in the amounts specified in a letter agreement between URC and the Administrative Agent. 2.02. Commitment Fee; Reduction of the Committed Amounts. (a) Commitment Fee. Each Account Party shall pay or cause to be paid to the Administrative Agent for the account of each Bank a commitment fee (the "Commitment Fee") for each day during the period from the Closing Date to but excluding the Expiration Date calculated (based on a year of 360 days and actual days elapsed) at a per annum rate equal to 0.08% for each Level One Day, 0.10% for each Level Two Day, 0.125% for each Level Three Day and 0.15% for each Level Four Day, payable on the unused portion of such Bank's Letter of Credit Participating Interest Committed Amount in effect on such day. Such fee shall be payable on each Regular Payment Date and on the Expiration Date for the preceding period for which such fee has not been paid. (b) Reduction of the Committed Amounts. URC may at any time or from time to time reduce Pro Rata the Letter of Credit Participating Interest Committed Amounts of the Banks to an aggregate amount (which may be zero) not less than the Letter of Credit Exposure. Any reduction of the Letter of Credit Participating Interest Committed Amounts shall be in an aggregate minimum amount of $5,000,000 and in an amount which is an integral multiple of $1,000,000. Reduction of the Letter of Credit Participating Interest Committed Amounts shall be made by providing not less than three Business Days' notice (which notice shall be irrevocable) to such effect to the Administrative Agent. After the date specified in such notice, the Commitment Fee shall be calculated upon the Letter of Credit Participating Interest Committed Amounts as so reduced. 2.03. Procedure for Issuance and Amendment of Letters of Credit. (a) Request for Issuance. An Account Party may from time to time request, upon at least three Business Days' notice, the Issuing Bank to issue a Letter of Credit by: -17- 19 (i) delivering to the Issuing Bank and the Administrative Agent a written request to such effect, specifying the date on which such Letter of Credit is to be issued, the expiration date thereof, and the Stated Amount thereof, and (ii) delivering to the Issuing Bank a completed application, in the form annexed hereto as Exhibit F, or in such other form as may from time to time be required by the Issuing Bank in accordance with its customary practice with respect to its customers generally (the "Letter of Credit Application"), together with such other certificates, documents and other papers as are specified in such application. Upon receiving any such notice, the Issuing Bank shall promptly notify the Administrative Agent (by telephone or otherwise), and furnish the Administrative Agent with the proposed form of Letter of Credit to be issued. The Administrative Agent shall, promptly upon receiving such notice, notify the Banks of such proposed Letter of Credit (which notice shall specify the Stated Amount and term of such proposed Letter of Credit), and shall determine, as of the close of business on the Business Day before such proposed issuance, whether such proposed Letter of Credit complies with the limitations set forth in Section 2.01 hereof. If such limitations set forth in Section 2.01 are not satisfied or if the Required Banks have given notice to the Administrative Agent to cease issuing Letters of Credit pursuant to Section 2.03(c)(ii) hereof, the Administrative Agent shall notify the Issuing Bank (in writing or by telephone promptly confirmed in writing) that the Issuing Bank is not authorized to issue such Letter of Credit. If the Issuing Bank issues a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct, and shall promptly notify the Administrative Agent thereof and furnish a copy thereof to the Administrative Agent. (b) Request for Extension or Increase. An Account Party may from time to time request the Issuing Bank to extend the expiration date of an outstanding Letter of Credit or increase (or, with the consent of the beneficiary, decrease) the Stated Amount of or the amount available to be drawn on such Letter of Credit. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of a replacement Letter of Credit (except only that the Issuing Bank may, if it elects, issue a notice of extension or increase in lieu of issuing a new Letter of Credit in substitution for the outstanding Letter of Credit). (c) Limitations on Issuance, Extension and Amendment. (i) As between the Issuing Bank, on the one hand, and the Agents and the Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing such Letter of Credit after receiving authorization from the Administrative Agent as provided in Section 2.03(a) hereof, notwithstanding any subsequent notices to the Issuing Bank, any knowledge of an Event of Default (unless the Issuing Bank shall have received a notice specifying that such Event of Default is an "Event of Default" under this Agreement) or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Issuing Bank, or any other event, condition or circumstance whatsoever. The Issuing Bank may amend, modify or supplement Letters of Credit or Letter of Credit Applications, or waive compliance with any condition of issuance or payment, without the consent of, and without liability to, any Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases the Stated Amount of or the amount available to be drawn on an outstanding Letter of Credit shall be subject to Section 2.01. (ii) As between the Administrative Agent, on the one hand, and the Banks, on the other hand, the Administrative Agent shall not authorize issuance of any Letter of Credit if the Administrative Agent shall have received, at least two Business Days before authorizing such issuance, from the Required Banks an unrevoked written notice that any condition precedent set forth in Section 4.02 will not be satisfied as of the time of such issuance and expressly requesting that the Administrative Agent direct the Issuing Bank to cease to issue Letters of Credit. Absent such notice, -18- 20 or unless the Administrative Agent determines that the applicable limitations set forth in Section 2.01 hereof are not satisfied, the Administrative Agent shall be justified and fully protected, as against the Banks, in authorizing the Issuing Bank to issue such Letter of Credit, notwithstanding any subsequent notices to the Administrative Agent, any knowledge of an Event of Default or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Administrative Agent, or any other event, condition or circumstance whatsoever. 2.04. Letter of Credit Participating Interests. (a) Generally. Concurrently with the issuance of each Letter of Credit, the Issuing Bank automatically shall be deemed, irrevocably and unconditionally, to have sold, assigned, transferred and conveyed to each other Bank, and each other Bank automatically shall be deemed, irrevocably and unconditionally, severally to have purchased, acquired, accepted and assumed from the Issuing Bank, without recourse to, or representation or warranty by, the Issuing Bank, an undivided interest, in a proportion equal to such Bank's Pro Rata share, in all of the Issuing Bank's rights and obligations in, to or under such Letter of Credit, the related Letter of Credit Application, the Letter of Credit Reimbursement Obligations, and all collateral, guarantees and other rights from time to time directly or indirectly securing the foregoing (such interest of each Bank being referred to herein as a "Letter of Credit Participating Interest", it being understood that the Letter of Credit Participating Interest of the Issuing Bank is the interest not otherwise attributable to the Letter of Credit Participating Interests of the other Banks). Each Bank irrevocably and unconditionally agrees to the immediately preceding sentence, such agreement being herein referred to as such Bank's "Letter of Credit Participating Interest Commitment". Amounts other than Letter of Credit Reimbursement Obligations and Letter of Credit Fees payable from time to time under or in connection with a Letter of Credit or Letter of Credit Application shall be for the sole account of the Issuing Bank. On the date that any Purchasing Bank becomes a party to this Agreement in accordance with Section 9.13(c) hereof, Letter of Credit Participating Interests in all outstanding Letters of Credit held by the Bank from which such Purchasing Bank acquired its interest hereunder shall be proportionately reallocated between such Purchasing Bank and such transferor Bank (and, to the extent such transferor Bank is the Issuing Bank, the Purchasing Bank shall be deemed to have acquired a Letter of Credit Participating Interest from the Issuing Bank to such extent). (b) Maximum Amounts of Funding of Participations. (i) This Section 2.04(b)(i) is applicable if the Conversion to Tranche System has not occurred. No Bank will be obligated to fund its Letter of Credit Participating Interest Percentage of a drawing on a Letter of Credit if such funding would cause the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit to exceed such Bank's Letter of Credit Participating Interest Committed Amount, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds, that the Dollar Equivalent of one Pound is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds. (ii) This Section 2.04(b)(ii) is applicable if the Conversion to Tranche System has occurred. No Tranche 1 Bank, Tranche 2 Bank or Tranche X Bank, as the case may be, will be obligated to fund its Letter of Credit Participating Interest Percentage of a drawing on a Tranche 1 Letter of Credit, Tranche 2 Letter of Credit or Tranche X Letter of Credit, as the case may be, if such funding would cause the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit under such applicable Tranche to exceed such Bank's Letter of Credit Participating Interest Committed Amount under such applicable Tranche, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds, that the Dollar Equivalent Amount of one Pound is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds. -19- 21 (c) Obligations Absolute. Notwithstanding any other provision hereof, each Bank hereby agrees that its obligation to participate in each Letter of Credit issued in accordance herewith, its obligation to make the payments specified in Section 2.05 hereof, and the right of the Issuing Bank to receive such payments in the manner specified therein, are each absolute, irrevocable and unconditional and shall not be affected by any event, condition or circumstance whatever. The failure of any Bank to make any such payment shall not relieve any other Bank of its funding obligation hereunder on the date due, but no Bank shall be responsible for the failure of any other Bank to meet its funding obligations hereunder. 2.05. Letter of Credit Drawings and Reimbursements. (a) Account Party's Reimbursement Obligation. Each Account Party hereby agrees to reimburse the Issuing Bank, by making payment to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.11(a) hereof on the date of each payment made by the Issuing Bank under any Letter of Credit issued for such Account Party's account (but not earlier than the date which is one Business Day after notice of such payment or of the drawing giving rise to such payment is given to URC), without, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. Each Account Party agrees that it will make such payment to the Administrative Agent for the account of the Issuing Bank in the same currency as the currency of the payment by the Issuing Bank under such Letter of Credit. To the extent such payment is not timely made, such Account Party hereby agrees to pay to the Administrative Agent, for the account of the Issuing Bank, on demand, interest on any Letter of Credit Unreimbursed Draws for each day from and including the date of such payment by the Issuing Bank until paid (before and after judgment) in accordance with Section 2.11(a) hereof, at the rate per annum set forth in Section 2.11(b) hereof. (b) Payment by Banks on Account of Unreimbursed Draws. If the Issuing Bank makes a payment under any Letter of Credit and is not reimbursed in full therefor on such payment date in accordance with Section 2.05(a) hereof, the Issuing Bank will promptly notify the Administrative Agent thereof (which notice may be by telephone), and the Administrative Agent shall forthwith notify each Bank (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Administrative Agent's close of business on the date such notice is given (if notice is given by 2:00 o'clock P.M. Pittsburgh time) or 10:00 o'clock A.M. Pittsburgh time the following day (if notice is given after 2:00 o'clock P.M. Pittsburgh time) , each such Bank will pay to the Administrative Agent, for the account of the Issuing Bank, in immediately available funds, an amount equal to such Bank's Pro Rata share of the unreimbursed portion of such payment by the Issuing Bank, provided such notice is given no later than 2:00 o'clock P.M., Pittsburgh time. Each Bank agrees that such payment to the Administrative Agent for the account of the Issuing Bank shall be in the same currency as the currency of the payment by the Issuing Bank under the Letter of Credit. If and to the extent that any Bank fails to make such payment to the Issuing Bank on such date, such Bank shall pay such amount on demand, together with interest, for the Issuing Bank's own account, for each day from and including the date of the Issuing Bank's payment to but not including the date of repayment to the Issuing Bank (before and after judgment) at rate per annum for each day from and including the date of such payment by the Issuing Bank to and including the second Business Day thereafter equal to the Applicable Interest Rate. (c) Distributions to Banks. If, at any time, after there occurs a Letter of Credit Unreimbursed Draw and the Issuing Bank has received from any Bank such Bank's share of such Letter of Credit Unreimbursed Draw, and the Issuing Bank receives any payment or makes any application of funds on account of the Letter of Credit Reimbursement Obligation arising from such Letter of Credit Unreimbursed Draw, the Issuing Bank will pay to the Administrative Agent, for the account of such Bank, such Bank's Pro Rata share of such payment. (d) Rescission. If any amount received by the Issuing Bank on account of any Letter of Credit Reimbursement Obligation shall be avoided, rescinded or otherwise returned or paid over by the Issuing Bank for any reason at any time, whether before or after the termination of this Agreement (or the Issuing Bank believes in good faith that such avoidance, rescission, return or payment is required, whether or not such -20- 22 matter has been adjudicated), each such Bank will, promptly upon notice from the Administrative Agent or the Issuing Bank, pay over to the Administrative Agent for the account of the Issuing Bank its Pro Rata share of such amount, together with its Pro Rata share of any interest or penalties payable with respect thereto. 2.06 Equalization. If any Bank receives any payment or makes any application on account of its Letter of Credit Participating Interest, such Bank shall forthwith pay over to the Issuing Bank, in Dollars and in like kind of funds received or applied by it the amount in excess of such Bank's ratable share of the amount so received or applied. 2.07. Obligations Absolute. The payment obligations of the Account Parties and of the Banks under Section 2.05 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of this Agreement, any Letter of Credit or any Transaction Document against an Account Party; (b) the existence of any claim, set-off, defense or other right which any Account Party, any Guarantor or any other Person may have at any time against any beneficiary or transferee of any Letter of Credit (or any Persons for whom any such beneficiary or transferee may be acting), the Issuing Bank, any Bank, or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or any unrelated transaction; (c) any draft, certificate, statement or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (d) payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit, or payment by the Issuing Bank under the Letter of Credit in any other circumstances in which conditions to payment are not met, except any such wrongful payment to the extent resulting from the gross negligence or willful misconduct of the Issuing Bank; or (e) any other event, condition or circumstance whatever, whether or not similar to any of the foregoing, except if the same results solely from the gross negligence or willful misconduct of the Issuing Bank. Each Account Party bears the risk of, and neither the Issuing Bank, any of its directors, officers, employees or agents, nor any Bank, shall be liable or responsible for any of, the foregoing matters, the use which may be made of any Letter of Credit, or acts or omissions of the beneficiary or any transferee in connection therewith, except for such person's gross negligence or willful misconduct. 2.08. Unacceptable Credit Rating. If the long-term debt credit rating of any Bank shall decline below the Acceptable Credit Rating (as defined below), the Issuing Bank shall have the right, but not the obligation, to cause such Bank to be replaced as a party hereto by a Replacement Bank, subject to approval of such Replacement Bank by each Account Party (which in each case shall not be unreasonably withheld). In the event that any Bank is to be replaced by a Replacement Bank, such Bank shall, upon payment to it of all amounts owing to it on the date of its replacement, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. A Bank shall have an "Acceptable Credit Rating" if it has both (i) a long-term debt rating of at least A by Standard & Poor's and (ii) a long-term debt rating of at least A2 by Moody's. Each Credit Party agrees that it shall cooperate with the Issuing Bank in connection with the identification of one or more Replacement Banks if the Issuing Bank exercises its right set forth in the first sentence of this Section 2.08. -21- 23 2.09. Letter of Credit Applications. The representations, warranties and covenants by the Account Parties under, and the rights and remedies of the Issuing Bank under, the Continuing Letter of Credit Agreement and any Letter of Credit Application relating to any Letter of Credit are in addition to, and not in limitation or derogation of, representations, warranties and covenants by the Account Parties under, and rights and remedies of the Issuing Bank and the Banks under, this Agreement, the Transaction Documents, and applicable Law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Application shall inure to the benefit of each Bank to the extent of its Letter of Credit Participating Interest Commitment Percentage as fully as if such Bank was a party to such Letter of Credit Application. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Application, this Agreement shall prevail. 2.10. Certain Provisions Relating to the Issuing Bank. (a) General. The Issuing Bank shall have no duties or responsibilities to the other Bank Parties except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or any Transaction Document or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the other Bank Parties under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Bank Party or any other Person. The Issuing Bank shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice to the other Bank Parties relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Account Party, (ii) the business, operations, condition (financial or otherwise) or prospects of the Account Parties or any other Person, or (iii) the existence of any Event of Default or Potential Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide any Agent or any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. The Issuing Bank shall not be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document. (b) Administration. The Issuing Bank may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Issuing Bank shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Issuing Bank may consult with legal counsel (including, without limitation, in-house counsel for the Issuing Bank or in-house or other counsel for the Account Parties), independent public accountants and any other experts selected by it from time to time, and the Issuing Bank shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever the Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to any Account Party or Bank Party, such matter may be established by a certificate of such Account Party or Bank Party, as the case may be, and the Issuing Bank may conclusively rely upon such certificate. The Issuing Bank shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Issuing Bank has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Issuing Bank receives such a notice, the Issuing Bank shall give prompt notice thereof to the Administrative Agent. (c) Indemnification of Issuing Bank by Banks. Each Bank hereby agrees to reimburse and indemnify the Issuing Bank and each of its directors, officers, employees and agents (to the extent not reimbursed by the Account Parties and without limitation of the obligations of the Account Parties to do so), Pro Rata, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, -22- 24 penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel (other than in-house counsel) for the Issuing Bank or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Issuing Bank or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Issuing Bank, in its capacity as such, or such other Person, as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Letter of Credit, provided, that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting from the gross negligence or willful misconduct of the Issuing Bank or such other Person, as finally determined by a court of competent jurisdiction. (d) Issuing Bank in its Individual Capacity. With respect to its Commitments and the Obligations owing to it, the Issuing Bank shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the term "Banks" and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Issuing Bank were not the Issuing Bank hereunder. 2.11. Payments Generally; Interest and Interest on Overdue Amounts. (a) Payments Generally. All payments to be made by an Account Party in respect of fees, indemnity, expenses or other amounts due from such Account Party hereunder or under any Transaction Document shall be payable in Dollars (except in the case of payment of reimbursement obligations with respect to Letters of Credit denominated in Pounds, which shall be payable in Pounds) by not later than 2:00 o'clock p.m., Pittsburgh time (or, in the case of payments in Pounds, London time), on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature. Except for payments under Sections 2.12, 2.13 and 9.04 hereof, such payments shall be made to the Administrative Agent at its Office in Dollars in funds immediately available at such Office or, in the case of payments in Pounds, at its London branch in funds immediately available at such branch. Payments under Sections 2.12, 2.13 and 9.04 hereof shall be made to the applicable Bank at such domestic account as it shall specify to the Account Parties from time to time in funds immediately available at such account. Any payment or prepayment received by the Administrative Agent or such Bank after 2:00 p.m., Pittsburgh time or London time, as applicable, on any day shall be deemed to have been received on the next succeeding Business Day. The Administrative Agent shall distribute to the Banks all such payments received by it from an Account Party as promptly as practicable after receipt by the Administrative Agent. (b) Interest and Interest on Overdue Amounts. Interest on Letter of Credit Reimbursement Obligations shall accrue at a rate per annum (based on a year of 360 days and actual days elapsed) which for each day shall be equal to the then-current Applicable Interest Rate beginning on the day that the related Letter of Credit payment is made and shall be due and payable on the day that the Letter of Credit Reimbursement Obligation is due and payable in accordance with Section 2.05(a) hereof. To the extent permitted by law, after there shall have become due (by acceleration or otherwise) fees, indemnity, expenses or any other amounts due from the Account Parties hereunder or under any other Transaction Document, such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days and actual days elapsed) which for each day shall be equal to 2% above the then-current Applicable Interest Rate. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any Transaction Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. -23- 25 2.12. Additional Compensation in Certain Circumstances. If the introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Official Body (whether or not having the force of law): (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Letters of Credit or payments by the Account Parties of fees or other amounts due from the Account Parties hereunder or under the other Transaction Documents (except for taxes on the overall net income or overall gross receipts, profits or gains of such Bank imposed by the jurisdictions (federal, state and local) in which the Bank's principal office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, such Bank, (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Bank or (B) otherwise applicable to the obligations of any Bank under this Agreement, or (iv) imposes upon any Bank any other condition or expense with respect to this Agreement or the issuance of any Letter of Credit, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank or, in the case of clause (iii) hereof, any Person controlling a Bank, with respect to this Agreement or the issuance of any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Bank's or controlling Person's capital, taking into consideration such Bank's or controlling Person's policies with respect to capital adequacy so long as such policies are reasonable in light of prevailing market practice at the time) by an amount which such Bank deems to be material, such Bank may from time to time notify the Account Parties of the amount determined in good faith (using any averaging and attribution methods) by such Bank (which determination shall be conclusive absent manifest error) to be necessary to compensate such Bank for such increase, reduction or imposition. Such amount shall be due and payable by any applicable Account Party to such Bank five Business Days after such notice is given, together with an amount equal to interest on such amount from the date two Business Days after the date demanded until such due date at the Prime Rate. Such notice shall set forth in reasonable detail the calculations upon which such Bank determined such amount. A certificate by such Bank as to the amount due and payable under this Section 2.12 from time to time and the method of calculating such amount shall be conclusive absent manifest error. Each Bank agrees that it will use good faith efforts promptly to notify the Account Parties of the occurrence of any event that would give rise to a payment under this Section 2.12; provided, however that, so long as such notice is given within a reasonable period after the occurrence of such event, any failure of such Bank to give any such notice shall have no effect on the Account Parties' obligations hereunder. Upon the receipt by the Account Parties from any Bank (an "Affected Bank") of a claim for compensation under this Section 2.12, the Account Parties may designate another commercial lending institution satisfactory to the Issuing Bank to acquire and assume all of such Affected Bank's Letter of Credit Participating Interest Commitment and Letter of Credit Participating Interest, and all other rights and obligations of the Affected Bank hereunder, by giving notice of the name of such institution to the Administrative Agent, the Issuing Bank and the Affected Bank. Such acquisition and assumption shall be made in accordance with Section 9.13(c). 2.13. Taxes. (a) Payments Net of Taxes. All payments made by the Account Parties under this Agreement or any other Transaction Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, -24- 26 deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Official Body, and all liabilities with respect thereto, excluding (i) in the case of each Agent and each Bank, income, profits, gains or franchise taxes imposed on such Agent or such Bank by the jurisdiction under the laws of which such Agent or such Bank is organized or any political subdivision or taxing authority thereof or therein or as a result of a connection between such Bank and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and (ii) in the case of each Bank, income, profits, gains or franchise taxes imposed by any jurisdiction in which such Bank's lending offices which issue Letters of Credit are located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"), unless an Account Party is required by Law to withhold or deduct Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to any Agent or any Bank under this Agreement or any other Transaction Document, the applicable Account Party shall pay the relevant amount of such Taxes and the amounts so payable to such Agent or such Bank shall be increased to the extent necessary to yield to such Agent or such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Transaction Documents. Whenever any Taxes are paid by an Account Party with respect to payments made in connection with this Agreement or any other Transaction Document, as promptly as possible thereafter, such Account Party shall send to such Agent for its own account or to the Administrative Agent for the account of such Bank, as the case may be, a certified copy of an original official receipt received by such Account Party showing payment thereof. If an Agent or a Bank determines in its sole discretion in good faith that it has received a refund in respect of, or that it has been able to utilize to offset its liability for Taxes a credit (a "utilized credit") in respect of, any Taxes as to which it has been indemnified by an Account Party, or with respect to which an Account Party has paid additional amounts pursuant to this Section 2.13, such Agent or such Bank shall promptly after the date of such receipt pay over the amount of such refund or utilized credit to such Account Party (but only to the extent of indemnity payments made, or additional amounts paid, by an Account Party under this Section 2.13 with respect to Taxes giving rise to such refund or utilized credit and only to the extent that such Agent or such Bank has determined that the amount of any such refund or utilized credit is directly attributable to payments made under this Agreement), net of all reasonable expenses of such Agent or such Bank (including additional Taxes attributable to such refund or utilized credit, as determined by such Agent or such Bank) and without interest (other than interest, if any, paid by the relevant Official Body with respect to such refund or utilized credit). An Account Party receiving any such payment from an Agent or a Bank shall, upon demand, pay to such Agent or such Bank any amount paid over to such Account Party by such Agent or such Bank (plus penalties, interest or other charges) in the event such Agent or such Bank is required to repay any portion of such refund or utilized credit to such Official Body. Nothing in this Section 2.13(a) shall entitle an Account Party to have access to the records of any Agent or any Bank, including, without limitation, tax returns. (b) Indemnity. Each Account Party hereby indemnifies each of the Agents and each of the Banks for the full amount of all Taxes attributable to payments by or on behalf of such Account Party hereunder or under any of the other Transaction Documents, any Taxes paid by such Agent or such Bank, as the case may be, any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Taxes (including any incremental Taxes, interest or penalties that may become payable by such Agent or such Bank as a result of any failure to pay such Taxes, except by reason of unreasonable delay by such Agent or Bank in notifying an Account Party or in making payment after payment was received from an Account Party), whether or not such Taxes were correctly or legally asserted. Such indemnification shall be made within 30 days from the date such Bank or such Agent, as the case may be, makes written demand therefor. -25- 27 (c) Withholding and Backup Withholding. Each Bank that is incorporated or organized under the laws of any jurisdiction other than the United States or any State thereof agrees that, on or prior to the date the first payment is due to be made to it hereunder or under any other Transaction Document, it will furnish to the Account Parties and the Administrative Agent: (i) two valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the other Transaction Documents without deduction or withholding of any United States federal income taxes and (ii) a valid, duly completed Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding tax. Each Bank which so delivers to the Account Parties and the Administrative Agent a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, agrees to deliver to the Account Parties and the Administrative Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from withholding tax, or after the occurrence of any event requiring a change in the most recent form previously delivered by it, and such extensions or renewals thereof as may reasonably be requested by the Account Parties and the Administrative Agent, certifying in the case of a Form 1001 or Form 4224 that such Bank is entitled to receive payments under this Agreement or any other Transaction Document without deduction or withholding of any United States federal income taxes, unless in any such cases an event (including any changes in Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Account Parties and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, in which case Section 2.13(a) and (b) shall apply to all further payments. 2.14. Extensions of Expiration Date. An Account Party may, at its option, give the Administrative Agent and the Issuing Bank written notice (an "Extension Request") at any time not more than ninety days, nor less than sixty days, prior to the Expiration Date in effect at such time (the "Current Expiration Date") of such Account Party's desire to extend the Expiration Date to a date which is not later than 364 days after the Current Expiration Date. The Administrative Agent shall promptly inform the Banks of such Extension Request. Each Bank which agrees to such Extension Request shall deliver to the Administrative Agent its express written consent thereto no later than forty-five days prior to the Current Expiration Date. No extension shall become effective unless the express written consent thereto by the Required Commitment Banks and the Issuing Bank is received by the Administrative Agent on or before the forty-fifth day prior to the Current Expiration Date. If the Issuing Bank and the Required Commitment Banks, but not all Commitment Banks, have expressly consented in writing to such Extension Request by such thirtieth day, then the Administrative Agent shall so notify such Account Party and such Account Party may, effective as of the Current Expiration Date, take one or both of the following actions: (i) replace any Commitment Bank which has not agreed to such Extension Request (a "Nonextending Bank") with another commercial lending institution satisfactory to the Issuing Bank (a "Replacement Bank") by giving notice of the name of such Replacement Bank to the Administrative Agent and the Issuing Bank not later than five Business Days prior to the then effective Expiration Date and (ii) elect to implement a Conversion to Tranche System as contemplated by Section 2.15 hereof (or, if the Conversion to Tranche System has previously been implemented, elect to implement a Supplement to Tranche System as contemplated by Section 2.15 hereof). In the event that a Nonextending Bank is to be replaced by a Replacement Bank, such Nonextending Bank shall, upon payment to it of all amounts -26- 28 owing to it on the date of its replacement, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. A Nonextending Bank retains the obligation to fund draws on Letters of Credit issued prior to the Expiration Date, unless such Letter of Credit has been renewed since the Expiration Date. If the Issuing Bank and the Required Commitment Banks shall have consented to such Extension Request, then, on the Current Expiration Date, the Expiration Date shall be deemed to have been extended to, and shall be, the date specified in such Extension Notice. The Administrative Agent shall promptly after any such extension advise the Banks of any changes in the Letter of Credit Participating Interest Committed Amounts and the Letter of Credit Participating Interest Commitment Percentages, as well as any changes effected by the election of the Conversion to Tranche System or a Supplement to Tranche System. 2.15. Tranches. (a) Certain Definitions. As used in this Agreement the following terms have the meanings ascribed thereto: "Commitment Banks" at any time means Banks which have Letter of Credit Participating Interest Commitments at such time and "Commitment Bank" means any one of them. "Conversion to Tranche System" means the written election by the Account Parties, at a time when an Account Party has made an Extension Request pursuant to Section 2.14 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify Letters of Credit as Tranche 1 Letters of Credit and Tranche 2 Letters of Credit, all in accordance with Section 2.15(b) hereof. "L/C Termination Date" means, with respect to a Letter of Credit, the date which is stated therein to be the last day on which the beneficiary thereof may draw thereon. "Pro Rata" means: (i) until the first Special Expiration Date, from and to the Banks in accordance with their respective Letter of Credit Participating Interest Percentages and (ii) thereafter, (x) with respect to Tranche 1 Letters of Credit, from and to the Tranche 1 Banks in accordance with their respective Tranche 1 Letter of Credit Participating Interest Percentages, (y) with respect to Tranche 2 Letters of Credit and Tranche 2 Letter of Credit Commitments, from and to the Tranche 2 Banks in accordance with their respective Tranche 2 Letter of Credit Participating Interest Percentages and (z) with respect to each additional Tranche of Letters of Credit (i.e., Tranche 3 Letters of Credit, Tranche 4 Letters of Credit, and so on), if any, from and to the Banks which have Letter of Credit Participating Interest Commitments or Letter of Credit Participating Interests, as applicable, with respect to such Tranche in accordance with their respective related Letter of Credit Participating Interest Percentages. "Required Commitment Banks" at any time means Commitment Banks which have, in the aggregate, Letter of Credit Participating Interest Committed Amounts in excess of 66 2/3% of the total outstanding Letter of Credit Participating Interest Committed Amounts at such time. "Special Expiration Date" means the Expiration Date which is in effect at a time when each of the following has occurred: (i) an Account Party has made an Extension Request pursuant to Section 2.14 hereof, (ii) such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, and (iii) such Account Party has elected to implement a Conversion to Tranche System or a Supplement to Tranche System. -27- 29 "Supplement to Tranche System" means the election by an Account Party at a time when the Conversion to Tranche System has been previously made and when such Account Party has made an Extension Request pursuant to Section 2.14 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify additional Letters of Credit as Tranche X Letters of Credit. "Tranche 1 Bank" shall mean each Bank which is a Bank immediately prior to the first Special Expiration Date. "Tranche 1 Letter of Credit" means each Letter of Credit which is issued prior to the first Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such first Special Expiration Date. "Tranche 1 Letter of Credit Participating Interest Percentage" for each Tranche 1 Bank means such Bank's Letter of Credit Participating Interest Percentage immediately prior to the first Special Expiration Date. "Tranche 2 Bank" shall mean each Bank which has a Tranche 2 Letter of Credit Participating Interest Commitment. "Tranche 2 Letter of Credit" means each Letter of Credit which is issued prior to the second Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such second Special Expiration Date and shall not include any Tranche 1 Letter of Credit (it being understood that a Letter of Credit may change from a Tranche 1 Letter of Credit to a Tranche 2 Letter of Credit as a result of the extension, after the first Special Expiration Date, of its L/C Termination Date). "Tranche 3 Letter of Credit" and "Tranche 4 Letter of Credit" have the meanings set forth in the definition of the term "Tranche X". "Tranche X" shall mean Tranche 3 if there are existing Tranche 2 Letters of Credit but not Tranche 3 Letters of Credit, Tranche 4 if there are existing Tranche 3 Letters of Credit but not Tranche 4 Letters of Credit, and so on in consecutive integral succession. The terms "Tranche X Bank", "Tranche X Letter of Credit Participating Interest Commitment", "Tranche X Letter of Credit Participating Interest Committed Amount" and "Tranche X Letter of Credit Participating Interest Percentage" shall have comparable meanings. The term "Tranche X Letter of Credit" shall have a comparable meaning, but such meaning shall be consistent with the following: (i) the term "Tranche 3 Letter of Credit" means each Letter of Credit which is issued prior to the third Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such third Special Expiration Date and shall not include any Tranche 1 Letter or Credit or any Tranche 2 Letter of Credit; (ii) the term "Tranche 4 Letter of Credit" means each Letter of Credit which is issued prior to the fourth Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such fourth Special Expiration Date and shall not include any Tranche 1 Letter of Credit, any Tranche 2 Letter of Credit or any Tranche 3 Letter of Credit; (iii) the terms "Tranche 5 Letter of Credit", "Tranche 6 Letter of Credit", and so on shall have comparable meanings (it being understood that a Letter of Credit can change from one Tranche to another as a result of an extension of its L/C Termination Date). -28- 30 (b) Conversion to Tranche System. If the Account Parties elect the Conversion to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate as of the Special Expiration Date related to such Extension Request, but such Nonextending Banks (other than Nonextending Banks which have been replaced as contemplated by Section 2.14 hereof) shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Tranche 1 Letters of Credit and shall retain their respective Letter of Credit Participating Interests in and with respect to Tranche 1 Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche 2 Letter of Credit Participating Interest Commitment" and the Letter of Credit Participating Interested Committed Amount of such Bank shall be its "Tranche 2 Letter of Credit Participating Interest Committed Amount"; (iii) the "Tranche 2 Letter of Credit Participating Interest Commitment Percentage" for each Tranche 2 Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche 2 Bank's Tranche 2 Letter of Credit Participating Interest Committed Amount and the denominator of which is the aggregate Tranche 2 Letter of Credit Participating Interest Committed Amounts of all of the Tranche 2 Banks; and (iv) the Issuing Bank shall have no obligation to issue any Tranche 2 Letters of Credit (or to permit any Letter of Credit to become a Tranche 2 Letter of Credit by extension of its L/C Transaction Date) if the Letters of Credit Exposure upon such issuance (or extension) issued exceed the aggregate of the Banks' Tranche 2 Letter of Credit Participating Interest Committed Amounts. (c) Supplement to Tranche System. If the Account Parties elect a Supplement to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate, but such Nonextending Banks shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Letters of Credit under existing Tranches and shall retain their respective Letter of Credit Participating Interests in and with respect to existing Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche X Letter of Credit Participating Interest Commitment" and the Letter of Credit Participating Interested Committed Amount of such Bank shall be its "Tranche X Letter of Credit Participating Interest Committed Amount"; (iii) the "Tranche X Letter of Credit Participating Interest Commitment Percentage" for each Tranche X Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche X Bank's Tranche X Letter of Credit Participating Interest Committed Amount, and the denominator of which is the aggregate Tranche X Letter of Credit Participating Interest Committed Amounts of all of the Tranche X Banks, all as contemplated by the definition of the term "Tranche X" contained in paragraph (a) of this Section 2.15; and (iv) the Issuing Bank shall have no obligation to issue any Tranche X Letters of Credit (or to permit any Letter of Credit to become a Tranche X Letter of Credit by extension of its L/C Transaction Date) if the Letters of Credit Exposure upon such issuance (or extension) issued exceed the aggregate of the Banks' Tranche X Letter of Credit Participating Interest Committed Amounts. ARTICLE III REPRESENTATIONS AND WARRANTIES. Each Credit Party represents and warrants to the Issuing Bank, the Banks and the Agents that: -29- 31 3.01. Corporate Existence and Standing. Such Credit Party and each of its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its respective jurisdiction of incorporation, has the power and authority to own its properties and assets, and to carry on its business as presently conducted, and is duly qualified to conduct business as a foreign corporation in each jurisdiction in which such qualification is required, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. 3.02. Authorization and Validity. Such Credit Party and any Subsidiary of such Credit Party which is also a Credit Party has all requisite corporate power and authority and legal right to execute and deliver (or file, as the case may be) this Agreement and any other Transaction Document to which it is a party, to request the issuance of Letters of Credit and to perform its obligations hereunder and thereunder. The execution and delivery (or filing, as the case may be) by such Credit Party of this Agreement and each such Transaction Document and the performance of its obligations hereunder and thereunder have been duly authorized by proper corporate proceedings and this Agreement and each such Transaction Document constitute legal, valid and binding obligations of such Credit Party enforceable against such Credit Party in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.03. Compliance with Laws and Contracts. Such Credit Party and its Subsidiaries have complied in all material respects with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective properties, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Neither the execution and delivery by such Credit Party of the Transaction Documents, the issuance or use of the Letters of Credit, the consummation of the transactions contemplated by the Transaction Documents nor compliance with the provisions of the Transaction Documents will, or at the relevant time did, (a) violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Credit Party or any Subsidiary or such Credit Party's or any Subsidiary's charter, articles or certificate of incorporation or by-laws, (b) violate the provisions of or require the approval or consent of any party to any indenture, instrument or agreement to which such Credit Party or any Subsidiary is a party or is subject, or by which it, or its property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the property of such Credit Party or any Subsidiary pursuant to the terms of any such indenture, instrument or agreement or (c) require any consent of the stockholders of any Person except for approvals or consents which will be obtained before the initial Letter of Credit issuance and are disclosed on Schedule 3.03, except for any violation of, or failure to obtain an approval or consent required under, any such law, rule, regulation, order, writ, judgment, injunction, decree, award, indenture, instrument or agreement that could not reasonably be expected to have a Material Adverse Effect. 3.04. Governmental Consents. Except as set forth on Schedule 3.04 hereto, no order, consent, approval, qualification, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of, a Governmental Authority, or any subdivision thereof, any securities exchange or any other Person is or at the relevant time was required to authorize, or is or at the relevant time was required in connection with the execution, delivery, consummation or performance of, or the legality, validity, binding effect or enforceability of any of the Transaction Documents, the issuance or use of the Letters of Credit or the consummation of any transaction contemplated in the Transaction Documents. 3.05. Financial Statements. URC and URGI have heretofore furnished to the Administrative Agent, with sufficient copies for each Bank, the financial statements listed on Schedule 3.05 hereto (collectively, the "Financial Statements"). Each of the Financial Statements was prepared in accordance with Agreement Accounting Principles or SAP, as applicable, and, together with the related notes, fairly presents the consolidated financial condition and operations of the relevant Credit Party and its Subsidiaries, or of the relevant Insurance Subsidiary, as applicable, at such dates and the consolidated -30- 32 results of their operations for the respective periods then ended (except, in the case of such unaudited statements, for normal year-end audit adjustments). 3.06. Material Adverse Change. No material adverse change in the business, Property, condition (financial or otherwise), performance, prospects or operations of URC and its Subsidiaries, taken as a whole, or of URGI and its Subsidiaries, taken as a whole, has occurred since December 31, 1997. 3.07. Taxes. Except as set forth in Schedule 3.07 hereto, such Credit Party and each of its Subsidiaries have filed or caused to be filed on a timely basis and in correct form all United States federal and applicable state tax returns and all other material tax returns which are required to be filed by it, each of Alleghany and each other Consolidated Person has filed or caused to be filed all United States federal and material applicable state tax returns which are required to be filed by it on a consolidated or combined basis and which include URC or any Subsidiary of URC and each of the Credit Parties, the Subsidiaries, Alleghany and each other Consolidated Person has paid all taxes due pursuant to said returns or pursuant to any assessment received by such person, except, in each case, such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles or SAP, as applicable, and as to which no Lien exists. From and after October 7, 1993, each of URC and each Subsidiary of URC has joined in the filing of a consolidated federal income tax return with Alleghany. No tax liens have been filed and no claims are being asserted with respect to any taxes for which any Consolidated Person may be liable which could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves (a) on the books of each Credit Party and its Subsidiaries in respect of any taxes or other governmental charges and (b) on the books of Alleghany and such other Consolidated Person in respect of any taxes or other governmental charges owing with respect to any tax year beginning after December 31, 1992 are in accordance with Agreement Accounting Principles or SAP, as applicable. 3.08. Litigation. There is no litigation, arbitration proceeding, inquiry or governmental investigation pending or, to the knowledge of any of its officers, threatened against or affecting such Credit Party or any of its Subsidiaries or any of their respective properties which could reasonably be expected to have a Material Adverse Effect if adversely determined. 3.09. Insurance Licenses. No License, the loss of which could reasonably be expected to have a Material Adverse Effect, is the subject of a proceeding for suspension or revocation. To such Credit Party's knowledge, there is no sustainable basis for such suspension or revocation, and no such suspension or revocation has been threatened by any Governmental Authority. No Insurance Subsidiary has received written notice from any Governmental Authority that it is deemed to be "commercially domiciled" for insurance regulatory purposes in any jurisdiction other than that indicated on Schedule 3.09. Schedule 3.09 also indicates the line or lines of insurance in which each Insurance Subsidiary is engaged and the state or states in which such Insurance Subsidiary is licensed to engage in any line of insurance in each case as of the date of this Agreement. 3.10. Use of Proceeds. Such Credit Party is not engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 3.11. Permits, Licenses and Rights. Such Credit Party and each Subsidiary of such Credit Party own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties and to carry on their respective businesses as presently conducted and presently planned to be conducted without, to the best knowledge of such Credit Party, conflict with the rights of others, except where failure to do so could not reasonably be expected to have a Material Adverse Effect. 3.12. Disclosure. None of the (a) information, exhibits or reports furnished by or on behalf of any Credit Party to any Agent or to any Bank in connection with this Agreement or the Transaction Documents and the transactions contemplated hereby and thereby or (b) representations or warranties of -31- 33 any Credit Party contained in this Agreement, the other Transaction Documents or any other document, certificate or written statement furnished to the Agents or the Banks by or on behalf of any Credit Party for use in connection with the transactions contemplated by this Agreement or the Transaction Documents contained, contains or will contain any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made and on the date as of which the same were made; provided, that this Section 3.12 shall not apply to any plan, forecast, projection or pro forma financial information contained in such materials that is based upon good faith estimates and assumptions believed to be reasonable at the time made. The pro forma financial information contained in such materials is based upon good faith estimates and assumptions believed by the Credit Parties to be reasonable at the time made. There is no fact known to any Credit Party (other than matters of a general economic or political nature and other than matters applicable to the insurance industry generally) that has had since December 31, 1997 or could reasonably be expected to have a Material Adverse Effect and that has not been disclosed herein or in such other documents, certificates and statements furnished to the Agents or Banks for use in connection with the transactions contemplated by this Agreement and the other Transaction Documents. 3.13. Environmental Laws. There are no claims, investigations, litigation, administrative proceedings, notices, requests for information (each a "Proceeding"), whether pending or, to such Credit Party's knowledge, threatened, or judgments or orders asserting violations of applicable federal, state and local environmental, health and safety statutes, regulations, ordinances, codes, rules, orders, decrees, directives and standards ("Environmental Laws") or relating to any toxic or hazardous waste, substance or chemical or any pollutant, contaminant, chemical or other substance defined or regulated pursuant to any Environmental Law, including, without limitation, asbestos, petroleum, crude oil or any fraction thereof ("Hazardous Materials") asserted against such Credit Party or any of its Subsidiaries which, in any case, could reasonably be expected to have a Material Adverse Effect. As of the date hereof, there are no such Proceedings pending, or to such Credit Party's knowledge threatened, except as disclosed on Schedule 3.13. Such Credit Party and each of its Subsidiaries have obtained and are in compliance in all material respects with all permits, certificates, licenses, approvals and other authorizations ("Environmental Permits") required for the operation of their business and have filed all required notifications or reports relating, in each case, to chemical substances, air emissions, effluent discharges and the storage, treatment, transport and disposal of Hazardous Materials. As of the date hereof, such Credit Party and its Subsidiaries do not have liabilities exceeding $100,000 in the aggregate for all of them with respect to compliance with applicable Environmental Laws and Environmental Permits or related to the generation, treatment, storage, disposal, release, investigation or cleanup of Hazardous Materials, and, to the knowledge of such Credit Party, no facts or circumstances exist which could give rise to such liabilities with respect to compliance with applicable Environmental Laws and Environmental Permits and the generation, treatment, storage, disposal, release, investigation or cleanup of Hazardous Materials. 3.14. Reserves. Each reserve and other liability amount in respect of the insurance business, including, without limitation reserve and other liability amounts in respect of insurance policies, established or reflected in the SAP Financial Statements for the year ended December 31, 1997 of each Insurance Subsidiary, was determined in accordance with generally accepted actuarial standards consistently applied, was fairly stated in accordance with sound actuarial principles and was in compliance with the requirements of the insurance laws, rules and regulations of its state of domicile as of the date thereof. Each Insurance Subsidiary owns assets that qualify as admitted assets under applicable law in an amount at least equal to the sum of all such reserves and liability amounts and its minimum statutory capital and surplus as required by the insurance laws, rules and regulations of its state of domicile. 3.15. Year 2000 Compliance. Such Credit Party has reviewed its operations and those of its Subsidiaries with a view to assessing whether its businesses, or the businesses of any of its Subsidiaries, will be vulnerable to a Year 2000 Problem or will be vulnerable to the effects of a Year 2000 Problem suffered by any of such Credit Party's or any of its Subsidiaries' major commercial counter-parties. Such -32- 34 Credit Party represents and warrants that it has a reasonable basis to believe that no Year 2000 Problem will cause a Material Adverse Effect. 3.16. Capitalization. Schedule 3.16 hereto contains (a) an accurate description of URGI's capitalization as of June 30, 1998, after giving pro forma effect to the Closing Transactions and (b) an accurate list of all of such Credit Party's existing Subsidiaries as of the date of this Agreement, setting forth their respective jurisdictions of incorporation and the percentage of their capital stock owned by such Credit Party or other Subsidiaries. All of the issued and outstanding shares of capital stock of such Credit Party and of each Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, and are free and clear of all Liens. Except as set forth on Schedule 3.16, no authorized but unissued or treasury shares of capital stock of such Credit Party or any Subsidiary are subject to any option, warrant, right to call or commitment of any kind or character. Except as set forth on Schedule 3.16, neither the Credit Party nor any Subsidiary has any outstanding stock or securities convertible into or exchangeable for any shares of its capital stock, or any right issued to any Person (either preemptive or other) to subscribe for or to purchase, or any options for the purchase of or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to any of its capital stock or any stock or securities convertible into or exchangeable for any of its capital stock other than as expressly set forth in the certificate or articles of incorporation of such Credit Party or such Subsidiary. Neither the Credit Party nor any Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding sentence except as otherwise set forth on Schedule 3.16. Except as set forth on Schedule 3.16 as of the date hereof such Credit Party does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity or partnership interest in any Person other than such Subsidiaries. 3.17. ERISA. The Unfunded Liabilities of all Single Employer Plans maintained by such Credit Party or any of its Subsidiaries do not in the aggregate exceed $1,000,000 and the Unfunded Liabilities of all Single Employer Plans maintained by the other members of the Controlled Group do not in the aggregate exceed an amount which could reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 3.17 neither such Credit Party nor any other member of the Controlled Group maintains, or is obligated to contribute to, any Multiemployer Plan. Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan maintained by such Credit Party or any of its Subsidiaries, no Reportable Event has occurred with respect to any Plan maintained by any other member of the Controlled Group that could reasonably be expected to have a Material Adverse Effect, neither such Credit Party nor any Subsidiary has withdrawn from any Multiemployer Plan or initiated steps to do so, no other member of the Controlled Group has withdrawn from any Multiemployer Plan resulting in any withdrawal liability that could reasonably be expected to have a Material Adverse Effect or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan by any member of the Controlled Group or, to such Credit Party's knowledge, by any other Person. 3.18. Defaults. No Default or Unmatured Default has occurred and is continuing. 3.19. Federal Reserve Regulations. Neither the Credit Party nor any its Subsidiaries is engaged, directly or indirectly, principally, or as one of its important activities, in the business of extending, or arranging for the extension of credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of any Letter of Credit will be used in a manner which would violate, or result in a violation of Regulation T, Regulation U or Regulation X. Neither the issuance of any Letter of Credit hereunder nor the use of the proceeds thereof will violate or conflict with the provisions of, Regulation T, Regulation U or Regulation X. Following the issuance of any Letters of Credit, less than 25% of the value (as determined by any reasonable method) of the assets of such Credit Party and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder taken as a whole has been, and will continue to be, represented by Margin Stock. -33- 35 3.20. Investment Company; Public Utility Holding Company Act. Neither such Credit Party nor any Subsidiary is, or after giving effect to the issuance of any Letter of Credit will be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Neither such Credit Party nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.21. Certain Fees. No broker's or finder's fee or commission was, is or will be payable by such Credit Party or any Subsidiary with respect to any of the transactions contemplated by this Agreement. Such Credit Party hereby agrees to indemnify the Agents and the Banks against and agrees that it will hold each of them harmless from any claim, demand or liability for broker's or finder's fees or commissions alleged to have been incurred by such Credit Party in connection with any of the transactions contemplated by this Agreement and any expenses (including, without limitation, attorneys' fees and time charges of attorneys for any Agent or any Bank which attorneys may be employees of any Agent or any Bank) arising in connection with any such claim, demand or liability. No other similar fee or commissions will be payable by such Credit Party or any Subsidiary for any other services rendered to such Credit Party or any Subsidiary ancillary to any of the transactions contemplated by this Agreement. 3.22. Solvency. As of the date hereof, before and after giving effect to the consummation of the transactions contemplated by the Transaction Documents and the payment of all fees, costs and expenses payable by the Credit Party or its Subsidiaries with respect to the transactions contemplated by the Transaction Documents, each Credit Party (individually and on a consolidated basis) is Solvent. 3.23. Ownership of Properties. Except as set forth on Schedule 3.23 hereto, such Credit Party and its Subsidiaries own, free of all Liens, other than those permitted by Section 6.16 or by any of the other Transaction Documents, all of the properties and assets reflected in the Financial Statements as being owned by it, except for assets sold, transferred or otherwise disposed of in the ordinary course of business since the date thereof. To the knowledge of such Credit Party, there are no actual, threatened or alleged defaults with respect to any leases of real property under which such Credit Party or any Subsidiary is lessee or lessor which could reasonably be expected to have a Material Adverse Effect. Such Credit Party and its Subsidiaries own or possess rights to use all licenses, patents, patent applications, copyrights, service marks, trademarks and trade names necessary to continue to conduct their business as heretofore conducted, and no such license, patent or trademark has been declared invalid or been limited by order of any court or by agreement or is the subject of any infringement, interference or similar proceeding or challenge, except for proceedings and challenges which could not reasonably be expected to have a Material Adverse Effect. 3.24. Indebtedness. Attached hereto as Schedule 3.24 is a complete and correct list of all Indebtedness of such Credit Party and its Subsidiaries outstanding on the date of this Agreement (other than Indebtedness in a principal amount not exceeding $1,000,000 for a single item of Indebtedness and $5,000,000 in the aggregate for all such Indebtedness), showing the aggregate principal amount which was outstanding on such date after giving effect to the Closing Transactions. Such Credit Party has delivered or caused to be delivered to the Administrative Agent, with sufficient copies for each of the Banks, a true and complete copy of each instrument evidencing Indebtedness in a principal amount of $5,000,000 or more and of each document pursuant to which any of such Indebtedness was issued. 3.25. Material Agreements. Neither such Credit Party nor any Subsidiary is a party to any agreement or instrument or subject to any charter, bylaw or other restriction set forth in a similar governing document which could reasonably be expected to have a Material Adverse Effect or which restricts or imposes conditions upon the ability of any Subsidiary to (a) pay dividends or make other distributions on its capital stock, (b) make loans or advances to such Credit Party or (c) repay loans or advances from such Credit Party. Neither such Credit Party nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any -34- 36 agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. 3.26 Insurance. Such Credit Party and its Subsidiaries maintain insurance on their Property with such companies, in such amounts and covering such risks as is, in each case, consistent with sound business practice. ARTICLE IV CONDITIONS 4.01. Effectiveness. The effectiveness of this Agreement shall be subject to the following conditions: (a) Proceedings and Incumbency. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank a certificate with respect to each Credit Party in form and substance satisfactory to each Co-Arranger dated the Closing Date and signed on behalf of each Credit Party by the Secretary or an Assistant Secretary of such Credit Party certifying as to: (a) true copies of all corporate action taken by such Credit Party relative to this Agreement and the other Transaction Documents applicable to it, including but not limited to that described in Section 3.02 hereof and (b) the names, true signatures and incumbency of the officer or officers of such Credit Party authorized to execute and deliver this Agreement and the other Transaction Documents applicable to it. Each Bank, the Issuing Bank and each Agent may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Person. (b) Organizational Documents. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation or memorandum of association and by-laws or other equivalent organizational documents for each Credit Party and (ii) a certificate of good standing for each Credit Party certified by the appropriate Official Body of its place of organization. (c) Opinions of Counsel. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank written opinions addressed to the Banks, dated the Closing Date, of Messrs. Dewey Ballantine LLP, counsel for URGI and URC and special English counsel for Talbot Underwriting Limited, and of Messrs. Conyers, Dill & Pearman, special Bermuda counsel for Venton Underwriting Limited, in form and substance satisfactory to each Bank, which together are substantially to the effects set forth in Exhibit C. (d) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory to each Bank, and each Bank shall have received all such counterpart originals or certified or other copies of this Agreement and the other the Transaction Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Bank has reasonably requested. (e) Fees and Expenses. Each Credit Party shall have paid all fees and other compensation to be paid by it hereunder, or with respect to the transactions contemplated hereby, on or prior to the Closing Date. (f) Representation and Warranties. The representations and warranties contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. -35- 37 (g) Letter of Credit Agreement. The Continuing Letter of Credit Agreement shall have been delivered to the Administrative Agent and the Issuing Bank, duly executed by each Account Party. (h) Other Certificates, Opinions or Documents. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank such other certificates, opinions or documents as may be reasonably requested by the Co-Arrangers. (i) Licenses; Regulatory Approvals. Each Credit Party shall have obtained all licenses and regulatory approvals, if any, which are necessary to complete the transactions contemplated by this Agreement and the other Transaction Documents. 4.02. Issuance of Letters of Credit. The obligation of the Issuing Bank to issue any Letters of Credit hereunder is subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the performance by each Credit Party of its obligations to be performed hereunder on or before the date of such Letters of Credit and to the satisfaction of the following further conditions: (a) Representations and Warranties; Events of Default and Unmatured Defaults. The representations and warranties contained in Article III hereof shall be true on and as of the date of each Letter of Credit issued hereunder with the same effect as though made on and as of each such date, and on the date of each Letter of Credit issued hereunder no Default and no Unmatured Default shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Letter of Credit to be issued on such date. Failure of the Administrative Agent to receive notice from the applicable Credit Party to the contrary before any Letter of Credit is issued hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the date of such Letter of Credit with the same effect as though made on and as of such date and (ii) on the date of such Letter of Credit no Default or Unmatured Default has occurred and is continuing or exists or will occur or exist after giving effect to such Letter of Credit. (b) Commitment. The fact that, immediately after the issuance of such Letter of Credit, the aggregate outstanding Stated Amounts (determined as Dollar Equivalents) of the Letters of Credit issued and outstanding hereunder will not exceed the aggregate amount of the Letter of Credit Participating Interest Committed Amounts. ARTICLE V GUARANTEE 5.01. The Guarantee. Each of the Guarantors hereby irrevocably, unconditionally and absolutely guarantees to the Agents, the Issuing Bank and the Banks, and becomes surety for, the prompt payment of the Obligations of the Account Parties (the "Guaranteed Obligations") in full when due (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each Guarantor hereby further agrees, as a primary obligor, that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise and whether or not such payments would not be permitted under any applicable bankruptcy or similar law), the Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Transaction Documents, to the extent the obligations of either Guarantor shall be adjudicated to be invalid or -36- 38 unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 5.02. Obligations Unconditional. The obligations of each Guarantor under this Article are irrevocable, absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Transaction Documents, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against any Account Party, for amounts paid under this Article V until such time as the Banks have been paid in full, no Letter of Credit is outstanding, the Letter of Credit Participating Interest Commitments under this Agreement have been terminated and no Person or Official Body shall have any right to request any return or reimbursement of funds from any Bank in connection with monies received under the Transaction Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of either Guarantor hereunder which shall remain irrevocable, absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, any Agent or any Bank as security for any of the Guaranteed Obligations shall be void or violable, or shall fail to attach or be perfected or any Agent or any Bank shall fail to realize on any collateral security; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of either Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of either Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and any requirement that the Banks exhaust any right, power or remedy or proceed against any Person under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. This is a guarantee of payment and not merely of collection. -37- 39 5.03. Reinstatement. The obligations of the Guarantors under this Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agents and the Banks on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by any Agent or any Bank in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 5.04. Remedies. Each Guarantor agrees that, to the fullest extent permitted by applicable law, as between such Guarantor, on the one hand, and the Agents and the Banks, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 5.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 5.01. 5.05. Continuing Guarantee. The guarantee in this Article is a continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 5.06. No Restrictions. Except for restrictions under the Transaction Documents, neither Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to any Account Party, (y) make loans or advances to my Account Party, or (z) transfer any of its properties or assets to my Account Party. ARTICLE VI COVENANTS During the term of this Agreement, unless the Required Banks shall otherwise consent in writing: 6.01. Financial Reporting. Each Credit Party will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, consistently applied, and will furnish to the Banks: (a) As soon as practicable and in any event within 90 days after the close of each of its Fiscal Years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in generally accepted accounting principles and required or approved by the independent certified public accountants of URGI or of Venton, as the case may be) audit report certified by independent certified public accountants, acceptable to the Banks, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for URGI and its Subsidiaries and for Venton and its Subsidiaries, including balance sheets as of the end of such period and related statements of income, retained earnings and cash flows accompanied by (i) any control letter prepared by said accountants addressed to the audit committee of the board of directors of URGI or Venton, as the case may be, (ii) a certificate of said accountants that, in the course of the examination necessary for their certification of the -38- 40 foregoing. they have obtained no knowledge of any Default or Unmatured Default, or if in the opinion of such accountants, any Default or Unmatured Default shall exist, stating the nature and status thereof and (iii) a letter from said accountants addressed to the Banks acknowledging that the Banks are relying on such certificate as part of their credit consideration of the transactions hereby contemplated and authorizing such reliance. (b) As soon as practicable and in any event within 45 days after the close of the first three Fiscal Quarters of each of its Fiscal Years, commencing September 30, 1998, for URGI and its Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating statements of income, retained earnings and cash flows for the period from the beginning of such Fiscal Year to the end of such quarter, all certified by its chief financial officer. (c) (i) Upon the earlier of (A) fifteen days after the regulatory filing date or (B) 75 days after the close of each Fiscal Year of each Insurance Subsidiary, copies of the unaudited Annual Statement of such Insurance Subsidiary, certified by the chief financial officer of such Insurance Subsidiary, all such statements to be prepared in accordance with SAP and (ii) no later than each June 15, copies of such Annual Statements audited and certified by independent certified public accountants of recognized annual standing. (d) Upon the earlier of (i) ten days after the regulatory filing date or (ii) 60 days after the close of each of the first three Fiscal Quarters of each Fiscal Year of each Insurance Subsidiary, copies of the Quarterly Statement of each of the Insurance Subsidiaries, certified by the chief financial officer of such Insurance Subsidiary, all such statements to be prepared in accordance with SAP. (e) Promptly and in any event within ten days after (i) learning thereof, notification of any changes after the date hereof in the rating given by (A) A.M. Best & Co. or Standard & Poor's in respect of any Insurance Subsidiary or (B) Standard & Poor's or Moody's in respect of the senior Indebtedness of any Credit Party and (ii) receipt thereof, copies of any ratings analysis by (A) A.M. Best & Co. or Standard & Poor's relating to any Insurance Subsidiary or (B) Standard & Poor's or Moody's in respect of the senior Indebtedness of any Credit Party. (f) Copies of any actuarial certificates prepared with respect to any Insurance Subsidiary by an employee of or an actuary engaged by such Insurance Subsidiary, promptly after the receipt thereof. (g) As soon as available but in any event not later than the last Business Day in February of each year, a copy of the plan and forecast (including a projected consolidated and consolidating balance sheet, income statement and funds flow statement) of URGI and its Subsidiaries for such Fiscal Year. (h) Together with the financial statements required by clauses (a) and (b) above, a compliance certificate in substantially the form of Exhibit D hereto signed by the chief financial officer of URGI showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof. (i) Within 270 days after the close of each Fiscal Year, a statement of the Unfunded Liabilities of each Single Employer Plan, if any, certified as correct by an actuary enrolled under ERISA. (j) As soon as possible and in any event within ten days after any Credit Party knows that any Termination Event has occurred with respect to any Plan, a statement, signed by the chief financial officer of URGI, describing said Termination Event and the action which such Credit Party proposes to take with respect thereto and as soon as possible and in any event within ten days after learning thereof notification of any lien imposed by the PBGC or the IRS on the assets of any member of the Controlled -39- 41 Group in respect of any Plan maintained by any such member (or any other employee pension benefit plan as to which any such member may be liable) which relates to liabilities in excess of ten percent of the net worth (determined according to generally accepted accounting principles and without reduction for any reserve for such liabilities) of Alleghany and its Subsidiaries. (k) As soon as possible and in any event within ten days after receipt by any Credit Party, a copy of (i) any notice, claim, complaint or order to the effect that a Credit Party or any of its Subsidiaries is or may be liable to any Person as a result of the release by such Credit Party, any of its Subsidiaries, or any other Person of any Hazardous Materials into the environment or requiring that action be taken to respond to or clean up a Release of Hazardous Materials into the environment. and (ii) any notice, complaint or citation alleging any violation of any Environmental Law or Environmental Permit by such Credit Party or any of its Subsidiaries. Within ten days of any Credit Party or any Subsidiary having knowledge of the proposal, enactment or promulgation of any Environmental Law which could reasonably be expected to have a Material Adverse Effect, URGI or URC shall provide the Administrative Agent with written notice thereof. (1) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which any Credit Party or any of its Subsidiaries files with the NAIC or any insurance commission or department or analogous Governmental Authority (including without limitation, any filing made by any Credit Party or any Subsidiary pursuant to any insurance holding company act or related rules or regulations), but excluding routine or non-material filings with the NAIC, any insurance commissioner or department or analogous Governmental Authority. (m) Promptly and in any event within ten days after learning thereof, notification of (i) any tax assessments demand, notice of proposed deficiency or notice of deficiency received by Alleghany or any other Consolidated Person or (ii) the filing of any tax Lien or commencement of any judicial proceeding by or against any such Consolidated Person, of any such assessment, demand, notice, Lien or judicial proceeding relates to tax liabilities in excess of ten percent (10%) of the net worth (determined according to generally accepted accounting standards and without reduction for any reserve for such liabilities) of Alleghany and its Subsidiaries taken as a whole. (n) Such other information (including, without limitation, the annual Best's Advance Report Service report prepared with respect to each Insurance Subsidiary rated by A.M. Best & Co.) as any Agent or any Bank may from time to time reasonably request. 6.02. Use of Proceeds. Each Account Party will, and will cause each Subsidiary to, use the Letters of Credit issued hereunder for its general corporate purposes. The Account Parties will not permit the issuance of any Letter of Credit in connection with the purchase or carrying of any Margin Stock or in connection with the Purchase of any Person which has not been approved and recommended by the board of directors (or functional equivalent thereof) of such Person. 6.03. Notice of Default. The Credit Parties will, and will cause each Subsidiary to, give prompt notice in writing to the Banks of (a) the occurrence of any Default or Unmatured Default, (b) the occurrence of any other development, financial or other, relating specifically to any Credit Party or any of its Subsidiaries (and not of a general economic or political nature) which could reasonably be expected to have a Material Adverse Effect, (c) the receipt of any notice from any Governmental Authority of the expiration without renewal, revocation or suspension of or the institution of any proceedings to revoke or suspend any License now or hereafter held by any Insurance Subsidiary which is required to conduct insurance business in compliance with all applicable laws and regulations and the expiration, revocation or suspension of which could reasonably be expected to have a Material Adverse Effect, (d) the receipt of any notice from any Governmental Authority of the institution of any disciplinary proceedings against or in respect of any Insurance Subsidiary, or the issuance of any order, the taking of any action or any request for an extraordinary audit for cause by any Governmental Authority which, if adversely determined, could reasonably be expected to have a Material Adverse Effect, (e) any judicial or -40- 42 administrative order limiting or controlling the insurance business of any Insurance Subsidiary (and not the insurance industry generally) which has been issued or adopted and which has had, or could reasonably be expected to have, a Material Adverse Effect, or (f) the commencement of any litigation which could reasonably be expected to create a Material Adverse Effect. 6.04. Conduct of Business. Each Credit Party will, and will cause each Subsidiary to, (a) carry on and conduct its business only in substantially the same manner as it is presently conducted, (b)(i) with respect to URGI, only engage in the business of a holding company owning entities engaged in the business of insurance or reasonably incidental activities, (ii) with respect to each Insurance Subsidiary, only engage in the insurance business in which it is engaged or licensed as of the date hereof if it is an Insurance Subsidiary as of such date, or as of the date of its Purchase, if hereafter acquired, or only engage in the insurance business for which it is formed, if hereafter formed, and (iii) with respect to each other Subsidiary, only engage in the business in which it is engaged as of the date hereof if it is a Subsidiary as of such date, or as of the date of its Purchase if hereafter acquired, or only engage in the business for which it is formed, if hereafter formed, (c) do all things necessary to remain duly incorporated, validly existing and in good standing in its jurisdiction of incorporation and its jurisdiction of domicile and maintain all requisite qualification to conduct business in each other jurisdiction in which such qualification is required, except where the failure to maintain such qualification could not reasonably be expected to have a Material Adverse Effect, and (d) do all things necessary to renew, extend and continue in effect all Licenses which may at any time and from time to time be necessary for any Insurance Subsidiary to operate its insurance business in compliance with all applicable laws and regulations; provided, that (i) any Insurance Subsidiary may withdraw from one or more states (other than its state of domicile) as an admitted insurer if such withdrawal is determined by the board of directors or management of such Insurance Subsidiary to be in the best interest of such Insurance Subsidiary and could not reasonably be expected to have a Material Adverse Effect and (ii) any Subsidiary that is not actively engaged in business may be dissolved, if such dissolution is determined by URGI's board of directors to be in the best interest of the Credit Parties and could not reasonably be expected to have a Material Adverse Effect. No Insurance Subsidiary shall change its state of domicile or incorporation without the prior written consent of the Required Banks. Each Wholly-Owned Subsidiary in existence as of the date of this Agreement shall continue to be a Wholly-Owned Subsidiary except as permitted by Section 6.12. It is understood that a merger of a Subsidiary of URC into an entity which is a Wholly-Owned Subsidiary of URC, to the extent otherwise permitted by this Agreement, will not be deemed to violate this Section 6.04. It is also understood that a merger of a Subsidiary of URGI (which is not a Subsidiary of URC) into an entity which is a Wholly-Owned Subsidiary of URGI, to the extent otherwise permitted by this Agreement, will not be deemed to violate this Section 6.04. 6.05. Taxes. Each Credit Party will, and will cause each Subsidiary to, timely file United States federal and applicable foreign, state and local tax returns required to be filed by it that are true and correct in all material respects, and each of each Credit Party, their respective Subsidiaries, Alleghany and each other Consolidated Person will pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except, in each case those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with generally accepted accounting principles or SAP, as applicable. 6.06. Insurance. Each Credit Party will, and will cause each Subsidiary to, maintain insurance on all their Property with such companies, in such amounts and covering such risks as is, in each case, consistent with sound business practice, and the Credit Parties will furnish to any Agent and any Bank upon request all information as to the insurance carried. 6.07. Compliance with Laws. Each Credit Party will, and will cause each Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, the failure to comply with which could reasonably be expected to have a Material Adverse Effect. -41- 43 6.08. Maintenance of Properties; Year 2000 Compliance. (a) Each Credit Party will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition except for ordinary wear and tear, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times; provided, that any Credit Party or any Subsidiary may, subject to Section 6.13, dispose of any Property that such Person deems unnecessary for the conduct of its business. (b) Each Credit Party shall take all actions necessary and commit adequate resources to assure that its computer-based and other systems (and those of all Subsidiaries) are able to effectively process data, including dates before, on and after January 1, 2000, without experiencing any Year 2000 Problem that could reasonably be expected to cause a Material Adverse Effect. At the request of the Administrative Agent, each Credit Party will provide the Administrative Agent with assurances and substantiations (including, but not limited to, the results of internal or external audit reports prepared in the ordinary course of business) reasonably acceptable to the Required Banks as to the capability of the such Credit Party and its Subsidiaries to conduct its and their businesses and operations before, on and after January 1, 2000 without experiencing a Year 2000 Problem causing a Material Adverse Effect. 6.09. Inspection. Each Credit Party will, and will cause each Subsidiary to, permit the Agents and the Banks, by their respective representatives and agents, to inspect any of the Property, corporate books and financial records of such Credit Party and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the such Credit Party and each Subsidiary, and to discuss the affairs, finances and accounts of such Credit Party and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Banks may designate. Each Credit Party will keep or cause to be kept, and cause each Subsidiary to keep or cause to be kept, appropriate records and books of account in which complete entries are to be made reflecting its and their business and financial transactions, such entries to be made in accordance with Agreement Accounting Principles or SAP, as applicable, consistently applied. 6.10. Capital Stock and Dividends. No Credit Party will, nor will it permit any Subsidiary to, (a) issue any capital stock or equity securities of any kind if as a result thereof a Change in Control would occur, or (b) declare or pay any dividends or make any distributions on its capital stock (other than dividends payable in its own capital stock) or redeem, repurchase or otherwise acquire or retire any of its capital stock or any options or other rights in respect thereof at any time outstanding if a Default or Unmatured Default has occurred and is continuing or would occur after giving effect thereto (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter), except that any Subsidiary of URC may declare and pay dividends or make distributions to URC or any Wholly-Owned Subsidiary or URC. 6.11. Indebtedness. No Credit Party will, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: (a) the Obligations; (b) Indebtedness existing (or committed to) on the date hereof and described in Schedule 3.24 hereto; (c) Rate Hedging Obligations related to the loans described in item 3 of Schedule 3.24; (d) Contingent Obligations permitted pursuant to Section 6.15; and (e) additional Indebtedness of URGI in an aggregate principal amount not exceeding $25,000,000, so long as no Default or Unmatured Default has occurred and is continuing or would occur -42- 44 after giving effect to the incurrence of such Indebtedness (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter). 6.12. Merger. No Credit Party will, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person except that (a) a Wholly-Owned Subsidiary of URC may merge into URC or any Wholly-Owned Subsidiary of URC and (b) any Subsidiary formed for the purpose of effecting a transaction permitted under Section 6.14(a)(iv) or (b)(v) may merge with another entity if required to consummate such transaction. 6.13. Sale of Assets. No Credit Party will, nor will it permit any Subsidiary to, lease, sell, transfer or otherwise dispose of its Property to any other Person except for (a) sales of Investments in the ordinary course of business by a Credit Party or any Insurance Subsidiary, including without limitation, transactions undertaken for the purpose of restructuring all or a part of the portfolio of Investments owned by such Credit Party or Insurance Subsidiary and (b) leases, sales, transfers or other dispositions of its Property that together with all other Property of its Subsidiaries previously leased, sold or disposed of (other than Investments sold in the ordinary course of business by Insurance Subsidiaries) as permitted by this Section 6.13 since the date hereof do not constitute a Substantial Portion of the Property of URGI and its Subsidiaries. 6.14. Investments and Purchases. (a) URGI will not, and will not permit any Subsidiary or other Credit Party which is not an Insurance Subsidiary to, make or suffer to exist any Investments (including, without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Purchases, except: (i) Cash and Cash Equivalents; (ii) Investments in existence as of October 23, 1998 (including Investments in Subsidiaries as of such date) and described in Schedule 6.14 hereto; (iii) Investments in debt securities rated BBB- or better by Standard & Poor's, Baa-3 or better by Moody's or NAIC-2 or better by the NAIC; provided, that any such Investment which, at any time after which it is made, ceases to meet such rating requirements shall (A) cease to be permitted hereby if then permitted by Section 6.14(a)(vi) and (B) if not then permitted by Section 6.14(a)(vi) remain permitted hereby until the earlier of the time it is permitted under Section 6.14(a)(vi) and the date which is 30 days after the date on which such rating requirement is no longer met; (iv) Purchases of businesses or entities engaged in the insurance business or businesses reasonably incident thereto which do not constitute hostile takeovers (including the creation of Subsidiaries in connection therewith) so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Purchase or creation (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); (v) Other Investments by URGI in any Person which is a Subsidiary as of the date hereof so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); and (vi) Other Investments by URGI in an amount not exceeding $40,000,000 (including the creation of Subsidiaries and Investments therein and Investments in any -43- 45 partnership or joint venture) so long as at the time of such Investment no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter). (b) The Credit Parties will not permit any Insurance Subsidiary to make or suffer to exist any Investments (including, without limitation, loans and advances to and other Investments in Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture or to make any Purchases, except: (i) Cash and Cash Equivalents; (ii) Investments in debt securities rated BBB- or better by Standard & Poor's, Baa-3 or better by Moody's or NAIC-2 or better by the NAIC, provided, that any such Investment which. at any time after which it is made, ceases to meet such rating requirements shall (A) cease to be permitted hereby if then permitted by Section 6.14(b)(vi) and (B) if not then permitted by Section 6.14(b)(vi) remain permitted hereby until the earlier of the time it is permitted under Section 6.14(b)(vi) and the date which is 30 days after the date on which such rating requirement is no longer met; (iii) Existing Investments in Subsidiaries and other Investments in existence on the date hereof; (iv) Other Investments in any Person which is a Subsidiary as of the date hereof so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); (v) Purchases of businesses or entities engaged in the insurance business which do not constitute hostile takeovers (including the creation of Subsidiaries in connection therewith) made after the date of this Agreement for an aggregate consideration not to exceed $50,000,000, so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect thereto (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); and (vi) Other Investments (including the creation of Subsidiaries and Investments therein and Investments in any partnership or joint venture but excluding any Investment of the type described in clause (b)(v) above) of a type acceptable to the insurance commissioner in the respective domiciliary state of such Insurance Subsidiary, provided, that such Investments do not exceed, in the aggregate at any one time outstanding, an amount equal to the Total Admitted Assets (as presented on the "Assets" statement, currently Page 2, Line 22 of the Annual Statement-1997) of all Insurance Subsidiaries (determined, where applicable, on a combined basis by reference to the comparable line in the combined Annual Statement) less 125% of the aggregate Total Required Liabilities (as presented on the "Liabilities, Surplus and Other Funds" statement, currently Page 3, Line 21 of the Annual Statement-1997) of all Insurance Subsidiaries (determined, where applicable, on a combined basis by reference to the comparable line in the combined Annual Statement); provided, further, that the fair market value of the Investment in Burlington Northern Santa Fe Corporation held by URGI and its Insurance Subsidiaries shall be subtracted from such amount for so long as such Investment exists. -44- 46 6.15. Contingent Obligations. No Credit Party will, nor will it permit any Subsidiary to, make or suffer to exist any Contingent Obligation (including, without limitation, any Contingent Obligation with respect to the obligations of a Subsidiary), except (a) the Contingent Obligations described on Schedule 3.24, (b) Contingent Obligations in respect of insurance contracts or policies issued in the ordinary course of business, (c) Contingent Obligations in respect of the extension of guaranties in the ordinary course of business to insureds of the obligations of insurers under insurance policies or contracts, (d) Contingent Obligations in respect of the endorsement of instruments for deposit or collection in the ordinary course of business and (e) the Obligations. 6.16. Liens. No Credit Party will, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of such Credit Party or any of its Subsidiaries, except Liens in favor of the Bank Parties to secure obligations hereunder and except: (a) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted principles of accounting or SAP, as applicable, shall have been set aside on its books; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure the payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books; (c) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation; (d) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of such Credit Party or its Subsidiaries; (e) Deposits made by any Insurance Subsidiary with the insurance regulatory authority in its jurisdiction of domicile or other statutory liens or liens or claims imposed or required by applicable insurance law or regulation against the assets of any Insurance Subsidiary, in each case in favor of all policyholders of such Insurance Subsidiary and in the ordinary course of such Insurance Subsidiary's business; (f) Rights of third parties with respect to amounts deposited with or for the benefit of any Insurance Subsidiary in trust to secure obligations owed to any Insurance Subsidiary under contracts of reinsurance entered into in the ordinary course of such Insurance Subsidiary's business; (g) Liens existing on the date hereof and described in Schedule 6.16 hereto; and (h) Other Liens securing Indebtedness or obligations with an aggregate principal amount not in excess of $1,000,000 at any time outstanding. 6.17. Affiliates. No Credit Party will, nor shall it permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate of such Credit Party (other than URC Barbados Holding Corp. and entities owned by it) except in the ordinary course of business and pursuant to the reasonable requirements of such Credit Party's or such Subsidiary's business and upon fair and reasonable terms no less favorable to such Credit Party or such Subsidiary than the Credit Party or such Subsidiary would obtain in a comparable arm's-length transaction. -45- 47 6.18. Other Indebtedness. No Credit Party will, nor will it permit any Subsidiary to, directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any Indebtedness prior to the date when due (other than the Obligations) while a Default or Unmatured Default has occurred and is continuing. 6.19. Environmental Matters. Each Credit Party shall and shall cause each of its Subsidiaries to (a) at all times comply in all material respects with all applicable Environmental Laws and (b) promptly take any and all commercially reasonable transactions in response to the presence, storage, use, disposal, transportation or Release of any Hazardous Materials on, under or about any real property owned, leased or operated by such Credit Party or any of its Subsidiaries. 6.20. Change in Corporate Structure; Fiscal Year. No Credit Party shall, nor shall it permit any Subsidiary to, (a) permit any amendment or modification to be made to its certificate or articles of incorporation or by-laws which is materially adverse to the interests of the Banks (provided that such Credit Party shall notify the Administrative Agent of any other amendment or modification thereto as soon as practicable thereafter) or (b) change its Fiscal Year to end on any date other than December 31 of each year. 6.21. Inconsistent Agreements. No Credit Party shall, nor shall it permit any Subsidiary to, enter into any indenture, agreement, instrument or other arrangement which, (a) directly or indirectly prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence of the Obligations, the amending of the Transaction Documents or the ability of any Subsidiary to (i) pay dividends or make other distributions on its capital stock, (ii) make loans or advances to a Credit Party of which it is a Subsidiary or (iii) repay loans or advances from a Credit Party or (b) contains any provision which would be violated or breached by the issuance of Letters of Credit or by the performance by any Credit Party of any of its obligations under any Loan Document. 6.22. Financial Covenants. The Credit Parties shall: (a) Minimum Statutory Surplus. At all times after the date hereof, cause URC and its Insurance Subsidiaries, as determined on a combined basis for URC and all of its Insurance Subsidiaries (without double counting) as of the last day of each Fiscal Quarter, to maintain a minimum Statutory Surplus at least equal to the sum of (i) $555,000,000, plus (ii) 100% of any capital contributions made to URC or to any of its Insurance Subsidiaries after June 30, 1998 (without double counting), plus (iii) 35% of positive Statutory Net Income, if any, for each Fiscal Quarter ending after January 1, 1999, and on or prior to the time of determination. (b) Leverage Ratio. At all times after the date hereof determined as of the end of each Fiscal Quarter, cause URGI and its Subsidiaries to maintain a Leverage Ratio of not more than 0.50 to 1.0 (c) Adjusted Leverage Ratio. At all times after the date hereof determined as of the end of each Fiscal Quarter cause URGI and its Subsidiaries to maintain an Adjusted Leverage Ratio of not more than 0.35 to 1.0. (d) URC Risk-Based Capital Ratio. At all times after the date hereof determined as of the end of each Fiscal Quarter cause URC and its Insurance Subsidiaries to maintain a Statutory Risk-Based Capital Ratio of not less than 3.15 to 1.0. 6.23. Tax Consolidation. No Credit Party will, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated, combined or unitary income tax return with any Person (other than any of its Subsidiaries, Alleghany or any other Consolidated Person), except as required by law. No Credit Party will, nor will it permit any of its Subsidiaries to, enter into any tax sharing agreement with any Person (other than Alleghany, another Credit Party or any of its Subsidiaries) without the written consent of the Required Banks. Each Credit Party will cause each -46- 48 Subsidiary (including any newly acquired or newly created Subsidiary) to enter into a tax sharing agreement with such Subsidiary's immediate parent corporation, which tax sharing agreement shall obligate such Subsidiary to pay to such Subsidiary's immediate parent corporation an amount of tax substantially equal to the amount of tax such parent corporation is required to pay to Alleghany (or to a Subsidiary of Alleghany) by reason of the taxable income of such Subsidiary. No Tax Sharing Agreement or other agreement described above may be amended to provide for any payments to be made to Alleghany in an amount substantially in excess of the amount of tax which Alleghany is required to pay by reason of the taxable income of URGI and its Subsidiaries. 6.24. ERISA Compliance. With respect to any Plan neither any Credit Party nor any Subsidiary shall: (a) engage in any "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) for which a civil penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section 4975 of the Code in excess of $1,000,000 could be imposed; (b) permit to be incurred any "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA) in excess of $1,000,000, whether or not waived; (c) permit the occurrence of any Termination Event which could result in a liability to any member of the Controlled Group in excess of $1,000,000; (d) be an "employer" (as such term is defined in Section 3(5) of ERISA) required to contribute to any Multiemployer Plan or a "substantial employer" (as such term in defined in Section 4001(a)(2) of ERISA) required to contribute to any Multiemployer Plan; or (e) permit the establishment, or amendment of any Plan or fail to comply with the applicable provisions of ERISA and the Code with respect to any Plan which could reasonably be expected to result in liability to any member of the Controlled Group watch, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. ARTICLE VII EVENTS OF DEFAULT 7.01. Events of Default. The occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law) shall be a Default: (a) Any Account Party shall default in the payment when due of any reimbursement obligation with respect to any Letter of Credit; (b) Any Account Party shall default in the payment when due of any Letter of Credit Fee, Commitment Fee, or any other fee or amount payable hereunder which default shall continue for a period of five days from the due date thereof; (c) Any Credit Party shall default in the observance, performance or fulfillment of any covenant contained in Section 6.02, Section 6.03(a) or Sections 6.10 through 6.24 hereof; -47- 49 (d) Any Credit Party shall default in the observance, performance or fulfillment of any other covenant, condition or provision hereof and such default shall not be remedied for a period of thirty days after written notice thereof to such Credit Party from any Agent or any Bank; (e) The default by any Credit Party or any Subsidiary of a Credit Party in the performance of any term, provision or condition contained in any agreement or agreements under which any Indebtedness aggregating in excess of $5,000,000 was created or is governed, or the occurrence of any other event or existence of any other condition, the effect of any of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity, or any such Indebtedness of a Credit Party or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; (f) Any Credit Party or any Subsidiary of a Credit Party shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 7.01(f), (vi) fail to contest in good faith any appointment or proceeding described in Section 7.01(g) or (vii) become unable to pay, not pay, or admit in writing its inability to pay, its debts generally as they become due; (g) Without the application, approval or consent of a Credit Party or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for such Credit Party or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.01(f)(iv) shall be instituted against any Credit Party or any Subsidiary or a Credit Party and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of forty-five consecutive days; (h) Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of (each a "Condemnation"), all or any portion of the Property of any Credit Party or its Subsidiaries which, when taken together with all other Property of URGI and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such Condemnation occurs, constitutes a Substantial Portion; (i) Any Credit Party or any Subsidiary of a Credit Party shall fail within thirty days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $500,000 (or multiple judgments or orders for the payment of an aggregate amount in excess of $1,000,000), which is not stayed on appeal or otherwise being appropriately contested in good faith and as to which no enforcement actions have been commenced; (j) Any representation or warranty made or deemed made by or on behalf of any Credit Party to the Banks, the Issuing Bank or the Agents under or in connection with this Agreement or any other Transaction Document, or any certificate or material information delivered in connection with this Agreement or any other Transaction Document, shall prove to have been false in any material respect on the date as of which made or deemed made; (k) A Change in Control shall occur; (l) The guarantee contained in Article V hereof shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of URGI or URC, or any Credit Party or any Person -48- 50 acting for or on behalf of any of such parties contests such validity or binding nature of such guarantee, or any other Person shall assert any of the foregoing; (m) URC shall fail to maintain an A.M. Best claims paying rating of at least A-; (n) Any material License of any Insurance Subsidiary (a) shall be revoked by the Governmental Authority which issued such License, or any action (administrative or judicial) to revoke such License shall have been commenced against such Insurance Subsidiary and shall not have been dismissed within 60 days after the commencement thereof, (b) shall be suspended by such Governmental Authority for a period in excess of 60 days or (c) shall not be reissued or renewed by such Governmental Authority upon the expiration thereof following application for such reissuance or renewal of such Insurance Subsidiary; (o) Any Insurance Subsidiary shall be the subject of a final non-appealable order imposing a fine in an amount in excess of $250,000 in any single instance or other such orders imposing fines in excess of $1,000,000 in the aggregate after the date of this Agreement by or at the request of any state insurance regulatory agency as a result of the violation by such Insurance Subsidiary of such state's applicable insurance laws or the regulations promulgated in connection therewith; (p) Any Insurance Subsidiary shall become subject to (i) any conservation or liquidation order, directive or mandate issued by any Governmental Authority or (ii) any other directive or mandate issued by any Governmental Authority which could reasonably be expected to have a Material Adverse Effect which in either case is not stayed within thirty days; (q) Any Credit Party, any Subsidiary of a Credit Party, Alleghany or any other Consolidated Person shall receive any tax assessment, demand or notice of deficiency or have any tax liens filed or any judicial proceeding relating to any tax matter commenced against it which, in any such case, could reasonably be expected to have a Material Adverse Effect or any tax lien shall be filed against any property of any Credit Party or any Subsidiary relating to the tax liabilities of any Person if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted principles of accounting or SAP, as applicable, shall have been set aside on its books; (r) (i) the unfunded Liabilities of all Single Employer Plans maintained by any Credit Party or any Subsidiary or a Credit Party shall exceed in the aggregate $1,000,000 or a Reportable Event shall occur in connection with any Plan maintained by any Credit Party or any Subsidiary or a Credit Party, (ii) the Unfunded Liabilities of all Single Employer Plans maintained by members of the Controlled Group shall exceed an amount which could reasonably be expected to have a Material Adverse Effect or any Reportable Event shall occur in connection with any Plan maintained by members of the Controlled Group which could reasonably be expected to have a Material Adverse Effect or (iii) any Lien shall be imposed by the PBGC or the IRS against any assets of any Credit Party or any Subsidiary of a Credit Party with respect to a Plan maintained by any other member of the Controlled Group (or any other employee pension benefit plan as to which any such member may be liable); then, the Issuing Bank shall be under no further obligation to issue Letters of Credit hereunder and the Administrative Agent may, and upon written request of the Required Banks shall, exercise any or all remedies available to it. 7.02 Certain Actions in Respect of Letters of Credit upon Default. If any Default shall have occurred and be continuing or shall exist, the Administrative Agent may, and at the direction of the Required Banks shall, irrespective of whether it is taking any other action with respect to such Default or otherwise and without limiting the generality of Section 7.01, make demand upon the applicable Account Party to, and forthwith upon such demand each applicable Account Party will, pay to the Administrative Agent on behalf of the Issuing Bank and the Banks in same day funds at the Administrative Agent's Office, for deposit to the Cash Collateral Account, an amount equal to the aggregate Letter of Credit -49- 51 Undrawn Availability of all Letters of Credit then outstanding. If at any time the Administrative Agent determines that any funds held in the Cash Collateral Account are subject to any right or claim of any Person other than the Administrative Agent, the Issuing Bank and the Banks, or that the total amount of such funds is less than the aggregate Letter of Credit Undrawn Availability of all Letters of Credit then outstanding, the Account Parties will, forthwith upon demand by the Administrative Agent, pay to the Administrative Agent, as additional funds to be deposited and held in the Cash Collateral Account, an amount equal to the excess of such aggregate Letter of Credit Undrawn Availability over the total amount of funds, if any, then held in the Cash Collateral Account that the Administrative Agent determines to be free and clear of any such right and claim. As used herein, the term "Cash Collateral Account" shall mean a cash collateral account opened by the Administrative Agent in the name of the Account Parties but under the sole dominion and control of the Administrative Agent and subject to the terms of this Agreement. Each Account Party hereby grants to the Administrative Agent, for the benefit of the Issuing Bank and the Banks, to secure payment of the Obligations, a security interest in the Cash Collateral Account, all funds held therein and all certificates and instruments, if any, from time to time representing or evidencing the Cash Collateral Account. Amounts on deposit in the Cash Collateral Account shall bear interest at the lowest customary rate payable at the time in question by the Administrative Agent for overnight deposits of a comparable amount and such interest shall be retained in and added to the Cash Collateral Account. URC shall not have an obligation to make any payment required by this Section 7.02 to the extent making such payment would violate applicable Law. URC agrees to use it best efforts, at its own expense and without regard to the amount of such expense, to assure that the making by it of all payments otherwise required by this Section 7.02 will not violate applicable Law, including without limitation the seeking of any required regulatory approvals, the contesting of any regulatory disapprovals to the extent reasonably requested by the Administrative Agent or the Required Banks and the taking of all other actions reasonably requested by the Administrative Agent or the Required Banks. ARTICLE VIII THE AGENTS 8.01. Appointment. Each Bank hereby irrevocably appoints Mellon Bank, N.A. to act as Administrative Agent, and Dresdner Bank AG, New York and Grand Cayman Branches, to act as Documentation Agent, for such Bank under this Agreement and the other Transaction Documents. Each Bank hereby irrevocably authorizes each of the Agents to take such action on behalf of such Bank under the provisions of this Agreement and the other Transaction Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of each such Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Administrative Agent, and Dresdner Bank hereby agrees to act as Documentation Agent, on behalf of the Banks on the terms and conditions set forth in this Agreement and the other Transaction Documents, subject to the right of each Agent to resign as provided in Section 8.09 hereof. Each Bank hereby irrevocably authorizes the Administrative Agent to execute and deliver each of the Transaction Documents and to accept delivery of such of the other Transaction Documents as may not require execution by the Administrative Agent. Each Bank agrees that the rights and remedies granted to each of the Agents under the Transaction Documents shall be exercised exclusively by the Agents, and that no Bank shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. 8.02. General Nature of Agents' Duties. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Transaction Document: (a) No Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of any Agent shall be read into this Agreement or any Transaction Document or shall otherwise exist. -50- 52 (b) The duties and responsibilities of each of the Agents under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and no Agent shall have a fiduciary relationship in respect of any Bank. (c) Each Agent is and shall be solely the agent of the Banks. No Agent assumes, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Banks as provided in this Agreement and the other Transaction Documents). (d) No Agent shall be under any obligation to take any action hereunder or under any other Transaction Document if such Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Transaction Document, or may require such Agent to qualify to do business in any jurisdiction where it is not then so qualified. 8.03. Exercise of Powers. Each of the Agents shall take any action of the type specified in this Agreement or any other Transaction Document as being within such Agent's rights, powers or discretion in accordance with directions from the Required Banks (or, to the extent this Agreement or such Transaction Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set of Persons). In the absence of such directions, such Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Transaction Document expressly requires the direction or consent of the Required Banks (or some other Person or set of Persons), in which case such Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Banks. No Agent shall have any liability to any Person as a result of (x) such Agent acting or refraining from acting in accordance with the directions of the Required Banks (or other applicable Person or set of Persons), (y) such Agent refraining from acting in the absence of instructions to act from the Required Banks (or other applicable Person or set of Persons), whether or not such Agent has discretionary power to take such action, or (z) such Agent taking discretionary action it is authorized to take under this Section (subject, in the case of this clause (z), to the provisions of Section 8.04(a) hereof). 8.04. General Exculpatory Provisions. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Transaction Document: (a) No Agent shall be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. (b) No Agent shall be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Transaction Document, (iii) any failure of any Credit Party or Bank to perform any of their respective obligations under this Agreement or any other Transaction Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Transaction Documents or otherwise from time to time. (c) No Agent shall be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Credit Party, (ii) the business, operations, condition (financial or otherwise) or prospects of any Credit Party or any other Person, or (iii) except to the extent set forth in Section 8.05(f) hereof, the existence of any Event of Default or Potential Default. -51- 53 (d) No Agent shall be under any obligation, either initially or on a continuing basis, to provide any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Transaction Document to be furnished by such Agent to such Bank. 8.05. Administration by the Agents. (a) Each of the Agents may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and such Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) Each of the Agents may consult with legal counsel (including, without limitation, in-house counsel for such Agent or in-house or other counsel for any Credit Party), independent public accountants and any other experts selected by it from time to time, and such Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) Each of the Agents may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to such Agent in accordance with the requirements of this Agreement or any other Transaction Document. Whenever such Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Credit Party or Bank, such matter may be established by a certificate of such Credit Party or Bank, as the case may be, and such Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Transaction Document). (d) Each of the Agents may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against such Agent by reason of taking or continuing to take any such action. (e) Each of the Agents may perform any of its duties under this Agreement or any other Transaction Document by or through agents or attorneys-in-fact. No Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care. (f) No Agent shall be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless such Agent has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If any Agent receives such a notice, such Agent shall give prompt notice thereof to each Bank. 8.06. Bank Not Relying on Agent or Other Banks. Each Bank acknowledges as follows: (a) neither any Agent nor any other Bank has made any representations or warranties to it, and no act taken hereafter by any Agent or any other Bank shall be deemed to constitute any representation or warranty by such Agent or such other Bank to it; (b) it has, independently and without reliance upon any Agent or any other Bank, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Transaction Documents; and (c) it will, independently and without reliance upon any Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Transaction Documents. 8.07. Indemnification. Each Bank agrees to reimburse and indemnify each Agent and its directors, officers, employees and agents (to the extent not reimbursed by a Credit Party and without limitation of the -52- 54 obligations of the Loan Parties to do so), ratably in accordance with their respective Letter of Credit Participating Interests, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel for such Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against such Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which a Letter of Credit directly or indirectly relates, provided that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section shall be due and payable on demand, and to the extent that any Bank fails to pay any such amount on demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to 2% over the interest rate per annum announced by the Federal Reserve Bank of New York or otherwise determined by such Agent to be applicable for such day to overnight federal funds transactions arranged by federal funds brokers on the previous trading day. 8.08. Agents in their Individual Capacities. With respect to its Commitments and the Obligations owing to each Agent, such Agent shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not an Agent, and the terms "Banks" and like terms shall include such Agent in its individual capacity as such. Each Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though such Agent were not an Agent hereunder. 8.09. Successor Agents. Any Agent may resign at any time by giving 10 days' prior written notice thereof to the Banks and the Account Parties. Any Agent may be removed by the Required Banks at any time by giving 10 days' prior written notice thereof to such Agent, the other Banks and the Account Parties. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then such retiring Agent may, on behalf of the Banks, appoint a successor Agent. Each successor Agent shall be a commercial bank or trust company organized under the laws of the United States of America or any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance by a successor Agent of its appointment as an Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Agent, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Transaction Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was an Agent under this Agreement. If and so long as no successor Agent shall have been appointed, then any notice or other communication required or permitted to be given by such Agent shall be sufficiently given if given by the Required Banks, all notices or other communications required or permitted to be given to such Agent shall be given to each Bank, and all payments to be made to such Agent shall be made directly to the Account Parties or Bank for whose account such payment is made. 8.10. Additional Administrative Agents. If the Administrative Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Banks, the Administrative Agent and the Account Parties shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Administrative Agent, to constitute another commercial bank or trust company, or one or more other Persons -53- 55 approved by the Administrative Agent, to act as co-Administrative Agent or agent with such powers of the Administrative Agent as may be provided in such supplemental agreement and to vest in such bank, trust company or Person as such co-Administrative Agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Administrative Agent under this Agreement or any other Transaction Document. 8.11. Calculations. No Agent shall be liable for any calculation, apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Bank to whom payment was due but not made shall be to recover from the other Banks any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by the appropriate Account Party, to recover such amount from the appropriate Account Party. 8.12. Agents' Fees. Each Account Party agrees to pay to each Agent, for its individual account, a nonrefundable Administrative Agent's fee or Documentation Agent's fee, as the case may be, in an amount and at such time or times as such Agent and the Account Parties have heretofore agreed. ARTICLE IX MISCELLANEOUS 9.01. No Implied Waiver etc. No delay or failure of any Agent or any Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies hereunder of the Agents and the Banks are cumulative and not exclusive of any rights or remedies which, it or they would otherwise have. Any amendment, waiver, permit, consent or approval of any kind or character on the part of an Agent or a Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent in such writing specifically set forth. 9.02. Set-Off. In case any one or more of the Events of Default described in Article VII hereof shall occur, each Bank shall have the right, in addition to all other rights and remedies available to it, to set-off against the unpaid balance of its interests in any Letter of Credit Reimbursement Obligations any debt owing by such Bank to the applicable Credit Party, including without limitation any funds in any deposit account maintained by such Credit Party with such Bank. Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.03. Survival of Provisions. Each of the representations, warranties, covenants and agreements of the Credit Parties contained herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, and the issuance of any Letter of Credit hereunder. 9.04. Expenses and Fees; Indemnity. (a) Each Account Party agrees to pay or cause to be paid and to save each of the Agents, the Co-Arrangers and (in the case of clause (iv) below) each of the Banks harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs) incurred by such Agent or such Bank from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Transaction Documents, (ii) any syndication of the transactions contemplated by -54- 56 this Agreement and the Transaction Documents, (iii) any amendments, modifications, supplements, waivers or consents requested by any Credit Party (whether or not ultimately entered into or granted) to this Agreement or any Transaction Document, and (iv) the enforcement or preservation of rights under this Agreement or any Transaction Document (including but not limited to the fees and expenses of special counsel to the Co-Arrangers and Banks and any such costs or expenses arising from or relating to (A) collection or enforcement of any other amount owing hereunder or thereunder by any Agent or any Bank and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Transaction Documents). Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. Each Account Party hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by any Agent or any Bank to be payable in connection with this Agreement or any other Transaction Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and an Account Party agrees to save each Agent and each Bank harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees. (b) Each Account Party hereby agrees to reimburse and indemnify each Agent, the Co-Arrangers and each Bank (the "Indemnified Parties") from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which any Letter of Credit directly or indirectly relates (and without in any way limiting the generality of the foregoing, including any violation or breach of any Law by any Credit Party or any exercise by any Agent or any Bank of any of its rights or remedies under this Agreement or any other Transaction Document; any breach of any representation or warranty, covenant or agreement of any Credit Party); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Account Parties under this Section 9.04, or any other indemnification obligation of the Account Parties hereunder or under any other Transaction Document, are unenforceable for any reason, the Account Parties hereby agree to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. Notwithstanding the foregoing, an Account Party shall not be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. 9.05. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Transaction Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.06. Holidays. Unless otherwise specified herein, whenever any payment or action to be made or taken hereunder shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. -55- 57 9.07. Notices, etc. Any notice or other communication in connection with this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to a Bank, at such Bank's address on the signature pages hereof, if to the Administrative Agent at Three Mellon Bank Center, Pittsburgh, Pennsylvania 15259, Attention: Letter of Credit Department, with a copy to Institutional Banking, Room 370, One Mellon Bank Center, Pittsburgh, PA 15258; if to the Issuing Bank at Three Mellon Bank Center, Pittsburgh, Pennsylvania 15259, Attention: Letter of Credit Department with a copy to Institutional Banking, Room 370, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258 and if to any Credit Party, to the Chief Financial Officer of URGI at 26050 Mureau Road, Calabasas, California 91302, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. For the purposes of both receiving information from any Agent or any Bank or providing information to any Agent or any Bank, URGI shall act as the agent for each other Credit Party. 9.08. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR ANY OTHER MATTER RELATED THERETO MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF COMMONWEALTH OF PENNSYLVANIA OR IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA. EACH CREDIT PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION, SUBJECT TO ANY GENERAL RIGHT OF APPEAL. EACH CREDIT PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS PROVIDED IN THIS AGREEMENT. 9.09. WAIVER OF JURY TRIAL. TO THE EXTENT LITIGATION HEREUNDER IS BROUGHT BEFORE A COURT IN THE UNITED STATES, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISIONS OF EACH OTHER DOCUMENT HERETO TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH AGENT AND EACH BANK ENTERING INTO THIS AGREEMENT AND RELATED AGREEMENTS. 9.10. Governing Law. This Agreement and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to conflict of laws principles. 9.11 Validity and Enforceability. If any stamp tax, levy, duty or fee is imposed or payable in respect to this Agreement or the transaction contemplated hereby or is necessary or advisable to ensure the legality, validity or enforceability of the documents in this transaction, the Account Parties shall promptly pay such stamp tax, levy, duty or fee. No government approval or consent is necessary for the execution, delivery and performance of the transactions contemplated under this Agreement. 9.12. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one (1) and the same instrument. 9.13. Successors and Assigns; Participations; Assignments. -56- 58 (a) Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the Account Parties, the Banks, the Agents, and their respective successors and assigns, except that no Credit Party may assign or otherwise transfer any of its rights or duties under this Agreement without the prior written consent of each of the Agents and each of the Banks, and any purported assignment without such consent shall be void. (b) Participations. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or a portion of its Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interest); provided, that (i) any such participation sold to a Participant which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of the Account Parties and each of the Agents, unless an Event of Default has occurred and is continuing, in which case the consent of the Account Parties shall not be required, (ii) any such Bank's obligations under this Agreement and the other Transaction Documents shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the parties hereto shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and each of the other Transaction Documents, (v) such Participant shall be bound by the provisions of Section 9.13 hereof, and the Bank selling such participation shall obtain from such Participant a written confirmation of its agreement to be so bound, (vi) no Participant (unless such Participant is an affiliate of such Bank, or is itself a Bank) shall be entitled to require such Bank to take or refrain from taking action under this Agreement or under any other Transaction Document, except that such Bank may agree with such Participant that such Bank will not, without such Participant's consent, take action of the type described in subsections (a), (b), (c), (d) or (e) of Section 9.14 hereof, and (vii) a Participant shall have the right to vote regarding amendments to this Agreement only in connection with amendments which effect changes in the amount of Letter of Credit Participating Interest Commitments, Letter of Credit Participating Interests, fees payable hereunder and the Expiration Date. Each Account Party agrees that any such Participant shall be entitled to the benefits of Sections 2.12 and 9.04 with respect to its participation in the Commitments and the Letters of Credit outstanding from time to time; provided, that no such Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) Assignments. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or any portion of its Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interests) to any -57- 59 Bank, any affiliate of a Bank or to one or more additional commercial banks or other Persons (each a "Purchasing Bank"); provided, that (i) any such assignment shall be made only with the consent (which in each case shall not be unreasonably withheld) of the Account Parties and the Issuing Bank, unless an Event of Default has occurred and is continuing or exists, in which case the consent of the Account Parties shall not be required, (ii) if a Bank makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Transaction Documents, such assignment shall be in a minimum aggregate principal amount of $10,000,000 of the Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interests then outstanding, (iii) each such assignment shall be of a constant, and not a varying, percentage of each Commitment of the transferor Bank and of all of the transferor Bank's rights and obligations under this Agreement and the other Transaction Documents, and (iv) each such assignment shall be made pursuant to a Transfer Supplement in substantially the form of Exhibit B to this Agreement, duly completed (a "Transfer Supplement"). In order to effect any such assignment, the transferor Bank and the Purchasing Bank shall execute and deliver to the Administrative Agent a duly completed Transfer Supplement (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, and a processing and recording fee of $2,500; and, upon receipt thereof, the Administrative Agent shall accept such Transfer Supplement; provided, however, that no such processing and recording fee shall be due if such assignment is to an affiliate of a Bank or a Federal Reserve Bank. Upon receipt of the Purchase Price Receipt Notice pursuant to such Transfer Supplement, the Administrative Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the close of business at the Administrative Agent's Office on the Transfer Effective Date specified in such Transfer Supplement: (x) the Purchasing Bank shall be a party hereto and, to the extent provided in such Transfer Supplement, shall have the rights and obligations of a Bank hereunder, and (y) the transferor Bank thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Transfer Supplement covering all or the remaining portion of a transferor Bank's rights and obligations under this Agreement, such transferor Bank shall cease to be a party to this Agreement) from and after the Transfer Effective Date. (d) Register. The Administrative Agent shall maintain at its office a copy of each Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the Letter of Credit Participating Interest Commitment of, and the amount of the Letter of Credit Participating Interests of, each Bank from time to time. The entries in the Register shall be conclusive absent manifest error and the Account Parties, the Agents and the Banks may treat each person whose name is recorded in the Register as a Bank hereunder for all purposes of the Agreement. The Register shall be available for inspection by an Account Party or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Financial and Other Information. Each Credit Party authorizes each Agent and each Bank to disclose to any Participant or Purchasing Bank (each, a "Transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning the Credit Parties and their affiliates which has been or may be delivered to such Person by or on behalf of the Credit Parties in connection with this Agreement or any other Transaction Document or such Person's credit evaluation of -58- 60 the Credit Parties and their affiliates, subject to the agreement of the Transferee or prospective Transferee to be bound by Section 9.17 hereof with respect to confidentiality. At the request of any Bank, a Credit Party, at a Credit Party's expense, shall provide to each prospective transferee the conformed copies of documents referred to in Section 4 of the form of Transfer Supplement. 9.14. Amendments and Waivers. Neither this Agreement nor any Transaction Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Agents and the Credit Parties may from time to time amend, modify or supplement the provisions of this Agreement or any other Transaction Document for the purpose of amending, adding to, or waiving any provisions or changing in any manner the rights and duties of any Credit Party, any Agent or any Bank. Any such amendment, modification or supplement made by the Credit Parties and the Agents in accordance with the provisions of this Section shall be binding upon the Credit Parties, each Bank and each Agent. The Agents shall enter into such amendments, modifications or supplements from time to time as directed by the Required Banks, and only as so directed, provided, that no such amendment, modification or supplement may be made which will: (a) Increase the Letter of Credit Participating Interest Committed Amount of any Bank over the amount thereof then in effect, or extend the Expiration Date, without the written consent of each Commitment Bank affected thereby; (b) Reduce the amount of or postpone the date for payment of any Commitment Fee or Letter of Credit Fee or reduce or postpone the date for payment of any other fees, expenses, indemnities or amounts payable under any Transaction Document, without the written consent of each Bank affected thereby; (c) Change the definition of "Required Banks" or amend this Section 9.14, without the written consent of all the Banks; (d) Amend or waive any of the provisions of Article IX hereof, or impose additional duties upon any Agent or otherwise adversely affect the rights, interests or obligations of any Agent, without the written consent of such Agent; (e) Amend or waive any of the provisions of Article V or release any Guarantor from its obligations hereunder without the written consent of all the Banks; and provided further, that Transfer Supplements may be entered into in the manner provided in Section 9.13 hereof. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. 9.15. Judgment Currency. In the event of a judgment or order being rendered by any court or tribunal for the payment of any amounts owing to the Banks or any of them under this Agreement or any other Transaction Document or for the payment of damages in respect of any breach of this Agreement or any other Transaction Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Banks harmless against any deficiency in terms of Dollars in the amounts received by the Banks arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which each Bank is able to purchase Dollars with the amount of the Judgment Currency actually received by the Banks on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Account Parties hereunder and shall apply irrespective of any indulgence granted by the Banks. -59- 61 9.16. Records. The amount of outstanding Letters of Credit, each Bank's Letter of Credit Participating Interest Committed Amount and the accrued and unpaid Commitment Fees shall at all times be ascertained from the records of the Administrative Agent, which shall be conclusive absent manifest error. 9.17 Confidentiality. Each of the Agents and the Banks agree to keep confidential any information relating to the Credit Parties received by it pursuant to or in connection with this Agreement which is (a) information which such Agent and such Bank reasonably expects that the applicable Credit Party would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.17 shall not be construed to prevent any Agent or any Bank from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Credit Parties to be bound by this obligation of confidentiality, (ii) upon the order of any court or administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Agent or such Bank which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by any Agent or any Bank, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that such Bank does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the applicable Credit Party (vi) in connection with the exercise of any right or remedy hereunder or under any other Transaction Document, (vii) as expressly contemplated by this Agreement or any other Transaction Document or (viii) to any prospective purchaser of all or any part of the interest of any Bank which shall agree in writing for the benefit of the Credit Parties to be bound by the obligation of confidentiality in this Agreement or the other Transaction Documents if such prospective purchaser is a financial institution or has been consented to by the Account Parties, which consent will not be withheld if such purchaser is not a competitor of any Account Party or an affiliate of a competitor of any Account Party. 9.18. Sharing of Collections. The Banks hereby agree among themselves that if any Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of any Obligation contemplated by this Agreement or the other Transaction Documents to be made by an Account Party pro rata to all Banks in greater proportion than any such amount received by any other Bank, then the Bank receiving such proportionately greater payment shall notify each other Bank and the Administrative Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Banks. The Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Banks a participation in the applicable Obligations owed to such other Banks in such amount as shall result in a ratable sharing by all Banks of such excess amount (and to such extent the receiving Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Bank making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Bank making such purchase. The Account Parties hereby consent to and confirm the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were a Bank hereunder. 9.19. Co-Arrangers. The Co-Arrangers shall have no obligations in their capacity as such under this Agreement. -60- 62 IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. VENTON UNDERWRITING LIMITED, AS AN ACCOUNT PARTY By: /s/D. M. Slade ------------------------------------------------- (Signature) Name: D. M. Slade ------------------------------------------------- Title: Director ------------------------------------------------ TALBOT UNDERWRITING LIMITED, AS AN ACCOUNT PARTY By: /s/D. M. Slade ------------------------------------------------- (Signature) Name: D. M. Slade ------------------------------------------------- Title: Director ------------------------------------------------ UNDERWRITERS RE GROUP, INC., AS A GUARANTOR By: /s/Stephen C. Kolakowski ------------------------------------------------- (Signature) Name: Stephen C. Kolakowski ------------------------------------------------- Title: Chief Financial Officer ------------------------------------------------ UNDERWRITERS REINSURANCE COMPANY, AS A GUARANTOR By: /s/Stuart M. de Haaff ------------------------------------------------- (Signature) Name: Stuart M. de Haaff ------------------------------------------------- Title: Senior Vice President ------------------------------------------------ -61- 63 MELLON BANK, N.A., AS A BANK, AS ISSUING BANK, AS ADMINISTRATIVE AGENT, AND AS CO-ARRANGER By: /s/Timothy J. Marchando ------------------------------------------------- (Signature) Name: Timothy J. Marchando ------------------------------------------------- Title: Vice President ------------------------------------------------ Notice Address: Institutional Banking Department One Mellon Bank Center, Room 370 Pittsburgh, PA 15258 Attn: Susan Whitewood with a copy to: Manager, Letter of Credit Operations Three Mellon Bank Center, 23rd Floor Pittsburgh, PA 15259 Initial Letter of Credit Participating Interest Committed Amount: $112,500,000 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, AS DOCUMENTATION AGENT AND AS A BANK By: /s/Lloyd C. Stevens By: /s/Robert P. Donohue ----------------------------- ----------------------------- (Signature) (Signature) Name: Lloyd C. Stevens Name: Robert P. Donohue ----------------------------- ----------------------------- Title: Vice President Title: Vice President ---------------------------- ---------------------------- Notice Address: Financial Institutions Sector 75 Wall Street New York, New York 10005 Attn: Robert P. Donohue Initial Letter of Credit Participating Interest Committed Amount: $112,500,000 -62- 64 DRESDNER KLEINWORT BENSON NORTH AMERICA LLC AS CO-ARRANGER By: /s/Lloyd C. Stevens By: /s/Robert P. Donohue ----------------------------- ----------------------------- (Signature) (Signature) Name: Lloyd C. Stevens Name: Robert P. Donohue ----------------------------- ----------------------------- Title: Vice President Title: Vice President ---------------------------- ---------------------------- Notice Address: Financial Institutions Sector 75 Wall Street New York, New York 10005 Attn: Robert P. Donohue -63- EX-10.29.B 13 LIST OF EXHIBITS TO THE LETTER OF CREDIT FACILITY 1 EXHIBIT 10.29(b) LIST OF EXHIBITS TO THE UNDERWRITERS LETTER OF CREDIT FACILITY EXHIBIT NUMBER DESCRIPTION - -------------- ----------- A Form of Letter of Credit Agreement B Form of Transfer Supplement C Contents of Opinions of Counsel D Form of Compliance Certificate E List of Existing Letters of Credit F Letter of Credit Application 2.01(b) Form of Evergreen Provision 3.03 Approvals and Consents 3.04 Governmental Consents 3.05 Financial Statements 3.07 Taxes 3.09 Insurance Licenses 3.13 Environmental Laws 3.16 Capitalization 3.17 ERISA 3.23 Ownership of Properties 3.24 Indebtedness 6.14 Investments 6.16 Liens EX-10.29.C 14 FIRST AMENDMENT TO THE LETTER OF CREDIT FACILITY 1 Exhibit 10.29(c) FIRST AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT THIS FIRST AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of November 25, 1998 (this "Amendment"), by and among between VENTON UNDERWRITING GROUP LIMITED, an English company ("VUGL"), VENTON UNDERWRITING LIMITED, TALBOT UNDERWRITING LIMITED, UNDERWRITERS RE GROUP, INC., UNDERWRITERS REINSURANCE COMPANY, the Banks (as defined in the Reimbursement Agreement) parties to the Reimbursement Agreement (as defined below), MELLON BANK, N.A., as Issuing Bank, as Administrative Agent and as a Co-Arranger, DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as Documentation Agent and DRESDNER KLEINWORT BENSON NORTH AMERICA LLC, as Co-Arranger. WITNESSETH: WHEREAS, the parties named above (other than VUGL) are parties to a Letter of Credit Facility and Reimbursement Agreement, dated as of October 23, 1998 (the "Reimbursement Agreement"), pursuant to which the Banks and the Issuing Bank have agreed, on the terms and subject to the conditions described therein, to extend credit to the Account Parties; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Reimbursement Agreement; and WHEREAS, URC proposes to acquire VUGL as an indirect wholly owned subsidiary; and WHEREAS, VUGL, the Account Parties and the Guarantors desire that, upon such acquisition, VUGL become a party to the Reimbursement Agreement as an Account Party and have requested the Bank Parties to amend the Reimbursement Agreement to provide therefor; and WHEREAS, URC has requested that, prior to such acquisition and to execution and delivery of this Amendment by VUGL, a Letter of Credit be issued which will be stated to be issued for the account of VUGL but which, upon its issuance, will be, and will be deemed to be, issued for the account of Venton Underwriting Limited; and WHEREAS, the Bank Parties are willing to so amend the Reimbursement Agreement and to agree to such issuance of a Letter of Credit. 2 NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. CERTAIN LETTER OF CREDIT. The Letter of Credit requested by Venton Underwriting Limited to be issued by the Issuing Bank on or about November 24, 1998, which has been requested to be, and will be, stated to be issued for the account of VUGL, will be and will be deemed to be a Letter of Credit under the Reimbursement Agreement issued for the account of Venton Underwriting Limited. Upon the execution and delivery of this Amendment by VUGL and the satisfaction of the conditions set forth in Section 3 of this Amendment, (x) such Letter of Credit will be, and will be deemed to be, issued for the account of VUGL as a Letter of Credit under the Reimbursement Agreement as amended by this Amendment and (y) Venton Underwriting Limited will thenceforth not be, and will thenceforth be deemed not to be, the Account Party with respect to such Letter of Credit. SECTION 2. AMENDMENTS TO REIMBURSEMENT AGREEMENT AND RELATED PROVISIONS. Upon the execution and delivery of this Amendment by VUGL and the satisfaction of all of the conditions set forth in Section 3 of this Amendment, the following provisions shall be effective: (a) AMENDMENTS. (i) The definition of the term "Account Parties" and "Account Party" in Section 1.01 of the Reimbursement Agreement is hereby amended by adding thereto, after the words "Venton Underwriting Limited" appearing therein, the phrase ", Venton Underwriting Group Limited". (ii) The definition of the term "Continuing Letter of Credit Agreement" is hereby amended by deleting the phrase "shall mean the letter of credit agreement" and inserting in lieu thereof the phrase "shall mean, collectively, one or more letter of credit agreements". (b) REPRESENTATIONS AND WARRANTIES. Each of VUGL and each Guarantor hereby represents and warrants that the representations and warranties set forth in Article III of the Reimbursement Agreement will be true and correct on the date of delivery of this Amendment by VUGL (and after giving effect hereto) as if made on and as of such date. (c) AGREEMENT OF VUGL. By its execution and delivery of this Amendment, VUGL becomes a party to the Reimbursement Agreement as an Account Party and a Credit Party. SECTION 3. CONDITIONS. (a) Proceedings and Incumbency. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank a certificate with respect to VUGL in form and substance satisfactory to each Co-Arranger dated the date of this Amendment and signed on behalf of each Credit Party by the Secretary or an Assistant Secretary of VUGL certifying as to: (a) true copies of all corporate action taken by such Credit Party relative to the Reimbursement Agreement, this Amendment and the other Transaction Documents applicable to it, including but not limited to that described in Section 3.02 of the Reimbursement Agreement and (b) the names, true signatures and incumbency of the officer or officers of VUGL authorized to execute and deliver this Amendment and the other Transaction Documents applicable to it. Each Bank, the 3 Issuing Bank and each Agent may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Person. (b) Organizational Documents. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation or memorandum of association and by-laws or other equivalent organizational documents for VUGL and (ii) a certificate of good standing for VUGL certified by the appropriate Official Body of its place of organization. (c) Opinions of Counsel. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank written opinions addressed to the Banks, dated the Closing Date, of Messrs. Dewey Ballantine LLP, counsel for URGI and URC and special English counsel for VUGL, in form and substance reasonably satisfactory to each Bank. (d) Letter of Credit Agreement. VUGL shall have executed and delivered to the Issuing Bank a letter of credit agreement substantially in the form attached as Exhibit A to the Reimbursement Agreement. (e) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Amendment shall be reasonably satisfactory to each Bank, and each Bank shall have received all such counterpart originals or certified or other copies of this Agreement and the other the Transaction Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Bank has reasonably requested. SECTION 4. EFFECT OF AMENDMENT. The Reimbursement Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 5. GOVERNING LAW. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 6. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. VENTON UNDERWRITING GROUP LIMITED, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ------------------------------------------------ (Signature) Name: D.M. Slade ---------------------------------------------- Title: Director --------------------------------------------- 4 VENTON UNDERWRITING LIMITED, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ------------------------------------------------ (Signature) Name: D.M. Slade ---------------------------------------------- Title: Director --------------------------------------------- TALBOT UNDERWRITING LIMITED, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ------------------------------------------------ (Signature) Name: D.M. Slade ---------------------------------------------- Title: Director --------------------------------------------- UNDERWRITERS RE GROUP, INC., AS A GUARANTOR By: /s/ Stuart M. de Haaff ------------------------------------------------ (Signature) Name: Stuart M. de Haaff ---------------------------------------------- Title: General Counsel and Secretary --------------------------------------------- UNDERWRITERS REINSURANCE COMPANY, AS A GUARANTOR By: /s/ Stuart M. de Haaff ------------------------------------------------ (Signature) Name: Stuart M. de Haaff ---------------------------------------------- Title: Senior Vice President --------------------------------------------- MELLON BANK, N.A., AS A BANK, AS ISSUING BANK, AS ADMINISTRATIVE AGENT, AND AS CO-ARRANGER By: /s/ Timothy J. Marchando ------------------------------------------------ (Signature) Name: Timothy J. Marchando ---------------------------------------------- Title: Vice President --------------------------------------------- 5 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, AS DOCUMENTATION AGENT AND AS A BANK By: /s/ Lloyd C. Stevens By: /s/ Anthony C. Valencourt ------------------------ ---------------------------- (Signature) (Signature) Name: Lloyd C. Stevens Name: Anthony C. Valencourt ---------------------- -------------------------- Title: Vice President Title: Senior Vice President --------------------- ------------------------- DRESDNER KLEINWORT BENSON NORTH AMERICA LLC AS CO-ARRANGER By: /s/ Lloyd C. Stevens By: /s/ Anthony C. Valencourt ------------------------ ---------------------------- (Signature) (Signature) Name: Lloyd C. Stevens Name: Anthony C. Valencourt ---------------------- -------------------------- Title: Vice President Title: Senior Vice President --------------------- ------------------------- EX-10.29.D 15 SECOND AMENDMENT TO THE LETTER OF CREDIT FACILITY 1 Exhibit 10.29(d) 12.29.98 SECOND AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT THIS SECOND AMENDMENT TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT, dated as of December 8, 1998 (this "Amendment"), by and among VENTON UNDERWRITING GROUP LIMITED, VENTON UNDERWRITING LIMITED, TALBOT UNDERWRITING LIMITED, UNDERWRITERS RE GROUP, INC., UNDERWRITERS REINSURANCE COMPANY, the Banks (as defined in the Reimbursement Agreement) parties to the Reimbursement Agreement (as defined below), MELLON BANK, N.A., as Issuing Bank, as Administrative Agent and as a Co-Arranger, DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as Documentation Agent and DRESDNER KLEINWORT BENSON NORTH AMERICA LLC, as Co-Arranger. WITNESSETH: WHEREAS, the parties named above are parties to a Letter of Credit Facility and Reimbursement Agreement, dated as of October 23, 1998 (as heretofore amended by the First Amendment thereto, the "Reimbursement Agreement"), pursuant to which the Banks and the Issuing Bank have agreed, on the terms and subject to the conditions described therein, to extend credit to the Account Parties; and WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Reimbursement Agreement; and WHEREAS, the Account Parties and the Guarantors have requested the Banks to amend the Reimbursement Agreement in certain respects; and WHEREAS, the Bank Parties are willing to so amend the Reimbursement Agreement. NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. AMENDMENT TO SECTION 6.20. Section 6.20 of the Reimbursement Agreement is amended to read as follows: 6.20. Change in Corporate Structure; Fiscal Year. No Credit Party shall, nor shall it permit any Subsidiary to, (a) permit any amendment or modification to be made to its certificate or articles of incorporation or by-laws which is materially adverse to the interests of the Banks (provided that such 2 Credit Party shall notify the Administrative Agent of any other amendment or modification thereto as soon as practicable thereafter) or (b) change its Fiscal Year to end on any date other than December 31 of each year, except that the Venton Entities may change their Fiscal Year to the twelve months ending September 30. SECTION 2. CERTAIN ADDITIONAL AMENDMENTS. In addition to the amendments made in Section 1 of this Amendment, the Reimbursement Agreement is hereby amended in the following respects: (a) Section 1.01 of the Reimbursement Agreement is amended by deleting the definition of "Subsidiary" appearing therein and by adding thereto, in proper alphabetical sequence, the following definitions: "Agents" shall mean, collectively, the Administrative Agent, the Documentation Agent and the Syndication Agent and "Agent" shall mean one of them. "Permitted Ratable Debt Payment" shall mean a payment by URGI under the Credit Agreement referred to in item 3 of Schedule 3.24 hereto, as amended, supplemented or modified from time to time, (i) which is made contemporaneously with an actual cash payment by URGI or any Subsidiary of URGI to the Cash Collateral Account and (ii) which bears the same ratio to the amount of the payment to the Cash Collateral Account referred to in clause (i) as the aggregate outstanding principal amount of loans under such Credit Agreement immediately before such payment (but not exceeding $50,000,000) bears to the Letter of Credit Exposure immediately before such payment. "Subsidiary" of a Person means (a) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or (b) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless the context otherwise requires, all references herein to a "Subsidiary" shall mean a Subsidiary of URGI. "Syndication Agent" shall mean First Union National Bank. (b) Section 2.03(c)(ii) of the Reimbursement Agreement is amended by deleting the phrase "at least two Business Days before" and inserting in lieu thereof the phrase "at least one Business Day before". (c) Section 2.05(b) of the Reimbursement Agreement is amended by deleting the words "to and including the second Business Day thereafter" appearing in the last sentence thereof (it having been determined that such words were included in the Reimbursement Agreement as a result of a typographical error). (d) Section 2.14 of the Reimbursement Agreement is amended by deleting the words "by such thirtieth day" (it having been determined that such words were included in the Reimbursement Agreement as a result of a typographical error) and inserting in lieu thereof the words "by such forty-fifth day". 3 (e) Section 5.06 of the Reimbursement Agreement is amended by deleting the words "my Account Party" (it having been determined that such words were included in the Reimbursement Agreement as a result of a typographical error) and inserting in lieu thereof the words "any Account Party". (f) The introductory phrase in Article VI of the Reimbursement Agreement, appearing immediately before Section 6.01, is amended to read as follows: So long as any Letter of Credit is outstanding, any Obligation is outstanding, or the Issuing Bank has any obligation to issue, or the Banks have any obligation to participate in, Letters of Credit, (g) Section 6.10 of the Reimbursement Agreement is amended by adding, immediately preceding the period at the end thereof, the following: "and except that URC may declare and may pay dividends to, or make distributions to, URGI the proceeds of which are used solely and immediately to make a Permitted Ratable Debt Payment". (h) Section 6.14(a) of the Reimbursement Agreement is amended by deleting the words "in an amount" appearing therein and inserting in lieu thereof the words "in an aggregate amount". (i) Section 6.15 of the Reimbursement Agreement is amended by deleting the phrase "in respect of insurance contracts or policies" appearing in clause (b) thereof and inserting in lieu of such phrase the phrase "incurred under insurance contracts or policies or under reinsurance contracts or policies" and by adding, immediately before the comma at the end of clause (c) thereof, the phrase "or reinsurance policies or contracts". (j) Section 6.24(e) of the Reimbursement Agreement is amended by deleting the words "Controlled Group watch" (it having been determined that such words were included in the Reimbursement Agreement as a result of a typographical error) and inserting in lieu thereof the words "Controlled Group which". (k) Section 8.07 of the Reimbursement Agreement is amended by deleting the words "Loan Parties" (it having been determined that such words were included in the Reimbursement Agreement as a result of a typographical error) and inserting in lieu thereof the words "Credit Parties". Section 8.07 of the Reimbursement Agreement is further amended by adding, as a new last sentence thereof, the following: If an Agent receives from a Bank interest for any day on a payment due under this Section, as contemplated by the immediately preceding sentence, and subsequently receives interest from a Credit Party for such day with respect to the cost, expense or other item giving rise to such payment, the amount of such interest received by such Agent from a Credit Party shall be forthwith paid to such Bank. (l) Section 8.02(a) of the Reimbursement Agreement is amended by adding, as a new second sentence thereof, the following: Neither the Documentation Agent nor the Syndication Agent shall have any duties or responsibilities in its capacity as such (as opposed to its capacity as a Bank) under this Agreement. 4 (m) Schedule 3.24 to the Reimbursement Agreement is amended by adding thereto as a new item 4 the following: "Guarantee by Underwriters Reinsurance Company of loans in an aggregate principal amount not exceeding $50,000,000, and of related obligations, in each case under the Credit Agreement referred to in item 3 of this Schedule, as the same may be amended from time to time". SECTION 3. EFFECT OF AMENDMENT. The Reimbursement Agreement, as amended by this Amendment, is in all respects ratified, approved and confirmed and shall, as so amended, remain in full force and effect. SECTION 4. GOVERNING LAW. This Amendment shall be deemed to be a contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said Commonwealth. SECTION 5. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. VENTON UNDERWRITING GROUP LIMITED, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ------------------------------------------------ (Signature) Name: D.M. Slade ---------------------------------------------- Title: Director --------------------------------------------- VENTON UNDERWRITING LIMITED, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ------------------------------------------------ (Signature) Name: D.M. Slade ---------------------------------------------- Title: Director --------------------------------------------- TALBOT UNDERWRITING LIMITED, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ------------------------------------------------ (Signature) Name: D.M. Slade ---------------------------------------------- Title: Director --------------------------------------------- 5 UNDERWRITERS RE GROUP, INC., AS A GUARANTOR By: /s/ Stephen C. Kolakowski ------------------------------------------------ (Signature) Name: Stephen C. Kolakowski ---------------------------------------------- Title: Chief Financial Officer --------------------------------------------- UNDERWRITERS REINSURANCE COMPANY, AS A GUARANTOR By: /s/ Stuart M. de Haaff ------------------------------------------------ (Signature) Name: Stuart M. de Haaff ---------------------------------------------- Title: Senior Vice President --------------------------------------------- MELLON BANK, N.A., AS A BANK, AS ISSUING BANK, AS ADMINISTRATIVE AGENT, AND AS CO-ARRANGER By: /s/ Timothy J. Marchando ------------------------------------------------ (Signature) Name: Timothy J. Marchando ---------------------------------------------- Title: Vice President --------------------------------------------- DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, AS DOCUMENTATION AGENT AND AS A BANK By: /s/ Lloyd C. Stevens By: /s/ Deborah Slusarczyk ------------------------ ---------------------------- (Signature) (Signature) Name: Lloyd C. Stevens Name: Deborah Slusarczyk ---------------------- -------------------------- Title: Vice President Title: Vice President --------------------- ------------------------- DRESDNER KLEINWORT BENSON NORTH AMERICA LLC AS CO-ARRANGER By: /s/ Lloyd C. Stevens By: /s/ Deborah Slusarczyk ------------------------ ---------------------------- (Signature) (Signature) Name: Lloyd C. Stevens Name: Deborah Slusarczyk ---------------------- -------------------------- Title: Vice President Title: Vice President --------------------- ------------------------- EX-13 16 SELECTED PAGES OF ANNUAL REPORT TO STOCKHOLDERS 1 ALLEGHANY CORPORATION ANNUAL REPORT 1998 2 TO OUR STOCKHOLDERS The year 1998 was one of significant developments for Alleghany and its stockholders. On June 17, Alleghany completed the tax-free spin-off of Chicago Title Corporation to Alleghany stockholders, thereby creating a major new independent title insurance company with an initial market capitalization in excess of $1.0 billion. As a part of the spin-off, the common stock of Chicago Title was listed on the New York Stock Exchange under the symbol "CTZ." The spin-off was of significant benefit to our stockholders, leaving Alleghany a somewhat smaller but more focused company. During 1998, all our other operating units continued to expand through both internal growth and acquisitions. We expect such expansion to continue in 1999. Our most significant acquisition in 1998 was the purchase on October 23 of Venton Holdings Ltd. by Underwriters Re Group, Inc. Venton, through its subsidiaries, is a managing agent and provider of corporate capital for syndicates in the Lloyd's insurance market and also has operations in Bermuda. The purchase, made for approximately $190 million principally in cash, will increase both the scale and the scope of Underwriters Re Group's operations in 1999 and beyond. In connection with the purchase, Underwriters Re Group established a letter of credit facility in the amount of $225 million to support the underwriting activities of the Lloyd's syndicates managed by Venton. Our net earnings from continuing operations in 1998 were $63.4 million, or $8.74 per share, compared with $51.4 million, or $7.05 per share, in 1997. Net earnings including discontinued operations were $96.1 million, or $13.25 per share, in 1998 compared with $105.7, or $14.50 per share, in 1997. Discontinued operations consist of the spun-off operations of Chicago Title. The comparative contributions to Alleghany's earnings made by Alleghany's operating units, parent-company operations and discontinued operations were as follows (in millions):
- ---------------------------------------------------------------------------------------- Year Ended Quarter Ended December 31 December 31 - ---------------------------------------------------------------------------------------- 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- Underwriters Re Group $ 52.4 $ 44.4 $ 10.0 $ 12.7 Alleghany Asset Management 35.7 19.8 7.8 5.2 World Minerals 23.6 27.5 8.7 9.2 Parent company and other Other $ (21.0) $ (15.1) $ (6.9) $ (7.8) Security transactions 0.3 (11.3) -- (8.0) - ---------------------------------------------------------------------------------------- $ (20.7) $ (26.4) $ (6.9) $ (15.8) Earnings from continuing operations, before income taxes $ 91.0 $ 65.2 $ 19.6 $ 11.3 - ---------------------------------------------------------------------------------------- Earnings from continuing operations, net $ 63.4 $ 51.4 $ 13.4 $ 13.3 Earnings from discontinued operations, net (Chicago Title) 32.7 54.3 0 15.5 - ---------------------------------------------------------------------------------------- Net earnings $ 96.1 $ 105.7 $ 13.4 $ 28.8 ========================================================================================
3 3 Underwriters Re Group, Inc. contributed pre-tax earnings of $52.4 million in 1998, an increase of more than 18 percent over 1997 pre-tax earnings, primarily reflecting growth in investment income resulting from an increase in invested assets. Reinsurance premiums remained level with 1997 as reinsurance markets continued to be highly competitive. In such markets, Underwriters Re Group continues to focus on coverages requiring specialized underwriting expertise or a high degree of actuarial analysis, such as property catastrophe exposures, as well as its primary insurance business conducted through its insurance subsidiaries and underwriting centers. In addition, the acquisition of Venton is expected almost to double the premium volume of Underwriters Re Group. Underwriters Re Group's 1998 results do not include the results of Venton for the period following its acquisition on October 23, 1998. During 1999, Venton's results will be reported on a one quarter lag due to the complexity of converting Lloyd's accounting information to U.S. accounting principles. Thus, results of Venton for the period from October 23 to December 31, 1998 will be included in the results of Underwriters Re Group for the first quarter of 1999. However, 1998 results of Underwriters Re Group do reflect the loss of investment income on the $185.4 million of its investment securities used to fund the acquisition. As of December 31, 1998, the statutory surplus of Underwriters Re Group's principal subsidiary, Underwriters Reinsurance Company, was $602.6 million making Underwriters Reinsurance the tenth-largest domestic professional reinsurer in terms of statutory surplus, according to the Reinsurance Association of America. Alleghany Asset Management, Inc. and its subsidiaries, The Chicago Trust Company, Montag & Caldwell, Inc. and Chicago Deferred Exchange Corporation, contributed pre-tax earnings of $35.7 million in 1998, a 79 percent increase over 1997. Having recovered from the turmoil experienced in the U.S. financial markets in August and September 1998, the improved results of Alleghany Asset Management are due primarily to an increase in assets under management, largely at Montag & Caldwell, and reflect its strong long-term performance record in managing equity investments. Assets under management totalled $35.6 billion at year-end 1998, compared with $23.1 billion at year-end 1997. In 1998, Alleghany Asset Management also expanded its product line by acquiring a small capitalization value equity manager and a 40 percent interest in a small capitalization growth equity manager, and by entering into a definitive agreement to acquire Blairlogie Capital Management, an Edinburgh, Scotland based investment manager managing approximately $800 million in assets, principally in non-U.S. equities. World Minerals Inc. contributed pre-tax earnings of $23.6 million, a decrease of 14 percent from its 1997 pre-tax earnings. These results reflect increased competitive pressure and increased operating costs, primarily at World Minerals' Lompoc, California diatomite operations. Lompoc's operations were affected in early 1998 by severe El Nino storms and rail car shortages on the Union Pacific Railroad. Increased spending was also incurred for research, operations and engineering. We are disappointed with the 1998 results of World Minerals but are optimistic that 1999 will prove to be a better year. The results of the Heads and Threads division of Alleghany were affected by the increasingly competitive markets for fastener imports. Heads and Threads has positioned itself for future growth through its acquisition of Gardenbolt International Corp. of Sayreville, New Jersey and a now completed restructuring of its computer systems. 4 4 Alleghany Properties, Inc. continued to benefit from improved real estate conditions in California, which resulted in considerably increased property sales. Alleghany's 1998 results included net gains of $0.3 million on investment transactions from continuing operations before taxes, compared with net losses of $11.3 million in 1997 resulting principally from the write-down of certain investment securities. As of March 1, 1999, Alleghany beneficially owned approximately 22.29 million shares, or 4.7 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of approximately $723.2 million, or $32.4375 per share. The aggregate cost of such shares was approximately $253.7 million, or $11.38 per share. Burlington Northern's record continues to demonstrate its position as the premier U.S. railroad. Alleghany common stockholders' equity per share was $172.51 at year-end 1998, compared with $160.91 at year-end 1997, as adjusted for the Chicago Title spin-off. Although we have become a smaller but more focused company in 1998, our goal remains the same: to continue to generate a growing, high quality stream of earnings for our stockholders. Yours sincerely, /s/ John J. Burns, Jr. /s/ F.M. Kirby - ----------------------------- ----------------------------- President Chairman of the Board March 16, 1999 [PHOTO -- SEE EDGAR APPENDIX] Photo caption Seated, F.M. Kirby, Chairman of the Board; Standing, John J. Burns, Jr., President 5 5 UNDERWRITERS RE GROUP, INC. Underwriters Re Group, headquartered in Calabasas, California, provides reinsurance through its principal subsidiary, Underwriters Reinsurance Company, to property and casualty insurers and reinsurers. Although it writes many lines of business, Underwriters Reinsurance concentrates on coverages requiring specialized underwriting expertise or a high degree of actuarial analysis. Underwriters Reinsurance operates throughout the United States and Canada, either as a licensed carrier or accredited reinsurer, and has branch offices in Chicago, Houston, New York and Calabasas. Underwriters Re Group also provides insurance through its insurance subsidiaries and underwriting centers. On October 23, 1998, Underwriters Reinsurance acquired Venton Holdings Ltd. for approximately $181.1 million in cash and Alleghany stock valued at approximately $8.9 million. Venton, through its subsidiaries, is a managing agent and provider of corporate capital for syndicates in the Lloyd's insurance market and also has operations in Bermuda. In connection with the purchase, Underwriters Reinsurance established a letter of credit facility in the amount of $225 million to support the underwriting activities of the Lloyd's syndicates managed by Venton. Underwriters Re Group contributed pre-tax earnings of $52.4 million on revenues of $508.6 million in 1998, compared with $44.4 million on revenues of $453.1 million in 1997 and $37.0 million on revenues of $410.9 million in 1996. Underwriters Re Group's results in 1998 reflect growth in its primary insurance operations but level reinsurance premiums due to highly competitive reinsurance markets. This resulted in a slowing in the growth of the operations of Underwriters Re Group compared with past years. Underwriters Re Group recorded in 1998 a 5.8 percent, or $24.0 million, increase in net written premiums from 1997 compared with a 15 percent, or $53.9 million, increase in 1997 from 1996 levels and a 23 percent, or $68.3 million, increase in 1996 from 1995 levels. Commissions and brokerage expenses increased primarily because of the change in the mix of treaty business having higher ceding commissions paid but lower assumed levels of risk. Other insurance expenses also increased during 1998 as emphasis was placed on the growth of Underwriters Re Group's primary insurance business. Underwriters Re Group's growth in premiums is shown below (in millions):
- ---------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------- Net written reinsurance premiums $ 384.2 $ 369.0 $ 335.0 Net written insurance premiums 54.0 45.2 25.3 - ---------------------------------------------------------------------------- Net written premiums $ 438.2 $ 414.2 $ 360.3 ============================================================================
Pre-tax investment income totalled $80.4 million in 1998, compared with $75.6 million in 1997 and $63.2 million in 1996, reflecting an increase in invested assets. 1998 investment income was negatively affected by lower interest rates during 1998 compared with the previous year's levels and the use in the fourth quarter of 1998 of $185.4 million in investment securities to acquire Venton. Underwriters Re Group recorded a pre-tax gain of $7.4 million on investment transactions in 1998, compared with a pre-tax gain of $932 thousand in 1997 and a pre-tax gain of $910 thousand in 1996. 7 6 Underwriters Re Group's 1998 results do not include the results of Venton for the period following its acquisition on October 23, 1998. Venton's results will be reported on a one quarter lag due to the complexity of converting Lloyd's accounting information to U.S. accounting principles. Thus, results of Venton for the period from October 23 to December 31, 1998 will be included in the results of Underwriters Re Group for the first quarter of 1999. REINSURANCE Underwriters Reinsurance carries an "A+" (Superior) rating from A.M. Best Company, Inc. and a claims-paying ability rating of "AA-" (Excellent) from Standard & Poor's. As of December 31, 1998, the statutory surplus of Underwriters Reinsurance was $602.6 million making Underwriters Reinsurance the tenth-largest domestic professional reinsurer in terms of statutory surplus, according to the Reinsurance Association of America. Brokers are the principal source of the reinsurance business of Underwriters Reinsurance; the remainder of its reinsurance business is obtained directly from ceding companies. By working primarily through brokers, Underwriters Reinsurance does not need to maintain a large sales organization which, during periods of reduced premium volume, could result in significant non-productive overhead. In addition, Underwriters Reinsurance believes that submissions from the broker market, including those for certain targeted specialty coverages, are more numerous and diverse than would be available through a salaried sales organization. Consequently, Underwriters Reinsurance is able to exercise greater selectivity than would usually be possible in dealing directly with ceding companies. Underwriters Reinsurance maintains a disciplined underwriting program with a focus on generating profitable business rather than on increasing market share. An important element of this program is to respond quickly to market opportunities (such as increased demand or more favorable pricing) by adjusting the mix of property and casualty business it writes. Underwriters Reinsurance concentrates on coverages which require a high degree of underwriting and actuarial expertise. This expertise is also required for certain business that Underwriters Reinsurance has developed in nontraditional areas, such as providing capital in combination with reinsurance and providing reinsurance to alternative risk markets, including risk retention groups, captives, underwriting syndicates and self-insured funds and associations. Nontraditional reinsurance may also refer to reinsurance contracts which limit exposure to loss through the use of aggregate loss limits, loss ratio caps or other loss containment features. Underwriters Reinsurance believes that coverages which require high levels of underwriting and actuarial expertise offer greater potential for favorable results than more general coverages, based on current market conditions. PRIMARY INSURANCE Underwriters Re Group established Commercial Underwriters Insurance Company at the end of 1992, acquired an inactive Nebraska insurance company which was renamed Underwriters Insurance Company in 1994, and established Newmarket Underwriters Insurance Company in 1996 to capitalize on advantageous market conditions for certain primary insurance business lines. Commercial Underwriters, Underwriters Insurance and Newmarket Underwriters are rated "A+" (Superior) by Best's because Underwriters Reinsurance reinsures a significant share of their business. 9 7 Commercial Underwriters, Underwriters Insurance and Newmarket Underwriters are property and casualty insurance companies. Commercial Underwriters focuses on specialized primary insurance lines in California and New York on an admitted basis and in 45 other states, Guam and the District of Columbia on an approved nonadmitted basis. Underwriters Insurance, licensed in 48 states and the District of Columbia, focuses on marine insurance, primary liability policies for medium- to large-sized businesses and certain professional liability coverages. Newmarket Underwriters, licensed in New Hampshire and qualified on a nonadmitted basis in New York and California, focuses on general liability policies for medium- to large-sized businesses. The Center Insurance Services, Inc. was established in 1995. The Center acts as agent and underwrites business on behalf of Commercial Underwriters, Underwriters Insurance and Newmarket Underwriters and at present, to a lesser extent, non-affiliated insurers. Business underwritten by The Center includes marine insurance, products liability insurance, general liability insurance for certain insureds with self-insured retentions and vehicle service contracts. INTERNATIONAL OPERATIONS Representative offices were established in Barbados at the end of 1995 and in London in 1996 to capitalize on international underwriting opportunities. In 1995, Underwriters Re Group also made an investment in a reinsurance company in Barbados. The acquisition of Venton and its subsidiaries is expected to enhance the competitive position of Underwriters Reinsurance by providing access to the Lloyd's and Bermuda markets, as well as diversifying the group's growth and earnings prospects outside the United States. Venton participates in the Lloyd's market through its subsidiaries Venton Underwriting Agencies Ltd. and Venton Underwriting Ltd. Venton Agencies is the managing agency for three Lloyd's syndicates: Syndicate 376 (non-marine), Syndicate 1183 (marine) and Syndicate 1207 (non-marine). For the calendar 1999 year of account, the three syndicates have available capacity of approximately pound sterling 301.8 million (equivalent to a maximum gross premiums written of approximately $645 million). Venton Underwriting and two affiliated companies are corporate names at Lloyd's which provide capital to the syndicates managed by Venton Agencies, including, on an exclusive basis, to Syndicate 1207. For calendar year 1999, Venton Underwriting and the affiliated companies provided approximately pound sterling 234.4 million, or 77.7 percent, of the pound sterling 301.8 million available capacity referred to above. The insurance and reinsurance business underwritten by Venton is broad-based with a diversified product mix of property, casualty, marine and other risks. Its risks are located around the world, primarily in the United States, the United Kingdom, Western Europe, Canada and Australia. 10 8 ALLEGHANY ASSET MANAGEMENT, INC. Alleghany Asset Management conducts a financial services business through its subsidiaries, The Chicago Trust Company, a Chicago-based investment firm with trust powers, Montag & Caldwell, Inc., an Atlanta-based investment counseling firm, Chicago Deferred Exchange Corporation, which facilitates certain tax-deferred property exchanges and Security Trust Company, a San Diego-based trust company. Alleghany Asset Management posted the following results (in millions):
- ---------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------- Revenues $ 125.1 $ 78.8 $ 53.4 Pre-tax earnings $ 35.7 $ 19.8 $ 9.7 Assets under management $ 35,600 $ 23,100 $ 14,500 ================================================================
Growth in profitability of Alleghany Asset Management is largely dependent on growth in assets under management, through market appreciation of existing assets and new business (new clients and additional investments from existing clients). Approximately 85 percent of Alleghany Asset Management's assets under management are institutional assets where competition is intense and success is driven primarily by investment performance. Both Montag & Caldwell and Chicago Trust have recorded very strong investment results over the past three years and have received high ratings in various consultant and mutual fund data bases. The $12.5 billion growth in assets under management from 1997 to 1998 included new business of approximately $5.5 billion, compared with the $8.6 billion growth in assets under management from 1996 to 1997, which included new business of approximately $4.2 billion. Due to the turmoil in U.S. equity markets in August and September of 1998, assets under management declined by six percent in the third quarter from the second quarter levels, but increased nineteen percent in the fourth quarter from the third quarter of 1998. Future volatility and reduced market valuations could adversely affect assets under management and the future results of Alleghany Asset Management. During 1998, Alleghany Asset Management expanded its product line by adding a small capitalization value equity product and acquiring a 40 percent interest in Veredus Asset Management LLC, a Louisville, Kentucky based small capitalization growth equity manager with about $100 million in assets under management. In addition, Alleghany Asset Management entered into a definitive agreement to acquire Blairlogie Capital Management, an Edinburgh, Scotland based investment manager that manages approximately $800 million in assets, principally in non-U.S. equities. Blairlogie would provide Alleghany Asset Management with its first international investment manager. Alleghany Asset Management provides distribution and marketing services to its investment managers through the 401(k) services offered by Chicago Trust and the Alleghany Funds, a mutual fund family offering ten no-load mutual funds. Chicago Trust's full service 401(k) administration group provides trustee, plan design, investment management and other administrative services. Such services are marketed through internal sales forces in Chicago and Atlanta as well as consultants and brokerage sources. The Alleghany Funds are marketed primarily through registered investment advisers, broker-dealers and direct sales to institutional clients, as well as through intermediary services, including Schwab and Fidelity. 11 9 MONTAG & CALDWELL Founded in 1945, Montag & Caldwell, one of the Southeast's oldest investment management firms, concentrates on managing large capitalization growth equity and balanced portfolios for institutional, mutual fund and high net worth clients. Montag & Caldwell believes that success in the institutional investment business is dependent upon a disciplined and consistently applied investment process, which has translated into outstanding investment results. Montag & Caldwell's equity results have consistently placed the firm among the top money managers in its category. Montag & Caldwell's assets under management have increased significantly, driven by excellent equity returns and strong new business activity. At year-end 1998, Montag & Caldwell had $25.5 billion in assets under management, compared with $15.4 billion at year-end 1997 and $8.4 billion at year-end 1996. Montag & Caldwell targets separate accounts of $40 million and higher through pension consultants or direct calls to prospective clients. Its investment expertise is also available through the Alleghany Funds. Montag & Caldwell advises two of the Alleghany Funds' mutual funds, with approximately $2.3 billion in assets under management at year-end 1998. CHICAGO TRUST Chicago Trust and its predecessors have managed assets for investors since 1887. Chicago Trust is an investment firm with full trust powers engaged in the following lines of business: institutional investment management, full service 401(k) administration, personal trust and investment services and administration of the Alleghany Funds. At year-end 1998, Chicago Trust had $10.1 billion in assets under management, compared with $7.7 billion at year-end 1997 and $6.1 billion at year-end 1996. Chicago Trust manages about $4.4 billion in institutional equity and fixed income accounts of which approximately $1.5 billion comprise the investment portfolio of Underwriters Re Group. Chicago Trust specializes in fixed income and large capitalization equity money management for institutional clients. Its fixed income results have consistently placed Chicago Trust among the top money managers in its category. The fixed income and equity products are marketed through pension consultants and directly to plan sponsors. Chicago Trust also advises seven mutual funds of the Alleghany Funds, with approximately $1.1 billion in assets under management at year-end 1998. Chicago Trust's personal trust and investment services business serves the investment and estate planning needs of individuals and families, mainly in the metropolitan Chicago area, and had about $1.8 billion in assets under management at year-end 1998. Chicago Trust believes that the business is well-positioned to benefit from growth in family wealth and the demographics of an aging baby boom generation. Chicago Trust's full service 401(k) business administers about $2.9 billion of assets, approximately half of which is invested in the Alleghany Funds and collective funds managed by the subsidiaries of Alleghany Asset Management, and the remainder of which is invested in third-party managed funds. 13 10 ALLEGHANY FUNDS Alleghany Funds had approximately $3.4 billion in assets under management at December 31, 1998, compared with $1.9 billion at year-end 1997. Montag & Caldwell Growth Fund and The Chicago Trust Growth & Income Fund experienced the greatest increase in assets under management from year-end 1997 to year-end 1998, adding a total of $1.3 billion. The ten no-load mutual funds in the Alleghany Funds family consist of five equity funds, two balanced funds, two fixed income funds and a money market fund. Current information with respect to the Alleghany Funds can be found on its website, www.alleghanyfunds.com. CHICAGO DEFERRED EXCHANGE AND SECURITY TRUST Chicago Deferred Exchange was established in 1989 and facilitates, with the assistance of Chicago Trust, tax-deferred exchanges of like-kind property. In 1998, Chicago Deferred Exchange facilitated more than 2,200 exchanges with aggregate asset values exceeding $5.0 billion. Chicago Deferred Exchange acts as a qualified intermediary, holding and investing the cash proceeds from the sale of property relinquished by a taxpayer in a qualified trust account, for which Chicago Trust acts as trustee, until replacement property is acquired. Security Trust provides trust, investment and tax-deferred property exchange services in California. 14 11 WORLD MINERALS INC. World Minerals, headquartered in Santa Barbara, California, conducts a worldwide industrial minerals business through its own operations and those of its subsidiaries, Celite Corporation and Harborlite Corporation. World Minerals contributed pre-tax earnings of $23.6 million on revenues of $201.1 million in 1998, compared with $27.5 million on revenues of $203.3 million in 1997 and $18.0 million on revenues of $198.5 million in 1996. The 1998 results reflect increased competitive pressure and increased operating costs, primarily at World Minerals' Lompoc, California diatomite operations. Lompoc's operations were affected in early 1998 by severe El Nino storms and rail car shortages on the Union Pacific Railroad. Increased spending was also incurred for research, operations and engineering. Revenues and pre-tax earnings increased in 1997 from the prior year due to increased sales and profit margins achieved by World Minerals' non-Asian diatomite operations. The mid-1990's marked a period of resurgent economic activity in most world markets. During this period, World Minerals enhanced its position in both of its core businesses, diatomite and perlite, through acquisitions of and strategic investments in mining, processing, distribution and sales facilities. World Minerals also acquired the minority interests in Harborlite. In 1998, Celite acquired additional diatomite reserves in Lompoc, California. In addition, World Minerals continued to increase its spending in new product development, seeking ways to put the unique properties of its industrial minerals to work in new applications. In 1998, however, economic activity in Asia and Latin America slowed, resulting in a decrease in net sales in and to these areas of the world. This trend, if continued, could have an adverse impact on World Minerals' earnings in 1999. World Minerals expects that its enhanced position in its core businesses will help to offset any decline in sales. Celite is believed to be the world's largest producer of filter-aid grade diatomite, a silica-based mineral consisting of the fossilized remains of microscopic freshwater or marine plants. [MAP -- SEE EDGAR APPENDIX] 15 12 Diatomite is used as a filter aid in the production of beer, fruit juice, wine, water, sweeteners, fats and oils, pharmaceuticals, chemicals, lubricants and petroleum; it is also used as a filler, mainly in paints, and as an anti-block agent in plastic film. Celite is also a producer of calcium and magnesium silicate products, which are used to convert liquid, semi-solid and sticky ingredients into dry, free-flowing powders in the production of rubber, sweeteners, flavorings and pesticides. Harborlite is believed to be the world's largest producer of perlite filter aids and, as a seller of perlite ore, is one of the world's largest merchant producers of perlite ore. Perlite ore is a volcanic rock containing a small amount of water that causes the ore to "pop" when heated, expanding it up to twenty times its original volume. Harborlite sells perlite ore to companies that expand it for use primarily in the manufacture of roofing board, formed pipe insulation, acoustical ceiling tile and filter aids. Harborlite also expands perlite in its own expansion plants in the United States and Europe. Most of this expanded perlite is sold as a filter aid to companies in the brewing, food, wine, sweetener, pharmaceutical, chemical and lubricant industries, or as a filler and insulating medium to companies in the construction industry. World Minerals focuses on customer and technical service. Its Research and Development group uses state of the art analytical instrumentation and techniques to seek ways to put the unique properties of its industrial minerals to work in new applications, as well as to refine minerals processing methods to yield higher purity and more consistent finished products. The Technical Services group helps to identify the best possible grade of industrial minerals for each customer process and assists in optimizing the customer's manufacturing process to achieve the highest possible value from World Minerals' products. World Minerals conducts its business on a worldwide basis, with mining or processing operations in eleven countries. While World Minerals believes that the international scope of its operations gives it some competitive advantages, international operations can be subject to additional risks, such as currency fluctuations, changes in foreign legal requirements and political instability. World Minerals minimizes its exposure to the risk of foreign currency fluctuation by closely monitoring its methods of operating in each country and by adopting strategies responsive to changing economic and political environments. It is not currently expected that any continued currency turmoil in the Far East or Latin America will have a material adverse impact on World Minerals' earnings in 1999. 17 13 HEADS AND THREADS The Heads and Threads division has been owned by Alleghany since 1974. Headquartered in Northbrook, Illinois, Heads and Threads is believed to be one of the nation's leading importers and distributors of steel fasteners. Nuts, bolts, screws, washers and other fasteners are imported and resold to fastener manufacturers and distributors through a network of sales offices and warehouses in nineteen states. The strength of Heads and Threads lies in its long years of association with suppliers and customers. Although 1998 results were affected by the increasingly competitive market of the fastener importing business and costs relating to the restructuring of its computer systems, Heads and Threads has been consistently profitable since its acquisition by Alleghany, despite the cyclical nature of its business and changing market conditions. In 1998, Heads and Threads acquired the assets of Gardenbolt International Corp. of Sayreville, New Jersey, substantially increasing both the size of Heads and Threads and its presence in East Coast markets. In addition, it completed the installation and implementation of a new fully-integrated, enterprise-wide computer system which will enhance the functionality of Heads and Threads' business operations, including order processing, sales and inventory management, transportation services and accounting and finance. Since Heads and Threads imports virtually all of its fasteners, its costs are subject to fluctuations in foreign currency and import duties. Costs also will be impacted by regulations implementing the Fastener Quality Act, the effective date of which has been postponed to 1999. ALLEGHANY PROPERTIES, INC. Headquartered in Sacramento, California, Alleghany Properties and its subsidiary own and manage, among other real estate and real estate-related assets, 23 properties in California. Such properties are comprised of improved and unimproved commercial land (office, retail and industrial), and improved and unimproved commercial and residential lots. A major portion of Alleghany Properties' real estate assets are located in North Natomas, the only large undeveloped area in the City of Sacramento. Development in the area had been delayed by flood plain zoning and wildlife habitat issues, both of which have been resolved allowing development to begin. 19 14 SELECTED FINANCIAL DATA Alleghany Corporation and Subsidiaries (in thousands, except for share and per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING DATA Revenues from continuing operations $ 918,993 $ 796,654 $ 734,482 $ 652,444 $ 503,669 - ------------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 63,381 $ 51,400 $ 40,470 $ 60,366 $ 28,236 Earnings from discontinued operations 32,725 54,267 46,578 24,934 109,270 - ------------------------------------------------------------------------------------------------------------------------------- Net earnings $ 96,106 $ 105,667 $ 87,048 $ 85,300 $ 137,506 - ------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share of common stock:* Continuing operations $ 8.74 $ 7.05 $ 5.50 $ 8.21 $ 3.89 Discontinued operations 4.51 7.45 6.32 3.39 15.06 - ------------------------------------------------------------------------------------------------------------------------------- Net earnings $ 13.25 $ 14.50 $ 11.82 $ 11.60 $ 18.95 - ------------------------------------------------------------------------------------------------------------------------------- Average number of shares of common stock* 7,251,238 7,287,459 7,360,584 7,354,822 7,253,093 ===============================================================================================================================
- -------------------------------------------------------------------------------------------------------------------- December 31 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- BALANCE SHEET Total assets $4,282,444 $3,700,376 $3,448,433 $3,023,583 $2,515,332 - -------------------------------------------------------------------------------------------------------------------- Long-term debt $ 439,795 $ 389,641 $ 404,244 $ 276,646 $ 270,632 - -------------------------------------------------------------------------------------------------------------------- Common stockholders' equity $1,247,428 $1,570,935 $1,423,260 $1,320,643 $1,021,193 - -------------------------------------------------------------------------------------------------------------------- Common stockholders' equity per share of common stock* $ 172.51 $ 213.22 $ 192.69 $ 178.89 $ 136.60 - --------------------------------------------------------------------------------------------------------------------
Alleghany sold Sacramento Savings Bank on October 31, 1994 and spun off to Alleghany stockholders shares of Chicago Title on June 17, 1998; accordingly, the operations of Sacramento Savings have been classified as discontinued operations for 1994 and certain operations of Chicago Title have been classified as discontinued operations for each of the five years ended in 1998. * Restated to reflect subsequent common stock dividends and the adoption of Statement of Financial Accounting Standards No. 128, "Earnings per Share." DIVIDENDS, MARKET PRICES AND RELATED SECURITY HOLDER MATTERS As of December 31, 1998, there were approximately 1,900 holders of record of Alleghany common stock. The following table indicates quarterly high and low prices of the common stock in 1998 and 1997 on the New York Stock Exchange. The prices have not been adjusted for the spin off. Alleghany's ticker symbol is Y. - ----------------------------------------------------------------- Quarter Ended 1998 1997 - ----------------------------------------------------------------- High Low High Low - ----------------------------------------------------------------- March 31 $ 350 $ 278 1/8 $ 216 7/8 $ 206 June 30 378 1/2 220 220 206 1/2 September 30 248 183 256 218 1/2 December 31 $ 205 $ 172 $ 290 $ 254 - ----------------------------------------------------------------- In 1997 and 1999, Alleghany's Board of Directors declared, as Alleghany' s dividend on its common stock for that year, a stock dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. The 1997 stock dividend was paid in April of that year. In light of the spin-off of Chicago Title on June 17, 1998, no stock dividend was declared for 1998. As part of the spin-off, Alleghany distributed three shares of Chicago Title common stock for each share of Alleghany common stock outstanding. Alleghany's ability to pay cash dividends is restricted by the terms of a revolving credit loan agreement. At December 31, 1998, this agreement permitted the payment of dividends aggregating approximately $285 million. At that date about $1.161 billion of Alleghany's consolidated common stockholders' equity of $1.247 billion was unavailable for dividends or advances to Alleghany from its subsidiaries, due to limitations imposed by statutes and agreements with lenders to which those subsidiaries are subject. 22 15 FINANCIAL CONDITION In recent years, Alleghany has followed a policy of maintaining a relatively liquid financial condition, in the form of cash, marketable securities, available credit lines and minimal amounts of debt at the parent company. This has permitted Alleghany to expand its operations through internal growth at its subsidiaries and through acquisitions or substantial investments in well-managed operating companies. On June 17, 1998, Alleghany completed the tax-free spin-off of Chicago Title to Alleghany stockholders. Chicago Title and Trust Company paid cash dividends to Alleghany totalling $9 million in 1998 and $32 million in 1997. Since the spin-off, Chicago Title is no longer a source of dividends to Alleghany. Alleghany Asset Management, previously a subsidiary of Chicago Title, was not a part of the spin-off and remains a source of cash dividends to Alleghany. As of March 1, 1999, Alleghany and its subsidiaries owned about 22.29 million shares, or about 4.7 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation ("BNSF") having an aggregate market value as of such date of approximately $723.2 million, or $32.4375 per share. The aggregate cost of such shares is approximately $253.7 million, or $11.38 per share. As of March 1, 1999, Alleghany and its subsidiaries owned about 5.64 million shares, or about 5.2 percent, of the outstanding common stock of Armco Inc. Alleghany has declared stock dividends in lieu of cash dividends every year since 1987 except 1998, which have helped to conserve Alleghany's financial strength and, in particular, the liquid assets available to finance internal growth and operating company acquisitions and investments. On April 26, 1999, Alleghany will pay to stockholders of record on April 1, as its dividend on its common stock for 1999, a dividend of one share of Alleghany common stock for every 50 shares outstanding. In addition to its liquid assets, Alleghany has a revolving credit agreement with a bank which provides a commitment for revolving credit loans in the aggregate principal amount of $200 million. Borrowings have been repaid promptly in order to keep the facility available for future acquisitions. $18.2 million in borrowings were outstanding under this facility at 1998 year-end and $16 million were outstanding under this facility at 1997 year-end. This agreement will mature in July 2000. Alleghany has announced that it may purchase shares of its common stock in open market transactions from time to time. In 1998, Alleghany purchased an aggregate of 222,564 shares of its common stock for about $72.0 million, at an average cost of about $324.11 per share. In 1997, Alleghany purchased an aggregate of 157,174 shares of its common stock for about $33.1 million, at an average cost of about $210.47 per share. At December 31, 1998, about $86.2 million of the equity of Alleghany's subsidiaries was available for dividends or advances to Alleghany. At that date about $1.161 billion of $1.247 billion of Alleghany's equity was unavailable for dividends or advances to Alleghany from its subsidiaries, due to limitations imposed by statutes and agreements with lenders to which those subsidiaries are subject. These limitations have not affected Alleghany's ability to meet its obligations. Financial strength is also a high priority of Alleghany's subsidiaries, whose assets stand behind their financial commitments to their customers and vendors. UNDERWRITERS RE GROUP On October 23, 1998, Underwriters Re Group purchased Venton. Venton, through its subsidiaries, is a managing agent and provider of corporate capital for syndicates in the Lloyd's insurance market and also has operations in Bermuda. The purchase was made for approximately $181.1 million cash and Alleghany stock valued at approximately $8.9 million. In connection with the purchase, Underwriters Re Group established a letter of credit facility in the amount of $225 million to support the underwriting activities of the Lloyd's syndicates managed by Venton. About $211 million in letters of credit was issued and outstanding at year-end 1998. In 1998, Underwriters Re Group began to pay cash dividends to Alleghany, with dividends totalling $3.8 million for the year. At December 31, 1998, Underwriters Re Group's investment portfolio (excluding Venton) had a fair value of $1.5 billion and consisted primarily of high quality fixed maturity securities with an average maturity of 4.5 years and an effective duration of 3.3 years, and about 7.4 million shares of BNSF common stock with a market value of $240.8 million at March 1, 1999. Effective duration measures a portfolio's sensitivity to change in interest rates; a change within a range of plus or minus 1% in interest rates would be expected to result in an inverse change of approximately 3.3% in the value of the portfolio of Underwriters Re Group. The overall fixed maturity portfolio quality is maintained at a Moody's rating of Aa2, with over 97 percent of all securities rated investment grade by Moody's as of December 31, 1998. Underwriters Re Group's portfolio contains no investments of a derivative nature. On June 25, 1996, Underwriters Re Group issued $200 million principal amount of 7-7/8% Senior Notes due 2006. Of the net proceeds of the offering, $120 million was contributed to the capital of Underwriters Reinsurance, $50 million was used to repay indebtedness under Underwriters Re Group's credit agreement, and the remainder is being used for general 24 16 FINANCIAL CONDITION (CONTINUED) corporate purposes. As of December 31, 1998, the statutory surplus of Underwriters Reinsurance was $602.6 million. Effective December 31, 1998, Underwriters Re Group entered into a credit agreement with several banks which provides for a commitment for revolving credit loans in an aggregate principal amount of $43 million, at interest rates tied to Underwriters Re Group's current debt rating. No amounts have been drawn under this facility. ALLEGHANY ASSET MANAGEMENT The financial services business of Alleghany Asset Management is not a capital intensive business and adequate funds are generated internally to provide for the currently foreseeable needs of its business. Alleghany Asset Management paid cash dividends to Alleghany totalling $8.4 million in 1998. WORLD MINERALS As of December 31, 1998, $71 million of indebtedness and $1.3 million of letters of credit were outstanding under World Minerals' long-term credit facility, and an additional $2.7 million of short-term debt was outstanding. The amount available under the long-term facility is required to be reduced periodically, with final maturity in December 1999. World Minerals is currently renegotiating its long-term credit facility. The aggregate available long-term borrowing and letter of credit amount as of December 31, 1998 was $76 million. HEADS AND THREADS As of December 31, 1998, $10.1 million in short-term debt was outstanding. In addition, $2.0 million in irrevocable letters of credit issued to overseas suppliers was outstanding. Heads and Threads has available lines of credit totalling $33.0 million. ALLEGHANY PROPERTIES As part of Alleghany's sale of Sacramento Savings Bank in 1994, Alleghany, through its wholly owned subsidiary Alleghany Properties, purchased real estate and real estate-related assets of Sacramento Savings for about $116 million. Accordingly, and in recognition that no general loss reserves of Sacramento Savings were transferred, Alleghany reduced the carrying value of such assets by about $20 million, net of related tax benefits. Alleghany Properties is Alleghany's only subsidiary holding substantial real estate investments. As of December 31, 1998, Alleghany Properties held 28 loans and properties having a total book value of approximately $52.9 million, as compared with 37 loans and properties having a total book value of approximately $61.0 million as of December 31, 1997, and 89 loans and properties having a total book value of approximately $90.1 million as of October 31, 1994 (the date the assets were purchased by Alleghany Properties). On December 11, 1998, Alleghany Properties issued $40 million aggregate principal amount of 6.83 percent senior notes due 2004 (the "2004 Notes"). The 2004 Notes will be repaid in five equal annual principal amortization payments beginning on the second anniversary of their issuance. The proceeds from the sale of the 2004 Notes were used to pay a dividend of $39.5 million to Alleghany and the balance was used to cover the expenses of the issuance. On February 23, 1995, Alleghany Properties issued $50 million aggregate principal amount of 8.62 percent senior notes due 2000 (the "2000 Notes"). On February 23, 1999, Alleghany Properties made its fourth principal payment on the 2000 Notes, including interest accrued thereon, in the amount of $10.9 million, reducing the outstanding principal to $10.0 million. The capital needs of Alleghany Properties consist primarily of various development costs relating to its owned properties. Adequate funds are expected to be generated by sales and reimbursements of tax benefits by Alleghany to provide for the currently foreseeable needs of its business. Alleghany management believes that Alleghany and its subsidiaries have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of its and their businesses. Alleghany and its subsidiaries have no material commitments for capital expenditures. YEAR 2000 The Year 2000 issue arises from computer programs that use two digits rather than four digits to define the applicable year. This could result in a failure of information technology systems ("IT systems") and other equipment containing imbedded technology ("non-IT systems") to correctly read the year 2000, which could cause significant disruption in business operations. Each of Alleghany and its subsidiaries has undertaken a four-phase program to determine the extent of Year 2000 issues within each of its significant IT systems and non-IT systems and to take appropriate remedial action. The four phases of the program are assessment, planning, execution and testing. The assessment and planning phases were completed in early 1998 and execution and testing began thereafter. Non-compliant systems were reprogrammed or replaced, and then tested. The execution and testing phases were largely completed by year-end 1998, but some testing is continuing into 1999. The cost of remediation (including replacement software and hardware), testing and outside consultant fees is currently expected to total $4.7 million, of which about $3.8 million has been incurred. 25 17 FINANCIAL CONDITION (CONTINUED) Management has recently engaged an outside consultant to assess the Year 2000 compliance programs of Alleghany and its subsidiaries. Such assessment is expected to be completed during the second quarter of 1999. The consultant's assessment and resulting recommendations will be presented to Alleghany's Board of Directors and implemented as appropriate. Management presently believes that it will be able to timely resolve the Year 2000 issues affecting the computer systems of Alleghany and its subsidiaries and that the cost of addressing such matters will not have a material impact on the business, operations or financial condition of Alleghany and its subsidiaries. However, the extent to which third-party computer systems are adversely affected could materially adversely affect the business, operations or financial condition of Alleghany and its subsidiaries. The following is a more detailed report of the state of readiness of each of Alleghany's operating units: UNDERWRITERS RE GROUP Underwriters Re Group has assessed, remediated, tested and returned to production all of its critical internal IT systems, including internally-developed applications and purchased software. Initial testing of main production computer systems was completed during the 1998 third quarter, and the systems were returned to production. Additional month-end tests will be performed in the 1999 second quarter to run actual data with expiration dates in year 2000. Other than third-party long distance telephone and data lines and public utility suppliers of electrical power, Underwriters Re Group's business operations are not heavily dependent on non-IT technology systems. In the event of a broader failure of electrical systems, the current uninterrupted power source of Underwriters Re Group is designed to remain operational long enough to bring all systems down without data loss. In addition, Underwriters Re Group plans to manually back-up and shut down all servers on December 31, 1999. Systems will be restarted when power is available and all critical applications will be tested. Underwriters Re Group realizes that non-compliance by third parties could impact its business. The possibility exists that a portion of Underwriters Re Group's distribution channel may not be compliant, that communication with brokers, ceding companies or agents could be disrupted, that underwriting data could be unobtainable or that the claim settling process could be delayed. Underwriters Re Group has contacted its key business partners to determine their status of compliance and to assess the impact of noncompliance to Underwriters Re Group. Underwriters Re Group is working closely with all material business relationships to minimize its exposure to Year 2000 issues, including on-site visits to identify their state of readiness. Underwriters Re Group will continue to monitor third party Year 2000 issue readiness to determine whether additional or alternative measures may be necessary. Such measures may include the selection of alternate third parties or other actions designed to mitigate the effects of a third party's lack of readiness. Venton is scheduled to replace its non-compliant IT systems with a new system. The new system has attained Lloyd's markets Year 2000 certification and is scheduled to be put in operation by the end of the 1999 first quarter. In light of production delays, however, Venton is updating its contingency plans to make the existing IT system Year 2000 compliant and to attain Lloyd's certification of such system by June 30, 1999. In addition to issues faced by all industries in assuring Year 2000 compliance in their own computer systems and third-party relationships, the insurance industry may also face claims asserted under certain insurance and reinsurance policies for damages incurred by insureds due to Year 2000 computer problems. Underwriters Re Group is evaluating the potential insurance exposures arising from Year 2000 problems. A quantification of the insurance industry's or Underwriters Re Group's potential exposure to Year 2000 losses is not possible, as policy wordings vary and legal interpretations of possible insurance coverage for losses are likely to differ from jurisdiction to jurisdiction. Underwriters Re Group, through the use of questionnaires and other methods of determining a client's exposure to Year 2000 losses, has adjusted its current underwriting practices to address potential insurance exposures for Year 2000 losses. Upon evaluation of the responses to these questionnaires and/or other information, Underwriters Re Group may in some instances exclude Year 2000 losses or decline to issue or renew a policy. If the responses are considered appropriate, contracts may be written without express Year 2000 language. ALLEGHANY ASSET MANAGEMENT Alleghany Asset Management has assessed, remediated and returned to production all of its critical internal IT systems. The software products in use by Alleghany Asset Management and its subsidiaries are primarily from nationally recognized vendors, which are widely used in the investment and trust businesses. The installed versions of all software critical to the operations of Alleghany Asset Management have been certified by their vendors as Year 2000 compliant. Alleghany Asset Management is in the process of testing all software in use by it, with testing to be completed by June 30, 1999. In addition, Alleghany Asset Management has identified a limited number of network hardware devices that are not Year 2000 compliant, 26 18 FINANCIAL CONDITION (CONTINUED) which are scheduled to be replaced by June 30, 1999. Other than third-party long distance telephone and data lines and public utility suppliers of electrical power, Alleghany Asset Management's business operations are not heavily dependent on non-IT technology systems. The Chicago based subsidiaries of Alleghany Asset Management have received certifications from the owner of their headquarters building that the building's systems are Year 2000 compliant. The telephone system is third-party administered and maintained, needs upgrades from third-party vendors, and is scheduled to be compliant by June 30, 1999. The Atlanta and San Diego based subsidiaries are moving into new leased premises no later than August 1999, and are obtaining certifications of Year 2000 compliance from the appropriate parties. Alleghany Asset Management utilizes four third-party service providers for critical business services, including custody, security receipt and delivery, and income collection services. These providers are nationally recognized vendors of such services, and have supplied Alleghany Asset Management with ongoing information regarding their Year 2000 status. All such providers have certified that their systems are Year 2000 compliant. Due to the integrated, production nature of such services, the providers have informed Alleghany Asset Management that it is not feasible for Alleghany Asset Management to independently test such systems. The vendors have provided proxy test results, which are being reviewed to ensure that they meet the requirements of Alleghany Asset Management. Alleghany Asset Management is preparing contingency plans for each such third-party system, which are to be completed by March 31, 1999. Alleghany Asset Management plans to retrieve customer account data at multiple dates prior to January 1, 2000, and, in the event of a third party failure, will maintain on an interim basis ongoing account activity on internally maintained systems that have been tested as Year 2000 compliant. The business operations of Alleghany Asset Management are heavily dependent upon a complex worldwide network of IT systems that contain date fields, including data feeds to Alleghany Asset Management, trading systems, securities transfer agent operations and stock market links. The ability of Alleghany Asset Management to minimize the effects of Year 2000 issues is highly dependent upon the efforts of third parties. The failure of organizations such as securities exchanges, securities clearing organizations, banks, vendors, clients or domestic or foreign governmental regulatory agencies to resolve their own processing issues with respect to Year 2000 in a timely manner could have a materially adverse effect on the business, results of operations or financial condition of Alleghany Asset Management. It is not clear, however, that any adequate contingency plan can be developed for such failures. WORLD MINERALS As of December 31, 1998, all critical internal IT systems of World Minerals have been inventoried and assessed and necessary corrections planned and executed. As a result, all critical non-compliant IT systems have been upgraded, replaced or reprogrammed. World Minerals expects to complete the testing of all of its IT systems by June 30, 1999. With respect to its non-IT systems (such as plant and mining equipment containing embedded chips or programmable logic controllers), with the exception of two plant processing systems which are being replaced or upgraded in the 1999 first half, the assessment, planning and execution phases are complete. World Minerals believes that, for all internal IT and non-IT systems, it will have all four phases of its Year 2000 project completed by June 30, 1999. World Minerals has also conducted a study as to the Year 2000 compliance of various third parties with which it does business. All material vendors, suppliers and customers have been asked to certify in writing as to the status of their own Year 2000 readiness, and World Minerals has developed, or is in the process of developing, second source suppliers for major purchased items. Such items include component parts necessary for maintenance and repair of plant equipment, as well as products used in production, such as bags, soda ash and pallets. Additionally, second sources have been developed for transportation companies which deliver the company's products to its customers. At this time, World Minerals is not aware of any material suppliers or customers who anticipate difficulty in solving their respective Year 2000 issues. While World Minerals expects to have all of its internal systems Year 2000 compliant and fully tested by June 30, 1999, it is possible that unforeseen events could arise, including a failure of the power grid or telecommunications, which would have an adverse effect on the business operations of World Minerals. Notwithstanding the fact that World Minerals has developed second source suppliers for all major purchased items, one or more of its key third-party vendors and/or customers could fail. Although it is impossible to determine the financial impact of such an event, World Minerals does not believe the failure of any single supplier or customer would have a material adverse effect on its business, results of operations or financial condition. World Minerals does not have any single customer which accounts for 5 percent or more of its revenues. HEADS AND THREADS Heads and Threads has assessed, planned and executed its internal IT systems and expects to complete the testing of such systems by June 30, 1999. With respect to its non-IT systems, including telephone, time clocks, lift trucks, weighing scales 27 19 FINANCIAL CONDITION (CONTINUED) and a generator, Heads and Threads has received written statements from suppliers of such systems assuring their Year 2000 compliance. As part of its Year 2000 program, Heads and Threads communicated, by telephone or personal interviews, with its material customers and overseas suppliers and surveyed a broader group of its customers and suppliers to determine their state of readiness. Based on the results of these meetings, telephone calls and surveys, Heads and Threads does not currently believe that its business operations will be adversely affected by the failure of these third parties to address adequately their Year 2000 issues. Heads and Threads has also received written assurances of Year 2000 compliance from its material banking and insurance providers and shipping companies. While Heads and Threads expects to have no interruption of operations as a result of internal IT and non-IT systems, it will continue to monitor third parties whose initial response to the communications from Heads and Threads indicated that they were not yet Year 2000 ready. In this regard, Heads and Threads will continue to evaluate its need to develop any contingency plans. ALLEGHANY PROPERTIES The business operations of Alleghany Properties do not rely on any critical IT or non-IT systems, other than communication systems, telephone or electrical systems needed to maintain an office. In addition, Alleghany Properties does not have any significant external interfaces or vendors upon which it relies. Nonetheless, Alleghany Properties has engaged an outside consultant to review its Year 2000 compliance and has implemented such consultant's recommendations. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE Market risk is the risk of loss from adverse changes in market prices and rates, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to Alleghany's non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. For fixed maturity securities, short-term liquidity needs and the potential liquidity needs of the business are key factors in managing the portfolio. The portfolio duration relative to the liabilities' duration is primarily managed through cash market transactions. For additional information regarding the fixed maturity portfolio, see the Financial Condition section of the Management's Discussion and Analysis. Alleghany and its subsidiaries invest in equities. Such investments include about 22.29 million shares of BNSF common stock, which had an aggregate market value as of March 1, 1999 of approximately $732.2 million, or $32.4375 per share. The aggregate cost of such shares is approximately $253.7 million, or $11.38 per share. Equity securities are subject to declines in market values. Alleghany holds its equity investments as available for sale. Any changes in the market value in these investments, net of tax, would affect Alleghany's stockholders' equity and comprehensive income. The primary market risk for the long-term debt of Alleghany and its subsidiaries is interest rate risk at the time of refinancing. Alleghany and its subsidiaries monitor the interest rate environment to evaluate refinancing opportunities. For additional information regarding the long-term debt of Alleghany and its subsidiaries, see the Financial Condition section of the Management's Discussion and Analysis. Other than the two interest rate swaps included in the table below, Alleghany currently does not use derivatives to manage market and interest rate risks. Alleghany, through World Minerals, conducts certain business activities in foreign countries. World Minerals minimizes its exposure to the risk of foreign currency fluctuation by, among other things, causing its subsidiaries, whenever feasible, to declare and pay dividends and to invoice their export customers in United States dollars or other "hard currencies." World Minerals' foreign operations do not subject Alleghany to a material risk from foreign currency fluctuation. The table below provides information about Alleghany's financial instruments that are sensitive to changes in interest rates. For mortgage-backed and asset-backed securities, the timing of the cash flow of the portfolio is based on an average prepayment assumption of 300 PSA, which assumes that the portfolio will prepay at an annual rate of 18 percent. The fixed maturities portfolio does not include money market instruments. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. The timing and amount of cash flows relating to Alleghany's debt obligations and interest rate swaps are determined by the relevant contractual agreements. 28 20
December 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- Expected Maturity Date - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1999 2000 2001 2002 2003 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Fixed maturities: U.S. Government, government agency, and municipal obligations - excluding mortgaged- backed securities $ 56,435 $ 53,572 $ 52,713 $ 99,684 $ 67,499 Average interest rate 6.37% 5.55% 6.24% 6.27% 6.03% Mortgaged-backed U.S. government, government agency, and municipal obligations $ 38,832 $ 35,452 $ 21,385 $ 16,832 $ 13,511 Average interest rate 6.64% 6.60% 6.68% 6.64% 6.64% Mortgage/asset-backed securities (all other) $ 21,764 $ 31,985 $ 17,542 $ 8,052 $ 2,776 Average interest rate 6.8% 6.47% 6.24% 6.83% 6.85% Certificates of deposit $ 1,333 -- -- -- -- Average interest rate 6.17% -- -- -- -- Commercial paper and bankers' acceptance $ 49,462 -- -- -- -- Average interest rate 5.16% -- -- -- -- Corporate bonds $ 46,139 $ 38,777 $ 36,681 $ 34,981 $ 43,305 Average interest rate 7.32% 6.53% 6.30% 6.18% 6.10% Foreign bonds $ 416 -- $ 8,605 -- -- Average interest rate 6.35% -- 6.49% -- -- LIABILITIES Long-term debt: Fixed rate $ 15,138 $ 18,039 $ 8,042 $ 8,027 $ 8,000 Average interest rate 8.13% 7.82% 6.8% 6.8% 6.83% Variable rate $ 96,890 -- -- -- -- Average interest rate 6.45% -- -- -- -- INTEREST RATE DERIVATIVES Interest rate swaps: Variable to fixed (Notional amount) $ 30,000 -- -- -- -- Average pay rate 7.02% -- -- -- -- Average receive rate -- -- -- -- -- Variable to variable -- -- -- -- -- Pay notional amount -- -- -- -- -- Average pay rate -- -- -- -- -- Receive notional amount -- -- -- -- -- Average receive rate -- -- -- -- -- ==========================================================================================================================
December 31, 1998 - ------------------------------------------------------------------------------------------------- Expected Maturity Date - ------------------------------------------------------------------------------------------------- (dollars in thousands) Thereafter Total Fair Value - ------------------------------------------------------------------------------------------------- ASSETS Fixed maturities: U.S. Government, government agency, and municipal obligations - excluding mortgaged- backed securities $ 193,038 $ 522,941 $ 537,937 Average interest rate 5.96% 6.07% Mortgaged-backed U.S. government, government agency, and municipal obligations $ 50,456 $ 176,468 $ 183,247 Average interest rate 6.48% 6.59% Mortgage/asset-backed securities (all other) $ 17,631 $ 99,750 $ 101,827 Average interest rate 6.87% 6.61% Certificates of deposit -- $ 1,333 $ 1,333 Average interest rate -- 6.17% Commercial paper and bankers' acceptance -- $ 49,462 $ 49,462 Average interest rate -- 5.16% Corporate bonds $ 102,519 $ 302,402 $310,282 Average interest rate 6.14% 6.38% Foreign bonds $ 27,203 $ 36,224 $ 35,888 Average interest rate 7.38% 7.16% LIABILITIES Long-term debt: Fixed rate $ 205,658 $ 262,904 $262,904 Average interest rate 7.83% 7.75% Variable rate $ 80,000 $ 176,890 $176,890 Average interest rate 6.0% 6.24% INTEREST RATE DERIVATIVES Interest rate swaps: Variable to fixed (Notional amount) -- $ 30,000 Average pay rate -- 7.02% Average receive rate -- -- Variable to variable -- -- Pay notional amount $ 86,232 $ 86,232 Average pay rate 5.56% 5.56% Receive notional amount $ 80,000 $ 80,000 Average receive rate 6.00% 6.00% =================================================================================================
FORWARD-LOOKING STATEMENTS The "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 3-5, 7, 9-11, 13-15, 17, 19, 24-28) and "Quantitative and Qualitative Market Risk Disclosure" (pages 28-29) contain disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based upon Alleghany's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and anticipated actions and Alleghany's future financial condition and results. The uncertainties and risks include, but are not limited to, those relating to conducting operations in a competitive environment; acquisition activities; the complexity of integrated computer systems; the success and expense of the remediation efforts of Alleghany, its subsidiaries and third parties in achieving Year 2000 compliance and general economic conditions. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of Alleghany. 29 21 CONSOLIDATED BALANCE SHEETS Alleghany Corporation and Subsidiaries
December 31, 1998 and 1997 - ------------------------------------------------------------------------------------------------------------------ (in thousands, except share amounts) 1998 1997 - ------------------------------------------------------------------------------------------------------------------ ASSETS Available for sale securities: Fixed maturities (amortized cost: 1998 $1,270,279; 1997 $1,255,081) $1,301,707 $1,277,566 Equity securities (cost: 1998 $317,216; 1997 $339,888) 824,326 783,433 - ------------------------------------------------------------------------------------------------------------------ 2,126,033 2,060,999 - ------------------------------------------------------------------------------------------------------------------ Cash 25,441 45,772 Cash pledged to secure trust deposits 56,907 1,336 Notes receivable 91,536 91,536 Funds held, accounts and other receivables 502,721 255,802 Property and equipment - at cost, less accumulated depreciation and amortization 208,698 193,304 Reinsurance receivable 571,689 387,609 Other assets 699,419 278,567 Net assets of discontinued operations -- 385,451 - ------------------------------------------------------------------------------------------------------------------ $4,282,444 $3,700,376 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Property and casualty losses and loss adjustment expenses $1,554,818 $1,159,070 Other liabilities 833,541 443,259 Long-term debt of parent 18,200 16,000 Long-term debt of subsidiaries 421,595 373,641 Net deferred tax liability 150,218 133,241 Trust deposits secured by pledged assets 56,644 4,230 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 3,035,016 2,129,441 Commitments and contingent liabilities Common stockholders' equity: (common shares authorized: 1998 and 1997 - 22,000,000; common shares issued and outstanding: 1998 - 7,231,224; 1997 - 7,367,551) 1,247,428 1,570,935 - ------------------------------------------------------------------------------------------------------------------ $4,282,444 $3,700,376 - ------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 30 22 Consolidated Statements of Earnings Alleghany Corporation and Subsidiaries
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ REVENUES Trust fees $ 122,913 $ 77,341 $ 52,259 Net property and casualty premiums earned 420,809 376,672 346,777 Interest, dividend and other income 166,737 149,724 132,960 Net mineral and filtration sales 200,815 203,264 198,179 Net gain (loss) on investment transactions 7,719 (10,347) 4,307 - ------------------------------------------------------------------------------------------------------------ Total revenues 918,993 796,654 734,482 - ------------------------------------------------------------------------------------------------------------ COSTS AND EXPENSES Commissions and brokerage expenses 113,170 94,444 88,895 Salaries, administrative and other operating expenses 231,970 187,049 168,965 Property and casualty losses and loss adjustment expenses 288,259 261,828 243,725 Cost of mineral and filtration sales 131,108 130,555 128,681 Interest expense 32,271 32,111 26,573 Corporate administration 31,199 25,437 20,253 - ------------------------------------------------------------------------------------------------------------ Total costs and expenses 827,977 731,424 677,092 - ------------------------------------------------------------------------------------------------------------ Earnings from continuing operations, before income taxes 91,016 65,230 57,390 Income taxes 27,635 13,830 16,920 - ------------------------------------------------------------------------------------------------------------ Earnings from continuing operations 63,381 51,400 40,470 DISCONTINUED OPERATIONS Earnings from discontinued operations, net of tax 32,725 54,267 46,578 - ------------------------------------------------------------------------------------------------------------ Net earnings $ 96,106 $ 105,667 $ 87,048 ============================================================================================================ BASIC EARNINGS PER SHARE OF COMMON STOCK:* Continuing operations $ 8.74 $ 7.05 $ 5.50 Discontinued operations 4.51 7.45 6.32 - ------------------------------------------------------------------------------------------------------------ Basic net earnings per share $ 13.25 $ 14.50 $ 11.82 ============================================================================================================ DILUTED EARNINGS PER SHARE OF COMMON STOCK:* Continuing operations $ 8.59 $ 6.98 $ 5.49 Discontinued operations 4.43 7.37 6.32 - ------------------------------------------------------------------------------------------------------------ Diluted net earnings per share $ 13.02 $ 14.35 $ 11.81 ============================================================================================================
*Adjusted to reflect subsequent common stock dividends and the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." See accompanying Notes to Consolidated Financial Statements. 31 23 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY Alleghany Corporation and Subsidiaries
Three Years Ended December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Cumulative Cumulative Total Common Contributed Comprehensive Treasury Retained Stockholders' (in thousands, except share amounts) Stock Capital Other Income Stock Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 $ 7,159 $ 477,672 $ 218,616 $ (10,174) $ 627,370 $ 1,320,643 (7,448,490 shares of common stock issued; 66,180 in treasury)* ADD (DEDUCT): Net earnings -- -- -- -- 87,048 87,048 Other comprehensive income, net of tax: Cumulative translation loss -- -- (1,357) -- -- (1,357) Change in unrealized appreciation of investments, net -- -- 28,003 -- -- 28,003 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- 26,646 -- 87,048 113,694 - ------------------------------------------------------------------------------------------------------------------------------------ Common stock dividend 75 15,756 -- 11,792 (27,766) (143) Other, net 69 1,508 -- (12,511) -- (10,934) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1996 7,303 494,936 245,262 (10,893) 686,652 1,423,260 (7,449,126 shares of common stock issued; 62,794 in treasury)* ADD (DEDUCT): Net earnings -- -- -- -- 105,667 105,667 Other comprehensive income, net of tax: Cumulative translation loss -- -- (3,166) -- -- (3,166) Change in unrealized appreciation of investments, net -- -- 56,900 -- -- 56,900 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- 53,734 -- 105,667 159,401 - ------------------------------------------------------------------------------------------------------------------------------------ Common stock dividend -- 1,181 -- 28,486 (29,815) (148) Other, net 110 15,032 -- (26,720) -- (11,578) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 7,413 511,149 298,996 (9,127) 762,504 1,570,935 (7,413,140 shares of common stock issued; 45,589 in treasury) ADD (DEDUCT): Net earnings -- -- -- -- 96,106 96,106 Other comprehensive income, net of tax: Cumulative translation gain -- -- 1,022 -- -- 1,022 Change in unrealized appreciation of investments, net -- -- 47,130 -- -- 47,130 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- 48,152 -- 96,106 144,258 - ------------------------------------------------------------------------------------------------------------------------------------ Spin-off of Chicago Title -- -- (10,663) -- (403,104) (413,767) Other, net 19 152 -- (53,437) (732) (53,998) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1998 $ 7,432 $ 511,301 $ 336,485 $ (62,564) $ 454,774 $ 1,247,428 (7,432,023 shares of common stock issued; 200,799 in treasury) ====================================================================================================================================
*Adjusted to reflect subsequent common stock dividends. See accompanying Notes to Consolidated Financial Statements. 32 24 CONSOLIDATED STATEMENTS OF CASH FLOWS Alleghany Corporation and Subsidiaries
Years Ended December 31, - -------------------------------------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES Earnings from continuing operations $ 63,381 $ 51,400 $ 40,470 Adjustments to reconcile earnings from continuing operations to cash provided by (used in) continuing operations: Depreciation and amortization 18,395 24,178 24,015 Net (gain) loss on investment transactions (7,719) 10,347 (4,307) Other charges to continuing operations, net (4,800) (300) (683) Decrease (increase) in funds held, accounts and other receivables (77,417) (31,088) 18,072 (Increase) decrease in reinsurance receivable (100,575) 4,601 7,573 Increase in property and casualty losses and loss adjustment expenses 192,337 49,050 96,020 (Decrease) in other assets (36,647) (3,175) (45,231) Increase in other liabilities 95,411 63,395 30,849 (Increase) decrease in cash pledged to secure trust deposits (55,571) 17,338 (3,041) Increase (decrease) in trust and escrow deposits 52,414 (17,599) 26,493 - -------------------------------------------------------------------------------------------------------------- Net adjustments 75,828 116,747 149,760 - -------------------------------------------------------------------------------------------------------------- Cash provided by (used in) continuing operations 139,209 168,147 190,230 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (321,092) (591,358) (494,421) Maturities of investments 53,367 210,154 55,257 Sales of investments 316,692 224,717 124,273 Purchases of property and equipment (29,769) (16,580) (23,728) Acquisition of Venton, net of cash received (172,963) -- -- Other, net (4,895) 20,960 8,807 - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (158,660) (152,107) (329,812) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (22,000) (112,000) (159,000) Proceeds of long-term debt 71,484 97,639 296,082 Cash provided by discontinued operations 3,903 18,805 30,000 Other, net (54,267) (11,594) (19,161) - -------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (880) (7,150) 147,921 - -------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (20,331) 8,890 8,339 Cash at beginning of year 45,772 36,882 28,543 - -------------------------------------------------------------------------------------------------------------- Cash at end of year $ 25,441 $ 45,772 $ 36,882 - -------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 32,758 $ 32,140 $ 26,464 Income taxes $ 34,748 $ 44,410 $ 63,646 - -------------------------------------------------------------------------------------------------------------- Non-cash item: Book value of spin-off of Chicago Title and Trust Company $ 413,767 -- -- ==============================================================================================================
See accompanying Notes to Consolidated Financial Statements. 33 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES a. PRINCIPLES OF FINANCIAL STATEMENT PRESENTATION. Alleghany Corporation, a Delaware corporation ("Alleghany", or together with its subsidiaries and division, the "Company"), owns Alleghany Asset Management, Inc.; Alleghany Funding Corporation ("AFC"); World Minerals Inc. ("World Minerals"); Underwriters Re Group, Inc., formerly known as URC Holdings Corp. ("Underwriters Re Group"), whose principal subsidiaries are Underwriters Reinsurance Company ("Underwriters Reinsurance"), Commercial Underwriters Insurance Company ("CUIC") and Underwriters Insurance Company ("UIC"); and Alleghany Properties Inc. ("API"). Heads and Threads currently conducts its business as a division of Alleghany. The Company in 1998 spun-off to Alleghany stockholders shares of a newly-formed holding company for Chicago Title and Trust Company, and accordingly its operations are shown as discontinued operations for all periods presented. See Note 2. Underwriters Reinsurance acquired Venton Holdings Ltd. and subsidiaries ("VHL") on October 23, 1998. The consolidated financial statements of Alleghany do not include the results of VHL for the period following its acquisition, except that Alleghany's consolidated balance sheet as of December 31, 1998 includes VHL's accounts as of September 30, 1998, which date is being used as the opening balance sheet date. VHL's accounts will be included in the consolidated financial statements of Alleghany on a one quarter lag. VHL is accounted for under the purchase accounting method. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company. All significant intercompany items have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions associated with property and casualty loss reserves include inherent uncertainties primarily due to the long- term nature of most reinsurance business, the diversity of development patterns among different lines of business and types of reinsurance, and the necessary reliance on the ceding company for information regarding claims. Actual results could differ from those estimates. b. INVESTMENTS. Marketable investment securities at December 31, 1998 and 1997 consist of U.S. Treasury securities, obligations of U.S. government agencies, municipal obligations, mortgage- backed securities, corporate debt securities, certificates of deposit, and equity securities. The Company classifies its debt and marketable equity securities into one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those fixed maturity securities which the Company has the ability and intent to hold until maturity. Securities held for indefinite periods of time which may not be held to maturity are classified as available for sale. Money market instruments are included in the bonds, notes and other category in Note 3. At December 31, 1998 and 1997, securities are classified as available for sale securities and recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported in comprehensive income and as a separate component of stockholders' equity until realized. A decline in the fair value of an available for sale security below its cost that is deemed other than temporary is charged to earnings. Realized gains and losses on investments are determined on the specific identification method. c. PROPERTY AND EQUIPMENT. Depreciation of buildings and equipment and amortization of leasehold improvements are principally calculated using the straight-line method over the estimated useful life of the respective assets or the life of the lease, whichever is less. d. PROPERTY AND CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES. The liability for outstanding losses and loss adjustment expenses includes estimated provisions for all reported and unreported claims incurred and is reduced by allowances for salvage and subrogation. In management's opinion, reserves for property and casualty losses and loss adjustment expenses are adequate. e. REVENUE RECOGNITION. Trust fees are recognized principally when billed. Property and casualty premiums are reflected in income generally on a daily pro rata basis for facultative business and as reported by the ceding company for treaty business. f. DERIVATIVE FINANCIAL INSTRUMENTS. The Company has only limited involvement with derivative financial instruments and does not use them for trading 34 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES purposes. The Company enters into interest rate swaps for purposes of converting variable interest rate exposure to a fixed rate and to match interest expense with interest income. Interest rate swaps are accounted for as a hedge of the obligation. Interest expense is recorded using the revised interest rate. g. INCOME TAXES. The Company files a consolidated federal income tax return with its domestic subsidiaries. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. h. FUNDS HELD, ACCOUNTS AND OTHER RECEIVABLES. Funds held, accounts, and other receivables consists of funds held under reinsurance contracts and accounts and other receivables, net of allowances. i. ACQUISITION COSTS. Acquisition costs related to unearned property and casualty premiums are deferred by major underwriting lines and amortized over the period in which the premiums are earned. The method followed in computing the deferred acquisition costs consists of deferring only those variable acquisition costs, such as commissions and brokerage fees, which relate directly to the production of business, and limiting the amount of those costs deferred to their net realizable value after allowing for anticipated investment income. j. REINSURANCE. Reinsurance receivables (including amounts related to claims incurred but not reported) and prepaid reinsurance premiums are reported as assets. Reinsurance contracts that do not result in a reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed and that do not provide for the transfer of significant insurance risk generally do not meet the conditions for reinsurance accounting and are accounted for as deposits. k. CASH. For purposes of the consolidated statements of cash flows, cash includes only funds on deposit which are available for immediate withdrawal. l. NET EARNINGS PER SHARE OF COMMON STOCK. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings per Share" which the Company implemented in 1997. SFAS 128 supersedes Opinion 15 and related accounting interpretations. SFAS 128 replaces the presentation of primary and fully diluted earnings per share with "basic earnings per share" and "diluted earnings per share," respectively. All prior periods presented have been restated to reflect the new requirement. Earnings per share of common stock are based on the average number of shares of Alleghany common stock outstanding during the years ended December 31, 1998, 1997, and 1996, respectively, as adjusted for stock dividends. The average number of shares of common stock outstanding, as adjusted for stock dividends, was 7,251,238 in 1998, 7,287,459 in 1997, and 7,360,584 in 1996. m. IMPAIRMENT OF LONG-LIVED ASSETS. The Company follows Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of." As guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. n. STOCK OPTION PLANS. The Company follows Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation." SFAS 123 establishes accounting and reporting standards for stock-based employee compensation plans. This statement allows companies to choose between the "fair value based method of accounting" as defined in this statement and the "intrinsic value based method of accounting" as prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The Company has elected to continue to follow the accounting guidance provided by APB 25, as permitted. o. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income." SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. All items that are required to be recognized under accounting standards as components of comprehensive income are to be reported in a financial statement that is displayed with the 35 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES same prominence as other financial statements. The Company implemented this statement in 1998. This statement relates to presentation of information and had no impact on the consolidated statement of earnings or consolidated balance sheets. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that selected information about those operating segments be reported in interim financial statements. The Company implemented this statement in 1998. The Company's reportable operating segments did not change as a result of the adoption of SFAS 131. In June 1998, the Financial Accounting Standards Board issued Statement 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The statement requires all derivatives to be recorded on the balance sheet at fair value and establishes special accounting for the following three different types of hedges: (1) hedges of changes in the fair value of assets, liabilities or firm commitments (referred to as fair value hedges); (2) hedges of the variable cash flows of forecasted transactions (cash flow hedges); and (3) hedges of foreign currency exposures of net investments in foreign operations. Though the accounting treatment and criteria for each of the three types of hedges is unique, they all result in recognizing offsetting changes in value or cash flow of both the hedge and the hedged item in earnings in the same period. Changes in the fair value of derivatives that do not meet the criteria of one of these three categories of hedges are included in earnings in the period of the change with no related offset. SFAS 133 is effective for years beginning after June 15, 1999, but companies may adopt it early. The Company expects to adopt SFAS 133 effective January 1, 2000. Management is assessing the impact of SFAS 133 on the Company and does not anticipate the impact to be significant. p. RECLASSIFICATION. Certain prior year amounts have been reclassified to conform to the 1998 presentation. 2. SPIN-OFF OF CHICAGO TITLE As a result of the spin-off, the Company has classified the operation spun-off as a "discontinued operation" in its financial statements. Historical financial information relating to the discontinued operations is as follows (in thousands):
- ----------------------------------------------------------------------------- ASSETS 1997 - ----------------------------------------------------------------------------- Investments: Fixed $1,032,089 Equities 34,490 - ----------------------------------------------------------------------------- 1,066,579 - ----------------------------------------------------------------------------- Cash 21,219 Cash pledged 100,207 Funds held, accounts receivable 69,519 Title records 150,546 Property and equipment, net 97,223 Net deferred tax asset 75,197 Other assets 102,821 - ----------------------------------------------------------------------------- $1,683,311 ============================================================================= LIABILITIES AND EQUITY - ----------------------------------------------------------------------------- Title losses and claims $ 564,453 Other liabilities 233,411 Long-term debt 32,443 Trust and escrow deposits 467,553 - ----------------------------------------------------------------------------- 1,297,860 - ----------------------------------------------------------------------------- Stockholder's equity 385,451 - ----------------------------------------------------------------------------- $1,683,311 =============================================================================
- ----------------------------------------------------------------------------------- REVENUES 1998* 1997 1996 - ----------------------------------------------------------------------------------- Title premiums, escrow and trust fees $ 777,882 $1,395,865 $1,265,461 Interest, dividend and other income 28,025 67,897 60,787 Net gain on investment transactions 487 1,469 1,436 - ----------------------------------------------------------------------------------- Total revenues 806,394 1,465,231 1,327,684 - ----------------------------------------------------------------------------------- COSTS AND EXPENSES - ----------------------------------------------------------------------------------- Commissions and brokerage expenses 260,797 526,324 484,352 Salaries, administrative and other operating expenses 440,260 749,624 684,548 Provision for title losses and other claims 51,910 103,251 83,526 Interest expense 2,259 4,644 5,566 - ----------------------------------------------------------------------------------- Total costs and expenses 755,226 1,383,843 1,257,992 - ----------------------------------------------------------------------------------- Earnings before income taxes 51,168 81,388 69,692 Income taxes 18,443 27,121 23,114 - ----------------------------------------------------------------------------------- NET EARNINGS $ 32,725 $ 54,267 $ 46,578 ===================================================================================
* For the period 1/1/98 thru 6/17/98. The financial information excludes the effects of certain inter-company securities transactions that Chicago Title and the Company entered into. In addition, the operations of Alleghany Asset Management are shown as a discontinued operation in Chicago Title's stand alone financial statements. Alleghany Asset Management is included in the continuing operations of the Company. Accordingly, the financial information shown above will not agree to Chicago Title's financial statements prepared on a stand alone basis. 36 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES 3. INVESTMENTS Available for sale securities at December 31, 1998 and 1997 are summarized as follows (in thousands):
- ------------------------------------------------------------------------------------------------- 1998 - ------------------------------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Unrealized Fair CONSOLIDATED or Cost Gains Losses Value - ------------------------------------------------------------------------------------------------- Fixed maturities: U.S. Government, government agency and municipal obligations $ 699,409 $ 22,100 $ (325) $ 721,184 Certificates of deposit 1,333 -- -- 1,333 Commercial paper 49,462 -- -- 49,462 Bonds, notes and other 520,075 11,301 (1,648) 529,728 - ------------------------------------------------------------------------------------------------- 1,270,279 33,401 (1,973) 1,301,707 Equity securities 317,216 507,110 -- 824,326 - ------------------------------------------------------------------------------------------------- $1,587,495 $ 540,511 $ (1,973) $2,126,033 ================================================================================================= INDUSTRY SEGMENT - ------------------------------------------------------------------------------------------------- Asset management $ 40,591 $ 441 $ -- $ 41,032 Property and casualty insurance 1,317,398 213,321 (1,973) 1,528,746 Mining and filtration 416 -- -- 416 Corporate activities 229,090 326,749 -- 555,839 - ------------------------------------------------------------------------------------------------- $1,587,495 $ 540,511 $ (1,973) $2,126,033 =================================================================================================
1997 - --------------------------------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Unrealized Fair CONSOLIDATED or Cost Gains Losses Value - --------------------------------------------------------------------------------------------------- FIXED MATURITIES: U.S. Government, government agency and municipal obligations $ 687,377 $ 16,638 $ (1,169) $ 702,846 Certificates of deposit 2,500 -- -- 2,500 Commercial paper 46,507 -- -- 46,507 Bonds, notes and other 518,697 8,393 (1,377) 525,713 - --------------------------------------------------------------------------------------------------- 1,255,081 25,081 (2,546) 1,277,566 EQUITY SECURITIES 339,888 443,545 -- 783,433 - --------------------------------------------------------------------------------------------------- $1,594,969 $ 468,576 $ (2,546) $2,060,999 =================================================================================================== INDUSTRY SEGMENT - --------------------------------------------------------------------------------------------------- Asset management $ 18,205 $ 150 $ (25) $ 18,330 Property and casualty insurance 1,328,273 186,426 (2,521) 1,512,178 Mining and filtration 1,022 -- -- 1,022 Corporate activities 247,469 282,000 -- 529,469 - --------------------------------------------------------------------------------------------------- $1,594,969 $ 468,576 $ (2,546) $2,060,999 ===================================================================================================
The amortized cost and estimated fair value of fixed maturities at December 31, 1998, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------------ Amortized Fair Cost Value - ------------------------------------------------------------------------------ Fixed maturities: Due in one year or less $ 215,118 $ 215,473 Due after one year through five years 337,676 344,615 Due after five years through ten years 320,335 331,017 Due after ten years 120,931 125,528 Mortgage-backed securities 276,219 285,074 - ------------------------------------------------------------------------------ $1,270,279 $1,301,707 ==============================================================================
The net unrealized appreciation for 1997 as reported in the Consolidated Statement of Changes in Common Stockholders' Equity does not agree to the amounts shown above due to the exclusion of Chicago Title's discontinued operations and the income tax effect. The proceeds from sales of available for sale securities were $317 million, $225 million, and $124 million, which included the proceeds from sales of fixed maturities of $145 million, $137 million, and $111 million, in 1998, 1997, and 1996, respectively. Gross realized gains and gross realized losses of available for sale securities were $8.9 million and $1.2 million, $2.4 million and $1.6 million, $4.5 million and $.2 million, respectively, in 1998, 1997, and 1996. These amounts include gross realized gains and gross realized losses on sales of fixed maturities of $1.7 million and $.9 million, $.5 million and $1.3 million, and $.1 million and $.2 million, respectively, in 1998, 1997, and 1996. During 1997, Alleghany had fixed maturity and equity investments that were trading below cost. The Company determined that these declines were other than temporary and, accordingly, recorded a loss provision of approximately $11.2 million, for these investments. At December 31, 1998 and 1997, investments, carried at fair value, totalling approximately $142 million and $35 million, respectively, were on deposit with various states or governmental departments to comply with property and casualty insurance laws. 37 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES Assets pledged to secure trust deposits at December 31, 1998 and 1997, carried at fair value, were as follows (in thousands):
- ------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------ Cash $56,907 $1,336 U.S. Government and municipal obligations 1,751 4,794 Certificates of deposit -- 2,000 Money Market Fund 2,036 -- - ------------------------------------------------------------------------ $60,694 $8,130 ========================================================================
4. REINSURANCE In the ordinary course of business, Underwriters Reinsurance cedes reinsurance for purposes of risk diversification and limiting maximum loss exposure to catastrophic events. If such assuming reinsurers are unable to meet the obligations assumed under these agreements, Underwriters Reinsurance would remain liable. Reinsurance receivable at December 31, 1998 and 1997 consists of the following (in thousands):
- ------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------- Reinsurance recoverable on paid losses $ 17,273 $ 12,808 Ceded outstanding losses and loss adjustment expenses $554,416 $374,801 - -------------------------------------------------------------------------
The reinsurance receivable balance as of December 31, 1998 and 1997 includes $65.7 million and $87.8 million, respectively, from Continental Reinsurance under reinsurance contracts entered into prior to 1993. For the years ended December 31, 1998, 1997, and 1996, Underwriters Reinsurance ceded losses and loss adjustment expenses of $158.9 million, $58.1million, and $86.5 million, respectively. The following table indicates property and casualty premiums written and earned for the years ended December 31, 1998, 1997, and 1996 (in thousands):
- ---------------------------------------------------------------------- 1998 Written Earned - ---------------------------------------------------------------------- Premiums direct $149,930 $144,812 Premiums assumed $399,038 $386,374 Premiums ceded $110,806 $110,377 ====================================================================== 1997 - ---------------------------------------------------------------------- Premiums direct $139,761 $112,158 Premiums assumed $366,143 $352,930 Premiums ceded $ 91,713 $ 88,416 ====================================================================== 1996 - ---------------------------------------------------------------------- Premiums direct $105,053 $ 85,437 Premiums assumed $328,604 $327,308 Premiums ceded $ 73,352 $ 65,968 ======================================================================
As of December 31, 1998 and 1997, loss reserves ceded are secured by deposits in a trust fund totalling $123.3 million and $.1 million, respectively, and letters of credit totalling $102 million and $290.3 million, respectively. 5. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows (in thousands):
- ------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------- PROPERTY AND CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES - ------------------------------------------------------------------------------------------------- Balance at January 1 $ 1,159,070 $ 1,110,020 $1,014,000 Less reinsurance recoverables 374,801 377,564 385,580 - ------------------------------------------------------------------------------------------------- Net balance at January 1 784,269 732,456 628,420 Incurred related to: Current year 290,513 267,530 242,332 Prior years (2,254) (5,702) 1,393 - ------------------------------------------------------------------------------------------------- Total incurred 288,259 261,828 243,725 - ------------------------------------------------------------------------------------------------- Paid related to: Current year 57,788 35,033 23,341 Prior years 134,243 174,982 116,348 - ------------------------------------------------------------------------------------------------- Total paid 192,031 210,015 139,689 - ------------------------------------------------------------------------------------------------- VHL's unpaid claim and claim adjustment expenses 119,905 -- -- - ------------------------------------------------------------------------------------------------- Net balance at December 31 1,000,402 784,269 732,456 Plus reinsurance recoverables 554,416 374,801 377,564 - ------------------------------------------------------------------------------------------------- Balance at December 31 $ 1,554,818 $ 1,159,070 $1,110,020 =================================================================================================
Underwriters Reinsurance's reserve for unpaid losses and loss adjustment expenses includes $66.9 million, $64.5 million, and $87.6 million gross reserves and $47.0 million, $45.1 million, and $67.5 million net reserves at December 31, 1998, 1997, and 1996, respectively, for various liability coverages related to asbestos and environmental impairment claims that arose from general liability and certain commercial multiple-peril coverages. Restrictive asbestos and environmental impairment exclusions were introduced in late 1986 on both insurance and reinsurance contracts, significantly reducing these exposures for accidents occurring after 1986. Reserves for asbestos and environmental impairment claims cannot be estimated with traditional loss reserving techniques because of uncertainties that are greater than those associated with other types of claims. Factors contributing to those uncertainties include a lack of historical data, the significant periods of time that often elapse between the occurrence of an insured loss and the reporting of that loss to the ceding company and the reinsurer, uncertainty as to the number and identity of insureds with potential exposure to such risks, unresolved legal issues regarding policy coverage, and the extent and timing of any 38 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES such contractual liability. Such uncertainties are not likely to be resolved in the near future and, therefore, management believes it is not possible at this time to determine the ultimate losses in this area or develop a meaningful range of such losses. For both asbestos and environmental excess of loss reinsurance claims, Underwriters Reinsurance establishes case reserves by applying reinsurance contract terms to losses reported by ceding companies, analyzing from the first dollar of loss incurred by the primary insurer. In establishing the liability for claims for asbestos related liability and for environmental impairment claims, management considers facts currently known and the current state of the law and coverage litigation. Additionally, ceding companies often report potential losses on a precautionary basis to protect their rights under the reinsurance arrangement, which generally calls for prompt notice to the reinsurer. Ceding companies, at the time they report such potential losses, advise Underwriters Reinsurance of the ceding companies' current estimate of the extent of such loss. Underwriters Reinsurance's claims department reviews each of the precautionary claims notices and, based upon current information, assesses the likelihood of loss to Underwriters Reinsurance. Such assessment is one of the factors used in determining the adequacy of the recorded asbestos and environmental reserves. 6. LONG-TERM DEBT Long-term debt at December 31, 1998 and 1997 is summarized as follows (in thousands):
- -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- ALLEGHANY Revolving credit $ 18,200 $ 16,000 API Senior notes at 8.6%, due through 2000 20,000 30,000 Senior notes at 6.83%, due through 2004 40,000 -- AFC Notes payable at 6.2% to 6.7% due 2007 80,000 80,000 Underwriters Re Group Senior notes at 7.9%, due 2006 197,658 197,384 WORLD MINERALS Notes payable at 6.0% to 7.0%, due through 1999 71,000 64,000 Other loans at 7.4% to 11.2%, due 1998 2,652 2,257 HEADS AND THREADS Notes payable at 6.1% to 6.4% due through 1999 2,450 -- Secured credit lines at 5.58% to 7.48% 7,690 -- Capital lease obligations 145 -- - -------------------------------------------------------------------------------- $439,795 $389,641 ================================================================================
Under the terms of a revolving credit loan agreement dated June 14, 1995, as amended April 8, 1998, with a bank, Alleghany may borrow up to $200 million until July 2000. At Alleghany's option, borrowings bear interest at a rate based on the purchase of negotiable certificates of deposit, prevailing rates for dollar deposits in the London interbank market or the greatest of the Federal funds rate, the bank's prime rate or a specified certificate of deposit rate. $18.2 million and $16 million were outstanding under this agreement at December 31, 1998 and 1997, respectively. A commitment fee of 1/4 of 1% per annum of the unused commitment is charged. The revolving credit agreement, among other things, requires Alleghany to maintain tangible net worth not less than $750 million, limits the amount of certain other indebtedness and contains restrictions with respect to mortgaging or pledging any of Alleghany's assets and consolidation or merger with any other corporation. In February 1995, API issued $50 million of senior notes. Proceeds were used to repay short-term borrowings and to make a dividend to Alleghany. The senior notes are being repaid in five equal annual installments which began in 1996. In December 1998, API issued $40 million of additional senior notes. Proceeds were used to make a dividend to Alleghany and to pay for the issuance expenses. The notes are being repaid in five equal annual installments beginning in 2000. AFC notes are primarily secured by a $91.5 million installment note receivable. AFC has entered into a related interest rate swap agreement with a notional amount of $86 million for the purpose of matching interest expense with interest income. This swap is pay variable, receive variable. Alleghany pays a variable rate equal to the one month commercial paper rate plus 0.0625% and receives a variable rate equal to the three month LIBOR rate plus 0.375%. The swap matures on January 22, 2007. AFC is exposed to credit risk in the unlikely event of nonperformance by the swap counter party. On June 25, 1996, Underwriters Re Group issued, without recourse to Alleghany, $200 million principal amount of 7.875% Senior Notes due 2006. Of the net proceeds of the offering, $120 million was contributed to the capital of Underwriters Reinsurance, $50 million was used to repay indebtedness under Underwriters Re Group's credit agreement and the remainder is being used for general corporate purposes. On December 20, 1991, World Minerals entered into a bank loan agreement, providing for borrowings of up to $70 million, pursuant to which it borrowed $50 million, without recourse to Alleghany. On March 10, 1995, the bank loan agreement was renegotiated to provide borrowing up to $117 million. During 1995, World Minerals borrowed an additional $31 million to fund a number of small acquisitions and joint ventures. World Minerals is currently renegotiating its long term credit facility. In January 1992, World Minerals entered into two interest rate swap agreements each with a notional 39 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES amount of $30 million. One swap matured on January 15, 1997 and was not renewed. The other swap matures on January 15, 1999 and was not renewed. These swaps were entered into for the purpose of converting variable interest rate exposure to a fixed rate. One such swap was entered into as a condition of a related variable rate loan agreement which required that hedging or interest rate protection agreements be maintained with respect to not less than 50% of the variable rate borrowing commitment. World Minerals is exposed to credit risk in the unlikely event of nonperformance by the swap counter party. Regarding the Company's interest rate swaps, there were no deferred gains or losses related to terminated interest rate swap contracts as of the end of each of the last three fiscal years. The impact of Alleghany's hedging activities has been to increase its weighted average borrowing rates by 0.07%, 0.31%, and 0.55% and to increase reported interest expense by $0.3 million, $1.2 million, and $1.9 million for the years ended 1998, 1997, and 1996, respectively. In June and August 1996, World Minerals repurchased from the minority interest shareholders in its subsidiary, Harborlite, all of the redeemable preferred stock for a total of $7.8 million. Scheduled aggregate annual maturities of long-term debt for each of the next five years and thereafter are as follows (in thousands): - ------------------------------------------------------------ 1999 $ 112,029 2000 18,039 2001 8,042 2002 8,027 2003 8,000 Thereafter 285,658 - ------------------------------------------------------------ $ 439,795 ============================================================
7. INCOME TAXES Income tax expense (benefit) from continuing operations consists of the following (in thousands):
- ---------------------------------------------------------------------------- Federal State Foreign Total - ---------------------------------------------------------------------------- 1998 - ---------------------------------------------------------------------------- Current $ 22,933 $ 4,979 $ 8,123 $ 36,035 Deferred (7,628) (19) (753) (8,400) - ---------------------------------------------------------------------------- $ 15,305 $ 4,960 $ 7,370 $ 27,635 ============================================================================ 1997 - ---------------------------------------------------------------------------- Current $ 7,345 $ 4,184 $ 6,736 $ 18,265 Deferred (4,758) 11 312 (4,435) - ---------------------------------------------------------------------------- $ 2,587 $ 4,195 $ 7,048 $ 13,830 ============================================================================ 1996 - ---------------------------------------------------------------------------- Current $ 8,823 $ 2,481 $ 6,415 $ 17,719 Deferred (440) (286) (73) (799) - ---------------------------------------------------------------------------- $ 8,383 $ 2,195 $ 6,342 $ 16,920 ============================================================================
Earnings from continuing operations, before income taxes includes $16.5 million, $15.4 million, and $15.7 million from foreign operations in 1998, 1997, and 1996, respectively. The difference between the federal income tax rate and the effective income tax rate on continuing operations is as follows:
- --------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------- Federal income tax rate 35.0% 35.0% 35.0% Goodwill amortization 1.4 2.3 2.4 Income subject to dividends-received deduction (3.1) (4.3) (4.3) State taxes, net of federal tax benefit 2.2 2.7 3.6 Tax-exempt interest income (6.2) (7.6) (7.6) (7.0) Other, net 1.2 (6.9) (0.2) - --------------------------------------------------------------------------------------- 30.5% 21.2% 29.5% =======================================================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows (in thousands):
- ------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------- DEFERRED TAX ASSETS Property and casualty loss reserves $ 61,137 $ 55,610 Reserves for impaired assets 11,333 21,253 Expenses deducted for tax purposes when paid 27,892 21,964 Unearned premium reserves 8,769 7,556 Other 9,031 9,668 - ------------------------------------------------------------------------- 118,162 116,051 - ------------------------------------------------------------------------- Valuation allowance 2,909 4,398 - ------------------------------------------------------------------------- Total deferred tax assets $ 115,253 $ 111,653 - ------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Deferred revenues and gains $(211,733) $(196,810) Tax over book depreciation (26,522) (31,382) Other (27,216) (16,702) - ------------------------------------------------------------------------- Total deferred tax liabilities (265,471) (244,894) - ------------------------------------------------------------------------- Net deferred tax liability $(150,218) $(133,241) =========================================================================
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 1998 and 1997, the Company has established a valuation allowance of $2.9 million and $4.4 million, respectively, for certain deferred state tax assets which it believes may not be realized. The Internal Revenue Service has closed its examination of Alleghany's federal income tax returns for 1991 and 1992. The deficiencies were settled for an amount which was not material. The IRS is currently examining the tax returns for the years 1993 through 1995. 40 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES 8. STOCKHOLDERS' EQUITY The total number of shares of all classes of capital stock which Alleghany has authority to issue is 30,000,000, of which 8,000,000 shares are preferred stock, par value of $1.00, and 22,000,000 shares are common stock, par value of $1.00. Stockholder's equity and surplus of Underwriters Re Group is not restricted as relates to payment of dividends. However, Underwriters Re Group's availability of funds for dividends is restricted by limitations imposed by statutes to which its subsidiaries are subject. Underwriters Reinsurance statutory surplus at December 31, 1998 and 1997 was $602.6 million and $659 million, respectively, and statutory net income for the years ended December 31, 1998 and 1997 was $41 million and $36 million, respectively. Stockholders' equity of World Minerals is restricted by a borrowing agreement as to payment of dividends. At December 31, 1998, substantially all of World Minerals stockholders' equity was restricted as to dividend payment to Alleghany. Additionally, payments of dividends (other than stock dividends) by Alleghany to its stockholders are limited by the terms of its revolving credit loan agreement which provides that Alleghany can pay dividends up to the sum of cumulative net earnings after 1994, less $158.5 million (Chicago Title's net earnings for the four year period), proceeds from the issuance of stock after 1994 and $50 million, provided that Alleghany maintains certain financial ratios as defined in the agreement. At December 31, 1998 approximately $285 million of capital was available for dividends. Alleghany provides, through its 1993 Long-Term Incentive Plan, for incentive compensation of the types commonly known as restricted stock, stock options, stock appreciation rights, performance shares, performance units, and phantom stock, as well as other types of incentive compensation. Awards may include, but are not limited to, cash and/or shares of Alleghany's common stock, rights to receive cash and/or shares of common stock and options to purchase shares of common stock including options intended to qualify as incentive stock options under the Internal Revenue Code and options not intended to qualify. The number of performance shares awarded under the incentive plan to employees of the Company were 19,395 in 1998, 13,603 in 1997, and 38,570 in 1996 (as adjusted for stock dividends). Under the incentive plan, participants are entitled, at the end of a four-year award period, to the fair value of the number of shares of Alleghany's common stock (adjusted for anti-dilution and the effect of the Chicago Title spin-off from date of award), equal to the number of performance shares issued to them based on market value on the payment date and normally payable half in cash and half in stock, provided defined levels of performance are achieved. As of December 31, 1998 (for all award periods through the award period 1998), approximately 153,000 performance shares were outstanding. The amounts charged to the Company's earnings with respect to the plan was $16.4 million in 1998, $10.9 million in 1997, and $6.9 million in 1996. Alleghany also provides, through its Directors' Stock Option Plan, for the automatic grant of non-qualified stock options to purchase 1,000 shares of common stock in each year after 1987 to each non-employee director. Options issued and subsequently adjusted for the Chicago Title spin-off to purchase 11,484 shares at the adjusted fair market value of $208.96 were granted in 1998. At December 31, 1998, 68,000 options were outstanding, of which 35,000 options were fully vested at an average option price of $76. In August 1997 options outstanding under the 1993 Stock Option Plan of the Underwriters Re Group, Inc. were converted into Alleghany options. The stock options are not exerciseable until one year from the date of grant when 25% are exercisable with an additional 25% becoming exercisable on each subsequent anniversary of the grant date. Options to purchase 97,500 shares at the then fair market value of $192.25 were granted in 1998. In connection with the Underwriters Re Group acquisition of VHL, 42,000 stock options under the URC plan were issued. At December 31, 1998, 397,000 were outstanding, of which 221,000 were fully vested at an average option price of $75. The Board of Directors has authorized the purchase from time to time of additional shares of common stock for the treasury. During 1998, 1997, and 1996, Alleghany repurchased 222,564 shares, 157,174 shares, and 92,700 shares of its common stock at a cost of $72.0 million, $33.1 million, and $17.9 million, respectively. 9. FIXED STOCK OPTION PLAN The Company has two fixed option plans as described in Note 8. All options outstanding as of the Chicago Title spin-off date were subsequently adjusted for the effect of this transaction. The fair value of each option grant, including the converted Underwriters Re Group options, is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1997, and 1996, respectively; no cash dividend yield for all years; expected volatility ranged from 15 to 16 percent for all years; risk-free interest rates ranged from 3.7 to 4.8 percent; and expected lives of six and seven years. 41 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES A summary of the status of the Company's fixed option plan as of December 31, 1998, 1997, and 1996 and changes during the years ending on those dates is presented below:
- ------------------------------------------------------------------------------------------------------- 1998 1997 1996 Weighted Weighted Weighted Average Average Average Shares Grant Shares Grant Shares Grant (000) Price (000) Price (000) Price - ------------------------------------------------------------------------------------------------------- Fixed Options - ------------------------------------------------------------------------------------------------------- Outstanding, beginning 390 $ 82 405 $ 78 373 $ 73 Granted 120 184 52 101 38 120 Exercised (41) 70 (62) 70 (6) 47 Forfeited (4) 119 (5) 103 -- -- - ------------------------------------------------------------------------------------------------------- Outstanding, ending 465 $ 109 390 $ 82 405 $ 78 ======================================================================================================= Options exercisable at year-end 286 295 266 Weighted-average fair value of options granted during the year $53.99 $28.79 $36.29 =======================================================================================================
Options Outstanding - ---------------------------------------------------------------------------- Weighted Average Number Remaining Weighted Outstanding Contractual Average at 12/31/98 Life (years) Exercise Price - ---------------------------------------------------------------------------- RANGE OF EXERCISE PRICES - ---------------------------------------------------------------------------- $ 45 to 52 7,000 1.6 $ 48 $ 68 to 91 298,000 5.0 76 $116 to 209 160,000 9.0 172 - ---------------------------------------------------------------------------- $45 to 209 465,000 6.4 $ 109 ===========================================================================
- ---------------------------------------------------------------------------- Options Exercisable - ---------------------------------------------------------------------------- Number Weighted Exercisable Average at 12/31/98 Exercise Price - ---------------------------------------------------------------------------- RANGE OF EXERCISE PRICES - ---------------------------------------------------------------------------- $ 45 to 52 7,000 $ 48 $ 68 to 91 256,000 76 $116 to 209 23,000 124 - ---------------------------------------------------------------------------- $116 to 209 286,000 $ 79 ============================================================================
The Company applies APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan. The compensation cost that has been charged against income for its performance-based plan was $16.4, $10.9, and $6.9 million in 1998, 1997, and 1996, respectively. Had compensation cost for the company's two stock-based compensation plans been determined based on the fair value at the grant date for awards under those plans consistent with the method of SFAS 123, the Company's net earnings and earnings per share would have been increased to the pro forma amounts indicated below:
- ------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------ Net earnings As reported $ 96,106 $ 105,667 $ 87,048 Pro forma $ 100,910 $ 107,138 $ 87,721 Basic earnings per share As reported $ 13.25 $ 14.50 $ 11.82 Pro forma $ 13.92 $ 14.70 $ 11.92 ========================================================================
10. EMPLOYEE BENEFIT PLANS The Company has several noncontributory defined benefit pension plans covering substantially all of its employees. The defined benefits are based on years of service and the employee's average annual base salary over a consecutive 3-year period during the last ten years of employment plus one half of the highest average annual bonus over a consecutive 5-year period during the last ten years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy the Internal Revenue Service's funding standards. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Chicago Trust, a subsidiary of Alleghany Asset Management, Inc., is a qualified trust company and, as such, serves as trustee for the assets of certain of the pension plans. The following tables set forth the defined benefit plans' funded status at December 31, 1998 and 1997 (in millions, except percentages):
- --------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATIONS: Projected benefit obligation at beginning of year $ 45.1 $ 40.2 Service cost 2.2 1.8 Interest cost 3.4 2.8 Amendments 5.0 -- Actuarial loss 5.8 2.0 Benefits paid (4.0) (1.7) Projected benefit obligation at end of year $ 57.5 $ 45.1 ================================================================================= CHANGE IN PLAN ASSETS: FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $ 37.3 $ 30.7 Actual return on plan assets 4.8 5.4 Company contributions 8.3 3.6 Benefits paid (4.0) (1.7) Adjustment for split off due to AAM spinoff (1.5) -- Other -- (0.7) Fair value of plan assets at end of year $ 44.9 $ 37.3 ================================================================================= Funded status $ (12.8) $ (7.9) Unrecognized net loss 2.3 (1.9) Unrecognized prior service cost 9.9 6.7 Pension liability included in other liabilities $ (0.6) $ (3.1) =================================================================================
42 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------- Net pension cost included the following expense (income) components Service cost -- benefits earned during the year $ 2.2 $ 1.8 $ 1.8 Interest cost on projected benefit obligation 3.4 2.8 3.0 Actual return on plan assets (2.9) (2.5) (3.4) Net amortization and deferral 1.8 1.8 2.4 - -------------------------------------------------------------------------------------- Net periodic pension cost included in costs and expenses $ 4.5 $ 3.9 $ 3.8 ======================================================================================
- -------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------- Assumptions used in computing the funded status of the plans are as follows Range of rates for increases in compensation levels 4.5%-5.5% 4.5%-5.5% Range of weighted average discount rates 6.0%-6.85% 6.5%-7.5% Range of expected long-term rates of return 4.0%-9.0% 4.0%-9.0% ==========================================================================
The Company provides supplemental retirement benefits through deferred compensation programs and profit sharing plans for certain of its officers and employees for which earnings were charged $6.3 million in 1998, $6.2 million in 1997, and $5.8 million in 1996. The Company also provides certain healthcare and life insurance benefits for retired employees. The cost of these benefits is accrued during the period that employees render service. The accrued postretirement benefit obligation was $1.5 million and $1.7 million at December 31, 1998 and 1997, respectively. The postretirement healthcare and life insurance (income) costs recognized were $(.9) million, $.6 million, and $.7 million, for 1998, 1997, and 1996, respectively. 11. COMPREHENSIVE INCOME In 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Comprehensive Income". This statement was implemented retroactively by the Company in 1998. The statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Accumulated other comprehensive income of the Company consists of net unrealized gains on investment securities and foreign exchange translation adjustments.
- ------------------------------------------------------------------------------------ Before Tax Net of Tax Expense Tax Amount - ------------------------------------------------------------------------------------ 1998 Unrealized Gains on Investments: Unrealized holding gains arising during period $ 80,227 $(28,080) $ 52,147 Less: reclassification adjustments for gains realized in net income (7,719) 2,702 (5,017) - ------------------------------------------------------------------------------------ Other comprehensive income $ 72,508 $(25,378) $ 47,130 ==================================================================================== 1997 Unrealized Gains on Investments: Unrealized holding gains arising during period $ 88,391 $(30,937) $ 57,454 Less: reclassification adjustments for gains realized in net income (853) 299 (554) - ------------------------------------------------------------------------------------ Other comprehensive income $ 87,538 $(30,638) $ 56,900 ==================================================================================== 1996 Unrealized Gains on Investments: Unrealized holding gains arising during period $ 47,389 $(16,586) $ 30,803 Less: reclassification adjustments for gains realized in net income (4,307) 1,507 (2,800) - ------------------------------------------------------------------------------------ Other comprehensive income $ 43,082 $(15,079) $ 28,003 ====================================================================================
12. EARNINGS PER SHARE Earnings per share has been computed in accordance with the provisions of SFAS 128. The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the years ended December 31 (in thousands, except per share amounts):
- ---------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------- Income from continuing operations $ 63,381 $ 51,400 $ 40,470 Discontinued operations 32,725 54,267 46,578 - ---------------------------------------------------------------------------------------- Income available to common stockholders for basic earnings per share 96,106 105,667 87,048 - ---------------------------------------------------------------------------------------- Effect of dilutive securities -- -- -- - ---------------------------------------------------------------------------------------- Income available to common stockholders for diluted earnings per share $ 96,106 $ 105,667 $ 87,048 ======================================================================================== Weighted average common shares outstanding applicable to basic earnings per share 7,251,238 7,287,459 7,360,584 Effect of dilutive securities Options 130,126 72,512 12,456 - ---------------------------------------------------------------------------------------- Adjusted weighted average common shares outstanding applicable to diluted earnings per share 7,381,364 7,359,971 7,373,040 ========================================================================================
43 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ALLEGHANY CORPORATION AND SUBSIDIARIES Contingently issuable shares of 76,648, 57,432, and 59,888 were potentially available during 1998, 1997, and 1996, respectively, but were not included in the computation of diluted earnings per share because the impact was anti-dilutive to the earnings per share calculation. 13. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities, furniture and equipment under long-term lease agreements. In addition, certain land, office space and equipment are leased under noncancelable operating leases which expire at various dates through 2013. Rent expense was $9.7 million, $7.9 million, and $6.5 million in 1998, 1997, and 1996, respectively. The aggregate minimum payments under operating leases with initial or remaining terms of more than one year are $9.8 million, $8.8 million, $7.6 million, $5.8 million, $4.3 million, and $22.8 million in 1999, 2000, 2001, 2002, 2003 and thereafter, respectively. The Company's subsidiaries and division are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such operating unit makes provisions for estimated losses to be incurred in such litigation and claims, including legal costs. In the opinion of management, based in part on advice of counsel, such provisions are adequate. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows (in thousands):
- ----------------------------------------------------------------------------------------- 1998 1997 Calculated Calculated Carrying Fair Carrying Fair Amount Value Amount Value - ----------------------------------------------------------------------------------------- ASSETS Investments $2,126,033 $2,126,033 $2,060,999 $2,060,999 Notes receivable $ 91,536 $ 91,536 $ 91,536 $ 91,536 Liabilities Long-term debt $ 439,795 $ 439,795 $ 389,641 $ 391,898 =========================================================================================
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value: INVESTMENTS: The fair value of fixed maturities and equity securities are based upon quoted market prices. The fair value of short term investments approximates amortized cost. NOTES RECEIVABLE: The carrying amount approximates fair value because interest rates approximate market rates. LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The fair value includes the effects of the interest rate swaps. 15. SEGMENTS OF BUSINESS Information concerning the Company's continuing operations by industry segment as of and for the years ended December 31, 1998, 1997 and 1996, respectively, is summarized as follows (in thousands):
- ------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------- REVENUES Asset management $ 125,060 $ 78,823 $ 53,280 Property and casualty insurance 508,602 453,135 410,867 Mining and filtration 201,137 203,295 198,518 Corporate activities 84,194 61,401 71,817 - ------------------------------------------------------------------------------------- Total $ 918,993 $ 796,654 $ 734,482 ===================================================================================== EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES Asset management $ 35,733 $ 19,876 $ 9,726 Property and casualty insurance 68,392 60,405 46,755 Mining and filtration 28,507 33,178 24,559 Corporate activities 21,854 9,319 23,176 - ------------------------------------------------------------------------------------- 154,486 122,778 104,216 Interest expense 32,271 32,111 26,573 Corporate administration 31,199 25,437 20,253 - ------------------------------------------------------------------------------------- Total $ 91,016 $ 65,230 $ 57,390 ===================================================================================== - ------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS AT DECEMBER 31 Asset management $ 118,458 $ 42,516 $ 50,757 Property and casualty insurance 3,064,155 2,240,549 2,053,101 Mining and filtration 331,714 302,183 310,444 Corporate activities 768,117 729,677 689,301 - ------------------------------------------------------------------------------------- Total $4,282,444 $3,314,925 $3,103,603 ===================================================================================== CAPITAL EXPENDITURES Asset management $ 1,520 $ 1,100 $ 1,190 Property and casualty insurance 8,412 2,472 1,270 Mining and filtration 19,360 12,057 16,379 Corporate activities 2,605 951 338 - ------------------------------------------------------------------------------------- Total $ 31,897 $ 16,580 $ 19,177 ===================================================================================== DEPRECIATION AND AMORTIZATION Asset management $ 1,262 $ 1,157 $ 910 Property and casualty insurance 6,117 6,235 6,018 Mining and filtration 16,812 16,143 16,307 Corporate activities 1,128 643 780 - ------------------------------------------------------------------------------------- Total $ 25,319 $ 24,178 $ 24,015 =====================================================================================
44 36 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected quarterly financial data for 1998 and 1997 are presented below (in thousands, except per share amounts):
- ------------------------------------------------------------------------------------------- QUARTERS ENDED - ------------------------------------------------------------------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 - ------------------------------------------------------------------------------------------- 1998 Revenues from continuing operations $206,792 $232,168 $244,613 $235,420 - ------------------------------------------------------------------------------------------- Earnings from continuing operations $ 12,959 $ 17,228 $ 19,834 $ 13,360 - ------------------------------------------------------------------------------------------- Earnings from discontinued operations, net of tax 21,241 11,484 -- -- - ------------------------------------------------------------------------------------------- Net earnings $ 34,200 $ 28,712 $ 19,834 $ 13,360 - ------------------------------------------------------------------------------------------- Basic earnings per share of common stock: * - ------------------------------------------------------------------------------------------- Continuing operations $ 1.76 $ 2.38 $ 2.76 $ 1.85 - ------------------------------------------------------------------------------------------- Discontinued operations 2.88 1.59 -- -- - ------------------------------------------------------------------------------------------- Basic net earnings $ 4.64 $ 3.97 $ 2.76 $ 1.85 =========================================================================================== 1997 - ------------------------------------------------------------------------------------------- Revenues from continuing operations $194,346 $196,309 $204,974 $201,025 - ------------------------------------------------------------------------------------------- Earnings from continuing operations $ 6,980 $ 17,101 $ 13,973 $ 13,346 - ------------------------------------------------------------------------------------------- Earnings from discontinued operations, net of tax 5,928 16,838 16,039 15,462 - ------------------------------------------------------------------------------------------- Net earnings $ 12,908 $ 33,939 $ 30,012 $ 28,808 - ------------------------------------------------------------------------------------------- Basic earnings per share of common stock: * - ------------------------------------------------------------------------------------------- Continuing operations $ .96 $ 2.36 $ 1.91 $ 1.82 - ------------------------------------------------------------------------------------------- Discontinued operations 81 2.33 2.19 2.11 - ------------------------------------------------------------------------------------------- Basic net earnings $ 1.77 $ 4.69 $ 4.10 $ 3.93 ===========================================================================================
* Adjusted to reflect subsequent stock dividends and the adoption of Financial Accounting Standards No.128, "Earnings per Share." Earnings per share by quarter may not equal the amount for the year due to the timing of share transactions and rounding. 17. OTHER INFORMATION a. Other assets shown in the consolidated balance sheets at December 31, 1998 and 1997 includes goodwill, net of accumulated amortization. The amount of goodwill included in the balance sheet is as follows (in thousands):
- ---------------------------------------------------------------------- Amortization 1998 1997 Period - ---------------------------------------------------------------------- Underwriters Re Group $202,237 $ 43,565 20 years World Minerals 43,375 29,790 40 years Heads and Threads 2,876 -- 15 years - ---------------------------------------------------------------------- $248,488 $ 73,355 ======================================================================
In addition, other assets shown at December 31, 1998 and 1997 includes $93.4 million and $29.6 million, respectively, of deferred acquisition costs. Amortization of deferred acquisition costs included in the 1998, 1997, and 1996 statement of earnings were $113.2 million, $94.4 million, and $88.9 million, respectively. b. Other liabilities shown in the consolidated balance sheets include the following amounts at December 31, 1998 and 1997 (in millions):
- -------------------------------------------------------- 1998 1997 - -------------------------------------------------------- Accounts payable $ 24.8 $ 22.6 Unearned premiums $ 389.6 $ 136.3 Reinsurance payable $ 69.4 $ 30.9 Funds held for reinsurers $ 143.8 $ 99.3 =======================================================
c. Property and equipment, net of accumulated depreciation and amortization at December 31, 1998 and 1997, are as follows (in thousands):
- --------------------------------------------------------------------------------------- Depreciation 1998 1997 Period - --------------------------------------------------------------------------------------- Land $ 17,157 $ 16,575 -- Buildings and improvements years 58,348 47,656 30-40 years Furniture and equipment years 173,712 158,151 3-20 years Ore reserves 32,810 32,082 30 years Leasehold improvements 4,868 2,924 Various 286,895 257,388 - --------------------------------------------------------------------------------------- Less: Accumulated depreciation and amortization (78,197) (64,084) - --------------------------------------------------------------------------------------- $ 208,698 $ 193,304 =======================================================================================
45 37 INDEPENDENT AUDITORS' REPORT Alleghany Corporation and Subsidiaries [KPMG LOGO] Certified Public Accountants 757 Third Avenue New York, NY 10017 THE BOARD OF DIRECTORS AND STOCKHOLDERS ALLEGHANY CORPORATION: We have audited the accompanying consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, changes in common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements, appearing on pages 30 through 45, are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alleghany Corporation and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP KPMG LLP February 19, 1999 46 38 APPENDIX
Page Narrative Description of Graphic 5 A photograph of John J. Burns, Jr., President and F.M. Kirby, Chairman, appears in the paper format. 15 A map depicting World Minerals' world headquarters diatomite mines and plants, perlite mines and plants, and sales offices appears in the paper format.
EX-21 17 LIST OF SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF ALLEGHANY Alleghany Asset Management, Inc. (Delaware) Chicago Deferred Exchange Corporation (Illinois) The Chicago Trust Company (Illinois) Security Trust Company (California) Montag & Caldwell Inc. (Georgia) Blairlogie International LLC (Delaware) Pacific Shelf 797 Limited (Scotland) Veredus Asset Management LLC (Kentucky -- 40%) Alleghany Properties, Inc. (Delaware) Sacramento Properties Holdings, Inc. (California) Alleghany Funding Corporation (Delaware) Alleghany Capital Corporation (Delaware) Mineral Holdings Inc. (Delaware -- 93.8%) World Minerals Inc. (Delaware) World Minerals Acquisition Corp. (Pennsylvania) Advanced Minerals Corporation (Delaware) Fluxx Corp. (Delaware) Fluxx France S.A. (France) LeVay & Houseman, Inc. (Nevada) World Minerals Italiana S.r.L. (Italy) World Minerals Espanola, S.A. (Spain) World Minerals (U.K.) Limited (United Kingdom) WM Canada Inc. (Canada) World Minerals do Brasil Ltda. (Brazil) World Minerals Europe, S.A. (France) World Minerals Island, h.f. (Iceland) World Minerals Japan K.K. (Japan) Celite Corporation (Delaware) Celite Europe Corporation (Delaware) Celite France, S.A. (France) Celite B.V. (Amsterdam, the Netherlands) Celite Hispanica, S.A. (Spain) Kisilidjan, h.f. (Iceland -- 48.56%) Celite Mexico S.A. de C.V. (Mexico) Almeria, S.A. de C.V. (Mexico) Diatomita San Nicolas, S.A. de C.V. (Mexico) Celite Pacific Limited (Hong Kong) Celite China Inc. (Delaware) Linjiang Celite Diatomite Company Ltd. (China -- 72.65%) Celite Jilin, Inc. (Delaware) Changbai Celite Diatomite Company Ltd. (China -- 70.11%) Celite Minerals China Corporation (Delaware) Linjiang Lin-Lin Celite Diatomite Company Limited (China -- 71.89%) Celite Chile S.A. (Chile) Sociedad Minera Celite del Peru, S.A. (Peru) Celite Korea Ltd. (South Korea) Harborlite Corporation (Delaware) Perlite, Inc. (Delaware) Harborlite (U.K.) Limited (United Kingdom) 2 Harborlite France (France) Harborlite Aegean Endustri Mineralleri-Sanayi, a.s. (Turkey) Substancias y Mineralas Navajas S.A. de C.V. (Mexico) Europerlite B.V. (Amsterdam, the Netherlands) Europerlita Espanola, S.A. (Spain) Europerlite Italiana, S.p.A. (Italy) Bibb Steel and Supply Company (Delaware) MSL Property Holdings, Inc. (Delaware) MSL Capital Recovery Corp. (Delaware) J & E Corporation (Tennessee) Underwriters Re Group, Inc. (Delaware) Underwriters Reinsurance Company (New Hampshire) Commercial Underwriters Insurance Company (California) Underwriters Insurance Company (Nebraska) Texas Underwriters General Agency, Inc. (Texas) Newmarket Underwriters Insurance Company (New Hampshire) Venton Holdings Ltd. (Bermuda) New Street Holdings Ltd. (United Kingdom) Venton Underwriting Agencies Ltd. (United Kingdom) Yachtsure Ltd. (United Kingdom -- majority owned) Venton Services Ltd. (United Kingdom) XL Prevent Risk Services Ltd. (United Kingdom -- 50%) Venton Risk Services Ltd. (United Kingdom) Venton Underwriting Management Ltd. (United Kingdom) Talbot Underwriting Limited (United Kingdom) Venton Insurance Ltd. (Bermuda) Venton Underwriting Ltd. (Bermuda) The Center Insurance Services, Inc. (Delaware) The Center E&S Insurance Agency, Inc. (Georgia) The Center Special Risk Insurance Agency, Inc. (Georgia) The Center Marine Managers, Inc. (New York -- 95%) The Center Financial Markets Insurance Agency, Inc. (Illinois) URC Risk Managers, Inc. (Delaware) Carnegie Holdings, Inc. (California -- 35%) URC Representatives Ltd. (United Kingdom) URC International Inc. (Barbados) URC Management Inc. (Barbados) Heads and Threads (PA) LLC (Delaware) Heads and Threads LLC (Delaware) EX-23 18 CONSENT OF KPMG LLP 1 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Alleghany Corporation: We consent to incorporation by reference in the Registration Statements Nos. 33-27598, 333-323, 333-37237 and 333-57133 on Forms S-8 and Nos. 33-55707, 33-62477, 333-09881 and 333-13971 on Forms S-3 of our reports dated February 19, 1999, relating to the financial statements and related schedules of Alleghany Corporation and subsidiaries, which appear in, or are incorporated by reference in this Annual Report on Form 10-K of Alleghany Corporation for the fiscal year ended December 31, 1998. We also consent to the reference to our Firm in Registration Statement Nos. 33-27598, 333-323, 333-37237 and 333-57133 and under the heading "Experts" in Registration Statement Nos. 33-55707, 33-62477, 333-09881 and 333-13971. /s/ KPMG LLP New York, New York March 18, 1999 EX-27 19 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from (a) Alleghany Corporation and subsidiaries consolidated balance sheet at 12/31/98 and the consolidated statement of earnings for the 12 months then ended 12/31/98 and is qualified in its entirety by reference to such (b) financial statements. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,301,707 0 0 824,326 0 0 2,126,033 82,348 571,689 0 4,282,444 1,554,818 0 0 0 439,795 0 0 0 1,247,428 4,282,444 420,809 166,737 7,719 200,815 288,259 0 0 91,016 27,635 63,381 32,725 0 0 96,106 13.25 13.02 0 0 0 0 0 0 0
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