EXHIBIT 10.9
Lumbermens Mutual Casualty Company
July 30, 2003
Insurance Holdings, Inc.
c/o Summit Partners
000 Xxxxxxxx Xxxxxx
Xxxx Xxxx, XX 00000
Attention: Xxxxx X. Xxxxx
J. Xxxxx Xxxxxx
Ladies and Gentlemen:
Reference is hereby made to that certain Purchase Agreement
(the "Purchase Agreement"), dated as of July 14, 2003, by and among Insurance
Holdings, Inc., a Delaware corporation ("Buyer"), Xxxxxx Employers Group, Inc.,
a Washington corporation ("KEG"), Lumbermens Mutual Casualty Company, an
Illinois domiciled mutual insurance company ("LMC"), Eagle Pacific Insurance
Company, a Washington domiciled insurance company ("Eagle Pacific"), and Pacific
Eagle Insurance Company, a California domiciled insurance company ("Pacific
Eagle" and, together with KEG, LMC and Eagle Pacific, the "Sellers").
Capitalized terms used but not defined herein shall have the respective meanings
ascribed to them in the Purchase Agreement.
In connection with the Purchase Agreement, Buyer and Sellers
hereby agree that:
1. For avoidance of doubt, Buyer and Sellers agree that in order for the
condition to closing set forth in Section 9.11 of the Purchase Agreement
to be satisfied, it must be the case that the indicative prospective
rating provided by A.M. Best & Co. ("Best") states that the rating will
become effective on or promptly (i.e., within 30 days) following the
Closing Date.
2. Buyer shall, in full satisfaction of its obligations contained in Section
7.12 of the Purchase Agreement to take reasonable steps to secure a an
"A-" or better indicative rating from Best and the proviso to Section 9.11
of the Purchase Agreement, take the following steps:
2.1. present to Best a business plan which calls for capital
contributions (not to exceed $30 million at Closing and an
additional $5 million in 2004) and projected net premium writings
consistent in all material respects with the financial projections
attached hereto as Annex I;
2.2. put in place a reinsurance program for KEIC consistent in all
material respects with the past practices of the Eagle Entities,
including in particular an excess of loss reinsurance arrangement
attaching no higher than $500,000 and extending to a minimum level
of $100 million, with a maximum retention of 50% of the $500,000 in
excess of the first $500,000, and no retention of any loss above
such amount (other than any retention that is provided in the Eagle
Entities' reinsurance agreements in effect as of the date of this
letter agreement);
2.3. make offers of employment to all of the current management team of
the Eagle Entities;
2.4. represent that it will not make any fundamental shift from the
Eagle Entities' business strategy (as in existence as of the date
hereof) and target markets through December 31, 2004;
2.5. adopt an investment management strategy focused on government and
other high grade fixed income securities (or any other security
constituting a "Permitted Investment" under the Escrow Agreement);
and
2.6. provide to Best copies of the Purchase Agreement and Annexes A
through I thereto.
3.3.1. Following the Closing, Buyer or KEIC shall pay to LMC the following
amounts by wire transfer of immediately available funds to the
account designated by LMC:
3.1.1. within 60 days after the first Profit Share Calculation
Date, 25% of the Profit Share Amount;
3.1.2. within 60 days after the second Profit Share Calculation
Date, 50% of the Profit Share Amount less the aggregate
amount previously paid in accordance with this Section 3.1;
and
3.1.3. within 60 days after the third Profit Share Calculation
Date, 100% of the Profit Share Amount less the aggregate
amount previously paid in accordance with this Section 3.1.
3.2. For purposes of this letter,
3.2.1. "Profit Share Amount" shall mean the following amount with
respect to the first new policies (i.e., not any subsequent
renewal thereof) (collectively, the "Subject Policies")
issued by KEIC immediately following the cancellation or
early termination (i.e., if canceled or terminated prior to
the natural expiration date of an applicable policy) of an
insured's (i) Agent Policy with either of the Eagle Entities
or (ii) Agent Policy written by LMC and 100% reinsured by
the Eagle Entities (an "LMC Fronted Policy"):
1. earned premium (including all audit adjustments)
with respect to the Subject Policies for the
period from the date of first issue through and
include to the natural expiration date of the
cancelled policy (which in most, if not all, cases
will be the normal anniversary rating date (NARD)
for such insured), minus
2. (a) case incurred losses plus allocated loss
adjustment expense with respect to the Subject
Policies multiplied by (b) a cumulative incurred
loss development factor to be determined at each
Profit Share Calculation Date by a mutually agreed
qualified actuary (which may, but shall not
necessarily, be current or prospective employees
of LMC) multiplied by (c) a discount factor of
0.9107 multiplied by (d) an unallocated loss
adjustment expense factor of 1.09 (in each case,
for the period from the date of first issue
through and include to the natural expiration date
of the cancelled policy (which in most, if not
all, cases will be the normal anniversary rating
date (NARD) for such insured)), minus
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3. the earned premium with respect to the Subject
Policies for the period from the date of first
issue through and include to the natural
expiration date of the cancelled policy (which in
most, if not all, cases will be the normal
anniversary rating date (NARD) for such insured)
multiplied by a discounted expense factor of
0.1772.
3.2.2. "Profit Share Calculation Date" shall mean each of the first
three anniversaries of the date on which the last Subject
Policy expires.
3.3. On each Profit Share Calculation Date, Buyer shall provide to LMC
information and supporting documentation reasonably necessary for
the calculation of the Profit Share Amount.
4.4.1. Following the Closing, LMC shall pay to Buyer or KEIC the following
amounts by wire transfer of immediately available funds to the
account designated by Buyer or KEIC:
4.1.1. within 90 days after the first Loss Reserve Calculation Date,
10% of the Nominal Profit;
4.1.2. within 90 days after the second Loss Reserve Calculation
Date, 25% of the Nominal Profit less the aggregate amount
previously paid in accordance with this Section 4.1;
4.1.3. within 90 days after the third Loss Reserve Calculation Date,
50% of the Nominal Profit less the aggregate amount
previously paid in accordance with this Section 4.1;
4.1.4. within 90 days after the fourth Loss Reserve Calculation
Date, 75% of the Nominal Profit less the aggregate amount
previously paid in accordance with this Section 4.1; and
4.1.5. within 90 days after the fifth Loss Reserve Calculation Date,
100% of the Nominal Profit less the aggregate amount
previously paid in accordance with this Section 4.1.
4.2. For purposes of this letter,
4.2.1. "Nominal Profit" shall mean (in each case, net of third party
reinsurance and losses assumed from LMC Fronted Policies):
1. the Subject Reserves, minus
2. indicated case and incurred but not reported loss
and allocated loss adjustment expense reserves,
minus
3. loss and allocated loss adjustment expense paid
after the Closing Date.
4.2.2. "Subject Reserves" shall mean LMC's indicated loss and
allocated loss adjustment expense reserve, net of third party
reinsurance and losses assumed from LMC Fronted Policies, for
accident dates prior to December 31, 2002 for the Eagle
Entities, calculated as of the Closing Date.
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4.2.3. "Loss Reserve Calculation Date" shall mean each of December
31, 2004, December 31, 2005, December 31, 2006, December 31,
2007 and December 31, 2008.
4.3. On each Loss Reserve Calculation Date, Buyer shall provide to LMC
information and supporting documentation reasonably necessary for
the calculation of the Nominal Profit.
5.5.1. Following the Closing, Sellers shall be responsible for servicing
the claims under all insurance policies written by KEIC prior to
the Closing Date and shall indemnify Buyer for Losses and Expenses
incurred by any Buyer Group Member as a result of the failure of
LMC (or its Affiliates or subcontractors) to fully and timely
perform such servicing.
5.2. The parties acknowledge that such servicing has been subcontracted
by LMC to NATLSCO, Inc.
5.3. Following the Closing, Sellers shall exercise all of its rights
with respect to the servicing such claims under its arrangement
with NATLSCO, Inc. in accordance with the reasonable instructions
of Buyer.
5.4. In recognition of Sellers' remaining responsible for such
servicing, the definition of KEIC Book Value in the Purchase
Agreement shall be amended and restated to read in its entirety as
follows:
"KEIC BOOK VALUE" means an amount equal to the book value of KEIC
as of the close of business on the day prior to the Closing Date,
calculated in accordance with the Agreed Accounting Principles,
after giving effect to the Commutation Agreement, and increased
(without duplication) by the aggregate amount of (i) the California
Prepayments transferred by LMC to KEIC pursuant to Section 7.11 and
(ii) the non-admitted prepaid unallocated loss adjustment expense
asset resulting from Sellers' agreement to be responsible for the
servicing of claims under all insurance policies written by KEIC
prior to the Closing Date and the prepayment therefor, regardless
of whether such prepayments would otherwise be included in
calculating book value in accordance with SAP.
5.5. In further recognition of Sellers' remaining responsible for such
servicing, the calculation of the price/premium (the "Premium") to
be paid under the Commutation Agreement shall be calculated as (i)
the amount of all transferred losses, loss adjustment expenses
(both allocated and unallocated), taxes, licenses and fees as of
such date minus (ii) the amount of the related tax impact of such
commutation (utilizing for such calculation prevailing actuarial
factors used for California workers compensation policies). The
price/premium to be paid under the Commutation Agreement shall be
LMC's reasonable, good faith estimate of the Premium, as determined
within five (5) business days prior to the Closing Date and
approved by Buyer in its reasonable, good faith discretion, and
shall be adjusted following the Closing Date in accordance with
(and within the same time periods set forth in) the provisions of
Section 4.4 of the Purchase Agreement. The parties acknowledge
that, in connection with the effectiveness of the Commutation
Agreement, KEIC shall pay to LMC an amount equal to the unallocated
loss adjustment expense reserves which
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were included in the calculation of the Premium. For the avoidance
of doubt, the parties agree that the calculation of KEIC Book Value
shall be completed assuming that the foregoing payments had already
been made (and that the tax liability, if any, arising from such
commutation had already been satisfied).
5.6. The Premium under the Commutation Agreement will not include any
additional amount for premiums in collection for such policies,
including audit premium, retrospective premium, deductible
reimbursements and compensating balance plan premium, which shall
belong to and remain the responsibility of LMC to collect. The
parties agree to cooperate with each other with respect to the
collection of such premium.
5.7. To the extent that Sellers would not have otherwise incurred the
following expenses in servicing such claims, KEIC shall be
responsible for any expenses incurred after the Closing resulting
from the transfer from Sellers to KEIC of information from Computer
Services Corporation relating to the "Point" system utilized in
servicing such claims.
6. Section 9.10 of the Purchase Agreement shall be amended and restated to
read in its entirety as follows:
SECTION 9.10 RECEIPT OF RELEASES. Buyer shall have received those
written releases contemplated by the last sentence of Section 8.8 above.
7. Buyer shall have the right to purchase its own Oracle software licenses
after the Closing, in lieu of assuming any obligations with respect to any
of Seller's Oracle software licenses. Buyer shall notify Sellers of its
decision in this regard at least five business days prior to the Closing.
8. Each sentence of Section 5.23(h) of the Purchase Agreement is hereby
amended to include the words "Except as disclosed on Schedule 5.23(h)," at
the beginning of each such sentence.
9. The Purchase Agreement shall be amended so that the following provision is
inserted as a new Section 5.28:
SECTION 5.28 SALE OF ASSETS. The transactions contemplated by this
Agreement do not constitute a sale of all or substantially all of the
assets of LMC.
10. Buyer is not assuming any of the Sellers' obligations under the
Termination Protection Agreement for the benefit of Xxxx Xxxxxxxxxxx, and,
in determining the level of employee benefits to be offered to the LMC
Employees by Buyer in accordance with Section 8.2 of the Purchase
Agreement, such arrangement shall be ignored.
11. The definition of the Post-Signing Due Diligence Period in the Purchase
Agreement shall be amended and restated to read in its entirety as
follows:
"POST-SIGNING DUE DILIGENCE PERIOD" means the period commencing on the
date of this Agreement and terminating at 11:59 p.m. Pacific Time on July
30, 2003.
12. The Ancillary Agreements, Exhibits, Annexes and Schedules attached hereto
shall constitute the definitive forms of the corresponding Post-Signing
Documents, except that (i) Annex C is
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not attached hereto and, in lieu thereof, shall be proposed by Buyer prior
to the Closing Date and be subject to the final approval of Sellers prior
to the Closing Date, such approval not to be unreasonably withheld or
delayed and (ii) references to Exhibit H in the Purchase Agreement shall
be deleted as the parties have deemed unnecessary the agreement
contemplated thereby.
13. The definition of "Agent Policies" in the Purchase Agreement is hereby
renamed "Broker Policies" (with all references to "Agent Policies" used in
the Purchase Agreement now to refer to Broker Policies), and the
definition thereof is amended and restated in its entirety as follows
"means all policies, including all endorsements thereto, whether written
prior to or following the date hereof, which either: (a) are marketed,
underwritten, issued or administered by, or on behalf of, the Eagle
Entities and were written on the paper of either of the Eagle Entities, or
(b) as listed under the heading "Agent Policies" on Annex E attached
hereto, are those USL&H Business policies which are marketed,
underwritten, issued and administered by LMC or any of its Affiliates
(other than the Companies) and were written on the paper of LMC or any of
its Affiliates (other than the Companies)."
14. The transactions contemplated by the Commutation Agreement shall occur
simultaneously with the Closing under the Purchase Agreement, and Buyer
and Sellers each agree to report, for all Tax purposes, the transactions
occurring under the Commutation Agreement as not having occurred in any
Post-Closing Tax Period and not allocable to the period after the Closing
Date. For the avoidance of doubt, Buyer and Sellers agree that the
preceding sentence shall not alter any party's liability for Taxes as set
forth in Section 8.1 of the Purchase Agreement.
15. For avoidance of doubt, Buyer and Sellers agree that Buyer and its
Affiliates may, notwithstanding Section 8.5 of the Purchase Agreement,
respond (as may be required by law or otherwise) to any informational
requests made by any policyholder or broker with respect to the terms of
cancellation or termination of any policy or the Best rating of either of
the Eagle Entities, so long as such information requests were not first
solicited by Buyer.
16. The reference to "second business day" in Section 7.3(b) of the Purchase
Agreement is hereby amended to read as follows: "third business day".
17. The definition of "USL&H Business" in Section 8.3 of the Purchase
Agreement is hereby amended to delete the word "related" before the words
"alternative dispute resolution insurance business" and to insert the
words "related to any state or federal workers compensation" immediately
following the words "alternative dispute resolution insurance business".
18. Except as expressly amended by this letter agreement, the Purchase
Agreement is not otherwise amended or modified and remains in full force
and effect in accordance with its original terms, and (for avoidance of
doubt) the Purchase Agreement shall, notwithstanding that this letter
agreement is dated as of a date after the end of the "Post-Signing Due
Diligence Period" (as originally defined in the Purchase Agreement), be
deemed not to have automatically terminated on July 28, 2003.
[Remainder of page intentionally left blank]
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In witness whereof, each of the parties has caused this letter to be
executed as of the date first written above.
INSURANCE HOLDINGS, INC.
By: /s/ Xxxx Xxxxxxxxxxx
-----------------------------------
Name: Xxxx Xxxxxxxxxxx
Title: President
XXXXXX EMPLOYERS GROUP, INC.
By: /s/ Xxxxxxx X. Xxxxxx
-----------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Treasurer and Vice President
LUMBERMENS MUTUAL CASUALTY COMPANY
By: /s/ Xxxxxxx X. Xxxxxx
-----------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Chief Financial Officer and
Executive Vice President
EAGLE PACIFIC INSURANCE COMPANY
By: /s/ Xxxxxxx X. Xxxxxx
-----------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Vice President
PACIFIC EAGLE INSURANCE COMPANY
By: /s/ Xxxxxxx X. Xxxxxx
-----------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Vice President
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