AMENDMENT #1 TO FORM S-4
As filed with the Securities and Exchange Commission on
June 8, 2007
Registration No. 333-142568
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
PXRE Group Ltd.
(Exact name of Registrant as
specified in its Charter)
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Bermuda
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6361
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98-0214719
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(State or other jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(IRS Employer
Identification Number)
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PXRE House
110 Pitts Bay Road
Pembroke HM 08
Bermuda
(441) 296-5858
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
CT Corporation
111 Eighth Avenue
13th Floor
New York, New York
10011
(212) 894-8600
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Linda E. Ransom, Esq.
Dewey Ballantine LLP
1301 Avenue of the
Americas
New York, NY 10019
(212) 259-8000
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Ronald B. Given, Esq.
Argonaut Group, Inc.
10101 Reunion Place, Suite 500
San Antonio, TX 78216
(210) 321-8400
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Michael Groll, Esq.
LeBoeuf, Lamb, Greene & MacRae LLP
125 West 55th Street
New York, NY 10019
(212) 424-8000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement and the conditions
to the completion of the merger described herein have been
satisfied or waived.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
CALCULATION OF REGISTRATION FEE
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Proposed maximum
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Proposed maximum
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Title of each class of
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Amount to be
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offering price
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aggregate offering
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Amount of
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securities to be registered
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registered(1)
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per share
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price(2)
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registration fee(3)(4)
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Common Shares of PXRE Group Ltd.,
par value $1.00 per share
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240,099,293
common shares
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N/A
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$
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1,206,155,277.69
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$
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37,028.97
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(1)
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Represents a bona fide estimate of
the maximum number of shares of common stock that may be issued
in connection with the merger described herein, calculated as
the product of (a) 35,257,389, the aggregate number of
shares of Argonaut Group, Inc., which we refer to as Argonaut,
common stock that were outstanding on April 26, 2007
(assuming the exercise of all options), and (b) 6.8099, the
maximum number of common shares of PXRE Group Ltd., which we
refer to as PXRE, that will be exchanged for each share of
Argonaut common stock.
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(2)
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Estimated solely for the purposes
of calculating the registration fee required by
Section 6(b) of the Securities Act and calculated pursuant
to Rules 457(c) and 457(f)(1) under the Securities Act, the
proposed maximum aggregate offering price of the
registrants common shares was calculated based upon the
market value of shares of Argonaut common stock (the securities
to be cancelled in the merger) as follows: the product of
(1) $34.21, the average of the high and low prices per
share of Argonaut common stock on April 26, 2007, as quoted
on the NASDAQ Global Select Market, multiplied by
(2) 35,257,389, the aggregate number of shares of Argonaut
common stock that were outstanding on April 26, 2007
(assuming the exercise of all options).
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(3)
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Determined in accordance with
Section 6(b) of the Securities Act at a rate equal to
$30.70 per $1,000,000 of the proposed maximum aggregate
offering price.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)
OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
REFERENCES
TO ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important
business and financial information about PXRE and Argonaut from
documents that are not included in or delivered with this joint
proxy statement/prospectus. This information is available for
you to review at the Securities and Exchange Commissions
public reference room located at 100 F Street, N.E.,
Room 1580, Washington, DC 20549, and through the SECs
website, www.sec.gov. You can also obtain those documents
incorporated by reference into this joint proxy
statement/prospectus, without charge, by requesting them in
writing or by telephone or email from the appropriate company at
the following addresses, telephone numbers and email addresses
or obtaining them from each companys website listed below:
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PXRE Group Ltd.
PXRE House
110 Pitts Bay Road
Pembroke HM 08
Bermuda
Attention: Shareholder Services
(441) 296-5858
bob.myron@pxre.com
www.pxre.com
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Argonaut Group, Inc.
10101 Reunion Place,
Suite 500
San Antonio, Texas 78216
Attention: Shareholder Services
(210) 321-8400
investors@argonautgroup.com
www.argonautgroup.com
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Information contained on the PXRE and Argonaut websites is
expressly not incorporated by reference into this joint proxy
statement/prospectus.
You can also obtain documents incorporated by reference into
this joint proxy statement/prospectus by requesting them in
writing or by telephone from Georgeson, Inc., the proxy
solicitor for both PXRE and Argonaut, at the following address
and telephone numbers:
17 State Street
New York, NY 10004
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PXRE Shareholders
(866) 577-4838
(toll-free)
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Argonaut Shareholders
(866) 574-4071 (toll-free)
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If you would like to request documents, you must do so by
July 18, 2007, so that you may receive them before the
shareholder meetings.
See Where You Can Find More Information beginning on
page 183.
TO THE
SHAREHOLDERS OF
PXRE GROUP LTD. AND ARGONAUT GROUP, INC.
MERGER PROPOSED YOUR VOTE IS VERY
IMPORTANT
The board of directors of PXRE Group Ltd., which we refer to as
PXRE, and the board of directors of Argonaut Group, Inc., which
we refer to as Argonaut, have each unanimously approved a
business combination of the two companies pursuant to an
Agreement and Plan of Merger, dated as of March 14, 2007
and amended and restated as of June 8, 2007. Upon
completion of the merger of a direct, wholly owned subsidiary of
PXRE with and into Argonaut, PXRE will acquire Argonaut and
Argonaut will become a direct, wholly owned subsidiary of PXRE.
If the merger is completed, Argonaut shareholders will have the
right to receive 6.4672 PXRE common shares in exchange for each
share of Argonaut common stock they hold, subject to adjustment
in the event that (i) Argonauts special dividend to
its shareholders is less than $60 million, or
(ii) Argonaut pays certain other dividends, incurs losses
on sales of assets
and/or
engages in dilutive sales or purchases of Argonaut shares. The
number of PXRE common shares that Argonaut shareholders will be
entitled to receive will be adjusted, proportionately among all
PXRE common shareholders, upon completion of a reverse split of
PXRE shares immediately after the merger (subject to the
approval of PXREs shareholders), as described in the
accompanying joint proxy statement/prospectus. PXRE will not
issue fractional shares in connection with the merger or in
connection with the reverse share split. The value of any
fractional shares will be determined after completion of the
reverse share split and will be paid in cash. The reverse share
split would affect all of PXREs shareholders uniformly,
including the former shareholders of Argonaut entitled to
receive PXRE shares as merger consideration in the merger, and
will not affect any shareholders percentage ownership
interests in PXRE or proportionate voting power, except to the
extent that the reverse share split would otherwise result in a
shareholder owning a fractional share for which it will receive
cash in lieu of such fractional share. The merger will be tax
free to PXRE shareholders; however, PXRE shareholders will
recognize gain or loss on any cash received in lieu of
fractional shares they would be entitled to receive as a result
of the reverse share split. Argonaut shareholders will recognize
gain (but not loss) on the exchange of their shares of Argonaut
common stock for common shares of PXRE and will recognize gain
or loss on any cash received in lieu of fractional shares of
PXRE.
Upon completion of the merger, PXREs name will be changed
to Argo Group International Holdings, Ltd., which we
refer to as Argo Group.
PXRE common shares are listed and traded on the New York Stock
Exchange, which we refer to as the NYSE, under the trading
symbol PXT. We intend to apply to have the PXRE
common shares delisted from the NYSE and listed on the NASDAQ
Global Select Market, which we refer to as the NASDAQ, under the
trading symbol AGII conditioned on and subject to
the completion of the merger. Initially, a fifth character
D will be appended to the AGII symbol
for 20 trading days to reflect the reverse share split. Argonaut
common stock, which is currently listed and traded on the NASDAQ
under the trading symbol AGII, will be delisted upon
completion of the merger.
Upon completion of the merger, we estimate that PXREs
shareholders will own approximately 27% and Argonaut
shareholders will own approximately 73% of the then-outstanding
PXRE common shares.
Your vote is very important. We cannot complete the merger
unless the PXRE shareholders approve the issuance of PXRE common
shares and certain other proposals in connection with the merger
and the Argonaut shareholders adopt the merger agreement. The
completion of the merger is also subject to the satisfaction or
waiver of several other conditions to the merger, including
receiving approval from certain regulatory authorities. We are
each holding a shareholder meeting for our shareholders to vote
on these proposals. The places, dates and times of the
shareholder meetings are as follows:
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For PXRE shareholders:
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For Argonaut shareholders:
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July 25, 2007
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July 25, 2007
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10:30 a.m., local time
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10:30 a.m., local time
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PXRE House
110 Pitts Bay Road
Pembroke, HM 08
Bermuda
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Union Square First Floor
Conference Room
10101 Reunion Place
San Antonio, Texas 78216
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Whether or not you plan to attend your companys
shareholder meeting, please take the time to vote by following
the instructions on your proxy/voting instruction card.
We urge you to read this joint proxy statement/prospectus, and
the documents incorporated by reference into this joint proxy
statement/prospectus, carefully and in their entirety. In
particular, see Risk Factors beginning on
page 22.
We are very excited about the opportunities the proposed merger
brings to both PXRE and Argonaut shareholders, and we thank you
for your consideration and continued support.
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Jeffrey L. Radke
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Mark E. Watson III
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President & Chief
Executive Officer
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President & Chief
Executive Officer
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PXRE Group Ltd.
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Argonaut Group, Inc.
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the merger
or the securities to be issued in the merger, or passed upon the
adequacy or accuracy of this joint proxy statement/prospectus.
Any representation to the contrary is a criminal offense.
The Bermuda Monetary Authority and the Registrar of Companies
accept no responsibility for the financial soundness of any
proposal or for the correctness of any of the statements made or
opinions expressed in this joint proxy statement/prospectus.
This joint proxy statement/prospectus is dated June 8,
2007, and is first being mailed to shareholders on or about
June 14, 2007.
PXRE House
110 Pitts Bay Road
Pembroke HM 08
Bermuda
June 8, 2007
NOTICE OF
SPECIAL GENERAL MEETING OF
SHAREHOLDERS
TO BE HELD ON JULY 25,
2007
To the Shareholders of PXRE Group Ltd.:
The special general meeting of the shareholders of PXRE Group
Ltd., which we refer to as PXRE, will be held on Wednesday,
July 25, 2007 at PXRE House, 110 Pitts Bay Road,
Pembroke HM 08, Bermuda, at 10:30 a.m., local time,
unless adjourned to a later date. The special general meeting is
being held for the following purposes, all as described in the
accompanying joint proxy statement/prospectus:
Proposal in connection with the proposed merger:
1. To approve the issuance of common shares of PXRE
pursuant to the Agreement and Plan of Merger, dated as of
March 14, 2007 and amended and restated as of June 8,
2007, by and among PXRE, PXMS Inc., a direct, wholly owned
subsidiary of PXRE, and Argonaut Group, Inc., a copy of which is
attached as Annex A to the accompanying joint proxy
statement/prospectus;
Proposals conditioned upon and subject to the completion of
the merger:
2. To approve the reverse split of the common shares of
PXRE at a ratio of one share of PXRE for each ten shares of PXRE
held or entitled to be received in the merger;
3. To approve the change of name of PXRE Group
Ltd. to Argo Group International Holdings,
Ltd.;
4. To approve an increase in the authorized share capital
of PXRE from $380 million to $530 million;
5. To increase the maximum number of directors of PXRE from
11 directors to 13 directors (if the affirmative vote
of
662/3%
of the voting power of the outstanding shares is obtained) or to
12 directors;
6. To approve an amendment and restatement of PXREs
memorandum of association;
7. To approve an amendment and restatement of PXREs
bye-laws (some of which amendments require the affirmative vote
of
662/3%
of the voting power of the outstanding shares);
Adjournments of the Meeting; Other Action:
8. To approve adjournments of the PXRE special general
meeting to a later date, if necessary, to permit further
solicitation of proxies if there are not sufficient votes at the
time of the special general meeting to approve the above
proposals; and
9. To approve actions upon any other business that may
properly come before the special general meeting or any
reconvened meeting following an adjournment of the special
general meeting.
These items are described in the accompanying joint proxy
statement/prospectus, and we urge you to read it carefully.
On March 13, 2007, after careful consideration,
PXREs board of directors unanimously determined that the
merger is in the best interests of PXRE and its shareholders and
unanimously approved the merger agreement and the transactions
contemplated by the merger agreement, including the issuance of
PXRE common shares pursuant to the merger agreement. PXREs
board of directors unanimously recommends
that you vote FOR the issuance of PXRE common shares
pursuant to the merger agreement and each of the other proposals
listed above.
Pursuant to a general permission issued by the Bermuda Monetary
Authority in 2005, PXRE may issue its common shares to
non-residents without the prior permission of the Bermuda
Monetary Authority provided its shares are listed on an
appointed stock exchange which, by definition, includes the NYSE
and NASDAQ.
Your vote is very important. The increase of the
maximum number of directors of PXRE from 11 directors to
13 directors and certain other amendments to PXREs
bye-laws require the affirmative vote of
662/3%
of the voting power of the outstanding PXRE shares. The
remaining proposals are required to be approved by an ordinary
resolution, that is, a simple majority of the votes cast on the
Item. To ensure that your PXRE shares are represented at the
special general meeting, please complete, date, sign and return
the enclosed proxy/voting instruction card and mail it promptly
in the envelope provided. Shares represented at the special
general meeting by a properly executed and returned proxy/voting
instruction card will be voted at the special general meeting in
accordance with the instructions noted thereon, or, if no
instructions are noted, the proxy/voting instruction card will
be voted in favor of the proposals set forth above. Completing a
proxy/voting instruction card now will not prevent you from
being able to vote at the special general meeting by attending
in person and casting a vote but will help to secure a quorum
and avoid additional solicitation costs. Any proxy/voting
instruction card given may be revoked by delivery to us, at
least two (2) hours prior to the commencement of the
special general meeting, either by a written notice of such
revocation or a duly executed proxy/voting instruction card
bearing a later date at PXREs mailing address, P.O.
Box HM 1282, Hamilton HM 08, Bermuda, Attn: Secretary, or
by attending the special general meeting and voting in person.
All PXRE shareholders are cordially invited to attend this
special general meeting, although only those shareholders of
record at the close of regular trading on the NYSE on
June 4, 2007 will be entitled to receive notice of, and to
vote at, the PXRE special general meeting or any adjournment
thereof.
Your vote is very important. Whether or not you plan to be
present at the special general meeting, please complete, sign,
date and return the enclosed proxy/voting instruction card.
By Order of the Board of Directors,
David J. Doyle
Secretary
June 8, 2007
10101 Reunion Place, Suite 500
San Antonio, Texas 78216
NOTICE OF
SPECIAL MEETING OF
SHAREHOLDERS
TO BE HELD ON JULY 25,
2007
To the Shareholders of Argonaut Group, Inc.:
A special meeting of shareholders of Argonaut Group, Inc., which
we refer to as Argonaut, will be held on Wednesday,
July 25, 2007 at 10101 Reunion Place, San Antonio, Texas in
the Union Square First Floor Conference Room, at 10:30 a.m.,
local time, unless adjourned to a later date. The special
meeting is being called for the following purposes:
1. To consider and vote upon a proposal to approve the
Agreement and Plan of Merger, dated as of March 14, 2007,
and amended and restated as of June 8, 2007, by and among
PXRE Group Ltd., PXMS Inc., a direct, wholly owned subsidiary of
PXRE Group Ltd., and Argonaut, whereby PXMS Inc. will merge with
and into Argonaut, with Argonaut as the surviving company. A
copy of the merger agreement is included as Annex A
to the accompanying joint proxy statement/prospectus;
2. To approve adjournments of the special meeting to a
later date if necessary, to permit further solicitation of
proxies if there are not sufficient votes at the time of the
special meeting to approve the above proposals; and
3. To consider and take action upon any other business that
may properly come before the special meeting or any reconvened
meeting following an adjournment of the special meeting.
These items are described in the accompanying joint proxy
statement/prospectus and we urge you to read it carefully. Only
shareholders who owned shares of Argonaut common stock at the
close of business on June 4, 2007, the record date for the
special meeting, are entitled to notice of, and to vote at, the
special meeting and any adjournment of it. A list of such
shareholders will be open to examination by any shareholder at
the special meeting and for a period of ten (10) days prior
to the date of the special meeting during ordinary business
hours at the Argonaut Group, Inc. Corporate Offices, 10101
Reunion Place, Suite 500, San Antonio, Texas 78216.
On March 14, 2007, after careful consideration,
Argonauts board of directors unanimously determined that
the merger is advisable, fair to and in the best interests of
Argonaut and its shareholders and unanimously approved the
merger agreement and the proposed merger. Argonauts board
of directors unanimously recommends that you vote FOR each
of the proposals listed above, all of which are described in
detail in the accompanying joint proxy statement/prospectus.
Under Delaware law, appraisal rights will not be available to
Argonaut shareholders in connection with the merger.
Your vote is very important. The affirmative vote of the
holders of a majority of the outstanding shares of Argonaut
common stock is necessary to approve and adopt the merger
agreement. To ensure that your shares of Argonaut stock are
represented at the special meeting, please complete, date, sign
and return the enclosed proxy/voting instruction card and mail
it promptly in the envelope provided or vote your shares by
telephone or over the Internet as described in the accompanying
joint proxy statement/prospectus. Completing a proxy/voting
instruction card now will not prevent you from being able to
vote at the special meeting by attending in person and casting a
vote but will help to secure a quorum and avoid added
solicitation costs.
Argonauts shareholders may revoke their proxy/voting
instruction card in the manner described in the accompanying
joint proxy statement/prospectus before it has been voted at the
special meeting.
All Argonaut shareholders are cordially invited to attend this
special meeting, although only those shareholders of record at
the close of business on June 4, 2007 will be entitled to
receive notice of, and to vote at, the special meeting or any
adjournment thereof.
Your vote is very important. Whether or not you plan to be
present at the special meeting, please complete, sign, date and
return the enclosed proxy/voting instruction card or vote by
telephone or over the Internet as provided on the proxy/voting
instruction card.
By Order of the Board of Directors,
Craig S. Comeaux
Secretary
June 8, 2007
TABLE OF
CONTENTS
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1
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4
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4
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4
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4
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5
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5
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10
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10
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11
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No Dissenters/Appraisal
Rights
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12
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12
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12
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14
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14
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15
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17
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Selected Unaudited Pro Forma
Combined Per Share Data
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19
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Comparative Per Share Market Data
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21
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22
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22
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30
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48
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52
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56
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59
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60
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60
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61
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62
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62
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Voting Shares Held in Street
Name
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62
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Voting Requirements
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62
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63
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63
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64
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69
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74
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75
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75
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75
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90
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91
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100
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107
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107
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111
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ii
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142
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142
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143
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144
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144
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147
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iii
QUESTIONS
AND ANSWERS
ABOUT THE SHAREHOLDER MEETINGS AND THE MERGER
The following questions and answers briefly address some
commonly asked questions about the shareholder meetings and the
merger. They do not include all the information that may be
important to you. PXRE and Argonaut urge you to read carefully
this entire joint proxy statement/prospectus, including the
annexes and the other documents referenced in this joint proxy
statement/prospectus. Except where specifically noted, the
following information and all other information in this joint
proxy statement/prospectus do not take into account the reverse
share split described in the section entitled PXRE Special
General Meeting Proposals to be Considered at the
PXRE Special General Meeting Reverse Share
Split.
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Q:
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Why am I receiving this joint proxy
statement/prospectus?
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A:
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PXRE and Argonaut have agreed to enter into a merger transaction
whereby a subsidiary of PXRE would be merged with and into
Argonaut with Argonaut shareholders receiving PXRE common shares
in exchange for their common stock in connection with the
merger. The terms of the merger are set forth in the Agreement
and Plan of Merger, dated as of March 14, 2007 and amended
and restated as of June 8, 2007, which we refer to as the
merger agreement, that is described in this joint proxy
statement/prospectus. A copy of the merger agreement is attached
to this joint proxy statement/prospectus as
Annex A.
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To complete the merger, PXRE shareholders must vote to approve
the issuance of PXRE common shares and certain other proposals
in connection with the merger and Argonaut shareholders must
vote to adopt the merger agreement. PXRE will hold its special
general meeting, which we refer to as the special general
meeting, and Argonaut will hold a separate special meeting,
which we refer to as the special meeting, of their respective
shareholders to obtain these approvals. See the sections
entitled PXRE Special General Meeting and
Argonaut Special Meeting.
This joint proxy statement/prospectus, which you should read
carefully, contains important information about the merger, the
merger agreement and the shareholder meetings. The enclosed
voting materials allow you to vote your shares without attending
your companys shareholder meeting.
Your vote is very important. We encourage you to vote as soon
as possible.
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A:
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You may vote before your shareholder meeting in one of the
following ways:
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for Argonaut shareholders, use the phone number shown on your
proxy/voting instruction card;
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for Argonaut shareholders, visit the website shown on your
proxy/voting instruction card to vote over the Internet; or
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for PXRE shareholders and Argonaut shareholders, complete, sign,
date and return the enclosed proxy/voting instruction card in
the enclosed postage-paid envelope.
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Q:
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If my shares are held in street name by my
broker, will my broker automatically vote my shares for
me?
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A:
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No. Your broker does not have authority to vote on the
proposals in connection with the merger without instruction from
you. Your broker will vote your shares held by it in
street name only if you provide instructions to it
on how to vote with respect to these matters. You should follow
the directions your broker provides.
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Q:
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What if I do not vote my shares on the matters relating to
the merger?
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A:
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If you are a PXRE shareholder and you fail to respond with a
vote or instruct your broker how to vote on the proposal to
issue PXRE common shares in connection with the merger, which we
refer to as a broker non-vote, your vote will not be counted
towards determining whether the required number of votes on the
proposal have been voted in favor of the proposal. With respect
to those matters requiring a special
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1
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resolution of the PXRE shareholders (that is a resolution passed
by the affirmative vote of 66
2/3%
of the voting power of the outstanding PXRE shares entitled to
vote on the matter), if you respond and abstain from voting,
your abstention from voting will have the same effect as a vote
against such proposals. If you respond but do not indicate how
you want to vote on the proposal, your proxy/voting instruction
card will be counted as a vote in favor of the proposal.
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If you are an Argonaut shareholder and you fail to respond with
a vote or instruct your broker how to vote on the merger
proposal, it will have the same effect as a vote against the
proposal. If you respond and abstain from voting, your
proxy/voting instruction card will have the same effect as a
vote against the proposal. If you respond but do not indicate
how you want to vote on the proposal, your proxy/voting
instruction card will be counted as a vote in favor of the
proposal.
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Q:
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When is the merger expected to be completed?
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A:
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If the requisite approvals of the shareholders of PXRE and
Argonaut are obtained, we expect to complete the merger as soon
as practicable after the satisfaction of the other conditions to
the merger, including the receipt of required regulatory
approvals. There may be a substantial period of time between the
approval of the shareholders at the PXRE and Argonaut
shareholder meetings and the effectiveness of the merger. We
currently anticipate that the merger will be completed by
August 31, 2007.
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Q:
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Is the merger taxable?
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A:
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PXRE and Argonaut expect that the merger will qualify as a
reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986 (as
amended from time to time), which we refer to as the Code. Even
if the merger qualifies as such a reorganization, for United
States federal income tax purposes, holders of Argonaut common
stock whose shares of Argonaut common stock are exchanged in the
merger for common shares of PXRE will recognize gain (but not
loss) on such exchange in accordance with Section 367(a) of
the Code. Moreover, the holders of Argonaut common stock will
recognize gain or loss on any cash received in lieu of
fractional PXRE common shares. The merger will be tax free to
PXRE shareholders; however, PXRE shareholders will recognize
gain or loss on any cash received in lieu of fractional shares
they would be entitled to receive as a result of the reverse
share split.
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If, contrary to the expectations of PXRE and Argonaut, the
merger does not qualify as a reorganization within the meaning
of Section 368(a) of the Code, the U.S. federal income
tax consequences will be the same as described above with the
exception that holders of Argonaut common stock will recognize
gain or loss on the exchange of Argonaut common stock for PXRE
common shares pursuant to the merger (such gain or loss will be
the difference between the fair market value, at the time of the
exchange, of the PXRE common shares received and the adjusted
basis of the Argonaut common stock exchanged).
Tax matters are very complicated, and the tax consequences of
the merger to a particular shareholder will depend in part on
such shareholders circumstances. Argonaut and PXRE
shareholders are urged to read the discussion in the section
entitled Material Tax Considerations Tax
Consequences of the Merger beginning on page 119 of
this joint proxy statement/prospectus and to consult their tax
advisors as to the United States federal income tax consequences
of the merger, as well as the effect of state, local and
non-United
States tax laws.
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Q:
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Who can answer questions about the merger?
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A:
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If you have any questions about the merger or your shareholder
meeting, need assistance in voting your shares, or need
additional copies of this joint proxy statement/prospectus or
the enclosed proxy/voting instruction card:
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Both PXRE and Argonaut shareholders should contact:
Georgeson, Inc.
17 State Street
New York, New York 10004
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PXRE Shareholders:
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Argonaut Shareholders:
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(866)
577-4838
(toll-free)
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(866) 574-4071 (toll-free)
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2
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A:
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You should read this joint proxy statement/prospectus carefully,
including the annexes. If you own shares in your own name,
return your completed, signed and dated proxy/voting instruction
card by mail in the enclosed postage-paid envelope (or, for
Argonaut shareholders, vote by telephone or over the
Internet) as soon as possible so that your shares will be
represented and voted at your shareholder meeting. If your
shares are held in street name through a broker,
bank or other nominee, please follow the voting instructions
provided by your broker, bank or other nominee.
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Q:
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Should I send in my share certificates now?
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A:
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No. Shareholders should not send in any share
certificates now. After the merger is completed, the
exchange agent will send shareholders a letter of transmittal
explaining what they must do to exchange their share
certificates.
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Q:
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If I am going to attend my shareholder meeting, should I
return my proxy/voting instruction card?
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A:
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Yes. Returning your signed and dated proxy/voting instruction
card (or, for Argonaut shareholders, voting by telephone or over
the Internet) ensures that your shares will be
represented and voted at your shareholder meeting. See
PXRE Special General Meeting How to Vote
beginning on page 63 and Argonaut Special
Meeting How to Vote beginning on page 77.
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Q:
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What does it mean if I receive multiple proxies?
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A:
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If you receive multiple proxies, your shares may be registered
in more than one account, such as a brokerage account and a
401(k) account. It is important that you complete, sign, date
and return each proxy/voting instruction card you receive (or,
for Argonaut shareholders, vote by telephone or over the
Internet) as described in the section entitled The PXRE
Special General Meeting How to Vote for PXRE
shareholders and the section entitled The Argonaut Special
Meeting How to Vote for Argonaut shareholders.
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Q:
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Can I change my vote after I deliver my proxy/voting
instruction card?
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A:
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Yes. You may change your vote at any time before the vote takes
place at your shareholder meeting. To change your vote, you may
submit a new proxy/voting instruction card by mail (or, for
Argonaut shareholders, submit a new proxy/voting instruction
card by telephone or over the Internet). A PXRE shareholder of
record may also send a signed written notice delivered to
PXREs Corporate Secretary at least two (2) hours
prior to the commencement of the PXRE special general meeting
stating that
he/she would
like to revoke
his/her
proxy/voting instruction card and an Argonaut shareholder of
record may send a signed written notice to Argonauts
Corporate Secretary stating that
he/she would
like to revoke
his/her
proxy/voting instruction card. If your shares are held in a
street name account, you must contact your broker,
bank or other nominee to change your vote.
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You may also change your vote by attending your shareholder
meeting and voting in person. However, if you elect to vote in
person at the shareholder meeting and your shares are held by a
broker, bank or other nominee, you must bring to the meeting a
legal proxy from the broker, bank or other nominee authorizing
you to vote the shares.
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Q:
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Where can I find more information about PXRE and
Argonaut?
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A:
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You can find more information about PXRE and Argonaut from
various sources described under Where You Can Find More
Information beginning on page 183.
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3
SUMMARY
This summary highlights selected information contained in
this joint proxy statement/prospectus and may not include all
the information that is important to you. To understand fully
the proposed merger, and for a more detailed description of the
terms and conditions of the merger and certain other matters
being considered at your shareholder meeting, you should read
this entire joint proxy statement/prospectus and the documents
to which we have referred you. See Where You Can Find More
Information beginning on page 183. We have included page
references parenthetically in this summary to direct you to a
more detailed description of each topic presented in this
summary.
THE
COMPANIES
Information
about PXRE (See page 142)
PXRE is an insurance holding company organized in Bermuda. PXRE
historically provided reinsurance products and services to a
worldwide marketplace through its subsidiary operations located
in Bermuda, Europe and the United States. PXREs primary
focus historically was providing property catastrophe
reinsurance and retrocessional coverage. PXRE also provided
marine, aviation and aerospace products and services. In
February 2006, PXRE announced that it would be increasing its
estimates of the net pre-tax impact of Hurricanes Katrina, Rita
and Wilma on PXREs operating results for the year ended
December 31, 2005 and also first announced PXREs
intention to explore strategic alternatives due to the potential
negative impact on PXREs credit ratings resulting from the
hurricane losses. Following these announcements, PXREs
counterparty credit and financial strength ratings were
downgraded by the major rating agencies to a level that was
generally unacceptable to many of PXREs reinsurance
clients. These ratings downgrades have had a significant
negative impact on PXREs operating results and
profitability because they have impaired PXREs ability to
retain and renew PXREs existing reinsurance business. At
March 31, 2007, PXRE had consolidated assets of
approximately $1,253,300,000 and consolidated shareholders
equity of approximately $490,300,000. For more information on
PXRE and its business, see Where You Can Find More
Information beginning on page 183.
PXRE GROUP LTD.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
(441) 296-5858
www.pxre.com
Concurrently with the announcement of the merger, PXRE also
announced the formation of a new Bermuda based reinsurance
subsidiary, Peleus Reinsurance Ltd., which we refer to as Peleus
Re. Peleus Re will focus on underwriting medium to small
commercial property reinsurance risks on a pro rata and
risk excess basis, and property catastrophe reinsurance risk on
a controlled basis. It is also expected to provide reinsurance
of casualty risks. Following the merger, Peleus Re will provide
quota share reinsurance to Argonaut for its property and
casualty risks.
Information
about Argonaut (See page 147)
Argonaut, a Delaware corporation, is, through its subsidiaries,
a national underwriter of specialty insurance products in niche
areas of the property and casualty market. Argonaut provides a
variety of specialty products in all 50 states on both an
admitted and non-admitted basis, underwriting multi-line
coverages in three ongoing segments: Excess and Surplus Lines,
Select Markets and Public Entity. Argonaut is headquartered in
San Antonio, Texas. At March 31, 2007, Argonaut had
consolidated assets of approximately $3,818,600,000 and
consolidated stockholders equity of approximately
$882,100,000. For more information on Argonaut and its business,
see Where You Can Find More Information beginning on
page 183.
ARGONAUT GROUP, INC.
10101 Reunion Place, Suite 500
San Antonio, TX 78216
(210) 321-8500
www.argonautgroup.com
4
Information
about PXMS Inc.
PXMS Inc., which we refer to as PXMS, is a direct, wholly owned
subsidiary of PXRE, which was formed exclusively for the purpose
of completing the merger.
Information
about the Resulting Company
Upon completion of the merger, the resulting company, which we
refer to as Argo Group, will operate as a combined business
including underwriting insurance products in Argonauts
three ongoing business segments: Excess and Surplus Lines,
Select Markets and Public Entity, as well as in a fourth
business segment, Reinsurance, through Peleus Re.
THE
MERGER AND THE MERGER AGREEMENT
The
Merger (See page 80)
On March 14, 2007, PXRE, PXMS and Argonaut entered into the
merger agreement which was subsequently amended and restated as
of June 8, 2007 and which provides for the merger of PXMS
with and into Argonaut, with Argonaut surviving as a direct,
wholly owned subsidiary of PXRE. At the effective time of the
merger, Argonaut shareholders will be entitled to receive newly
issued PXRE common shares for their shares of Argonaut common
stock. The number of PXRE common shares that Argonaut
shareholders will receive will be based on an exchange ratio.
The exchange ratio as specified in the merger agreement provides
that Argonaut shareholders will be entitled to receive 6.4672
PXRE common shares in exchange for each share of Argonaut common
stock they hold, subject to adjustment in the event that
(i) Argonauts special dividend to its shareholders is
less than $60 million, or (ii) Argonaut pays certain
other dividends, incurs losses on sales of assets
and/or
engages in dilutive sales or purchases of Argonaut shares. The
number of PXRE common shares that Argonaut shareholders will be
entitled to receive will be adjusted, proportionately among all
PXRE common shareholders, upon completion of a reverse share
split of PXRE shares immediately after the merger (subject to
the approval of PXREs shareholders), as described below.
PXRE will not issue fractional shares in connection with the
merger or in connection with the reverse share split. The value
of any fractional shares will be determined after completion of
the reverse share split and will be paid in cash. The reverse
share split would affect all of PXREs shareholders
uniformly, including the former shareholders of Argonaut
entitled to receive PXRE shares as merger consideration in the
merger, and will not affect any shareholders percentage
ownership interests in PXRE or proportionate voting power,
except to the extent that the reverse share split would
otherwise result in a shareholder owning a fractional share for
which it will receive cash in lieu of such fractional share.
The exchange ratio will not be adjusted based on changes in
market price, although the exchange ratio is subject to
adjustment to prevent dilution under certain circumstances.
Because we cannot predict the market price of PXRE common shares
at the effective time of the transactions, we cannot predict the
value of the PXRE common shares Argonaut shareholders will
receive. The value of the consideration received for each share
of Argonaut common stock at that time, based on reported market
prices, may be significantly higher or lower than the value of
the consideration on the date of this joint proxy
statement/prospectus.
Upon completion of the merger, we estimate that PXREs
shareholders will own approximately 27% and Argonaut
shareholders will own approximately 73% of the then-outstanding
PXRE common shares.
Prior to or following the closing of the merger, the parties
intend to review the capital structure of the resulting company
and consider financing alternatives. As a result of such
review, Argonaut may seek to incur additional indebtedness
either through the issuance of public or private debt or through
bank or other financing. The funds raised by the incurrence of
such additional indebtedness may be used to repay existing
indebtedness of the parties, including amounts borrowed under
Argonauts credit facility to fund the special dividend,
PXREs outstanding trust preferred securities and
Argonauts outstanding trust preferred securities, or for
general corporate purposes of the resulting company, including
additions to working capital, capital expenditures, investments
in subsidiaries or acquisitions.
5
Upon completion of the merger, the parties intend to have the
PXRE common shares delisted from the New York Stock Exchange,
which we refer to as the NYSE, and listed on the NASDAQ Global
Select Market, which we refer to as the NASDAQ, under the
trading symbol AGII. Initially, a fifth character
D will be appended to the AGII symbol
for 20 trading days to reflect the reverse share split.
PXREs name will be changed to Argo Group
International Holdings, Ltd. The common stock of Argonaut
will be delisted from the NASDAQ and deregistered under the
Securities Exchange Act of 1934, as amended, which we refer to
as the Exchange Act.
In addition to the approval by the PXRE shareholders of the
issuance of common shares of PXRE in the merger and the approval
by the Argonaut shareholders of the merger agreement, there are
a number of conditions to the completion of the merger, several
of which require shareholder approval. These are described below
under Shareholder Meetings, Actions to be Taken and
Recommendations of the Boards of Directors. We currently
expect to complete the merger by August 31, 2007, subject
to the receipt of required shareholder and regulatory approvals
and satisfaction or, where permitted, waiver of the other
conditions to completion of the merger.
A copy of the merger agreement is attached as
Annex A to this joint proxy statement/prospectus.
PXRE and Argonaut encourage you to read the entire merger
agreement carefully because it is the principal document
governing the merger.
The initial proposal regarding a merger with Argonaut
contemplated the departure of PXREs chief executive
officer, who is also a member of the PXRE board of directors,
and the conversion of PXREs outstanding convertible
preferred shares, the holders of which nominated three of the
members of the PXRE board of directors. In order to avoid
potential conflicts with these directors, a special committee of
independent directors of the PXREs board of directors,
which we refer to as the special committee, was formed upon
PXREs receipt of the initial merger proposal in late
November 2006 to negotiate the merger agreement with Argonaut, a
separation agreement with PXREs chief executive officer,
and a voting and conversion agreement, which we refer to as the
voting agreement, with the PXRE preferred shareholders, as
described below.
The
Voting Agreement (See page 140)
In April 2002, PXRE sold convertible preferred shares to Capital
Z Partners, Ltd. and affiliates, Reservoir Capital Management
L.L.C. and affiliates and RER Reinsurance Holdings, L.P., which
we collectively refer to as the PXRE preferred shareholders. The
PXRE preferred shareholders also hold PXRE convertible common
shares and PXRE common shares. The PXRE preferred shareholders
have a right to nominate four directors for election to the PXRE
board of directors. Currently, there are three directors serving
on the PXRE board of directors who were so nominated: Bradley E.
Cooper and Jonathan Kelly, who are partners of Capital Z
Partners, Ltd., and Craig A. Huff, who is President and
co-founder of Reservoir Capital Group.
The terms of the PXRE convertible preferred shares provide the
PXRE preferred shareholders with the ability to veto certain
corporate actions by PXRE, including the merger with Argonaut.
In addition, in the course of the merger negotiations between
PXRE and Argonaut, Argonaut requested that PXRE have only one
class of equity securities outstanding following the merger. In
order to obtain the consent of the PXRE preferred shareholders
to the merger and to provide for the conversion of the
convertible preferred shares and convertible common shares into
PXRE common shares, PXRE and Argonaut entered into the voting
agreement with the PXRE preferred shareholders pursuant to which
the PXRE preferred shareholders consented to the merger and the
convertible preferred shares will be converted into common
shares of PXRE immediately prior to the merger at a reduced
conversion price of $6.24. The reduction of the conversion price
to $6.24 per share will result in dilution to PXRE common
shareholders of approximately 5.0% more than what would have
resulted from the conversion of the convertible preferred shares
at $11.18 per share, the conversion price which otherwise would
have been applicable as of March 31, 2007.
The voting agreement will terminate on the earliest of
(a) the effective time of the merger, (b) the
termination of the merger agreement and (c) August 31,
2007.
Mr. Cooper, a PXRE director who is a partner of Capital Z
Partners, Ltd., one of the PXRE preferred shareholders, is
expected to continue as a director of the resulting company
after the merger.
6
A copy of the voting agreement is attached as
Annex D to this joint proxy statement/prospectus.
PXRE and Argonaut encourage you to read the voting agreement
carefully.
Treatment
of Options and Other Equity-Based Awards
When we complete the merger, all outstanding options to purchase
PXRE common shares held by existing option holders will become
exercisable and will continue in full force and effect. All
outstanding restricted shares will vest and continue outstanding
except for 137,263 restricted shares granted in 2007 to
non-executive officers, which vest over four years.
With the exception of the possible acceleration of vesting of
certain outstanding equity awards held by the five executive
officers named in Argonauts annual proxy statement dated
March 30, 2007 and one other executive officer of Argonaut,
when we complete the merger, all equity awards outstanding as of
the effective time of the merger will be converted into
equivalent equity awards of Argo Group. Each outstanding vested
and unvested option to acquire shares of Argonaut common stock
will be automatically converted into an option to acquire a
number of whole common shares of PXRE equal to the product of
the number of shares of Argonaut common stock that were subject
to the original Argonaut stock option multiplied by the exchange
ratio (rounded down to the nearest whole share) at a per share
exercise price of the original Argonaut stock option divided by
the exchange ratio (rounded up to the nearest whole cent). Upon
completion of the reverse share split, proportionate adjustments
will be made to the per share exercise price and the number of
shares issued upon the exercise of all outstanding options
entitling the holders to purchase Argo Group common shares,
which will result in approximately the same aggregate amount
being required to be paid for such options upon exercise
immediately preceding the reverse share split. The unvested
number of shares in a restricted stock grant will be converted
into a number of whole common shares of an Argo Group restricted
share grant equal to the product of the number of unvested
shares of Argonaut stock that were subject to the original
Argonaut restricted stock grant multiplied by the exchange ratio
(rounded down to the nearest whole share). The resulting number
of shares will then be divided by ten to reflect the reverse
share split and rounded down to the nearest whole share to
eliminate fractional shares. No fractional shares will be issued
and no cash payment for fractional shares will be made to
holders of unvested restricted stock grants. Each converted
Argonaut stock option will otherwise continue unaltered and have
substantially the same terms and conditions as were in effect
immediately prior to the completion of the transactions,
including, as applicable, vesting and term of exercise, and no
other change will be made to each unvested restricted stock
grant, and the terms and conditions in effect immediately before
the completion of the transactions, including vesting, will be
unchanged, except in each case as described in The
Merger Effect of the Merger; Consideration to be
Received in the Merger; Treatment of Options and Other
Equity-Based Awards beginning on page 80.
The reverse share split will be achieved under Bermuda law by
(i) the consolidation and division of PXREs shares
into a larger par value, (ii) the cancellation of the
excess par value in the amount of $9.00 per share which was
created by step (i) above, and (iii) the
re-characterization of the cancelled par value as contributed
surplus.
United
States Federal Income Tax Consequences of the Merger to PXRE and
Argonaut Common Shareholders (See page 121)
PXRE and Argonaut expect that the merger will qualify as a
reorganization within the meaning of
Section 368(a) of the Code. Even if the merger qualifies as
such a reorganization, for United States Federal income tax
purposes, holders of Argonaut common stock whose shares of
Argonaut common stock are exchanged in the merger for shares of
PXRE common shares will recognize gain (but not loss) on such
exchange in accordance with Section 367(a) of the Code.
Moreover, the holders of Argonaut common stock will recognize
gain or loss on any cash received in lieu of fractional PXRE
common shares. The merger will be tax free to PXRE shareholders;
however, PXRE shareholders will recognize gain or loss on any
cash received in lieu of fractional shares they would be
entitled to receive as a result of the reverse share split.
If, contrary to the expectations of PXRE and Argonaut, the
merger does not qualify as a reorganization within the meaning
of Section 368(a) of the Code, the United States federal
income tax consequences will be the same as described above with
the exception that holders of Argonaut common stock will
recognize gain or loss on the exchange of Argonaut common stock
for PXRE common shares pursuant to the merger (such gain or loss
will be the
7
difference between the fair market value, at the time of the
exchange, of the PXRE common shares received and the adjusted
basis of the Argonaut common stock exchanged).
Argonaut intends to treat the special cash dividend to be paid
to Argonaut common shareholders as a distribution with respect
to Argonaut common stock, and not as consideration in connection
with the merger.
Tax matters are very complicated, and the tax consequences of
the merger to a particular shareholder will depend in part on
such shareholders circumstances. Argonaut and PXRE
shareholders are urged to read the discussion in the section
entitled Material Tax Considerations Tax
Consequences of the Merger beginning on page 119 of
this joint proxy statement/prospectus and to consult their tax
advisors as to the United States federal income tax consequences
to them of the merger, as well as the effect of state, local and
non-United
States tax laws.
Shareholder
Meetings, Actions to be Taken and Recommendations of the Boards
of Directors
PXRE
(See page 60)
The PXRE special general meeting will be held at
10:30 a.m., local time, on Wednesday, July 25, 2007,
at PXRE House 110 Pitts Bay Road Pembroke HM 08 Bermuda. At
the PXRE special general meeting, shareholders of PXRE are being
asked to consider and vote on the following proposals, which, if
approved by the shareholders, would be effective only upon
completion of the merger:
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to approve the issuance of common shares of PXRE pursuant to the
merger agreement;
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to approve a reverse split of the common shares of PXRE, at a
ratio of one share of PXRE for each ten shares of PXRE held or
entitled to be received in the merger;
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to approve the change of name of PXRE Group Ltd. to
Argo Group International Holdings, Ltd.;
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to approve an amendment to PXREs bye-laws, to increase the
maximum number of directors that may constitute the entire board
of directors of PXRE from 11 to 13 directors (if the
affirmative vote of
662/3%
of the voting power of the outstanding shares is obtained) or to
12 directors;
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to approve an increase in the authorized share capital of PXRE
from $380 million to $530 million;
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to approve an amendment and restatement of PXREs
memorandum of association; and
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to approve an amendment and restatement of PXREs bye-laws
(some of which amendments require the affirmative vote of
662/3%
of the voting power of the outstanding shares).
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Other than as specified above, the foregoing proposals are
required to be approved by an ordinary resolution, that is, a
simple majority of the votes cast on the Item. See PXRE
Special General Meeting Proposals to be Considered
at the PXRE Special Meeting beginning on page 64.
THE MERGER WILL NOT BE COMPLETED UNLESS PXRE SHAREHOLDERS
APPROVE THE ISSUANCE OF COMMON SHARES OF PXRE PURSUANT TO
THE MERGER AGREEMENT. IN ADDITION, THE MERGER WILL NOT BE
COMPLETED UNLESS THE REVERSE SPLIT OF THE COMMON SHARES OF
PXRE AND THE CHANGE OF PXRES NAME TO ARGO GROUP
INTERNATIONAL HOLDINGS, LTD., ARE APPROVED BY PXRE
SHAREHOLDERS OR ARE WAIVED BY ARGONAUT.
After careful consideration, the PXRE board of directors on
March 13, 2007, acting upon the unanimous recommendation of
the special committee, unanimously approved the merger agreement
and the transactions contemplated thereby, including each of the
foregoing proposals. For the factors considered by the PXRE
board of directors in reaching its decision to approve the
merger agreement and the transactions contemplated thereby,
including each of the foregoing proposals, see the section
entitled The Merger PXREs Reasons for
the Merger and Recommendation of PXREs Board of
Directors beginning on page 86. The PXRE board of
directors believes that the merger is advisable and in the best
interests of PXRE and its shareholders, and unanimously
recommends that the PXRE shareholders vote FOR each of the
foregoing proposals.
8
In addition, PXRE shareholders are being asked to vote upon the
following proposals at the special general meeting:
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to approve any proposal to adjourn the PXRE special general
meeting to a later date, if necessary, to permit further
solicitation of proxies if there are not sufficient votes at the
time of the special general meeting to approve the above
proposals; and
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to approve actions upon any other business that may properly
come before the special general meeting or any reconvened
meeting following an adjournment of the special general meeting.
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The PXRE board of directors unanimously recommends that the
PXRE shareholders vote FOR each of the foregoing
proposals.
Argonaut
(See page 75)
The Argonaut special meeting will be held on Wednesday,
July 25, 2007, at 10:30 a.m., local time, at 10101
Reunion Place, San Antonio, Texas in the Union Square First
Floor Conference Room. At the Argonaut special meeting, holders
of Argonaut common stock are being asked to consider and vote on
the following proposals:
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to approve the merger agreement;
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to approve any proposal to adjourn the Argonaut special meeting
to a later date, if necessary, to permit further solicitation of
proxies if there are not sufficient votes at the time of
Argonauts special meeting to approve the above proposals;
and
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to approve actions upon any other business that may properly
come before the special meeting or any reconvened meeting
following an adjournment of the special meeting.
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The affirmative vote of the holders of a majority of the
outstanding shares of Argonaut common stock is necessary to
approve and adopt the merger agreement.
THE MERGER WILL NOT BE COMPLETED UNLESS ARGONAUT SHAREHOLDERS
APPROVE THE MERGER AGREEMENT.
After careful consideration, the Argonaut board of directors, on
March 14, 2007, unanimously approved the merger agreement.
For the factors considered by the Argonaut board of directors in
reaching its decision to approve the merger agreement, see the
section entitled The Merger Argonauts
Reasons for the Merger and Recommendation of the Merger by the
Argonaut Board of Directors beginning on page 89.
Argonauts board of directors believes that the merger
is advisable, fair to and in the best interests of Argonaut and
its shareholders, and unanimously recommends that Argonaut
shareholders vote FOR the foregoing proposals.
Opinion
of PXREs Financial Advisor (See page 91)
Keefe, Bruyette & Woods, Inc., which we refer to as
KBW, acted as the financial advisor to the special committee in
connection with the merger. On March 12, 2007, KBW
delivered its oral opinion to the special committee, which was
subsequently confirmed by delivery of a written opinion, dated
March 12, 2007, that, as of that date and based upon and
subject to the factors and assumptions set forth in the written
opinion, the consideration paid in the merger, after giving
effect to the transactions contemplated by the voting agreement
with the PXRE preferred and convertible common shareholders was
fair from a financial point of view to the holders of the PXRE
common shares (other than the PXRE common shareholders party to
the voting agreement). The full text of KBWs written
opinion, dated March 12, 2007, which sets forth assumptions
made, procedures followed, matters considered and limitations on
the review undertaken in connection with its opinion, is
attached to this joint proxy statement/prospectus as
Annex E. A summary of KBWs opinion is set
forth in this joint proxy statement/prospectus and is qualified
by reference to the full text of its opinion, which we urge you
to read in its entirety. KBW provided its opinion for the
information and assistance of the special committee in
connection with its consideration of the merger. The KBW opinion
is not a recommendation as to how PXRE shareholders should vote
in connection with the merger or the merger agreement.
9
Opinion
of Argonauts Financial Advisor (See
page 100)
Bear, Stearns & Co. Inc., which we refer to as Bear
Stearns, acted as the financial advisor to Argonaut in
connection with the merger. On March 14, 2007, Bear Stearns
delivered its oral opinion to the board of directors of
Argonaut, which was subsequently confirmed in writing, that as
of March 14, 2007, and based upon and subject to the
assumptions, qualifications and limitations set forth in the
written opinion, the exchange ratio was fair, from a financial
point of view, to the shareholders of Argonaut. The full text of
Bear Stearns written opinion, dated March 14, 2007,
which sets forth assumptions made, procedures followed, matters
considered and limitations on the review undertaken in
connection with its opinion, is attached to this joint proxy
statement/prospectus as Annex F. A
summary of Bear Stearns opinion is set forth in this joint
proxy statement/prospectus and is qualified by reference to the
full text of its opinion, which we urge you to read in its
entirety. Bear Stearns provided its opinion for the information
and assistance of Argonauts board of directors in
connection with its consideration of the merger. Bear
Stearns opinion is not a recommendation as to how Argonaut
shareholders should vote in connection with the merger or the
merger agreement.
Interests
of PXRE Directors and Executive Officers in the Merger (See
page 107)
When considering the recommendations by the PXRE board of
directors, you should be aware that a number of PXRE executive
officers and directors have interests in the merger that are
different from those of other PXRE shareholders. These interests
include:
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affiliations with the PXRE preferred shareholders, who are
parties to and beneficiaries of the voting agreement;
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severance payments under a separation agreement between PXRE and
PXREs chief executive officer, upon completion of the
merger;
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payments under employment contracts which may be triggered if an
executive officers employment terminates under certain
circumstances following the merger;
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vesting of unvested options and restricted shares under
PXREs 2002 Officer Incentive Plan and Director Stock Plan;
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continuation of the terms of three (or four if the PXRE
shareholder proposal to increase the size of the board of
directors to 13 directors is approved) of the members of
PXREs board of directors on the PXRE board of directors
following the merger; and
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continuing as executive or senior officers of PXRE after the
transaction.
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As a result of these interests, these directors and executive
officers may be more likely to support and to vote to approve
the merger agreement and the transactions contemplated thereby
than if they did not have these interests. Shareholders should
consider whether these interests may have influenced those
directors and executive officers to support or recommend
approval of the merger. As of the close of regular trading on
the NYSE on the record date for the PXRE special general
meeting, PXREs directors and executive officers and their
affiliates were entitled to vote approximately 341,000 common
shares, 8,855,347 convertible common shares and 5,813.20
convertible preferred shares of PXRE at the PXRE special general
meeting, which represented less than one percent of the
PXRE common shares and 100 percent of each of the PXRE
convertible common shares and PXRE convertible preferred shares,
outstanding and entitled to vote at the meeting.
Interests
of Argonauts Directors and Executive Officers in the
Merger (See page 111)
When considering the recommendations by the Argonaut board of
directors, you should be aware that a number of Argonaut
executive officers and directors have interests in the merger
that are different from those of other Argonaut shareholders.
These interests include:
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continuing as executive or senior officers of Argonaut or
becoming executive or senior officers of PXRE after the
transaction (subject to receipt of Bermuda work permits as
described in Risk Factors Risks
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Related to the Resulting Companys Operations After the
Completion of the Merger Risks Related to
Regulation beginning on page 45);
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payments under the Argonaut executive severance plan which may
be triggered if an executive officers employment
terminates under certain circumstances following the merger;
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appointment of all nine of the Argonaut directors to the PXRE
board of directors following the merger; and
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possible acceleration of the vesting of outstanding equity
awards held by certain executive officers of Argonaut, as
described in The Merger Effect of the Merger;
Consideration to be Received in the Merger; Treatment of Options
and Other Equity-Based Awards beginning on page 80.
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In addition to her position as Senior Vice President, Business
Development at Argonaut, Barbara Bufkin has been appointed
President of Peleus Re.
As a result of these interests, these directors and executive
officers may be more likely to support and to vote to approve
the merger agreement and the transactions contemplated thereby
than if they did not have these interests. Shareholders should
consider whether these interests may have influenced those
directors and executive officers to support or recommend
approval of the merger. As of the close of business on the
record date for the Argonaut special meeting, Argonauts
directors and executive officers and their affiliates were
entitled to vote 3.7 percent of the then-outstanding shares
of Argonaut common stock.
Directors
and Executive Officers Following the Merger (See
page 112)
PXREs board of directors is currently comprised of nine
members and has two vacant seats. PXREs bye-laws currently
set the size of PXREs board of directors at not less than
three or more than 12 members. Increasing the size of the board
above its current size of 11 directors requires the
approval of PXREs shareholders. PXRE has agreed to use
commercially reasonable efforts to cause the board of directors
of the resulting company to consist of 13 directors
following the merger. Increasing the size of the board to
13 directors requires an amendment to PXREs bye-laws
approved by
662/3%
of the voting power of the outstanding PXRE shares. Increasing
the size of the board to 12 directors requires a simple
majority of the votes cast. If PXRE receives the affirmative
vote of
662/3%
of the voting power of the outstanding PXRE shares to increase
the size of the board to 13 directors, the
13 directors immediately following the merger will consist
of Argonauts nine current directors and four of
PXREs current directors. A chairman will be elected from
the group of 13 directors. If PXRE does not receive the
affirmative vote of
662/3%
of the voting power of the outstanding PXRE shares to increase
the size of the board to 13 directors, but does receive the
affirmative vote of a simple majority of the votes cast
approving an increase of the size of the board to
12 directors, the board immediately following the merger
will consist of Argonauts nine current directors and three
of PXREs current directors. A chairman would be elected
from the group of 12 directors.
Jeffrey Radke, Wendy Luscombe, Gerald L. Radke, Craig A. Huff
and Jonathan Kelly are expected to resign as members of the PXRE
board of directors immediately following the merger. F. Sedgwick
Browne, Mural R. Josephson and Bradley E. Cooper are expected to
continue as members of the PXRE board of directors immediately
following the merger if the board is increased to 12 members.
Philip R. McLoughlin is expected to continue as a member of the
PXRE board of directors immediately following the merger if the
board is increased to 13 members, and otherwise he is expected
to resign immediately following the merger. If, for any reason,
any of the PXRE directors presently expected to continue as a
member of the PXRE board is not able or willing to serve as a
director following the merger (a situation which is not
presently contemplated), one of the resigning directors would
instead continue to serve as a director immediately following
the merger. See PXREs Board of Directors and
Management Following the Merger beginning on page 112
for information regarding the directors and executive officers
of PXRE expected to continue in such capacities following the
merger.
Upon completion of the merger, Mark E. Watson III,
currently President and Chief Executive Officer of Argonaut, is
expected to become the President and Chief Executive Officer of
the resulting company. Robert P. Myron, currently Executive Vice
President, Chief Financial Officer and Treasurer of PXRE, is
expected to continue in those positions with the resulting
company. Jeffrey L. Radke, currently Chief Executive Officer and
President and a director of PXRE, will leave those positions
pursuant to a letter agreement entered into between PXRE and
Mr. Radke. See The Merger Interests of
PXRE Directors and Executive Officers in the Merger
11
Arrangements with PXREs President and Chief Executive
Officer beginning on page 108 for information
regarding the letter agreement.
No
Dissenters/Appraisal Rights (See page 114)
No holders of record of PXRE or Argonaut capital stock will be
entitled to dissenters or appraisal rights in connection
with the merger. See Risk Factors Risks
Related to the Merger Argonaut may be required to
offer appraisal rights to its shareholders in connection with
the merger, which may require the renegotiation of the merger
agreement and the postponement of the Argonaut special meeting,
possibly causing a delay in the completion of the merger. More
than a minimal amount of cash payments in respect of the
exercise of appraisal rights by Argonaut shareholders could have
a material adverse effect on the financial condition of the
resulting company beginning on page 24.
Regulatory
Approvals (See page 115)
State insurance laws generally require that, prior to the
acquisition of an insurance company, the acquiring party must
obtain approval from the insurance commissioner of the insurance
companys state of domicile or obtain an exemption from
such insurance commissioner from the filing and approval
requirements. Accordingly, the necessary applications (or
exemption requests) have been made with the insurance
commissioners of Illinois, Louisiana, Ohio, Pennsylvania and
Virginia, the states of domicile of Argonauts
U.S. insurance company subsidiaries, and Connecticut, the
state of domicile of PXREs U.S. insurance subsidiary.
The merger is subject to U.S. antitrust laws. PXRE and
Argonaut have separately filed notifications under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, which we
refer to as the HSR Act, with both the Antitrust Division of the
Department of Justice and the Federal Trade Commission, which we
refer to as the DOJ and the FTC, respectively. Both parties
filed notifications on April 5, 2007 and the waiting period
for those filings expired on April 17, 2007. The DOJ or the
FTC, as well as a state attorney general or private person, may
challenge the merger at any time before or after its completion.
We currently expect to complete the merger by August 31,
2007, subject to the receipt of required shareholder and
regulatory approvals and satisfaction or, where permitted,
waiver of the other conditions to completion of the merger.
Principal
Conditions to Completion of the Merger (See
page 137)
The obligations of PXRE and Argonaut to complete the
transactions are subject to the satisfaction or, where
permitted, waiver of the conditions specified in the merger
agreement, including the following:
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the approval of PXREs issuance of common shares in the
merger by the PXRE shareholders;
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the approval of the merger agreement by the Argonaut
shareholders;
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the termination or expiration of the applicable waiting period
under the HSR Act;
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the receipt of other requisite governmental approvals or
consents required to complete the transactions contemplated by
the merger agreement;
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no temporary restraining order, injunction or other legal
restraint preventing any of the transactions;
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the representations and warranties of the other party being true
and correct, subject to the material adverse effect standard
provided in the merger agreement;
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no event having occurred that, individually or in the aggregate,
would reasonably be expected to have any material adverse
effect, as defined in the merger agreement, with respect to the
other party;
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the other party having complied in all material respects with
its obligations required to be complied with by it under the
merger agreement;
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the receipt of an officers certificate from executive
officers of the other party stating that the three preceding
conditions have been satisfied;
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12
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the receipt of legal opinions addressing certain of the tax
consequences of the proposed transactions; and
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the receipt of a legal opinion addressing the votes or consents
of shareholders necessary to complete the transactions under
Bermuda law.
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In addition, Argonauts obligation to complete the
transactions is subject to the satisfaction of the following
additional conditions:
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the voting agreement entered into by the PXRE preferred
shareholders and PXRE convertible common shareholders being in
full force and effect without having been amended, modified or
supplemented without the consent of all of the parties thereto;
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the satisfaction of all conditions precedent to the reverse
split of the common shares of PXRE;
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the satisfaction of all conditions precedent to the change of
name of PXRE Group Ltd. to Argo Group
International Holdings, Ltd.;
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neither PXRE nor Argonaut receiving notice from either A.M. Best
Company, which we refer to as A.M. Best, or
Standard & Poors, a Division of the McGraw-Hill
Companies, Inc., which we refer to as S&P, that any rating
assigned to PXRE or Argonaut is subject to being downgraded or
has been downgraded; and
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the conversion of all convertible preferred shares of PXRE into
common shares of PXRE.
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Termination
of the Merger Agreement (See page 137)
PXRE and Argonaut can jointly agree to terminate the merger
agreement at any given time. Either company may also terminate
the merger agreement if the merger is not completed by
August 31, 2007 or if one of the other termination
conditions in the merger agreement occurs.
Expenses
and Termination Fees (See page 138)
Whether or not we complete the proposed transactions, PXRE and
Argonaut will each bear its own expenses in connection with the
transactions, except that PXRE and Argonaut will each pay
one-half of the costs and expenses incurred in connection with
the filing and printing of this joint proxy statement/prospectus
and the required filings under the HSR Act. If the merger
agreement is terminated under specified circumstances, PXRE may
be obligated to pay a termination fee of $20 million to
Argonaut or Argonaut may be obligated to pay a termination fee
of $40 million to PXRE.
Accounting
Treatment
The merger will be accounted for as a business combination using
the purchase method of accounting. Argonaut will be the acquirer
for financial accounting purposes.
Argo
Group Annual General Meeting Following the Merger (See
page 117)
Following the merger and the completion of the related
transactions described in this joint proxy statement/prospectus,
shareholders will receive notice of the initial annual general
meeting of the resulting company, Argo Group. At this initial
annual general meeting, shareholders will be asked to consider
and vote on:
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the election of the Class III directors of the resulting
company;
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the replacement of certain PXRE and Argonaut benefit plans with
new benefit plans of the resulting company; and
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the appointment of the independent auditors for the resulting
company.
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13
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
Selected
Historical Consolidated Financial Data of PXRE
The following selected historical financial data for the three
months ended March 31, 2007 and 2006 has been derived from
PXREs unaudited interim consolidated financial statements.
In the opinion of PXREs management, the unaudited interim
consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for
the fair presentation of unaudited interim consolidated
financial statements. Results for the interim periods are not
necessarily indicative of the results to be expected for the
full year. The following selected historical financial data for
each of the years in the five-year period ended
December 31, 2006 has been derived from PXREs audited
consolidated financial statements as of December 31, 2006,
2005, 2004, 2003 and 2002.
PXREs historical financial data may not be indicative of
the operating results or financial position to be expected in
the future. This information is only a summary. The selected
financial data should be read together with PXREs
unaudited interim consolidated financial statements and related
notes to those interim financial statements and the
Managements Discussion and Analysis of Financial
Condition and Results of Operations, section included in
PXREs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007 and PXREs
audited consolidated financial statements and the related notes
to those financial statements and the Managements
Discussion and Analysis of Financial Condition and Results of
Operations, section included in PXREs Annual Report
on
Form 10-K
for the year ended December 31, 2006 which have been filed
with the United States Securities and Exchange Commission, which
we refer to as the SEC, and are incorporated by reference into
this joint proxy statement/prospectus.
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For the Three Months Ended March 31,
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For the Year Ended December 31,
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2007
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2006
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2006
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2005
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2004
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2003
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2002
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(Unaudited)
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(In millions except per share amounts)
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Statement of Operations
Data
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Gross written premiums
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$
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(2.1
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$
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121.4
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$
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138.8
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$
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542.3
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$
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346.0
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$
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339.1
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$
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366.8
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Net written premiums
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(16.5
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78.9
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53.5
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407.0
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309.8
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278.4
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294.5
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Earned premiums
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(5.2
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77.1
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84.5
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388.3
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308.1
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320.9
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269.4
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Net investment income
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13.7
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17.9
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60.7
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45.3
|
|
|
|
26.2
|
|
|
|
26.9
|
|
|
|
24.9
|
|
Fee income
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.9
|
|
|
|
1.8
|
|
|
|
5.0
|
|
|
|
3.4
|
|
Realized investment (loss) gains
and other (losses)/gains, net
|
|
|
(2.3
|
)
|
|
|
(4.7
|
)
|
|
|
(7.8
|
)
|
|
|
(14.7
|
)
|
|
|
(0.2
|
)
|
|
|
2.5
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
6.3
|
|
|
|
90.5
|
|
|
|
137.8
|
|
|
|
419.8
|
|
|
|
335.9
|
|
|
|
355.3
|
|
|
|
306.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred
|
|
|
(3.2
|
)
|
|
|
17.8
|
|
|
|
12.4
|
|
|
|
1,011.5
|
|
|
|
226.3
|
|
|
|
157.6
|
|
|
|
125.4
|
|
Underwriting, acquisition and
operating expense
|
|
|
11.3
|
|
|
|
23.8
|
|
|
|
63.9
|
|
|
|
84.6
|
|
|
|
77.5
|
|
|
|
87.2
|
|
|
|
87.4
|
|
Other reinsurance related expense
|
|
|
1.8
|
|
|
|
3.7
|
|
|
|
17.9
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3.6
|
|
|
|
3.6
|
|
|
|
14.5
|
|
|
|
14.5
|
|
|
|
14.4
|
|
|
|
2.5
|
|
|
|
2.9
|
|
Minority interest in consolidated
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
13.5
|
|
|
|
48.9
|
|
|
|
108.7
|
|
|
|
1,111.5
|
|
|
|
318.2
|
|
|
|
257.8
|
|
|
|
224.3
|
|
(Loss) income before income taxes,
cumulative effect of accounting change and convertible preferred
share dividends
|
|
|
(7.2
|
)
|
|
|
41.6
|
|
|
|
29.1
|
|
|
|
(691.7
|
)
|
|
|
17.7
|
|
|
|
97.5
|
|
|
|
82.4
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
|
|
5.9
|
|
|
|
(6.2
|
)
|
|
|
0.8
|
|
|
|
17.8
|
|
(Loss) income before cumulative
effect of accounting change and convertible preferred share
dividends
|
|
|
(7.2
|
)
|
|
|
41.6
|
|
|
|
28.5
|
|
|
|
(697.6
|
)
|
|
|
23.9
|
|
|
|
96.7
|
|
|
|
64.6
|
|
Cumulative effect of accounting
change, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before
convertible preferred share dividends
|
|
$
|
(7.2
|
)
|
|
$
|
41.6
|
|
|
$
|
28.5
|
|
|
$
|
(697.6
|
)
|
|
$
|
22.8
|
|
|
$
|
96.7
|
|
|
$
|
64.6
|
|
Convertible preferred shared
dividends
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
4.9
|
|
|
|
7.0
|
|
|
|
14.0
|
|
|
|
13.1
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income to common
shareholders
|
|
$
|
(8.4
|
)
|
|
$
|
40.4
|
|
|
$
|
23.6
|
|
|
$
|
(704.6
|
)
|
|
$
|
8.8
|
|
|
$
|
83.6
|
|
|
$
|
55.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
(In millions except per share amounts)
|
|
|
Net (loss) income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
0.56
|
|
|
$
|
0.33
|
|
|
$
|
(21.65
|
)
|
|
$
|
0.61
|
|
|
$
|
6.97
|
|
|
$
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
0.54
|
|
|
$
|
0.33
|
|
|
$
|
(21.65
|
)
|
|
$
|
0.59
|
|
|
$
|
4.10
|
|
|
$
|
3.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common
share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.42
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
72.0
|
|
|
$
|
71.9
|
|
|
$
|
71.9
|
|
|
$
|
32.5
|
|
|
$
|
14.4
|
|
|
$
|
12.0
|
|
|
$
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
72.0
|
|
|
$
|
77.0
|
|
|
$
|
71.9
|
|
|
$
|
32.5
|
|
|
$
|
15.0
|
|
|
$
|
23.6
|
|
|
$
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets
|
|
$
|
1,080.1
|
|
|
$
|
1,502.2
|
|
|
$
|
1,204.1
|
|
|
$
|
1,646.5
|
|
|
$
|
1,149.5
|
|
|
$
|
946.5
|
|
|
$
|
758.7
|
|
Total assets
|
|
$
|
1,253.3
|
|
|
$
|
1,889.1
|
|
|
$
|
1,401.3
|
|
|
$
|
2,116.0
|
|
|
$
|
1,454.4
|
|
|
$
|
1,359.6
|
|
|
$
|
1,237.1
|
|
Reserves for losses and loss
adjustment expense
|
|
$
|
470.0
|
|
|
$
|
1,010.0
|
|
|
$
|
603.2
|
|
|
$
|
1,320.1
|
|
|
$
|
460.1
|
|
|
$
|
450.6
|
|
|
$
|
447.8
|
|
Subordinated debt
|
|
$
|
167.1
|
|
|
$
|
167.1
|
|
|
$
|
167.1
|
|
|
$
|
167.1
|
|
|
$
|
167.1
|
|
|
$
|
|
|
|
$
|
|
|
Minority interest in consolidated
subsidiaries
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
156.8
|
|
|
$
|
94.3
|
|
Shareholders equity
|
|
$
|
490.3
|
|
|
$
|
503.7
|
|
|
$
|
496.8
|
|
|
$
|
465.3
|
|
|
$
|
696.6
|
|
|
$
|
564.5
|
|
|
$
|
453.5
|
|
|
|
|
(1) |
|
Included in losses and loss expenses incurred was
$850.8 million due to Hurricanes Katrina, Rita and Wilma. |
Selected
Historical Consolidated Financial Data of Argonaut
The following selected historical financial data for the three
months ended March 31, 2007 and 2006 has been derived from
Argonauts unaudited interim consolidated financial
statements. In the opinion of Argonauts management, the
unaudited interim consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of unaudited interim
consolidated financial statements. Results for the interim
periods are not necessarily indicative of the results to be
expected for the full year. The following selected historical
financial data for each of the years in the five-year period
ended December 31, 2006 has been derived from
Argonauts audited consolidated financial statements as of
December 31, 2006, 2005, 2004, 2003 and 2002.
Argonauts historical financial data may not be indicative
of the operating results or financial position to be expected in
the future. This information is only a summary. The selected
financial data should be read together with Argonauts
unaudited interim consolidated financial statements and related
notes to those interim financial statements and the
Managements Discussion and Analysis of Financial
Condition and Results of Operations, section included in
Argonauts Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007 and Argonauts
audited consolidated financial statements and the related notes
to those financial statements and the Managements
Discussion and Analysis of Financial Condition and Results of
Operations, section included in Argonauts Annual
Report on
Form 10-K
for the year ended December 31, 2006 which have been filed
with the SEC and are incorporated by reference into this joint
proxy statement/prospectus.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(2)
|
|
|
2002(1)
|
|
|
|
(Unaudited)
|
|
|
(In millions except per share amounts)
|
|
|
Statement of Operations
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$
|
286.7
|
|
|
$
|
269.2
|
|
|
$
|
1,155.6
|
|
|
$
|
1,055.7
|
|
|
$
|
903.4
|
|
|
$
|
788.3
|
|
|
$
|
622.1
|
|
Net written premiums
|
|
|
200.5
|
|
|
|
191.5
|
|
|
|
847.0
|
|
|
|
769.4
|
|
|
|
669.5
|
|
|
|
592.5
|
|
|
|
484.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
|
205.6
|
|
|
|
199.9
|
|
|
|
813.0
|
|
|
|
699.0
|
|
|
|
633.9
|
|
|
|
562.8
|
|
|
|
378.4
|
|
Net investment income
|
|
|
28.2
|
|
|
|
24.7
|
|
|
|
104.5
|
|
|
|
83.9
|
|
|
|
65.1
|
|
|
|
53.6
|
|
|
|
52.9
|
|
Realized investment and other
gains, net
|
|
|
0.6
|
|
|
|
|
|
|
|
21.2
|
|
|
|
3.3
|
|
|
|
5.2
|
|
|
|
113.6
|
|
|
|
26.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
234.4
|
|
|
|
224.6
|
|
|
|
938.7
|
|
|
|
786.2
|
|
|
|
704.2
|
|
|
|
730.0
|
|
|
|
457.9
|
|
Losses and loss adjustment expenses
|
|
|
119.1
|
|
|
|
121.9
|
|
|
|
477.6
|
|
|
|
427.2
|
|
|
|
409.7
|
|
|
|
395.3
|
|
|
|
334.6
|
|
Underwriting, acquisition and
insurance expense
|
|
|
74.6
|
|
|
|
68.4
|
|
|
|
285.1
|
|
|
|
262.5
|
|
|
|
222.8
|
|
|
|
191.0
|
|
|
|
144.4
|
|
Interest expense
|
|
|
3.3
|
|
|
|
3.1
|
|
|
|
13.0
|
|
|
|
15.0
|
|
|
|
11.0
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
197.0
|
|
|
|
193.4
|
|
|
|
775.7
|
|
|
|
704.7
|
|
|
|
643.5
|
|
|
|
594.7
|
|
|
|
479.0
|
|
Income (loss) before income taxes
|
|
|
37.4
|
|
|
|
31.2
|
|
|
|
163.0
|
|
|
|
81.5
|
|
|
|
60.7
|
|
|
|
135.3
|
|
|
|
(21.1
|
)
|
Provision (benefit) for income taxes
|
|
|
12.3
|
|
|
|
10.7
|
|
|
|
57.0
|
|
|
|
1.0
|
|
|
|
(11.1
|
)
|
|
|
26.3
|
|
|
|
65.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25.1
|
|
|
$
|
20.5
|
|
|
$
|
106.0
|
|
|
$
|
80.5
|
|
|
$
|
71.8
|
|
|
$
|
109.0
|
|
|
$
|
(87.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.76
|
|
|
$
|
0.65
|
|
|
$
|
3.32
|
|
|
$
|
2.73
|
|
|
$
|
2.51
|
|
|
$
|
4.76
|
|
|
$
|
(4.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.61
|
|
|
$
|
3.13
|
|
|
$
|
2.53
|
|
|
$
|
2.33
|
|
|
$
|
4.40
|
|
|
$
|
(4.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common
share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32.9
|
|
|
|
31.1
|
|
|
|
31.6
|
|
|
|
28.6
|
|
|
|
27.6
|
|
|
|
22.5
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
34.2
|
|
|
|
33.8
|
|
|
|
33.9
|
|
|
|
31.8
|
|
|
|
30.8
|
|
|
|
24.8
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets
|
|
$
|
2,588.3
|
|
|
$
|
2,208.4
|
|
|
$
|
2,514.1
|
|
|
$
|
2,173.0
|
|
|
$
|
1,783.9
|
|
|
$
|
1,553.2
|
|
|
$
|
1,181.3
|
|
Total assets
|
|
$
|
3,818.6
|
|
|
$
|
3,440.1
|
|
|
$
|
3,721.5
|
|
|
$
|
3,404.6
|
|
|
$
|
3,073.2
|
|
|
$
|
2,766.5
|
|
|
$
|
2,208.9
|
|
Reserves for losses and loss
adjustment expenses
|
|
$
|
2,080.5
|
|
|
$
|
1,903.9
|
|
|
$
|
2,029.2
|
|
|
$
|
1,875.4
|
|
|
$
|
1,607.5
|
|
|
$
|
1,480.8
|
|
|
$
|
1,281.6
|
|
Junior subordinated debentures
|
|
$
|
144.3
|
|
|
$
|
144.3
|
|
|
$
|
144.3
|
|
|
$
|
144.3
|
|
|
$
|
113.4
|
|
|
$
|
27.5
|
|
|
$
|
|
|
Shareholders equity
|
|
$
|
882.1
|
|
|
$
|
728.4
|
|
|
$
|
847.7
|
|
|
$
|
716.1
|
|
|
$
|
603.4
|
|
|
$
|
539.2
|
|
|
$
|
327.7
|
|
|
|
|
(1) |
|
Included in losses and loss adjustment expenses is
$59.8 million in reserve strengthening in the Runoff Lines
primarily attributable to Argonauts asbestos exposure.
Included in the provision of income taxes is the establishment
of a deferred tax asset valuation allowance of
$71.9 million. |
|
(2) |
|
Included in realized investment gains, net, is
$57.6 million in gains related to the disposal of four real
estate holdings, and $48.8 million in realized gains
resulting from Argonaut reallocating its investment portfolio. |
16
SELECTED
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
For accounting purposes, this transaction will be accounted for
as a reverse acquisition with Argonaut as the accounting
acquirer. Accordingly, Argo Group will account for the
transaction as a purchase business combination, using
Argonauts historical financial information and accounting
policies and applying fair value estimates to the acquired
assets, liabilities and commitments of PXRE as of the date of
the transaction. See The Merger Accounting
Treatment beginning on page 114.
The selected preliminary unaudited pro forma combined financial
information which follows reflects the purchase method of
accounting and is intended to provide information regarding how
the companies might have looked had PXRE and Argonaut actually
been combined as of the dates indicated. The preliminary
selected unaudited pro forma combined financial information does
not reflect the effect of revenue enhancements, expense
efficiencies, synergies or asset dispositions that may result
from the merger. The preliminary selected unaudited pro forma
combined financial information should not be relied upon as
being indicative of the historical results that would have
occurred had the companies been combined or the future results
that may be achieved after the merger.
The following selected preliminary unaudited pro forma combined
financial information has been derived from, and should be read
in conjunction with the preliminary Unaudited Pro Forma
Condensed Combined Financial Statements and related notes that
begin on page 167. The preliminary Unaudited Pro Forma
Condensed Combined Balance Sheet combines the unaudited
historical consolidated balance sheet of PXRE and the unaudited
historical consolidated balance sheet of Argonaut as of
March 31, 2007, giving effect to the merger as if it had
been consummated on that date. The preliminary Unaudited Pro
Forma Condensed Combined Statements of Income combine the
historical consolidated statements of income of PXRE and
Argonaut for the three months ended March 31, 2007 and for
the year ended December 31, 2006, giving effect to the
merger as if it had occurred on January 1, 2006. We have
adjusted the historical consolidated financial information to
give effect to pro forma events that are (1) directly
attributable to the merger, (2) factually supportable, and
(3) with respect to the statement of income, expected to
have a continuing impact on the combined results.
The preliminary unaudited pro forma adjustments represent
managements estimates based on information available at
this time. Actual adjustments to the combined balance sheet and
income statement will differ, perhaps materially, from those
reflected in these preliminary Unaudited Pro Forma Condensed
Combined Financial Statements because the assets and liabilities
of PXRE will be recorded at their respective fair values on the
date the merger is consummated, and the preliminary assumptions
used to estimate these fair values may change between now and
the completion of the merger.
Selected
Unaudited Pro Forma Combined Financial Information
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Year Ended
|
|
|
|
Ended March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
(In millions, except per share amounts)
|
|
|
Total revenues
|
|
$
|
240.7
|
|
|
$
|
1,076.5
|
|
Income from continuing operations
|
|
|
17.6
|
|
|
|
134.4
|
|
Income per common
share continuing operations:
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$
|
0.58
|
|
|
$
|
4.51
|
|
Diluted(1)
|
|
|
0.57
|
|
|
|
4.36
|
|
Cash dividends paid per share(2)
|
|
|
N/A
|
|
|
|
N/A
|
|
17
|
|
|
|
|
|
|
At March 31, 2007
|
|
|
|
(In millions, except
|
|
|
|
per share amounts)
|
|
|
Total investments
|
|
$
|
3,668.3
|
|
Total assets
|
|
|
5,086.1
|
|
Reserves for losses and loss
adjustment expenses
|
|
|
2,549.1
|
|
Total subordinated debt and note
payable
|
|
|
371.4
|
|
Total liabilities
|
|
|
3,777.1
|
|
Shareholders equity(3)
|
|
|
1,309.0
|
|
Book value per share(1)(3)
|
|
|
42.45
|
|
|
|
|
(1) |
|
Reflects a 1:10 reverse share split for Argo Group. |
|
|
|
(2) |
|
Excludes the Argonaut special dividend declared on June 6,
2007. On such date, Argonaut declared a $1.65 per share special
dividend with a record date of June 26, 2007 payable on
July 10, 2007. The actual aggregate amount of the special
dividend will depend on the number of shares outstanding on the
record date. That amount is likely to be less than
$60 million but under the merger agreement cannot exceed
$60 million. |
|
|
|
(3) |
|
Reflects the Argonaut special dividend in an amount assumed to
be $60 million in the aggregate. On June 6, 2007,
Argonaut declared a $1.65 per share special dividend with a
record date of June 26, 2007 payable on July 10, 2007.
The actual aggregate amount of the special dividend will depend
on the number of shares outstanding on the record date. That
amount is likely to be less than $60 million but under the
merger agreement cannot be greater than $60 million. To the
extent that the actual aggregate amount of the special dividend
is less than $60 million, the exchange ratio as specified
in the merger agreement will be adjusted. |
18
SELECTED
UNAUDITED PRO FORMA COMBINED PER SHARE DATA
The following table presents, for the periods indicated,
selected unaudited pro forma combined per share amounts for Argo
Group shares, pro forma per share adjustments for shares of
Argonaut common stock and the comparative historical per share
data for PXRE common shares and Argonaut common stock. The pro
forma amounts included in the table below are presented as if
the merger had been effective for the period presented, have
been prepared in accordance with accounting principles generally
accepted in the United States of America and are based on the
purchase method of accounting. The pro forma amounts in the
tables below do not, however, give consideration to the impact
of possible revenue enhancements, expense efficiencies,
synergies or asset dispositions, as well as other possible
adjustments discussed in Note 1 to the preliminary
Unaudited Pro Forma Condensed Combined Financial Statements.
You should read this information in conjunction with, and the
information is qualified in its entirety by, the consolidated
financial statements of PXRE and Argonaut incorporated into this
joint proxy statement/prospectus by reference and the
preliminary Unaudited Pro Forma Condensed Combined Financial
Statements and accompanying discussions and notes beginning on
page 167. See also Where You Can Find More
Information beginning on page 183. The pro forma
amounts in the table below are presented for informational
purposes only. You should not rely on the pro forma amounts as
being indicative of the financial position or results of
operations of the combined company that would have actually
occurred had the merger been effective during the period
presented or of the future financial position or future results
of operations of the combined company. The combined financial
information as of and for the period presented may have been
different had the companies actually been combined as of and
during those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended March 31, 2007
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Argonaut
|
|
|
PXRE
|
|
|
Adjustments(1)
|
|
|
Argo Group
|
|
|
|
(In millions, except per share data)
|
|
|
Basic Income (Loss) Per Common
Share from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
25.1
|
|
|
$
|
(7.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
17.6
|
|
Income (loss) from continuing
operations available to common shareholders
|
|
$
|
25.1
|
|
|
$
|
(8.4
|
)
|
|
$
|
0.9
|
|
|
$
|
17.6
|
|
Weighted average basic common
shares outstanding
|
|
|
32,917
|
|
|
|
72,049
|
|
|
|
|
|
|
|
30,373
|
(2)
|
Basic income (loss) per common
share
|
|
$
|
0.76
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
$
|
0.58
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per
Common Share from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
25.1
|
|
|
$
|
(7.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
17.6
|
|
Income (loss) from continuing
operations available to common shareholders
|
|
$
|
25.1
|
|
|
$
|
(8.4
|
)
|
|
$
|
0.9
|
|
|
$
|
17.6
|
|
Weighted average diluted common
shares outstanding
|
|
|
34,203
|
|
|
|
72,049
|
|
|
|
|
|
|
|
30,959
|
(2)
|
Diluted income (loss) per common
share
|
|
$
|
0.73
|
|
|
$
|
(0.12
|
)
|
|
$
|
|
|
|
$
|
0.57
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Common
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
(3)
|
Dividends per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per Common
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
882.1
|
|
|
$
|
490.3
|
|
|
$
|
(63.4
|
)
|
|
$
|
1,309.0
|
(4)
|
Shares outstanding at period-end
|
|
|
33,611
|
|
|
|
77,788
|
|
|
|
|
|
|
|
30,837
|
(2)
|
Book value per share
|
|
$
|
26.24
|
|
|
$
|
6.30
|
|
|
$
|
|
|
|
$
|
42.45
|
(2)(4)
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Argonaut
|
|
|
PXRE
|
|
|
Adjustments(1)
|
|
|
Argo Group
|
|
|
|
(In millions, except per share data)
|
|
|
Basic Income Per Common Share
from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
106.0
|
|
|
$
|
28.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
134.4
|
|
Income from continuing operations
available to common shareholders
|
|
$
|
105.0
|
|
|
$
|
23.6
|
|
|
$
|
4.8
|
|
|
$
|
133.4
|
|
Weighted average basic common
shares outstanding
|
|
|
31,641
|
|
|
|
71,954
|
|
|
|
|
|
|
|
29,559
|
(2)
|
Basic income per common share
|
|
$
|
3.32
|
|
|
$
|
0.33
|
|
|
$
|
|
|
|
$
|
4.51
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income Per Common Share
from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
106.0
|
|
|
$
|
28.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
134.4
|
|
Income from continuing operations
available to common shareholders
|
|
$
|
105.0
|
|
|
$
|
23.6
|
|
|
$
|
4.8
|
|
|
$
|
133.4
|
|
Weighted average diluted common
shares outstanding
|
|
|
33,900
|
|
|
|
71,959
|
|
|
|
|
|
|
|
30,792
|
(2)
|
Diluted income per common share
|
|
$
|
3.13
|
|
|
$
|
0.33
|
|
|
$
|
|
|
|
$
|
4.36
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Common
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
(3)
|
Dividends per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are based on Argonauts historical share amounts
adjusted by the exchange ratio in the merger (6.4672 PXRE common
shares for each share of Argonaut common stock) as well as other
pro forma adjustments. |
|
|
|
(2) |
|
Reflects a 1:10 reverse share split for Argo Group. See
Note 4 to the preliminary Unaudited Pro Forma Condensed
Combined Financial Statements. |
|
|
|
(3) |
|
Excludes the Argonaut special dividend declared on June 6,
2007. On such date, Argonaut declared a $1.65 per share special
dividend with a record date of June 26, 2007 payable on
July 10, 2007. The actual aggregate amount of the special
dividend will depend on the number of shares outstanding on the
record date. That amount is likely to be less than
$60 million but under the merger agreement cannot exceed
$60 million. |
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(4) |
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Reflects the Argonaut special dividend in an amount assumed to
be $60 million in the aggregate. On June 6, 2007,
Argonaut declared a $1.65 per share special dividend with a
record date of June 26, 2007 payable on July 10, 2007.
The actual aggregate amount of the special dividend will depend
on the number of shares outstanding on the record date. That
amount is likely to be less than $60 million but under the
merger agreement cannot be greater than $60 million. To the
extent that the actual aggregate amount of the special dividend
is less than $60 million, the exchange ratio as specified
in the merger agreement will be adjusted. |
20
COMPARATIVE
PER SHARE MARKET DATA
PXREs common shares trade on the NYSE under the trading
symbol PXT. Argonauts common stock trades on
the NASDAQ under the trading symbol AGII.
The following table presents the closing prices per share of
PXRE common shares and Argonaut common stock as reported by the
NYSE and the NASDAQ, respectively on March 14, 2007, the
last trading day prior to the public announcement of the
proposed merger and June 7, 2007 the last trading day
before the date of this joint proxy statement/prospectus, as
well as the market value of Argonaut common stock on an
equivalent price per share basis.
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PXRE
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Argonaut
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Common
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Argonaut
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Equivalent
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Shares
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Common
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Stock Price
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(price per
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Stock (price
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(price per
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share)
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per share)
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share)(1)
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March 14, 2007
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Closing price per share
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$
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4.46
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$
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34.15
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$
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28.84
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June 7, 2007
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Closing price per share
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$
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4.55
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$
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32.04
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$
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29.43
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(1) |
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The Argonaut equivalent stock prices were calculated by
multiplying the closing price per share of PXRE common shares on
each date by the exchange ratio of 6.4672. |
The above table shows only historical
comparisons. These comparisons may not provide
meaningful information to shareholders in determining whether to
approve the merger. Because the exchange ratio will not be
adjusted as a result of changes in market price, the implied
value of the merger consideration will fluctuate with the market
price of PXRE common shares. You should obtain current market
quotations for the PXRE common shares and Argonaut common stock
and review carefully the other information contained in this
joint proxy statement/prospectus or incorporated by reference
into this joint proxy statement/prospectus. See Where You
Can Find More Information on page 183.
21
RISK
FACTORS
We urge you to carefully consider all of the information we
have included or incorporated by reference in this joint proxy
statement/prospectus before you vote. See Where You Can
Find More Information beginning on page 183. You
should also read and consider the risks associated with each of
the businesses of PXRE and Argonaut because these risks will
also affect the resulting company. These risks can be found in
the sections below entitled Risks Related to
the Resulting Companys Operations After Completion of the
Merger Risks Related to PXRE Legacy
Issues and Risks Related to
Argonaut Legacy Issues, as well as in the PXRE
and Argonaut annual reports on
Form 10-K
or 10-K/A
for the year ended December 31, 2006 and in subsequent
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
which are filed with the United States Securities and Exchange
Commission, which we refer to as the SEC, and incorporated by
reference into this joint proxy statement/prospectus. In
addition, we urge you to carefully consider the following
material risks relating to the merger and the business of the
resulting company.
Risks
Related to the Merger
Risks
Related to the Merger General
We
face risks related to the proposed merger.
There are significant risks and uncertainties associated with
the proposed merger. For example, the merger may not be
completed, or may not be completed in the third quarter of 2007
as currently anticipated, as a result of a number of factors,
including, without limitation, the inability to obtain
regulatory approvals of the merger on the proposed terms or the
failure of either company to obtain the shareholder approvals
required to complete the merger. If the resulting company is not
able to successfully integrate the businesses of Argonaut and
PXRE, the anticipated benefits from the merger may not be
realized fully or at all or may take longer to realize than
expected. For example, it is possible that the integration
process could result in the loss of key employees.
Moreover, A.M. Bests rating of Peleus Re assumes that
the merger will be completed. If the merger is not completed,
there can be no assurance that PXRE will be able to maintain
Peleus Res current A− rating or be able
to continue writing reinsurance business.
We
must obtain several regulatory approvals to complete the merger,
which, if delayed, not granted or granted with unacceptable
conditions may jeopardize or delay the merger, result in
additional expense or reduce the anticipated benefits of the
transaction.
We must obtain certain approvals in a timely manner from federal
and state regulatory authorities prior to the completion of the
merger. State insurance laws generally require that, prior to
the acquisition of an insurance company, the acquiring party
must obtain approval from the insurance commissioner of the
insurance companys state of domicile or, in certain
jurisdictions, where such insurance company is commercially
domiciled. The regulatory authorities from which we seek
approvals have broad discretion in administering relevant laws
and regulations. As a condition to the approval of the merger,
regulatory authorities may impose requirements, limitations or
costs that could negatively affect the way the resulting company
conducts business. If PXRE and Argonaut agree to any material
conditions or restrictions in order to obtain any approvals
required to complete the merger, these conditions or
restrictions could adversely affect PXREs and
Argonauts ability to integrate the businesses of PXRE and
Argonaut or reduce the anticipated benefits of the merger.
Whether
or not the merger is completed, the announcement and pendency of
the merger could cause disruptions in the businesses of PXRE and
Argonaut, which could have an adverse effect on their business
and financial results.
Whether or not the merger is completed, the announcement and
pendency of the merger could cause disruptions in the businesses
of PXRE and Argonaut. Specifically:
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current and prospective employees and agents may experience
uncertainty about their future roles with the resulting company,
which might adversely affect PXREs and Argonauts
ability to retain key managers and other employees and
agents; and
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22
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the attention of management of each of PXRE and Argonaut may be
directed toward the completion of the merger and not their
ongoing businesses.
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Some
directors and executive officers of PXRE and Argonaut have
interests and arrangements that are different from, or in
addition to, those of PXRE and Argonaut
shareholders.
When considering the recommendations of the PXRE and Argonaut
boards of directors with respect to the merger, you should be
aware that some directors and executive officers of PXRE and
Argonaut have interests in the merger that are different from,
or in addition to, their interests as shareholders and the
interests of shareholders generally. These interests include:
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continuing as executive or senior officers of Argonaut or
continuing as or becoming executive or senior officers of PXRE
after the transaction (subject to receipt of Bermuda work
permits) as described in Risk Factors Risks
Related to the Resulting Companys Operations After the
Completion of the Merger Risks Related to
Regulation beginning on page 45;
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payments under the PXRE employment contracts which may be
triggered if the executive officers employment terminates
under certain circumstances following the merger;
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vesting of unvested options and restricted shares under
PXREs 2002 Officer Incentive Plan and Director Stock Plan;
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possible acceleration of the vesting of outstanding equity
awards held by certain executive officers of Argonaut, as
described in The Merger Effect of the Merger;
Consideration to be Received in the Merger; Treatment of Options
and Other Equity-Based Awards beginning on page 80;
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continuation of the terms of three (or four if the PXRE
shareholder proposal to increase the size of the board to
13 directors is approved) of the members of PXREs
board of directors and appointment of all of the nine members of
the Argonaut board of directors to the PXRE board of directors
following the merger; and
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affiliations with holders of the PXRE convertible preferred
shares (who, pursuant to the voting agreement, will be receiving
additional shares of PXRE common shares upon conversion of their
convertible preferred shares in connection with the merger) and
convertible common shares.
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As a result of these interests, these directors and executive
officers may be more likely to support and to vote to approve
the merger agreement and the transactions contemplated thereby
than if they did not have these interests. Shareholders should
consider whether these interests may have influenced those
directors and executive officers to support or recommend
approval of the merger. As of the close of business on the
record date for the PXRE special general meeting, PXREs
directors and executive officers and their affiliates were
entitled to vote approximately 341,000 common shares,
8,855,347 convertible common shares and
5,813.20 convertible preferred shares of PXRE at the PXRE
special general meeting, which represented less than one percent
of the PXRE common shares, and, 100 percent of each of the
PXRE convertible common shares and PXRE convertible preferred
shares, outstanding and entitled to vote at the meeting. As of
the close of business on the record date for the Argonaut
special meeting, Argonauts directors and executive
officers and their affiliates were entitled to
vote 3.7 percent of the then outstanding shares of
Argonaut common stock. See The Merger
Interests of Argonauts Directors and Executive Officers in
the Merger beginning on page 111.
The
merger agreement limits PXREs and Argonauts ability
to pursue certain alternative transactions and may require PXRE
or Argonaut to pay a termination fee if it does.
The merger agreement prohibits PXRE from initiating, soliciting,
encouraging or facilitating certain alternative transactions
with any third party, subject to exceptions set forth in the
merger agreement, and limits Argonauts ability to enter
into certain significant transactions without PXREs
consent. See The Merger Agreement Alternative
Proposals beginning on page 134. The merger
agreement also provides for the payment of a termination fee of
$20 million, in the case of payment by PXRE to Argonaut,
and $40 million, in the case of payment by Argonaut to
PXRE, if the merger agreement is terminated in certain
circumstances, including in
23
connection with PXRE or Argonaut approving or completing
certain alternative transactions with third parties. See
The Merger Agreement Termination and
Termination Fees and Expenses beginning
on page 138.
These provisions limit PXREs and Argonauts ability
to pursue offers from third parties that could result in greater
value to PXREs or Argonauts shareholders. The
obligation to pay the termination fee also may discourage a
third party from proposing an alternative transaction.
The
merger is subject to certain closing conditions that, if not
satisfied or waived, will result in the merger not being
completed, which may cause the market price of PXRE common
shares or Argonaut common stock to decline.
The merger is subject to customary conditions to closing,
including the receipt of required regulatory approvals and
approvals of the PXRE and Argonaut shareholders. If any
condition to the merger is not satisfied or waived to the extent
permitted by law or stock exchange rules, the merger will not be
completed. In addition, PXRE and Argonaut may terminate the
merger agreement under certain circumstances. If PXRE and
Argonaut do not complete the merger, to the extent that the
current market prices of those shares reflect a market
assumption that the merger will be completed, the market price
of PXRE common shares and Argonaut common stock may fluctuate.
Further, whether or not the merger is completed, PXRE and
Argonaut will also be obligated to pay certain investment
banking, financing, legal and accounting fees and related
expenses in connection with the merger, which could negatively
impact operating results when incurred. In addition, if the
merger is not completed, neither company would realize any of
the expected benefits of having completed the merger. If the
merger is not completed, PXRE and Argonaut cannot assure their
respective shareholders that additional risks will not
materialize or not materially adversely affect the business,
financial condition, operating results and share prices of PXRE
or Argonaut.
Argonaut
may be required to offer appraisal rights to its shareholders in
connection with the merger, which may require the renegotiation
of the merger agreement and the postponement of the Argonaut
special meeting, possibly causing a delay in the completion of
the merger. More than a minimal amount of cash payments in
respect of the exercise of appraisal rights by Argonaut
shareholders could have a material adverse effect on the
financial condition of the resulting company.
Pursuant to Section 262 of the Delaware General Corporation
Law, which we refer to as the DGCL, shareholders of a Delaware
corporation are not entitled to appraisal rights in connection
with a merger of the Delaware corporation with another company
when the shares of stock of the Delaware corporation are traded
on NASDAQ and the consideration to be received in the merger by
the shareholders of the Delaware corporation is solely in the
form of shares of a company that will be traded on NASDAQ (and
cash in lieu of fractional shares). Based on this provision of
Delaware law, Argonaut shareholders are not entitled to
appraisal rights in connection with the merger. However, the
recent decision of the Court of Chancery of the State of
Delaware in Louisiana Municipal Police Employees
Retirement System v. Crawford, 2007 WL 582510 (Del. Ch.
February 23, 2007), which we refer to as LAMPERS v.
Crawford, has created uncertainty as to the application of
Section 262 of the DGCL in situations where a cash dividend
is paid around the time of a merger. In that case, the acquired
company proposed to declare a special cash dividend before its
shareholder meeting called to approve a
stock-for-stock
merger, but payment of the dividend would have been conditioned
upon shareholder approval of the merger and would have been paid
upon or after the effective time of the merger. The court held
that this special cash dividend was fundamentally cash
consideration paid by the acquired company on behalf of the
acquiring company, thus triggering appraisal rights for the
shareholders of the acquired company.
Argonaut has declared a special cash dividend to its
shareholders. The dividend has no conditions to payment and will
be paid prior to the special meeting date. The dividend is not
being paid to Argonaut shareholders on behalf of PXRE, and will
be paid whether or not the merger is completed. Thus, we do not
believe that the holding of LAMPERS v. Crawford
applies to the Argonaut dividend and the merger. However, it
is possible that a Delaware court could determine that our facts
are not sufficiently distinguishable from the facts described in
LAMPERS v. Crawford and hold that appraisal rights
should be offered to Argonaut shareholders. As the possibility
of appraisal rights for Argonaut shareholders is not provided
for in the merger agreement, Argonaut and PXRE would need to
reach an agreement for the amendment of the merger agreement to
provide for appraisal rights, and it is possible that
24
the Argonaut special meeting would have to be postponed in order
to allow for this joint proxy statement/prospectus to be
supplemented with a notice that appraisal rights are available
to Argonaut shareholders. If any Argonaut shareholders exercise
those appraisal rights, PXRE would be required to make cash
payments to those shareholders reflecting the appraised fair
value of their Argonaut shares in lieu of issuing PXRE shares to
those shareholders in the merger. The obligation to make more
than a minimal amount of cash payments could have a material
adverse effect on the financial condition of the resulting
company.
Upon
the issuance of PXRE common shares in the merger, former
Argonaut shareholders will own a controlling block of PXRE
voting shares and will have the ability to appoint a majority of
the resulting companys directors.
Upon the issuance of PXRE common shares in the merger, former
Argonaut shareholders will hold common shares representing
approximately 73% of the voting power of all of the shareholders
of the resulting company. As a result, if the former Argonaut
shareholders were to vote in concert they would have the ability
to determine matters requiring shareholder approval, including,
without limitation, the election and removal of directors,
business combinations, changes of control and sales of all or
substantially all of PXREs assets. Argonaut has
represented that there is no plan, agreement or understanding,
oral or written, for its shareholders to vote in concert.
Pursuant to a general permission issued in 2005 by the Bermuda
Monetary Authority, which we refer to as the BMA, PXRE may issue
its common shares to non-residents without the prior permission
of the BMA provided its shares are listed on an appointed stock
exchange which, by definition, includes the NYSE and NASDAQ.
However, it should be noted that any person who, directly or
indirectly, becomes a holder of at least 10 percent,
20 percent, 33 percent or 50 percent of the
common shares of PXRE must notify the BMA in writing within
45 days of becoming such a holder or 30 days from the
date they have knowledge of having such a holding, whichever is
later. The BMA may, by written notice, object to such a person
if it appears to it that the person is not fit and proper to be
such a holder. The BMA may require the holder to reduce its
holdings of common shares and direct, among other things, that
voting rights attaching to such common shares shall not be
exercisable. A person that does not comply with such a notice or
direction from the BMA will be guilty of an offense.
Finally, the BMA may at any time, by written notice, object to a
person holding 10 percent or more of the common shares of
PXRE if it appears to the BMA that the person is not or is no
longer fit and proper to be such a holder. In such a case, the
BMA may require the shareholder to reduce its holding of common
shares and direct, among other things, that voting rights
attaching to such common shares shall not be exercisable. A
person who does not comply with such a notice or direction from
the BMA will be guilty of an offense.
Risks
Related to the Merger PXRE
Shareholders
If the
merger is not completed, unless PXREs board of directors
identifies and implements a strategic alternative, PXRE will not
write or earn any material premiums in the future and, as a
result, PXRE expects to incur material operating losses, since
its remaining revenue may be insufficient to cover its projected
operating and other expenses.
In the aftermath of Hurricane Katrina, each of the major rating
agencies placed the credit ratings of PXREs reinsurance
subsidiaries on CreditWatch negative or the equivalent, and
S&P and A.M. Best initially downgraded their ratings
from A to A−. On February 16,
2006, A.M. Best downgraded PXREs financial strength
rating from A− to B++ with a
negative outlook. In February, 2006, A.M. Best further
downgraded PXREs financial strength rating from
B++ to B+ with negative implications and
S&P downgraded its counterparty credit and financial
strength rating on PXRE Reinsurance Company, which we refer to
as PXRE Reinsurance, and PXRE Reinsurance Ltd., which we refer
to as PXRE Bermuda, from A− to
BBB+ and placed these ratings on CreditWatch with
negative implications. Thereafter, S&P further downgraded
its counterparty credit and financial strength rating on PXRE
Reinsurance and PXRE Bermuda from BBB+ to
BBB−. Moodys Investors Service, which we
refer to as Moodys, downgraded its insurance financial
strength rating of PXRE Reinsurance from Baa1 to
Baa2 and placed this rating under review for
possible further downgrade. Subsequently, Moodys further
downgraded its insurance financial strength rating of PXRE
Reinsurance from Baa2 to Baa3 and placed
this rating under review for possible further downgrade.
25
In April, 2006, after finding that operational ratings below the
critical A category provided little value for a
reinsurer, PXRE announced that it had requested that the major
credit rating agencies withdraw their financial strength and
claims paying ratings of PXRE and its operating subsidiaries. In
the wake of this request, A.M. Best downgraded its
financial strength ratings of PXRE Reinsurance and PXRE Bermuda
from B+ to B and then withdrew these
ratings; S&P downgraded its counterparty credit and
financial strength rating on PXRE Reinsurance and PXRE Bermuda
from BBB− to BB+ and then withdrew
these ratings; and Moodys downgraded its insurance
financial strength rating of PXRE Reinsurance from
Baa3 to Ba2 and then withdrew this
rating.
Ratings have become an increasingly important factor in
establishing the competitive position of reinsurance companies.
Due to the ratings downgrades and withdrawal of the operational
ratings of PXREs reinsurance subsidiaries by
A.M. Best, S&P and Moodys, PXREs
competitive position in the reinsurance industry has suffered
and it has been unable to retain its reinsurance portfolio or
renew many of its existing reinsurance agreements.
If the merger is not completed, unless PXRE is able to implement
a strategic alternative that would allow it to provide clients
with an acceptably rated counterparty, PXRE does not anticipate
being able to underwrite any material amount of new reinsurance
business in 2007 and would therefore not be able to generate any
material amount of net premiums earned during 2007. The
reduction in premium income has and will have a material adverse
effect on PXREs future operating results, liquidity and
financial condition. Net premiums earned were PXREs
primary source of revenue for the years ended December 31,
2006 and 2005, accounting for 61% and 92% of its revenue,
respectively. In 2006 and 2005, revenue from non-premium sources
was not sufficient to offset operating expenses and interest
expenses. PXRE therefore expects to incur net operating losses
in future periods unless it is successful in executing a
strategic alternative other than runoff. If such operating
losses were to occur, this would result in a decline in
PXREs shareholders equity.
Ratings are not evaluations directed to investors in PXREs
securities (including investors in PXREs common shares) or
a recommendation to buy, sell or hold PXREs securities
(including PXREs common shares). Ratings may be revised or
revoked at the sole discretion of the rating agencies.
If the
merger is not completed, PXRE may not be able to identify or
implement a strategic alternative.
PXREs counterparty credit and financial strength ratings
were downgraded by the major rating agencies in February 2006 to
a level that is generally unacceptable to many of PXREs
reinsurance clients. These ratings downgrades have had a
significant negative impact on PXREs operating results and
profitability. PXRE has not written any new reinsurance business
or renewed any expiring reinsurance business since the
downgrades occurred. In light of the negative consequences of
the rating downgrades, PXREs board of directors decided to
retain Lazard Frères & Co. LLC, which we refer to
as Lazard, as a financial advisor to assist in the process of
exploring strategic alternatives. Lazard was subsequently
succeeded by KBW as a financial advisor to assist in the process
of exploring strategic alternatives, which resulted in the
proposed merger with Argonaut.
If the merger with Argonaut is not completed, the board of
directors of PXRE would likely re-commence its strategic
evaluation process, but it may not be able to identify or
complete any of the alternatives that PXREs board of
directors finds to be in the shareholders best interests.
Even if PXRE is successful in identifying and completing a
merger or sale of PXRE or some other strategic alternative, it
cannot provide any assurance about the financial impact or
timing of the implementation of any such strategic alternative
or the ability to obtain any required regulatory approval, or
that any individual shareholder will determine that such
strategic alternative is in his, her or its best interests.
In over one year of considering potential strategic
alternatives, the Argonaut merger was found by PXREs board
of directors to be the most suitable strategic alternative
available. If PXRE is not able to complete this merger, it may
not be able to identify or implement in the future a strategic
alternative that is as attractive as the merger with Argonaut.
26
If the
merger is not completed and PXREs board of directors
concludes that no other feasible strategic alternative would be
in the best interests of PXREs shareholders, it may
determine that the best course of action is to place the
reinsurance operations of PXRE into runoff and eventually
commence an orderly winding up and liquidation of PXRE
operations over some period of time that is not currently
determinable.
If the merger is not completed, and PXREs board of
directors concludes that no other feasible strategic alternative
would be in the best interests of PXREs shareholders, it
may determine that the best course of action is to place the
reinsurance operations of PXRE into runoff. Once in runoff there
are various options available to bring PXREs business to a
conclusion including pursuing an arrangement with its
policyholders in which it estimates and pays out all existing
and contingent liabilities with a view to liquidating PXRE in
accordance with a procedure which is approved by a statutory
majority of policyholders. Under Bermuda law this is referred to
as a solvent scheme of arrangement and is, in effect, a global
commutation of PXREs business.
Alternatively, a program of individual commutations could be
pursued with a similar result. Following either a scheme or
individual commutation program, PXRE would be placed into
liquidation as a solvent entity (a voluntary liquidation
approved by shareholders). In the event that PXRE were to become
insolvent, it would have to be liquidated under the supervision
of the Bermuda Supreme Court during which a court appointed
liquidator of PXRE may or may not pursue a scheme of arrangement
to shorten the time otherwise required to wind up PXREs
business.
In a winding up or liquidation as described above, a liquidator
would be appointed and would sell or otherwise dispose of
PXREs remaining assets, pay its existing liabilities,
including contingent obligations (which would have to be
estimated in advance of payment) and distribute net proceeds, if
any, to PXREs shareholders in one or more liquidating
distributions. In liquidation, PXRE may not receive any material
amounts for the sale or other disposition of its assets.
Further, in liquidation, PXRE will have significant obligations,
including the costs incurred by the independent liquidator
appointed and the work required to estimate liabilities and
realize assets. Additionally, if PXRE does not generate
sufficient revenue to support its continued operations, PXRE
will be required to reduce its cash balance to support its
continued operations and the amount of any liquidation proceeds
available for distribution to its shareholders would thereby be
reduced. Accordingly, the amount and timing of distributions, if
any, to shareholders in a liquidation cannot be determined
because such would depend on a variety of factors, including the
amount of proceeds received from any asset sales or
dispositions, the time and amount required to resolve
outstanding obligations and the amount of any reserves for
future contingencies. If PXRE were to become insolvent, there
will be no distributions payable to PXREs shareholders.
If the
merger is not completed and the board of directors of PXRE
elects to pursue a strategic alternative that does not involve
the continuation of meaningful property catastrophe reinsurance
business, there is a risk that PXRE could incur material charges
or termination fees in connection with its collateralized
catastrophe facility and certain multi-year ceded reinsurance
agreements.
During the fourth quarter of 2005, PXRE entered into a
collateralized catastrophe facility that currently provides
$125.0 million of aggregate protection against losses
arising from hurricanes in the Eastern and Gulf coasts of the
United States, windstorms in northern Europe and earthquakes in
California.
If the merger is not completed, and the board of directors of
PXRE elects to pursue a strategic alternative that materially
changes PXREs catastrophe risk profile, the board of
directors of PXRE may elect to explore the assignment or
novation of PXREs rights and obligations under the
collateralized catastrophe facility to another insurance or
reinsurance company. There can be no assurance that any other
insurance or reinsurance company would be willing to accept such
an assignment or novation, that note holders who funded the
facilities would consent to such an assignment or novation, or
that the cost of such an assignment or novation would not have a
material adverse impact on PXRE. If PXRE was not able to
successfully assign or novate its rights and obligations under
this collateralized catastrophe facility, PXRE could incur
material termination fees and liabilities, which could be as
much as $5.8 million, and PXRE would be obligated to make
all premium payments up to the date of termination.
If the merger is not completed, and the board of directors of
PXRE elects to pursue a strategic alternative that materially
changes PXREs catastrophe risk profile, PXRE will also
need to evaluate its obligations under two multi-year ceded
reinsurance contracts that provide PXRE with reinsurance
protection against catastrophic events
27
in 2007 and 2008. In this regard, PXRE will need to evaluate
whether it is likely that catastrophe loss exposure assumed by
PXRE in 2007 and 2008 has the potential to result in losses that
exceed the retention level under these ceded reinsurance
protections. PXRE is currently obligated to cede reinsurance
premiums of $15.0 million per annum in each of 2007 and
2008 under these multi-year contracts.
PXREs
ability to continue to operate its business, complete the merger
and to identify, evaluate and complete any other strategic
alternative are dependent on its ability to retain its
management and other key employees, and PXRE may not be able to
do so.
PXRE may have difficulty retaining its management and other key
employees on whom PXRE will depend to continue to operate its
business and to assist in consummating the merger or in
identifying, evaluating and completing any other strategic
alternative. If PXRE is unable to do so for at least the time
necessary to complete the merger or identify and implement an
alternative selected strategy, PXREs continued business
operations and its ability to identify, evaluate and complete a
strategic alternative could be materially and adversely
affected. PXRE has entered into a separation agreement with its
chief executive officer which provides, among other things, for
his last day of employment to be the earlier of the date of the
completion of the merger or December 28, 2007. If the
merger is not completed prior to December 28, 2007,
PXREs chief executive officer will no longer be available
to assist in completing the merger or another strategic
alternative.
Upon
the completion of the merger, the current holders of PXREs
common shares will suffer dilution due to a negotiated reduction
in the conversion price of PXREs convertible preferred
shares.
Pursuant to the terms of the convertible preferred shares of
PXRE, approval of the PXRE preferred shareholders is required to
complete the transactions contemplated by the merger agreement.
In order to assure that the PXRE preferred shareholders would
approve the transactions contemplated by the merger agreement
and in furtherance of Argonauts desire for PXRE to have
only one class of equity securities outstanding following the
merger, Argonaut required as a condition to signing the merger
agreement that the PXRE preferred shareholders execute a voting
agreement, pursuant to which they would agree, among other
things, to vote in favor of the transactions and to convert
their convertible preferred shares into PXRE common shares
immediately prior to the effective time of the merger. After
lengthy negotiations between the special committee of the PXRE
board of directors and the PXRE preferred shareholders, the
conversion price of the convertible preferred shares was reduced
from $11.28 per share, the conversion price as of
December 31, 2006, to $6.24 per share in order to
obtain the assent of the PXRE preferred shareholders to execute
the voting agreement. This reduced conversion price will only
apply in connection with the completion of the merger.
Conversion at the reduced conversion price in connection with
the merger will result in dilution to PXRE common shareholders
of approximately 5.0% more than what would have resulted from
conversion of the convertible preferred shares at $11.18 per
share, the conversion price which otherwise would have been
applicable as of March 31, 2007.
In the
event that the merger is not completed, the rights and
protections afforded to the PXRE preferred shareholders could
have a material negative impact on the holders of PXREs
common shares.
The PXRE convertible preferred shares and convertible common
shares will be converted in connection with the merger. In the
event that the merger is not completed, the rights and
protections afforded to the PXRE preferred shareholders will
continue. The PXRE preferred shareholders have the right to
nominate four directors for election to the board of directors,
and were granted demand and other registration rights. They also
have the ability to veto certain corporate actions being
considered in the context of PXREs review of strategic
alternatives, including, among other things, (i) the sale
or merger of PXRE, (ii) the sale of more than 25% of
PXREs assets, (iii) the expansion into other lines of
business, (iv) the payment of extraordinary dividends, and
(v) the voluntary liquidation, dissolution or winding up of
PXRE. The interests of the PXRE preferred shareholders may
differ materially from the interests of PXREs common
shareholders, and these investors could take actions or make
decisions that are not in the best interests of PXREs
common shareholders.
If the merger is not completed, the anti-dilution protections
afforded to the PXRE preferred shareholders could have a
material dilutive effect on PXREs common shareholders.
Each convertible preferred share, in whole or in part, is
convertible at any time at the option of the holder into
convertible common shares for that series according to
28
a formula set forth in the terms of the convertible preferred
shares. The convertible common shares are, in turn, convertible
into common shares on a
one-for-one
basis. The number of convertible common shares per convertible
preferred share issuable upon any conversion will be determined
by dividing a liquidation preference for the series equal to the
aggregate original purchase price of the convertible preferred
shares plus accrued but unpaid dividends thereon, by the
conversion price then in effect. The conversion price is subject
to adjustment to avoid dilution in the event of
recapitalization, reclassification, share split, consolidation,
merger, amalgamation or other similar event or an issuance of
additional common shares in a private placement below the fair
market value or in a registered public offering below 95% of
fair market value or without consideration. If the merger is not
completed, the conversion price is subject to adjustment for
certain loss and loss expense development on reserves for losses
incurred on or before September 30, 2001 and for any
liability or loss arising out of pending material litigation on
December 10, 2001. Because the conversion price for the
convertible preferred shares is subject to adjustment for a
variety of reasons, including if PXRE has certain types of
adverse loss development, the number of PXREs common
shares into which the convertible preferred shares are
ultimately convertible and, accordingly, the amount of dilution
experienced by PXREs common shareholders, could increase.
Furthermore, upon conversion, sales of substantial amounts of
common shares by the PXRE preferred shareholders, or the
perception that these sales could occur, could adversely affect
the market price of the common shares, as well as PXREs
ability to raise additional capital in the public equity markets
at a desirable time and price.
If the merger is completed, the convertible preferred shares
will be converted pursuant to the voting agreement at a reduced
conversion price (approximately $6.24, reduced from
approximately $11.18 as of March 31, 2007), which will
result in dilution to PXRE common shareholders of approximately
5.0% more than what would have resulted from the conversion of
the convertible preferred shares at the conversion price which
otherwise would have been applicable as of March 31, 2007.
Risks
Related to the Merger Argonaut
Shareholders
The
value of the PXRE common shares that Argonaut shareholders
receive in the merger may be less than the value of such PXRE
common shares on the date on which the merger was publicly
announced or on the date on which you vote. Further, at the
shareholder meetings, shareholders will not know the exact value
of the PXRE common shares that will be issued in the
merger.
At the effective time of the merger, each outstanding share of
Argonaut common stock will be converted into the right to
receive approximately 6.4672 PXRE common shares. The ratio at
which the shares will be converted is fixed, subject to
adjustment in the event that (i) Argonauts special
dividend to its shareholders is less than $60 million, or
(ii) Argonaut pays certain other dividends, incurs losses
on sales of assets
and/or
engages in dilutive sales or purchases of Argonaut shares. See
The Merger Effect of the Merger; Consideration
to be Received in the Merger; Treatment of Options and Other
Equity-Based Awards beginning on page 80. Any changes
in the price of PXRE common shares will affect the value of the
PXRE common shares that Argonaut shareholders receive in the
merger such that, if the price of PXRE common shares declines
prior to completion of the merger, the value of the
consideration to be received by Argonaut shareholders will
decrease. Share price variations could be the result of changes
in the business, operations or prospects of PXRE, Argonaut or
the resulting company, market assessments of the likelihood that
the merger will be completed within the anticipated time or at
all, general market and economic conditions, regulatory
considerations and other factors which are beyond the control of
PXRE and Argonaut.
PXRE and Argonaut are working to complete the merger as quickly
as possible. However, the time period between the shareholder
votes taken at the shareholder meetings and the completion of
the merger will depend upon the timing and status of the
regulatory approvals that must be obtained prior to the
completion of the merger and the satisfaction or waiver of the
other conditions described in this joint proxy
statement/prospectus, and there is currently no way to predict
with certainty how long it will take to obtain these approvals.
Because the date when the merger is completed will be later than
the date of the shareholder meetings, PXRE and Argonaut
shareholders will not know the exact value of the PXRE common
shares that will be issued in the merger at the time they vote
on the merger proposals.
29
Risks
Related to the Resulting Companys Operations After the
Completion of the Merger
Risks
Related to the Integration of PXRE and
Argonaut
The
anticipated benefits of combining PXRE and Argonaut may not be
realized.
PXRE and Argonaut entered into the merger agreement with the
expectation that the merger would result in various benefits
including, among other things, enhanced revenues, a strengthened
market position for the resulting company in its businesses,
cost savings and operating efficiencies. Achieving the
anticipated benefits of the merger is subject to a number of
uncertainties, including whether the businesses of PXRE and
Argonaut are integrated in an efficient and effective manner,
and general competitive factors in the marketplace. Failure to
achieve these anticipated benefits could result in increased
costs, decreases in the amount of expected revenues and
diversion of managements time and energy and could
materially impact the resulting companys business,
financial condition and operating results.
The
resulting company may have difficulty integrating the businesses
of PXRE and Argonaut and may incur substantial costs in
connection with the integration.
PXRE and Argonaut currently operate independently, each with its
own business, products, customers, employees, culture and
systems. Integrating the businesses of PXRE and Argonaut will be
a complex, time-consuming and expensive process. The resulting
company may experience unanticipated difficulties or expenses in
connection with integrating the businesses of PXRE and Argonaut.
These factors may include:
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conditions imposed by regulatory authorities in connection with
their decisions whether to approve the merger;
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potential charges to earnings resulting from the application of
purchase accounting to the transaction;
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the retention of existing clients, agents and wholesalers of
Argonaut; and
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retaining and integrating management and other key employees of
the resulting company.
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After the merger, we may seek to combine certain operations and
functions using common information and communication systems,
operating procedures, financial controls and human resource
practices, including training, professional development and
benefit programs. We may be unsuccessful or delayed in
implementing the integration of these systems and processes.
Any one or all of these factors may cause increased operating
costs, worse than anticipated financial performance or the loss
of clients, employees and agents. Many of these factors are
outside the control of either company.
Risks
Related to the Resulting Company (Argo Group)
The following risk factors assume the merger has been completed
and are applicable to the resulting company which we call Argo
Group.
Argo
Group may incur income statement charges if the claims and claim
adjustment expense reserves are insufficient. Such income
statement charges could be material, individually or in the
aggregate, to the resulting companys financial condition
and operating results in future periods and could result in
rating agency actions
and/or the
need to raise capital.
Both PXRE and Argonaut maintain claims and claim adjustment
expense reserves to cover estimated ultimate unpaid liabilities
with respect to reported and unreported claims incurred as of
the end of each accounting period. Reserves do not represent an
exact calculation of liability, but instead represent
managements estimates, which take into account various
statistical and actuarial projection techniques as well as other
influencing factors. These reserve estimates represent
managements expectations of what the ultimate settlement
and administration of claims will cost based on an assessment of
facts and circumstances then known, review of historical
settlement patterns, estimates of trends in claims severity and
frequency, changing legal theories of liability and other
factors. Variables in the reserve estimation process can be
affected by both internal and external events, such as changes
in
30
claims handling procedures, economic inflation, legal trends and
legislative changes. Many of these items are not directly
quantifiable, particularly on a prospective basis. Additionally,
there may be significant reporting lags between the occurrence
of an insured event and the time it is actually reported to the
insurer. Reserve estimates are continually refined in a regular
ongoing process as historical loss experience develops and
additional claims are reported and settled, and as a
consequence, managements estimates may change from time to
time. Because establishment of claims and claim adjustment
expense reserves is an inherently uncertain process involving
estimates, currently established reserves may not be sufficient
or estimates of ultimate claim and claim adjustment expenses may
increase.
Management of Argo Group will also make decisions regarding the
integration of claims handling practices, actuarial practices
and other operational procedures after the merger. These
decisions may impact managements estimate of reserves.
Because of all of the above, estimates of ultimate claims and
claim adjustment expenses may increase in the future. Income
statement charges that would result from such increases, if any,
cannot now be reasonably estimated. Such charges could be
material, individually or in the aggregate, to Argo Groups
future operating results and financial condition and could
result in rating agency actions
and/or the
need to raise capital. Adjustments to reserves are reflected in
the results of the periods in which the estimates are changed.
You should also be aware that the exposures of Argonaut may be
materially different than the exposures of PXRE, and
correspondingly that the exposures of Argo Group may be
materially different from the separate exposures of either
company.
For more information about each of PXREs and
Argonauts claims and claim adjustment expense reserves
generally, see the information under the headings
Managements Discussion and Analysis of Financial
Condition and Results of Operations in each companys
most recent annual report on
Form 10-K
and all related disclosures in each companys quarterly
reports on
Form 10-Q
and current reports on
Form 8-K
since the period covered by that annual report, in each case as
filed with the SEC.
There
can be no assurance that the merger will not result in a ratings
downgrade of PXREs reinsurance operating companies,
Argonaut or Argo Group, which may result in an adverse effect on
Argo Groups business, financial condition and operating
results.
Ratings with respect to claims paying ability and financial
strength are important factors in establishing the competitive
position of insurance companies and will also impact the cost
and availability of capital to an insurance company. The
combined operations of PXRE and Argonaut will compete with other
insurance companies, financial intermediaries and financial
institutions on the basis of a number of factors, including the
ratings assigned by internationally-recognized rating
organizations. Ratings will represent an important consideration
in maintaining customer confidence in Argo Group and in its
ability to market insurance products. Rating organizations
regularly analyze the financial performance and condition of
insurers. Any ratings downgrades, or the potential for ratings
downgrades, of Argo Group could adversely affect its ability to
market and distribute products and services, which could have an
adverse effect on Argo Groups business, financial
condition and operating results. Although it is a condition to
Argonauts obligation to complete the merger that neither
PXRE nor Argonaut receive notice from either A.M. Best or
S&P that any rating assigned to PXRE or Argonaut is subject
to being downgraded or has been downgraded, there can be no
assurance that the ratings of PXREs reinsurance operating
companies, Argonaut or Argo Group will not be downgraded
following the merger.
Ratings are not in any way a measure of protection afforded to
investors and should not be relied upon in making an investment
or voting decision.
The
insurance and reinsurance business is historically cyclical, and
Argo Group may experience periods with excess underwriting
capacity and unfavorable premium rates; conversely, Argo Group
may have a shortage of underwriting capacity when premium rates
are strong.
Historically, insurers and reinsurers have experienced
significant fluctuations in operating results due to
competition, frequency and severity of catastrophic events,
levels of capacity, general economic conditions and other
factors. The supply of insurance and reinsurance is related to
prevailing prices, the level of insured losses and the level of
industry surplus which, in turn, may fluctuate in response to
changes in rates of return on investments
31
being earned in the insurance and reinsurance industry. As a
result, the insurance and reinsurance business historically has
been a cyclical industry characterized by periods of intense
price competition due to excessive underwriting capacity as well
as periods when shortages of capacity permitted favorable
premium levels. Both Argonauts and PXREs growth from
January 1, 2002 through December 31, 2005 related in
part to improved industry pricing, but the supply of insurance
and reinsurance may increase, either by capital provided by new
entrants or by the commitment of additional capital by existing
insurers or reinsurers, which may cause prices to decrease. Any
of these factors could lead to an adverse effect on Argo
Groups profits. In addition to these considerations,
changes in the frequency and severity of losses suffered by
insureds and insurers may affect the cycles of the insurance and
reinsurance business significantly, and Argo Group expects to
experience the effects of such cyclicality.
Some
aspects of PXREs corporate structure and applicable
insurance regulations may discourage third-party takeovers and
other transactions, may result in the entrenchment of incumbent
management and may reduce or increase the voting rights of Argo
Groups common shares.
Under PXREs bye-laws, subject to certain exceptions and to
waiver by PXREs board of directors on a case by case
basis, no transfer of shares of PXRE is permitted if such
transfer would result in a shareholder owning, directly or
indirectly, more than 9.9% of the voting power of PXREs
outstanding shares, including its common shares, or more than
9.9% of the outstanding shares of any class of its share
capital. Ownership is broadly defined in PXREs bye-laws.
If certain amendments to PXREs bye-laws are approved
pursuant to this joint proxy statement/prospectus, the foregoing
provisions will be replaced by the New Transfer Restrictions (as
described in Information about PXRE
Description of Share Capital), which generally permit
transfers unless the board of directors determines a transfer
may result in a non-de minimis adverse tax, legal or regulatory
consequence to PXRE, any PXRE subsidiary or any direct or
indirect shareholder of PXRE or its affiliates. PXRE may refuse
to register on its share transfer records any transfer that does
not comply with these share transfer restrictions. A transferee
will be permitted to promptly dispose of any of PXRE shares
purchased which violate the restrictions and as to the transfer
of which registration is refused.
In the event that PXRE becomes aware of a shareholder owning
more than the permitted level of voting power of the outstanding
shares of PXRE after a transfer of shares has been registered,
PXREs bye-laws provide that, subject to the same
exceptions and waiver procedures, the voting rights with respect
to the shares of PXRE owned by any such shareholder will be
limited to the permitted level of voting power, subject only to
the further limitation that no other shareholder allocated any
such voting rights may exceed the permitted level of voting
power as a result of such limitation. The board of directors may
waive this limitation, and has determined to waive this
limitation with respect to Capital Z Financial Services
Fund II, L.P., Capital Z Financial Services Private
Fund II, L.P. (which, together with Capital Z Financial
Services Fund II, L.P. and certain of Capital Zs
affiliates, we refer to as Capital Z) as a result of their
ownership of convertible preferred shares of PXRE. These
convertible preferred shares will be converted into common
shares immediately prior to the merger, and the waiver of the
voting limitation will terminate. If certain amendments to
PXREs bye-laws are approved pursuant to this joint proxy
statement/prospectus, the foregoing provisions will be replaced
by the Voting Cutback Provisions (described below), which, among
other things, (i) reduce the voting limitation percentage
from 9.9% to 9.5% and (ii) only apply the voting
limitations to U.S. persons (that own PXRE shares directly
or indirectly through
non-U.S. entities).
The PXRE bye-law amendments also provide for the shareholders of
PXRE to govern the vote of PXREs
non-U.S. subsidiaries
shares. See Information about PXRE Description
of Share Capital beginning on page 144.
In addition, PXREs ownership of U.S. subsidiaries
can, under applicable state insurance company laws and
regulations, delay or impede a change of control of PXRE. Under
applicable insurance regulations, any proposed purchase of 10%
or more of the voting securities of PXRE would require the prior
approval of the relevant insurance regulatory authorities.
PXREs bye-laws provide for a classified board of
directors. The directors of the class elected at each annual
general meeting hold office for a term of three years, with the
term of each class expiring at successive annual general
meetings of shareholders. Under PXREs bye-laws, the vote
of
662/3%
of the outstanding shares entitled to vote and the approval of a
majority of the board are required to amend bye-laws regarding
appointment and removal
32
of directors, indemnification of directors and officers,
directors interests and the procedures for amending
bye-laws.
The provisions described above may have the effect of making
more difficult or discouraging unsolicited takeover bids from
third parties. To the extent that these effects occur,
shareholders could be deprived of opportunities to realize
takeover premiums for their shares and the market price of their
shares could be depressed. In addition, these provisions could
also result in the entrenchment of incumbent management.
The operation of the Voting Cutback Provisions would have the
effect of limiting voting rights. In general, and except as
provided below, shareholders have one vote for each common share
held by them and are entitled to vote at all meetings of
shareholders. However, if certain amendments to PXREs
bye-laws are approved pursuant to this joint proxy
statement/prospectus, then, if, and so long as, the shares of a
shareholder are treated as controlled shares (as
determined under section 958 of the Code) of any
U.S. Person (that owns shares directly or indirectly
through
non-U.S. entities)
and such controlled shares constitute 9.5% or more of the votes
conferred by PXREs issued shares, the voting rights with
respect to the controlled shares of such U.S. Person, which
we refer to as a 9.5% U.S. Shareholder, will be limited, in
the aggregate, to a voting power of less than 9.5%, under a
formula specified in PXREs bye-laws. The formula is
applied repeatedly until the voting power of all 9.5%
U.S. Shareholders has been reduced to less than 9.5%. In
addition, the board of PXRE may limit a shareholders
voting rights where it deems it appropriate to do so to
(i) avoid the existence of any 9.5% U.S. Shareholder;
and (ii) avoid certain material adverse tax, legal or
regulatory consequences to PXRE, any subsidiary of PXRE or any
direct or indirect shareholder or its affiliates.
Controlled shares includes, among other things, all
shares of PXRE that such U.S. Person is deemed to own
directly, indirectly or constructively (within the meaning of
section 958 of the Code). We refer to these provisions
collectively as the Voting Cutback Provisions.
Under these provisions, certain shareholders may have their
voting rights limited, while other shareholders may have voting
rights in excess of one vote per share (as described in
Information about PXRE Description of Share
Capital beginning on page 144). Moreover, these provisions
could have the effect of reducing the votes of certain
shareholders who would not otherwise be subject to the 9.5%
limitation by virtue of their direct share ownership.
PXRE also has the authority under its bye-laws to request
information from any shareholder for the purpose of determining
whether a shareholders voting rights are to be reallocated
under the bye-laws. If a shareholder fails to respond to such a
request for information or submits incomplete or inaccurate
information in response to such a request, PXRE may, in its sole
discretion, eliminate such shareholders voting rights.
Recoveries
under PXREs collateralized catastrophe facility are
triggered by modeled loss to a notional portfolio, rather than
PXREs actual losses arising from a catastrophe event,
which creates a potential mismatch between the risks assumed
through Argo Groups inwards reinsurance business and the
protection afforded by this facility.
During the fourth quarter of 2005, PXRE entered into a
collateralized facility that provides $125.0 million of
aggregate protection against losses arising from hurricanes in
the Eastern and Gulf coasts of the United States, windstorms in
northern Europe and earthquakes in California. The coverage
under the facility is based on a modeled loss trigger. PXRE
created a series of notional portfolios of reinsurance contracts
designed to closely mimic the expected exposures in PXREs
assumed reinsurance portfolio. Upon the occurrence of a
hurricane, windstorm or earthquake in the covered territories,
the parameters of the catastrophe event are determined and
modeled against the notional portfolios. If the modeled loss to
the notional portfolio exceeds the attachment point for the
peril at issue, then PXRE will make a recovery under the
agreement. If such a hurricane, windstorm or earthquake were to
occur, there is a risk that the actual losses incurred by Argo
Group could exceed the modeled loss to the notional portfolios
and that the actual benefit of this facility could be
substantially less than expected.
The
effects of emerging claim and coverage issues on Argo
Groups business are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect Argo Groups business by either
extending coverage beyond its underwriting intent or by
increasing the number or size of claims.
33
In some instances, these changes may not become apparent until
some time after Argonaut has issued insurance or reinsurance
contracts that are affected by the changes. As a result, the
full extent of liability under Argo Groups insurance or
reinsurance contracts may not be known for many years after a
contract is issued, and its financial position and results of
operations may be adversely affected.
Argo
Group will have exposure to unpredictable catastrophes, which
can materially and adversely affect its business, results of
operations
and/or
financial condition.
Argo Group will be subject to claims arising out of catastrophes
that may have a significant effect on its business, results of
operations,
and/or
financial condition. Catastrophes can be caused by various
events, including hurricanes, windstorms, earthquakes,
hailstorms, explosions, power outages, severe winter weather,
fires and intentional man-made events, such as terrorist
attacks. The incidence and severity of catastrophes are
inherently unpredictable. The extent of losses from a
catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of
the event. Insurance companies are not permitted to reserve for
catastrophes until such event takes place. Therefore, although
Argo Group will actively manage its exposure to catastrophes
through its underwriting process and the purchase of reinsurance
protection, an especially severe catastrophe or series of
catastrophes could exceed its reinsurance protection and may
have a material adverse impact on Argo Groups business,
results of operations
and/or
financial condition.
As a
primary insurer, Argo Group may have significant exposure for
terrorist acts.
Argo Group may have exposure to losses resulting from acts of
terrorism. Even if reinsurers are able to exclude coverage for
terrorist acts or price that coverage at rates that Argo Group
considers unattractive, direct insurers, like Argo Groups
insurance company subsidiaries, might not be able to likewise
exclude terrorist acts because of regulatory constraints. If
this does occur, Argonaut, in its capacity as a primary insurer,
would have a significant gap in its reinsurance protection and
would be exposed to potential losses as a result of any
terrorist acts. These events are inherently unpredictable,
although recent events may lead to their increased frequency and
severity. It is difficult to predict occurrence of such events
with statistical certainty or to estimate the amount of loss per
occurrence they will generate.
The Terrorism Risk Insurance Act of 2002 (as amended by the
Terrorism Risk Insurance Extension Act of 2005), which we refer
to as TRIA, was enacted to ensure availability of insurance
coverage for defined terrorist acts in the United States. This
law requires insurers writing certain lines of property and
casualty insurance, including Argonaut, to offer coverage
against certified acts of terrorism causing damage within the
United States or to U.S. flagged vessels or aircraft. In
return, the law requires the federal government, should an
insurer comply with the procedures of the law, to indemnify the
insurer for 85% of covered losses, exceeding a deductible, based
on a percentage of direct earned premiums for the previous
calendar year, up to an industry limit of $100 billion
resulting from covered acts of terrorism. This law does not
apply to acts of domestic terrorism or acts that might otherwise
be considered acts of terrorism that are not certified by the
Secretary of the Treasury to be acts of terrorism under this
law. Argonaut continues to attempt to exclude acts of terrorism
not covered under the federal act, subject to state approvals.
Given the retention limits imposed under this law and that some
or many of Argonauts policies may not include an exclusion
for terrorism, future terrorist attacks may result in losses
that have a material adverse effect on Argonauts business,
results of operations
and/or
financial condition. The federal terrorism risk assistance
provided by TRIA will expire at the end of 2007 and it is not
currently clear whether that assistance will renewed. Any
renewal may be on substantially less favorable terms.
Litigation
and legal proceedings against Argo Groups insurance
subsidiaries could have an adverse effect on Argo Groups
business, results of operations
and/or
financial condition.
In the normal course of business, insurance companies may be
sued in a class action lawsuit and other major litigation as a
result of their insurance operations. Argo Groups
insurance companies may become involved in such lawsuits. An
adverse judgment in one or more of such lawsuits could have a
material adverse effect on Argo Groups business, results
of operation
and/or
financial condition.
34
Argo
Group faces a risk of non-availability of reinsurance, which
could materially and adversely affect Argo Groups ability
to write business and its results of operations and financial
condition.
Market conditions beyond Argo Groups control, such as the
amount of capital in the reinsurance market and natural and
man-made catastrophes, determine the availability and cost of
the reinsurance protection Argo Group can purchase. Argo Group
cannot be assured that reinsurance will remain continuously
available to the same extent and on the same terms and rates as
are currently available. If Argo Group is unable to maintain its
current level of reinsurance or purchase new reinsurance
protection in amounts that are considered sufficient, Argo Group
would either have to be willing to accept an increase in its net
exposures or reduce its insurance writings. Either of these
potential developments could have a material adverse effect on
its financial position, results of operations and cash flows.
Argo
Group faces a risk of non-collectibility of reinsurance, which
could materially and adversely affect its business, results of
operations
and/or
financial condition.
As is common practice within the insurance industry, Argo Group
will transfer a portion of the risks insured under its policies
to other companies through the purchase of reinsurance. This
reinsurance is maintained to protect the insurance subsidiaries
against the severity of losses on individual claims, unusually
serious occurrences in which a number of claims produce an
aggregate extraordinary loss and catastrophic events. Although
reinsurance does not discharge Argo Groups subsidiaries
from their primary obligation to pay for losses insured under
the policies they issue, reinsurance does make the assuming
reinsurer liable to the insurance subsidiaries for the reinsured
portion of the risk. A credit exposure exists with respect to
ceded losses to the extent that any reinsurer is unable or
unwilling to meet the obligations assumed under the reinsurance
contracts. The collectibility of reinsurance is subject to the
solvency of the reinsurers, interpretation of contract language
and other factors. Argo Group will be selective in regard to its
reinsurers, placing reinsurance with those reinsurers with
strong financial strength ratings from A.M. Best, S&P,
or a combination thereof, although the financial condition of a
reinsurer may change based on market conditions. Argo Group will
perform credit reviews on its reinsurers, focusing on, among
other things, financial condition, stability, trends and
commitment to the reinsurance business. Argo Group will also
require assets in trust, letters of credit or other acceptable
collateral to support balances due from reinsurers not
authorized to transact business in the applicable jurisdictions.
It has not always been standard business practice to require
security for balances due; therefore, certain balances are not
collateralized. A reinsurers insolvency or inability to
make payments under the terms of a reinsurance contract could
have a material adverse effect on Argo Groups business,
results of operations
and/or
financial condition.
The
failure of the risk mitigation strategies Argo Group will
utilize could have a material adverse effect on its financial
condition or results of operations.
We will utilize a number of strategies to mitigate our risk
exposure including:
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engaging in vigorous underwriting;
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carefully evaluating terms and conditions of our policies;
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focusing on our risk aggregations by geographic zones, industry
type, credit exposure and other bases; and
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ceding insurance risk to reinsurance companies.
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However, there are inherent limitations in all of these tactics.
No assurance can be given that an event or series of
unanticipated events will not result in loss levels which could
have a material adverse effect on Argo Groups financial
condition or results of operations.
Argo
Group may be unable to attract and retain qualified
employees.
We depend on our ability to attract and retain experienced
underwriting talent and other skilled employees who are
knowledgeable about our business. If the quality of our
underwriting team and other personnel decreases, we may be
unable to maintain our current competitive position in the
specialized markets in which we operate and be unable to expand
our operations into new markets, which could adversely affect
our results.
35
Argo
Groups information technology systems may fail or suffer a
loss of security which could adversely affect our
business.
Argo Groups business will be highly dependent upon the
successful and uninterrupted functioning of our computer and
data processing systems. We will rely on these systems to
perform actuarial and other modeling functions necessary for
writing business, as well as to process and make claims
payments. We will have a highly trained staff that is committed
to the development and maintenance of these systems. The failure
of these systems could interrupt our operations. This could
result in a material adverse effect on our business results.
In addition, a security breach of our computer systems could
damage our reputation or result in liability. We retain
confidential information regarding our business dealings in our
computer systems. We may be required to spend significant
capital and other resources to protect against security breaches
or to alleviate problems caused by such breaches. It is critical
that these facilities and infrastructure remain secure. Despite
the implementation of security measures, this infrastructure may
be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar
disruptive problems. In addition, we could be subject to
liability if hackers were able to penetrate our network security
or otherwise misappropriate confidential information.
Because
Argo Group will give a select group of wholesale agents limited
quoting and binding authority, their failure to comply with our
pre-established guidelines could cause our results to be
adversely affected.
Argo Group will market and distribute some of our insurance
products through a select group of wholesale agents who have
limited quoting and binding authority and who, in turn, sell our
insurance products to insureds through retail insurance brokers.
These agencies can bind certain risks that meet our
pre-established guidelines without our initial approval. If
these agents failed to comply with our underwriting guidelines
and the terms of their appointment, we could be bound on a
particular risk or number of risks that were not anticipated
when we developed the insurance products. Such actions could
adversely affect our results of operations.
Argo
Groups merger and acquisition strategy may not
succeed.
Argo Groups strategy for growth may include merger and
acquisition transactions. This strategy presents risks that
could have a material adverse effect on the Argo Groups
business and financial performance, including: (i) the
diversion of managements attention, (ii) the ability
of Argo Group to execute a transaction effectively, including
the integration of operations and the retention of employees,
and (iii) the contingent and latent risks associated with
the past operations of and other unanticipated problems arising
from a transaction partner. Argo Group cannot predict whether it
will be able to identify and complete a future transaction on
terms favorable to it. Argo Group cannot know if it will realize
the anticipated benefits of a completed transaction or if there
will be substantial unanticipated costs associated with the
transaction. In addition, a future transaction by Argo Group may
result in tax consequences at either or both the shareholder and
Argo Group level, potentially dilutive issuances of our equity
securities, the incurrence of additional debt and the
recognition of potential impairment of goodwill and other
intangible assets. Each of these factors could adversely affect
the Argo Groups financial position and results of
operations.
Argo
Group may incur significant additional
indebtedness.
Argonaut intends to borrow up to $60 million under its
credit facility to fund the special dividend. As of
March 31, 2007, Argonaut had outstanding
$144.3 million in aggregate of subordinated debt and PXRE
had outstanding $167.1 million in aggregate of subordinated
debt. Prior to or following the closing of the merger, the
parties intend to review the capital structure of the resulting
company and consider financing alternatives. As a result of such
review, Argonaut may seek to incur additional indebtedness
either through the issuance of public or private debt or through
bank or other financing. The funds raised by the incurrence of
such additional indebtedness may be used to repay existing
indebtedness of the parties, including amounts borrowed under
Argonauts credit facility to fund the special dividend,
PXREs outstanding subordinated debt and Argonauts
outstanding subordinated debt, or for general corporate purposes
of the resulting company, including additions to working
capital, capital expenditures, investments in subsidiaries or
acquisitions.
This additional indebtedness, particularly if not used to repay
existing indebtedness, could limit Argo Groups financial
and operating flexibility, including as a result of the need to
dedicate a greater portion of its cash flows
36
from operations to interest and principal payments. It may also
be more difficult for Argo Group to obtain additional financing
on favorable terms, limiting Argo Groups ability to
capitalize on significant business opportunities and making Argo
Group more vulnerable to economic downturns.
Risks
Related to PXRE Legacy Issues
PXRE
faces significant litigation related to alleged securities law
violations.
PXRE has recently experienced material adverse events, including
the downgrading of PXREs ratings in February 2006, and the
market price of PXREs common shares has declined
materially and may continue to do so, regardless of PXREs
financial condition or PXREs ability to meet its
contractual and financial obligations. Several class action
lawsuits have been filed against PXRE and certain of PXREs
officers on behalf of a putative class consisting of investors
who purchased PXREs publicly traded securities between
July 28, 2005 and February 16, 2006. The complaints
allege, among other things, that PXRE made false and misleading
statements regarding loss estimates in violation of the federal
securities laws. Pursuant to an opinion and order of the United
States District Court for the Southern District of New York
dated March 30, 2007, these lawsuits have been consolidated
into one proceeding. It is possible that additional lawsuits
relating to the recent decline in PXREs share price may be
filed against PXRE
and/or
certain of PXREs current and former officers and directors
in the future. It is also possible that regulators may institute
administrative or regulatory proceedings against PXRE in the
future.
The pending securities litigation is currently at a very early
stage and PXRE has very little information as to the course it
will take. This litigation, which could continue for a
significant period, and any future proceedings could be
expensive and could divert managements attention and other
resources away from other matters. Any such diversion of
managements attention or other resources could negatively
and materially impact PXREs business. PXRE cannot predict
the timing of any trials with respect to the pending securities
litigation or any future proceedings. PXRE is not currently able
to estimate legal defense costs or the amount of any damages
that PXRE may be required to pay in connection with the pending
securities litigation or any future proceedings. In view of the
inherent difficulty of predicting the outcome of litigation,
particularly where there are many claimants and the claimants
seek indeterminate damages, PXRE is unable to predict the
outcome of these matters and at this time cannot reasonably
estimate the possible loss or range of loss with respect to the
pending securities litigation or any future proceedings.
PXRE has not established any reserves for any potential
liability relating to the pending securities litigation, other
than $1.0 million for legal fees. PXRE has insurance
coverage with respect to claims such as the securities
litigation, but it is not currently possible to determine
whether such insurance coverage will be adequate to cover
PXREs defense costs and any losses.
On February 21, 2007, PXRE entered into a tolling and
standstill agreement with certain institutional investors in
connection with potential claims arising out of the private
placement of Series D Perpetual Non-voting Preferred Shares
of PXRE that were sold pursuant to a private placement
memorandum dated on or about September 28, 2005.
PXREs
investment portfolio is subject to significant market and credit
risks which could result in an adverse impact on PXREs
financial position or results.
PXREs invested assets consist primarily of debt
instruments with fixed maturities, short-term investments and,
to a lesser extent, hedge funds and interests in mezzanine bond
and equity limited partnerships. At March 31, 2007, 99.3%
of PXREs investment portfolio consisted of fixed
maturities and short-term investments and 0.7% consisted of
hedge funds and other investments.
In February 2006, $490.5 million of fixed maturity
investments were liquidated and the proceeds were invested in
cash equivalents. As of March 31, 2007, $570.2 million
of PXREs invested assets were in short-term investments.
This could have a material negative impact on PXREs future
income from its investment portfolio.
PXREs invested assets are subject to market-wide risks and
fluctuations as well as to risks inherent in particular
securities. Although PXRE seeks to preserve its capital, PXRE
has invested in a portfolio of hedge funds and other privately
held securities. These investments were designed to provide
diversification of risk; however, such investments entail
substantial risks. There can be no assurance that PXREs
investment objectives will be
37
achieved, and results may vary substantially over time. In
addition, although PXRE seeks to employ investment strategies
that are not correlated with its reinsurance exposures, losses
in PXREs investment portfolio may occur at the same time
as underwriting losses and, therefore, exacerbate such
losses adverse effect on PXRE. While PXREs primary
objective is capital preservation, all PXREs portfolios
have a degree of risk. See Investments in
Item 7A of PXREs
Form 10-K
for the year ended December 31, 2006.
Risks Related to PXREs Fixed Maturity
Investments. PXRE is exposed to potential losses
from the risks inherent in its fixed maturity investments. The
two most significant risks inherent in PXREs fixed income
portfolio are interest rate risk and credit risk:
PXREs principal fixed maturity market risk exposure is to
changes in U.S. interest rates. Changes in interest rates
may affect the fair value of PXREs fixed maturity
portfolio and borrowings (in the form of trust preferred
securities). PXREs holdings subject us to exposures in the
treasury, municipal, and various asset-backed sectors. Changes
in interest rates could also cause a potential underperformance
in PXREs exited finite coverages and shortfalls in cash
flows necessary to pay fixed rate amounts due to exited finite
contract counterparties.
PXRE is also exposed to potential losses from changes in
probability of default and from defaulting counterparties with
respect to its investments. A majority of PXREs investment
portfolio consists of fixed maturities and short-term
investments rated A or A2 or better by
Moodys or S&P. The average credit rating of the fixed
maturities and short-term investments at March 31, 2007 is
AAA. PXREs investment portfolio also contains
privately held fixed maturities that are not traded on a
recognized exchange. A deterioration in the credit quality of
PXREs investments or its inability to liquidate any of its
privately held investments promptly could have an adverse effect
on PXREs financial condition.
Risks Related to PXREs Hedge
Fund Investments. PXRE is exposed to
potential losses from the risks inherent in its portfolio of
hedge funds. The three most significant risks inherent in
PXREs hedge fund portfolio are liquidity risk, credit risk
and market risk:
Liquidity risk exists in the hedge fund portfolio because there
are delays between giving notice to redeem a hedge fund
investment and receiving proceeds. In February 2006, redemption
orders were placed with PXREs hedge funds in the amount of
$150 million. At March 31, 2007, PXRE had
$5.6 million in hedge funds subject to redemption notices.
The redemption terms are defined in the offering documents and
generally require notice periods and time scales for settlement.
PXRE remains at risk during the notice period, which typically
specifies a month or quarter end reference point at which to
calculate redemption proceeds. The risk also exists that a hedge
fund may be unable to meet its redemption obligations. A hedge
fund may be faced with excessive redemption notices and illiquid
underlying investments.
Credit risk exists in the hedge fund portfolio where hedge funds
are net long in a particular security, or group of correlated
securities. Where a hedge fund is net long in a security that
defaults, or suffers an adverse credit event, PXRE is exposed to
loss. PXRE exposure to any individual hedge fund is limited to
the carrying value of the investment, and PXRE invests in a
diversified portfolio of hedge funds that utilize different
strategies and markets to reduce this risk. However, different
hedge funds in the portfolio may be net long in the same or
correlated securities at the same time, which could have an
adverse effect on the value of the portfolio and thus
PXREs financial condition.
PXRE invests in hedge funds that trade in securities using
strategies that are generally market neutral. The hedge fund
investments do not generally benefit from rising equity or bond
markets, and have
38
demonstrated historically low correlation of returns to equity
market indices. However, hedge funds may maintain leveraged net
long positions, and this can expose PXRE to market risks.
PXRE
has exited the finite reinsurance business, but claims in
respect of finite reinsurance could have an adverse effect on
PXREs operating results.
Finite risk reinsurance contracts are highly customized and
typically involve complicated structural elements. Generally
accepted accounting principles in the United States, which we
refer to as GAAP, govern whether or not a contract should be
accounted for as reinsurance. Contracts that do not meet these
GAAP requirements may not be accounted for as reinsurance and
are required to be accounted for as deposits. As reported in the
past few years, certain finite insurance and reinsurance
arrangements are coming under scrutiny by the New York Attorney
Generals Office, the SEC and other governmental
authorities. According to the press, investigators have asserted
that the contracts in question were accounted for in an improper
or fraudulent manner.
PXRE sold finite reinsurance prior to June 30, 2004, and
from time to time, has purchased finite reinsurance. Although
PXRE has received no request for information or documents in
connection with the investigations with respect to any finite
reinsurance PXRE sold or purchased from time to time, certain of
its customers or reinsurers have been asked to provide or have
provided documents and information in the framework of these
investigations with respect to reinsurance contracts to which
PXRE is a party. Any claim challenging the appropriateness of
the accounting treatment of the finite contracts PXRE underwrote
or purchased could result in negative publicity, costs and, in
the event of any regulatory or judicial decision being entered
against PXRE, ultimately fines and penalties, all of which could
have a material adverse effect on PXREs business and
operating results.
Reserving
for losses includes significant estimates, which are also
subject to inherent uncertainties.
PXREs success is dependent upon its ability to accurately
assess the risks associated with the businesses that PXRE
insures and reinsures. Claim reserves represent estimates
involving underwriting, actuarial and statistical projections,
at a given point in time, of PXREs expectations of the
ultimate settlement and administration costs of claims incurred.
PXRE utilizes actuarial models as well as historical insurance
industry loss development patterns to assist in the
establishment of appropriate claim reserves. As a property
catastrophe reinsurer, incurred losses are inherently more
volatile than those of primary insurers and reinsurers of risks
that have an established historical pattern of losses.
In reserving for catastrophe losses, PXREs estimates are
influenced by underwriting and loss information provided by
PXREs clients, industry catastrophe models and its
internal analyses of this information. As an event matures, PXRE
relies more and more on its development patterns by type of
event as well as contract information to project ultimate losses
for the event. This process can cause PXREs ultimate
estimates to differ significantly from initial projections.
PXREs estimate of the ultimate incurred gross loss and
loss expenses arising from Hurricanes Katrina, Rita and Wilma of
$1,028.5 million as of March 31, 2007 is based mainly
on modeling, a review of exposed reinsurance contracts, claims
notices received from clients, discussions with clients and loss
information provided by clients to underwriters as part of the
underwriting submissions received in connection with the January
2006 renewal process. Although PXRE has begun to receive loss
notices with respect to Hurricanes Katrina, Rita and Wilma, PXRE
has paid less than 71% of its net incurred loss with respect to
Hurricanes Katrina, Rita and Wilma as of March 31, 2007. In
addition, PXRE estimates are subject to a high level of
uncertainty arising out of extremely complex and unique
causation and coverage issues, including the appropriate
attribution of losses to wind or flood damage as opposed to
other perils such as fire, business interruption or civil
commotion. The underlying policies generally contain exclusions
for flood damage; however, water damage caused by wind may be
covered. PXRE expects that causation and coverage issues may not
be resolved for a considerable period of time and may be
influenced by evolving legal and regulatory developments.
PXREs actual losses from Hurricanes Katrina, Rita and
Wilma may exceed its estimate as a result of, among other
things, the receipt of additional information from clients, the
attribution of losses to coverages that for the purpose of its
estimates PXRE assumed would not be exposed, and inflation in
repair costs due to the limited
39
availability of labor and materials, in which case PXREs
financial results could be further materially adversely affected.
In developing its estimate for Hurricane Katrina, PXRE has also
assumed flood damage exclusions contained in its cedents
underlying insurance policies will be effective. PXRE
understands that various lawsuits are pending seeking to
invalidate such flood damage exclusions on various grounds. If
such lawsuits were to successfully invalidate the underlying
flood damage exclusions or if the court or a jury were to find
that an insurer had not adequately established that a loss was
attributable to flood rather than wind, PXREs liabilities
for losses and loss expenses relating to Hurricane Katrina could
prove to be inadequate, with a consequent adverse impact on
PXREs shareholders equity in future periods. Based
on reports in the press, PXRE understands that State Farm, one
of the nations largest insurers, has been engaging in
various settlement discussions concerning claims involving the
controversies over the flood exclusion. PXRE does not reinsure
State Farm, but it is unclear at this time how any potential
settlements by State Farm would impact or influence PXREs
cedents. If PXREs clients were to incur widespread
additional losses as a result of settlements or adverse
litigation results involving the flood versus wind controversy,
it is possible that PXREs actual losses from Hurricane
Katrina will exceed its estimate.
In PXREs casualty and finite business, given its limited
experience, PXRE does not have established historical loss
development patterns that can be used to establish loss
liabilities. For these lines of business, PXRE relies on loss
development patterns that have been estimated from industry or
client data, which may not accurately represent the true
development pattern for the business PXRE wrote. For property
lines of business, reserves may differ from ultimate settlement
values due to the infrequency of some types of catastrophe
losses, the incompleteness of information in the wake of a major
catastrophe and delay in receiving that information. PXRE may
also seek to enter into commutations of reinsurance contracts of
exited lines of business. Actual claims and claim expenses paid,
including commutations, may deviate, perhaps substantially, from
the reserve estimates reflected in PXREs financial
statements.
If PXREs claim reserves are determined to be inadequate,
PXRE will be required to increase claim reserves at the time of
such determination with a corresponding reduction in its net
income in the period in which the deficiency is rectified. It is
possible that claims in respect of events that have occurred
could exceed PXREs claim reserves and have a material
adverse effect on PXREs operating results, in a particular
period, or its financial condition in general. As a compounding
factor, although most insurance contracts have policy limits,
the nature of property and casualty insurance and reinsurance is
that losses can exceed policy limits for a variety of reasons
and could significantly exceed the premiums received on the
underlying policies, thereby further adversely affecting
PXREs financial condition.
PXRE
has exhausted its retrocessional coverage with respect to
Hurricane Katrina, leaving it exposed to further
losses.
Based on PXREs current estimate of losses related to
Hurricane Katrina, PXRE has exhausted its retrocessional
protection with respect to this event, meaning that PXRE has no
retrocessional coverage available should PXREs Hurricane
Katrina losses prove to be greater than currently estimated.
PXRE cannot be sure that retrocessional coverage will be
available to it on acceptable terms, or at all, in the future.
PXREs business, financial condition and operating results
could be materially adversely impacted by additional losses
related to Hurricane Katrina.
PXRE
may be adversely affected by foreign currency
fluctuations.
Although PXREs functional currency is the
U.S. dollar, premium receivables and loss reserves include
business denominated in currencies other than U.S. dollars.
PXRE is exposed to the possibility of significant claims in
currencies other than U.S. dollars. PXRE may, from time to
time, experience losses resulting from fluctuations in the
values of these
non-U.S. currencies,
which could adversely affect its operating results. While PXRE
holds positions denominated in foreign currencies to mitigate,
in part, the effects of currency fluctuations on its operating
results, PXRE currently does not hedge its currency exposures
before a catastrophic event that may produce a claim.
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PXREs
reliance on reinsurance brokers exposes PXRE to their credit
risk.
In accordance with industry practice, PXRE frequently pays
amounts owed on claims under PXREs policies to reinsurance
brokers, and these brokers, in turn, pay these amounts over to
the insurers that have reinsured a portion of their liabilities
with PXRE (we refer to these insurers as ceding insurers). In
some jurisdictions, if a broker fails to make such a payment,
PXRE might remain liable to the ceding insurer for the
deficiency. Conversely, in certain jurisdictions, when the
ceding insurer pays premiums for these policies to reinsurance
brokers for payment over to PXRE, these premiums are considered
to have been paid and the ceding insurer will no longer be
liable to PXRE for those amounts, whether or not PXRE has
actually received the premiums. PXRE is aware of one instance in
recent years, involving an insignificant amount, in which a
broker did not forward premiums to PXRE. Consequently, in
connection with the settlement of reinsurance balances, PXRE
assumed a degree of credit risk associated with brokers around
the world. If PXRE completes the merger or implements another
strategic alternative, PXRE is likely to continue to rely on
such brokers and assume this risk.
Risks
Related to Argonaut Legacy Issues
If
Argonauts actual losses from insureds exceed its loss
reserves, Argonauts financial results would be adversely
affected.
Argonaut records reserves for specific claims incurred and
reported and reserves for claims incurred but not reported. The
estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are
based on Argonauts particular experience with the type of
risk involved and its knowledge of the circumstances surrounding
each individual claim. Reserves for reported claims consider
Argonauts estimate of the ultimate cost to settle the
claims, including investigation and defense of the claim, and
may be adjusted for differences between costs originally
estimated and costs re-estimated or incurred. Reserves for
incurred but not reported claims are based on the estimated
ultimate cost of settling claims, including the effects of
inflation and other social and economic factors, using past
experience adjusted for current trends and any other factors
that would modify past experience. Argonaut uses a variety of
statistical and actuarial techniques to analyze current claim
costs, frequency and severity data, and prevailing economic,
social and legal factors. While Argonauts management
believes that amounts included in its consolidated financial
statements are adequate, there can be no assurance that future
changes in loss development, favorable or unfavorable, will not
occur. The estimates are periodically reviewed and any changes
are reflected in current operations.
Argonauts objective is to set reserves that are adequate
and represent Argonaut managements best estimate; that is,
the amounts originally recorded as reserves should at least
equal the ultimate cost to investigate and settle claims.
However, the process of establishing adequate reserves is
inherently uncertain, and the ultimate cost of a claim may vary
materially from the amounts reserved. The reserving process is
particularly imprecise for claims involving asbestos,
environmental and other long-tailed exposures (those exposures
for which claims take a long time to develop or for which the
amount of claims payments are not known for a long period of
time) confronting property and casualty insurers. Argonaut
regularly monitors and evaluates loss and loss adjustment
expense reserve developments to verify reserve adequacy. Any
adjustment to reserves is reflected in underwriting results for
the accounting period in which the adjustment is made.
Argonaut has received asbestos and environmental liability
claims arising out of general liability coverage primarily
written in the 1970s and into the mid-1980s. Argonaut has a
specialized claims unit that investigates and adjusts asbestos
and environmental claims. Beginning in 1986, nearly all standard
liability policies contained an express exclusion for asbestos
and environmental related claims. All policies currently being
issued by Argonauts insurance subsidiaries contain this
exclusion. In addition to the previously described general
uncertainties encountered in estimating reserves, there are
significant additional uncertainties in estimating the amount of
Argonauts potential losses from asbestos and environmental
claims. Reserves for asbestos and environmental claims cannot be
estimated with traditional loss reserving techniques that rely
on historical accident year development factors due to the
uncertainties surrounding these types of claims. Among the
uncertainties impacting the estimation of such losses are:
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potentially long waiting periods between exposure and emergence
of any bodily injury or property damage;
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difficulty in identifying sources of environmental or asbestos
contamination;
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difficulty in properly allocating responsibility
and/or
liability for environmental or asbestos damage;
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changes in underlying laws and judicial interpretation of those
laws;
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potential for an environmental or asbestos claim to involve many
insurance providers over many policy periods;
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long reporting delays from insureds to insurance companies;
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historical data concerning asbestos and environmental losses,
which is more limited than historical information on other types
of claims;
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questions concerning interpretation and application of insurance
coverage; and
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uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
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Argonauts management believes that these factors continue
to render traditional actuarial methods less effective at
estimating reserves for asbestos and environmental losses than
reserves on other types of losses. Argonaut establishes reserves
to the extent that, in the judgment of its management, the facts
and prevailing law reflect an exposure for Argonaut not
dissimilar to those results the industry has experienced with
regard to asbestos and environmental related claims. Argonaut
annually reviews its loss and loss adjustment expense reserves
for its runoff lines of business, including its asbestos and
environmental claims. The review entails a detailed analysis of
its direct and assumed exposure. Argonaut engages a consulting
actuary to assist it in determining a best estimate of ultimate
losses, and Argonauts management evaluates that estimate
in assessing the adequacy of the runoff loss and loss adjustment
expense reserves. Argonaut completed the 2006 analysis during
the third quarter and updated this analysis during the fourth
quarter. As a result of this analysis, Argonaut recorded an
additional $12.2 million in loss reserves in 2006.
Additionally, Argonaut strengthened its unallocated loss and
loss adjustment expense reserves by $4.7 million based on
this analysis. Argonaut will continue to monitor industry trends
and its own experience in order to determine the adequacy of its
environmental and asbestos reserves.
Through Argonauts subsidiary Rockwood Casualty Insurance
Company, which we refer to as Rockwood, it has exposure to
claims for black lung disease. Those diagnosed with black lung
disease are eligible to receive workers compensation benefits
from various federal and state programs. These programs are
continually being reviewed by the governing bodies and may be
revised without notice in such a way as to increase the level of
Argonauts exposure. Argonauts subsidiary, the Colony
Group, which we refer to as Colony, also currently underwrites
environmental and pollution coverages (on a limited number of
policies) for underground storage tanks.
Due to the uncertainties discussed above, the ultimate losses
may vary materially from current loss reserves which could have
a material adverse effect on Argo Groups future financial
condition, results of operations and cash flows.
The
effects of emerging claim and coverage issues on Argonauts
legacy business are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect Argonauts business by either
extending coverage beyond its underwriting intent or by
increasing the number or size of claims. In some instances,
these changes may not become apparent until some time after
Argonaut has issued insurance or reinsurance contracts that are
affected by the changes. As a result, the full extent of
liability under Argonauts insurance or reinsurance
contracts may not be known for many years after a contract is
issued, and its financial position and results of operations may
adversely impact Argo Group.
42
Argonauts
existing business has exposure to unpredictable catastrophes,
which can materially and adversely affect its business, results
of operations
and/or
financial condition.
Argonaut is subject to claims arising out of catastrophes that
may have a significant effect on its business, results of
operations,
and/or
financial condition. Catastrophes can be caused by various
events, including hurricanes, windstorms, earthquakes,
hailstorms, explosions, power outages, severe winter weather,
fires and intentional man-made events, such as terrorist
attacks. The incidence and severity of catastrophes are
inherently unpredictable. The extent of losses from a
catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of
the event. Insurance companies are not permitted to reserve for
catastrophes until such event takes place. Therefore, although
Argonaut actively manages its exposure to catastrophes through
its underwriting process and the purchase of reinsurance
protection, an especially severe catastrophe or series of
catastrophes could exceed its reinsurance protection and may
have a material adverse impact on Argo Groups business,
results of operations
and/or
financial condition.
As a
primary insurer, Argonauts existing business may have
significant exposure for terrorist acts.
Argonaut may have exposure to losses resulting from acts of
terrorism. Even if reinsurers are able to exclude coverage for
terrorist acts or price that coverage at rates that Argonaut
considers unattractive, direct insurers, like Argonauts
insurance company subsidiaries, might not be able to likewise
exclude terrorist acts because of regulatory constraints. If
this does occur, Argonaut, in its capacity as a primary insurer,
would have a significant gap in its reinsurance protection and
would be exposed to potential losses as a result of any
terrorist acts. These events are inherently unpredictable,
although recent events may lead to their increased frequency and
severity. It is difficult to predict occurrence of such events
with statistical certainty or to estimate the amount of loss per
occurrence they will generate.
TRIA was enacted to ensure availability of insurance coverage
for defined terrorist acts in the United States. This law
requires insurers writing certain lines of property and casualty
insurance, including Argonaut, to offer coverage against
certified acts of terrorism causing damage within the United
States or to U.S. flagged vessels or aircraft. In return,
the law requires the federal government, should an insurer
comply with the procedures of the law, to indemnify the insurer
for 85% of covered losses, exceeding a deductible, based on a
percentage of direct earned premiums for the previous calendar
year, up to an industry limit of $100 billion resulting
from covered acts of terrorism. This law does not apply to acts
of domestic terrorism or acts that might otherwise be considered
acts of terrorism that are not certified by the Secretary of the
Treasury to be acts of terrorism under this law. Argonaut
continues to attempt to exclude acts of terrorism not covered
under the federal act, subject to state approvals.
Given the retention limits imposed under this law and that some
or many of Argonauts policies may not include an exclusion
for terrorism, future terrorist attacks may result in losses
that have a material adverse effect on Argo Groups
business, results of operations
and/or
financial condition. The federal terrorism risk assistance
provided by TRIA will expire at the end of 2007 and it is not
currently clear whether that assistance will be renewed. Any
renewal may be on substantially less favorable terms.
Litigation
and legal proceedings against Argonauts insurance
subsidiaries could have an adverse effect on Argonauts
business, results of operations
and/or
financial condition.
In the normal course of business, Argonauts insurance
subsidiaries have been sued in a number of class action lawsuits
and other major litigation as a result of their insurance
operations. Argonauts insurance companies have responded
to the lawsuits and believe that there are meritorious defenses
and intend to vigorously contest these claims. The plaintiffs in
certain of these lawsuits have not quantified the amounts they
ultimately will seek to recover. In addition, in the case of
class actions, it is uncertain whether a class will be
certified, the number of persons included in any class, and the
amount of damages that are ultimately sought by the class
members. As a result, Argonaut is unable, with any degree of
certainty, to determine a range of any potential loss, or
whether such an outcome is probable or remote. However, adverse
judgments in one or more of such lawsuits could have a material
adverse effect on Argonauts business, results of
operations
and/or
financial condition.
43
Argonaut
faces a risk of non-collectibility of reinsurance, which could
materially and adversely affect Argo Groups business,
results of operations
and/or
financial condition.
As is common practice within the insurance industry, Argonaut
transfers a portion of the risks insured under its policies to
other companies through the purchase of reinsurance. This
reinsurance is maintained to protect the insurance subsidiaries
against the severity of losses on individual claims, unusually
serious occurrences in which a number of claims produce an
aggregate extraordinary loss and catastrophic events. Although
reinsurance does not discharge Argonauts subsidiaries from
their primary obligation to pay for losses insured under the
policies they issue, reinsurance does make the assuming
reinsurer liable to the insurance subsidiaries for the reinsured
portion of the risk. A credit exposure exists with respect to
ceded losses to the extent that any reinsurer is unable or
unwilling to meet the obligations assumed under the reinsurance
contracts. The collectibility of reinsurance is subject to the
solvency of the reinsurers, interpretation of contract language
and other factors. Argonaut is selective in regard to its
reinsurers, placing reinsurance with those reinsurers with
strong financial strength ratings from A.M. Best, S&P,
or a combination thereof, although the financial condition of a
reinsurer may change based on market conditions. Argonaut
performs credit reviews on its reinsurers, focusing on, among
other things, financial condition, stability, trends and
commitment to the reinsurance business. Argonaut also requires
assets in trust, letters of credit or other acceptable
collateral to support balances due from reinsurers not
authorized to transact business in the applicable jurisdictions.
It has not always been standard business practice to require
security for balances due; therefore, certain balances are not
collateralized. A reinsurers insolvency or inability to
make payments under the terms of a reinsurance contract could
have a material adverse effect on Argo Groups business,
results of operations
and/or
financial condition.
Risks
Related to PXRE through Peleus Re
Reinsurance
prices may decline, which could affect Peleus Res
profitability.
Demand for reinsurance depends on numerous factors, including
the frequency and severity of catastrophic events, levels of
capacity, general economic conditions and underwriting results
of primary property insurers. The supply of reinsurance is
related to prevailing prices, recent loss experience and levels
of surplus capacity. All of these factors fluctuate and may
contribute to price declines generally in the reinsurance
industry. Premium rates or other terms and conditions of trade
may vary in the future. If any of these factors were to cause
the demand for reinsurance to fall or the supply to rise, Peleus
Res profitability could be adversely affected.
Because
of potential exposure to catastrophes in the future, Peleus
Res financial results may vary significantly from period
to period.
As a reinsurer of property catastrophe-type coverages in the
worldwide marketplace, Peleus Res operating results in any
given period will depend to some extent on the number and
magnitude of natural and man-made catastrophes such as
hurricanes, windstorms, hailstorms, earthquakes, volcanic
eruptions, fires, industrial explosions, freezes, riots and
floods. While Peleus Re may, depending on market conditions,
purchase catastrophe retrocessional coverage for its own
protection, the occurrence of one or more major catastrophes in
any given period could nevertheless have a material adverse
impact on Peleus Res operating results and financial
condition and result in substantial liquidation of investments
and outflows of cash as losses are paid.
Peleus
Re will operate in a highly competitive environment and no
assurance can be given that Peleus Re will be able to compete
effectively in this environment.
Peleus Re will compete with numerous companies, many of whom
have credit ratings and substantially greater financial,
marketing and management resources. No assurance can be given
that Peleus Re will be able to compete successfully in the
reinsurance markets in which PXRE has historically operated.
Peleus Re will compete with reinsurers that provide
property-based lines of reinsurance, such as ACE Tempest
Reinsurance Ltd., Arch Reinsurance Ltd., Aspen Insurance
Holdings Limited, AXIS Reinsurance Company, Endurance Specialty
Insurance Ltd., Everest Reinsurance Company, IPC Re Limited,
Lloyds of London syndicates, Montpelier Reinsurance Ltd.,
Munich Reinsurance Company, Partner Reinsurance Company Ltd.,
Platinum Underwriters Holdings, Ltd., Renaissance Reinsurance
Ltd., Swiss Reinsurance Company and XL Re Ltd. A
44
number of reinsurers were also formed in Bermuda in the wake of
Hurricanes Katrina, Rita and Wilma in 2005 that are providing
additional competition.
Peleus
Res inability to provide the necessary collateral could
affect Peleus Res ability to offer reinsurance in certain
markets.
Peleus Re will not be licensed or admitted as an insurer in any
jurisdiction other than Bermuda. Because many jurisdictions do
not permit insurance companies to take credit for reinsurance
obtained from unlicensed or non-admitted insurers on their
statutory financial statements unless appropriate security
mechanisms are in place, Peleus Re anticipates that its
reinsurance clients will typically require it to post a letter
of credit or other collateral. If Peleus Re is unable to arrange
for security on commercially reasonable terms, Peleus Re could
be limited in its ability to write business for certain of its
clients.
As of April 30, 2007, Peleus Re had no committed letter of
credit facility and PXRE had $310.0 million of committed
letter of credit facilities and an uncommitted facility that
allows for letters of credit to be issued subject to
satisfactory collateral being provided to the issuing bank by
PXRE.
At March 31, 2007, PXRE had issued letters of credit in the
amount of $208.3 million which are secured by cash and
securities with a fair value of $271.2 million.
Risks
Related to Regulation
Regulatory
constraints may restrict Argo Groups ability to operate
its business.
General. Argo Groups insurance and
reinsurance subsidiaries may not be able to obtain or maintain
necessary licenses, permits, authorizations or may be able to do
so only at significant cost. In addition, Argo Group may not be
able to comply with, or obtain appropriate exemptions from, the
wide variety of laws and regulations applicable to insurance or
reinsurance companies or holding companies. Failure to comply
with or to obtain appropriate authorizations
and/or
exemptions under any applicable laws could result in
restrictions on Argo Groups ability to do business or
certain activities that are regulated in one or more of the
jurisdictions and could subject Argo Group to fines and other
sanctions, which could have a material adverse effect on Argo
Group s business.
Argo Groups Bermuda Subsidiaries. PXRE
Bermuda is registered as a Class 4 Bermuda insurance and
reinsurance company and Peleus Re is registered as a
Class 3 Bermuda insurance and reinsurance company. Among
other matters, Bermuda statutes, regulations and policies of the
BMA require PXRE Bermuda and Peleus Re to maintain minimum
levels of statutory capital, surplus and liquidity, to meet
solvency standards, to obtain prior approval of ownership and
transfer of shares and to submit to certain periodic
examinations of its financial condition. These statutes and
regulations may, in effect, restrict the ability of PXRE Bermuda
and Peleus Re to write insurance and reinsurance policies, to
make certain investments and to distribute funds. By agreement
with the BMA, PXRE Bermuda may not underwrite any new
reinsurance business without the prior consent of the BMA, other
than reinsurance of business written by Peleus Re.
The offshore insurance and reinsurance regulatory environment
has become subject to increased scrutiny in many jurisdictions,
including the United States and various states within the United
States. Compliance with any new laws or regulations regulating
offshore insurers or reinsurers could have a material adverse
effect on Argo Groups business. In addition, although
neither PXRE Bermuda nor Peleus Re believes it is or will be in
violation of insurance laws or regulations of any jurisdiction
outside Bermuda, inquiries or challenges to the insurance or
reinsurance activities of PXRE Bermuda or Peleus Re may still be
raised in the future.
Argo Groups U.S. Subsidiaries. Argo
Groups U.S. insurance subsidiaries are subject to
extensive regulation which may reduce our profitability or
inhibit our growth. Moreover, if we fail to comply with these
regulations, we may be subject to penalties, including fines and
suspensions, which may adversely affect our financial condition
and results of operations.
The U.S. insurance industry is highly regulated and
supervised. Our insurance subsidiaries are subject to the
supervision and regulation of the states in which they are
domiciled and the states in which they do business. Such
45
supervision and regulation is designed to protect our
policyholders rather than our shareholders. These regulations
are generally administered by a department of insurance in each
state and relate to, among other things:
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approval of policy forms and premium rates;
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standards of solvency, including risk-based capital measurements;
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licensing of insurers and their producers;
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restrictions on the nature, quality and concentration of
investments;
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restrictions on the ability of our insurance company
subsidiaries to pay dividends to us;
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restrictions on transactions between insurance company
subsidiaries and their affiliates;
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restrictions on the size of risks insurable under a single
policy;
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requiring deposits for the benefit of policyholders;
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requiring certain methods of accounting;
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periodic examinations of our operations and finances;
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prescribing the form and content of records of financial
condition required to be filed; and
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requiring additional reserves as required by statutory
accounting rules.
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State insurance departments also conduct periodic examinations
of the affairs of insurance companies and require the filing of
annual and other reports relating to financial condition,
holding company issues and other matters. These regulatory
requirements may adversely affect or inhibit our ability to
achieve some or all of our business objectives.
In addition, regulatory authorities have relatively broad
discretion to deny or revoke licenses for various reasons,
including the violation of regulations. In some instances, we
follow practices based on our interpretations of regulations or
practices that we believe may be generally followed by the
industry. These practices may turn out to be different from the
interpretations of regulatory authorities. If we do not have the
requisite licenses and approvals or do not comply with
applicable regulatory requirements, insurance regulatory
authorities could preclude or temporarily suspend us from
carrying on some or all of our activities or otherwise penalize
us. This could adversely affect our ability to operate our
business.
Finally, changes in the level of regulation of the insurance
industry or changes in laws or regulations themselves or
interpretations by regulatory authorities could adversely affect
our ability to operate our business.
Argo
Groups U.S. insurance subsidiaries will be subject to
the risk-based capital provisions under The Insurers Model
Act.
The risk-based capital system is designed to measure whether the
amount of available capital is adequate to support the inherent
specific risks of each insurer. Risk-based capital is calculated
annually. State regulatory authorities use the risk-based
capital formula to identify insurance companies that may be
undercapitalized and thus may require further regulatory
attention. The formula prescribes a series of risk measurements
to determine a minimum capital amount for an insurance company,
based on the profile of the individual company. The ratio of a
companys actual policyholder surplus to its minimum
capital requirements will determine whether any state regulatory
action is required.
The risk-based capital system in The Insurers Model Act provides
four levels of regulatory activity if the risk-based capital
ratio yielded by the calculation falls below specified minimums.
At each of four successively lower risk-based capital ratios
specified by statute, increasing regulatory remedies become
available, some of which are mandatory. The four levels are:
(i) Company Action Level Event, (ii) Regulatory
Action Level Event, (iii) Authorized Control
Level Event, and (iv) Mandatory Control
Level Event. As of December 31, 2006, all of our
insurance subsidiaries had risk-based capital ratios that exceed
specified minimums. If we fall below the minimum acceptable
risk-based capital level, we would be subject to additional
regulation.
46
Argo
Groups U.S. subsidiaries affiliated company
transactions will be subject to regulation by certain
states.
All states have enacted legislation that regulates transactions
with related companies. Such regulation generally provides that
transactions between related companies must be fair and
equitable. Transfers of assets among such affiliated companies,
certain dividend payments from insurance subsidiaries and
certain material transactions between companies within the
system may be subject to prior notice to, or prior approval by,
state regulatory authorities. If Argo Group is unable to obtain
the requisite prior approval for a specific transaction, we
would be precluded from taking the action which could adversely
affect our operations.
If
PXRE Bermuda or Peleus Re becomes subject to insurance statutes
and regulations in jurisdictions other than Bermuda or there are
changes in Bermuda law or regulations or the application of
Bermuda law or regulations, there could be a significant and
negative impact on their businesses.
PXRE Bermuda, as a registered Bermuda Class 4 insurer, and
Peleus Re, as a registered Bermuda Class 3 insurer, are
subject to regulation and supervision in Bermuda. Bermuda
insurance statutes, regulations and policies of the BMA require
PXRE Bermuda and Peleus Re to, among other things:
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maintain a minimum level of capital, surplus and liquidity;
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satisfy solvency standards;
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restrict dividends and distributions;
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obtain prior approval of ownership and transfer of shares;
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appoint an approved loss reserve specialist;
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maintain a principal office and appoint and maintain a principal
representative in Bermuda; and
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provide for the performance of certain periodic examinations of
PXRE Bermuda and its financial condition.
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In addition to the above, PXRE Bermuda has agreed to submit to
additional regulatory oversight by the BMA effective
March 12, 2007. Please refer to the section entitled
Risk Factors Risks Related to the Resulting
Companys Operations After the Completion of the
Merger Risks Related to Regulation beginning
on page 45, for a full discussion of this matter.
These statutes and regulations may, in effect, restrict
PXREs ability to write reinsurance policies, to distribute
funds and to pursue its investment strategy.
PXRE does not presently intend that either PXRE Bermuda or
Peleus Re will be admitted to do business in any jurisdiction in
the United States, the United Kingdom or elsewhere (other than
Bermuda). However, PXRE cannot assure you that insurance
regulators in the United States, the United Kingdom or elsewhere
will not review the activities of PXRE Bermuda or Peleus Re or
related companies or their agents and claim that PXRE Bermuda or
Peleus Re is subject to such jurisdictions licensing
requirements. If any such claim is successful and PXRE Bermuda
or Peleus Re must obtain a license, PXRE may be subject to
taxation in such jurisdiction. (In certain circumstances, PXRE
may be subject to tax in a jurisdiction even if it is not
licensed by such jurisdiction. See Risks
Related to Taxation beginning on page 52.) In
addition, PXRE Bermuda and Peleus Re are subject to indirect
regulatory requirements imposed by jurisdictions that may limit
their ability to provide insurance or reinsurance. For example,
the ability of PXRE Bermuda and Peleus Re to write insurance or
reinsurance may be subject, in certain cases, to arrangements
satisfactory to applicable regulatory bodies. Proposed
legislation and regulations may have the effect of imposing
additional requirements upon, or restricting the market for,
alien insurers or reinsurers with whom domestic companies place
business.
Generally, Bermuda insurance statutes and regulations applicable
to PXRE Bermuda and Peleus Re are less restrictive than those
that would be applicable if it were governed by the laws of any
state in the United States. In the past, there have been
congressional and other initiatives in the United States
regarding proposals to supervise and regulate insurers domiciled
outside the United States. If in the future either PXRE Bermuda
or Peleus Re becomes subject to any insurance laws of the United
States or any state thereof or of any other jurisdiction, PXRE
cannot
47
assure you that PXRE Bermuda or Peleus Re would be in compliance
with those laws or that coming into compliance with those laws
would not have a significant and negative effect on the business
of PXRE Bermuda or Peleus Re.
The process of obtaining licenses is very time consuming and
costly, and PXRE may not be able to become licensed in a
jurisdiction other than Bermuda, should it choose to do so. The
modification of the conduct of PXREs business resulting
from its becoming licensed in certain jurisdictions could
significantly and negatively affect PXREs business. In
addition PXREs inability to comply with insurance statutes
and regulations could significantly and adversely affect its
business by limiting PXREs ability to conduct business as
well as subjecting PXRE to penalties and fines.
Because PXRE is incorporated in Bermuda, PXRE is subject to
changes in Bermuda law and regulation that may have an adverse
impact on its operations, including imposition of tax liability
or increased regulatory supervision. In addition, PXRE will be
exposed to changes in the political environment in Bermuda. The
Bermuda insurance and reinsurance regulatory framework recently
has become subject to increased scrutiny in many jurisdictions,
including in the United States and in various states within the
United States. PXRE cannot predict the future impact on its
operations of changes in the laws and regulations to which PXRE
is or may become subject.
Argo
Group may be unable to obtain extensions of work permits for its
employees, which may cause its business to be adversely
affected.
Under Bermuda law, non-Bermudians (other than spouses of
Bermudians or holders of permanent residence certificates) may
not engage in any gainful occupation in Bermuda without the
specific permission of the appropriate government authority. The
Bermuda government will issue a work permit for a specific
period of time, which may be extended upon showing that, after
proper public advertisements, no Bermudian (or spouse of a
Bermudian or holder of a permanent residence certificate) is
available who meets the minimum standards for the advertised
position. The Bermuda government has a policy that limits the
duration of work permits to six years, subject to certain
exemptions for key employees. A significant number of Argo
Groups key officers, including an executive vice president
and key reinsurance underwriters of PXRE, are working in Bermuda
under work permits that will expire over the next two years. The
Bermuda government could refuse to extend these work permits. If
any of Argo Groups senior executive officers were not
permitted to remain in Bermuda, Argo Groups operations
could be disrupted and its financial performance could be
adversely affected.
Risks
Related to an Investment in Argo Groups Common
Shares
Argo
Groups share price and trading volume may be subject to
significant fluctuations in response to a number of events and
factors, including:
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the completion of the merger and the level of success in
integrating the businesses of PXRE and Argonaut and pursuing the
Peleus Re business plan;
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potential shareholder litigation and regulatory investigations
relating to the recent decline in PXREs share price,
ratings downgrade and catastrophe losses;
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natural catastrophes or other events that may impact or be
perceived by investors as impacting the insurance industry,
generally, and the reinsurance industry, in particular;
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quarterly variations in Argo Groups operating results;
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changes in the markets expectations about Argo
Groups future operating results;
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changes in financial estimates and recommendations by securities
analysts concerning Argo Group or the reinsurance industry
generally;
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operating and stock price performance of other companies that
investors may deem comparable;
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news reports relating to Argo Groups business and trends
in Argo Groups markets;
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changes in the laws and regulations affecting Argo Groups
business;
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48
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acquisitions and financings by Argo Group or others in Argo
Groups industry; and
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sales or acquisitions of substantial amounts of Argo
Groups common shares by Argo Groups directors and
executive officers or principal shareholders, or the perception
that such sales could occur.
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In addition, in recent years the stock market has experienced
extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities issued by
many companies for reasons unrelated to their operating
performance. These broad market fluctuations may materially
adversely affect Argo Groups share price, regardless of
Argo Groups operating results.
Argo
Group will be a holding company and if its subsidiaries do not
make dividend payments to Argo Group, Argo Group may not be able
to pay dividends or other obligations.
Argo Group will be a holding company with no operations or
significant assets other than the share capital of its
subsidiaries.
PXRE effected an internal reorganization of its subsidiaries on
March 15, 2005. The purpose of the reorganization was to
consolidate all of PXREs non-Bermudian subsidiaries under
a newly formed holding company established in Ireland, PXRE
Ireland. PXRE Ireland is a wholly owned subsidiary of PXRE
Bermuda. In the reorganization, PXRE Reinsurance (Barbados) Ltd.
distributed all of the common shares of PXRE Delaware to PXRE
Bermuda. PXRE Bermuda then contributed the common shares of PXRE
Delaware and the common shares of PXRE Europe to PXRE Ireland.
Argo Group will rely primarily on cash dividends from its
subsidiaries to pay its operating expenses, including debt
service payments, shareholder dividends, if any, income taxes
and other obligations that may arise from time to time. Argo
Group expects future dividends and other permitted payments from
these subsidiaries to be its principal source of funds to pay
expenses and dividends. The payment of dividends by Argo
Groups insurance and reinsurance subsidiaries to Argo
Group is limited under Bermuda law, Irish law and under certain
insurance statutes of various U.S. states in which they are
licensed to transact business. Argo Groups
U.S. insurance subsidiaries are subject to state regulatory
restrictions that limit the maximum amount of annual dividends
or other distributions, including loans or cash advances,
available to shareholders without prior approval of the state
regulatory authorities. As of January 1, 2007, PXRE
Reinsurance cannot pay any dividends without the prior approval
of the Insurance Commissioner of the State of Connecticut.
Bermuda insurance laws require PXRE Bermuda and Peleus Re to
maintain certain measures of solvency and liquidity, and further
limit the amount by which PXRE can reduce capital and surplus
without prior regulatory approval. Moreover, as a precondition
to the licensing of Peleus Re, PXRE Bermuda has agreed to submit
to additional regulatory oversight by the BMA. PXRE agreed that
effective March 12, 2007 PXRE Bermuda will not write any
insurance business without the approval of the BMA other than
reinsurance of business written by Peleus Re.
PXRE also agreed with the BMA that effective March 12,
2007, PXRE Bermuda, before reducing its total statutory capital
by 10% or more, in the aggregate, as set out in its previous
years financial statements, in any calendar year, shall
obtain the BMAs approval. PXRE Bermuda may reduce its
total statutory capital, as set out in its previous years
financial statements, by less than 10% in the aggregate in any
calendar year, provided that at least fourteen days before
payment of such distribution it files with the BMA a certificate
signed by the insurers principal representative and two of
its directors which states that, in the opinion of those signing
the certificate, the return and reduction of statutory capital
will not cause the insurer to fail to meet its relevant margins.
Additionally, PXRE Bermuda, before declaring a dividend in
respect of any financial year which would exceed 20% of its
total statutory capital and surplus as shown on its statutory
balance sheet in relation to the previous financial year, must
obtain the BMAs approval. PXRE Bermuda may declare and pay
dividends in respect of any financial year which would not
exceed 20% of its total statutory capital and surplus as shown
on its statutory balance sheet in relation to the previous
financial year, provided that at least fourteen days before
payment of such dividend it files with the BMA a certificate
signed by its principal representative and two of its directors
which states that, in the opinion of those signing the
certificate, the payment of such dividend will not cause PXRE
Bermuda to fail to meet its relevant margins.
49
PXRE Bermuda is prohibited from declaring or paying any
dividends during any financial year it is in breach of its
minimum solvency margin or minimum liquidity ratio or if the
declaration or payment of such dividends would cause it to fail
to meet such margin or ratio. If it fails to meet its minimum
solvency margin or minimum liquidity ratio on the last day of
any financial year, the insurer will be prohibited, without the
approval of the BMA, from declaring or paying any dividends
during the next financial year. If its total statutory capital
and surplus falls to $75.0 million or less, it will have to
comply with additional reporting requirements as mandated by the
BMA.
U.S. persons
who own Argo Groups common shares may have more difficulty
in protecting their interests than U.S. persons who are
shareholders of a U.S. corporation.
The Companies Act 1981 of Bermuda, which we refer to as the
Companies Act, which applies to Argo Group, differs in certain
material respects from laws generally applicable to
U.S. corporations and their shareholders. Set forth below
is a summary of certain significant provisions of the Companies
Act applicable to Argo Group which includes, where relevant,
information on modifications thereto adopted pursuant to
PXREs bye-laws which differ in certain respects from
provisions of Delaware corporate law. Because the following
statements are summaries, they do not discuss all aspects of
Bermuda law that may be relevant to Argo Group and its
shareholders. See Comparison of Shareholder Rights and
Corporate Governance Matters beginning on page 151.
Interested Directors. Under Bermuda law and
PXREs bye-laws, a transaction entered into by Argo Group
in which a director has an interest will not be voidable by Argo
Group, and such director will not be liable to Argo Group for
any profit realized pursuant to such transaction, provided the
nature of the interest is disclosed at the first opportunity at
a meeting of directors, or in writing to the directors. In
addition, PXREs bye-laws allow an interested director to
be taken into account in determining whether a quorum is present
and to vote on a transaction in which that director has an
interest following a declaration of the interest pursuant to the
Companies Act, provided that the director is not disqualified
from doing so by the chairman of the meeting. Under Delaware
law, a transaction with an interested director would not be
voidable if:
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the material facts as to the interested directors
relationship or interests were disclosed or were known to the
board of directors and the board of directors in good faith
authorized the transaction by the affirmative vote of a majority
of the disinterested directors;
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such material facts were disclosed or were known to the
shareholders entitled to vote on such transaction and the
transaction was specifically approved in good faith by vote of
the majority of shares entitled to vote thereon; or
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the transaction was fair as to the corporation as of the time it
was authorized, approved or ratified.
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Under Delaware law, an interested director could be held liable
for a transaction in which such director derived an improper
personal benefit.
Certain Transactions with Significant
Shareholders. As a Bermuda company, upon the
approval of Argo Groups board of directors, Argo Group may
enter into certain business transactions with its significant
shareholders, including asset sales, in which a significant
shareholder receives, or could receive, a financial benefit that
is greater than that received, or to be received, by other
shareholders without obtaining prior approval from Argo Group
shareholders. Amalgamations, including amalgamations with an
interested shareholder, require the approval of the board of
directors and a resolution of shareholders approved by the
affirmative vote of three-fourths of those voting at such
meeting and the quorum shall be two persons holding or
represented by proxy of more than one-third of the issued shares
of Argo Group. If Argo Group was a Delaware corporation, a
business combination (which, for this purpose, includes mergers
and asset sales of greater than 10% of Argo Groups assets
that would otherwise be considered transactions in the ordinary
course of business) with an interested shareholder, would
require, subject to certain exceptions, prior approval from
shareholders holding at least two-thirds of its outstanding
common shares not owned by such interested shareholder for a
period of three years from the time the person became an
interested shareholder, unless Argo Group opted out of the
relevant Delaware statute.
Shareholders Suits. The rights of
shareholders under Bermuda law are not as extensive as the
rights of shareholders in many U.S. jurisdictions. Class
actions and derivative actions are generally not available to
shareholders under the laws of Bermuda. However, the Bermuda
courts ordinarily would be expected to follow
50
English case law precedent, which would permit a shareholder to
commence an action in Argo Groups name to remedy a wrong
done to Argo Group where an act is alleged to be beyond Argo
Groups corporate power, is illegal or would result in the
violation of Argo Groups memorandum of association or
bye-laws. Furthermore, consideration would be given by the court
to acts that are alleged to constitute a fraud against the
minority shareholders or where an act requires the approval of a
greater percentage of Argo Groups shareholders than
actually approved it. The winning party in such an action
generally would be able to recover a portion of attorneys
fees incurred in connection with such action. Argo Groups
bye-laws provide that shareholders waive all claims or rights of
action that they might have, individually or in Argo
Groups right, against any director or officer for any act
or failure to act in the performance of such directors or
officers duties, except with respect to any fraud or
dishonesty of such director or officer. Class actions and
derivative actions generally are available to shareholders under
Delaware law for, among other things, breach of fiduciary duty,
corporate waste and actions not taken in accordance with
applicable law. In such actions, the court has discretion to
permit the winning party to recover attorneys fees
incurred in connection with such action.
Indemnification of Directors and
Officers. Under Bermuda law and PXREs
bye-laws, Argo Group may indemnify Argo Group directors,
officers or any other person appointed to a committee of the
board of directors (and their respective heirs, executors or
administrators) to the full extent permitted by law against all
actions, costs, charges, liabilities, loss, damage or expense
incurred or sustained by such person by reason of any act done,
concurred in or omitted in the conduct of Argo Groups
business or in the discharge of
his/her
duties; provided that such indemnification shall not extend to
any matter in which any of such persons is found, in a final
judgment or decree not subject to appeal, to have committed
fraud or dishonesty. Under Delaware law, a corporation may
indemnify a director or officer of the corporation against
expenses (including attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in
defense of an action, suit or proceeding by reason of such
position if (i) such director or officer acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and
(ii) with respect to any criminal action or proceeding,
such director or officer had no reasonable cause to believe his
conduct was unlawful.
Committees of the Board of
Directors. PXREs bye-laws provide, as
permitted by Bermuda law, that the board of directors may
delegate any of its powers to committees that the board
appoints, and those committees may consist partly or entirely of
non-directors.
Delaware law allows the board of directors of a corporation to
delegate many of its powers to committees, but those committees
may consist only of directors.
Argo
Groups shareholders may have difficulty effecting service
of process on Argo Group or enforcing judgments against PXRE in
the United States.
PXRE is organized under the laws of Bermuda and Argo
Groups business will be based in Bermuda. In addition,
certain of Argo Groups directors and officers reside
outside the United States, and all or a substantial portion of
Argo Groups assets and the assets of such persons are
located in jurisdictions outside the United States. As such,
Argo Group has been advised that there is doubt as to whether:
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a holder of Argo Groups common shares would be able to
enforce, in the courts of Bermuda, judgments of United States
courts against persons who reside in Bermuda based upon the
civil liability provisions of the United States federal
securities laws;
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a holder of Argo Groups common shares would be able to
enforce, in the courts of Bermuda, judgments of United States
courts based upon the civil liability provisions of the United
States federal securities laws; and
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a holder of Argo Groups common shares would be able to
bring an original action in the Bermuda courts to enforce
liabilities against PXRE or PXREs directors or officers,
as well as PXREs independent accountants, who reside
outside the United States based solely upon United States
federal securities laws.
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Further, Argo Group has been advised that there is no treaty in
effect between the United States and Bermuda providing for the
enforcement of judgments of United States courts, and there are
grounds upon which Bermuda courts may not enforce judgments of
United States courts. Because judgments of United States courts
are not automatically enforceable in Bermuda, it may be
difficult for Argo Groups shareholders to recover against
Argo Group based on such judgments.
51
Risks
Related to Taxation
PXRE
and PXREs Bermuda subsidiaries may become subject to
Bermuda taxes after 2016.
Bermuda currently imposes no income tax on corporations. PXRE
has obtained an assurance from the Bermuda Minister of Finance,
under The Exempted Undertakings Tax Protection Act 1966 of
Bermuda, that if any legislation is enacted in Bermuda that
would impose tax computed on profits or income, or computed on
any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, then the imposition of
any such tax will not be applicable to PXRE or PXREs
Bermuda subsidiaries, until March 28, 2016. PXRE cannot
assure you that PXRE or its Bermuda subsidiaries will not be
subject to any Bermuda tax after that date. See Material
Tax Considerations Taxation of PXRE and its
Subsidiaries following the Merger Bermuda
beginning on page 123.
PXRE
and PXREs
non-U.S. subsidiaries
may be subject to U.S. tax, which may have a material
adverse effect on PXREs financial condition and operating
results.
PXRE and PXREs
non-U.S. subsidiaries
have operated and intend to continue to operate in a manner that
should not cause them to be treated as engaged in a trade or
business in the United States (and, in the case of those
non-U.S. companies
qualifying for treaty protection, in a manner that should not
cause any of such
non-U.S. subsidiaries
to be doing business through a permanent establishment in the
United States) and, thus, PXRE believes that it and its
non-U.S. subsidiaries
should not be subject to U.S. federal income taxes or
branch profits tax (other than withholding taxes on certain
U.S. source investment income and excise taxes on insurance
or reinsurance premiums). However, because there is uncertainty
as to the activities that constitute being engaged in a trade or
business within the United States, and what constitutes a
permanent establishment under the applicable tax treaties, there
can be no assurances that the United States Internal Revenue
Service, which we refer to as the IRS, will not contend
successfully that one of the
non-U.S. subsidiaries
is engaged in a trade or business, or carrying on business
through a permanent establishment, in the United States. See
Material Tax Considerations Taxation of PXRE
and its Subsidiaries Following the Merger United
States beginning on page 123.
Dividends
paid by PXREs U.S. subsidiaries to PXRE Ireland may
not be eligible for benefits under the
U.S.-Ireland
income tax treaty.
Under U.S. federal income tax law, dividends paid by a
U.S. corporation to a
non-U.S. shareholder
are generally subject to a 30% withholding tax, unless reduced
by treaty. The income tax treaty between the Republic of Ireland
and the United States, which we refer to as the Irish Treaty,
reduces the rate of withholding tax on certain dividends to 5%.
Were the IRS to contend successfully that PXRE Ireland is not
eligible for benefits under the Irish Treaty, any dividends paid
by PXREs U.S. subsidiaries to PXRE Ireland would be
subject to the 30% withholding tax. Such a result could have a
material adverse effect on PXREs financial condition and
operating results.
If you
are a U.S. non-corporate shareholder, dividends you receive
from PXRE will not be eligible for reduced rates of tax upon
enactment of certain legislative proposals or after 2010 if
legislation is not enacted extending the qualified
dividend income provisions.
Dividends are generally considered to be ordinary income
subject, in the case of individuals, to rates of tax up to 35%.
However, dividends paid by a qualified foreign corporation, such
as PXRE will be, to U.S. non-corporate holders of its
common shares are eligible for reduced rates of taxation (based
on the long-term capital gain rates) up to a maximum of 15%. The
application of these reduced rates is, however, set to expire in
2011. PXRE, therefore, cannot assure you that any dividends paid
by PXRE after 2010 would continue to qualify for reduced rates
of tax.
Moreover, legislation has been introduced in the
U.S. Congress that would, if enacted, deny the
applicability of reduced rates to dividends paid by any
corporation organized under the laws of a foreign country which
does not have a comprehensive income tax system, such as
Bermuda. It is possible that this legislative proposal could
become law before 2011 or that it could apply retroactively.
Therefore, depending on whether, when and in what form this
legislative proposal is enacted, PXRE cannot assure you that any
dividends paid by Argo Group in the future would qualify for
reduced rates of tax.
52
If you
acquire 10% or more of PXREs shares and PXRE or one or
more of its
non-U.S. subsidiaries
is classified as a controlled foreign corporation, which we
refer to as a CFC, your taxes could increase.
Each United States person (as defined in Section 957(c) of
the Code) who (i) owns (directly, indirectly through
non-U.S. persons,
or constructively by application of certain attribution rules,
which we refer to as constructively) 10% or more of the total
combined voting power of all classes of shares of a
non-U.S. corporation
at any time during a taxable year, which we refer to as a 10%
U.S. Shareholder, and (ii) owns (directly or
indirectly through
non-U.S. persons)
shares of such
non-U.S. corporation
on the last day of such taxable year, must include in its gross
income for U.S. federal income tax purposes its pro rata
share of the CFCs subpart F income, even
if the subpart F income is not distributed, if such
non-U.S. corporation
has been a CFC for an uninterrupted period of 30 days or
more during such taxable year. A
non-U.S. corporation
is considered a CFC if 10% U.S. Shareholders own (directly,
indirectly through
non-U.S. entities,
or constructively) more than 50% of the total combined voting
power of all classes of voting shares of such
non-U.S. corporation
or more than 50% of the total value of all shares of such
corporation. For purposes of taking into account insurance
income, a CFC also includes a
non-U.S. insurance
company in which more than 25% of the total combined voting
power of all classes of shares (or more than 25% of the total
value of the shares) is owned (directly, indirectly through
non-U.S. persons
or constructively) by 10% U.S. Shareholders, on any day
during the taxable year of such corporation, if the gross amount
of premiums or other consideration for the reinsurance or the
issuing of insurance or annuity contracts (other than certain
insurance or reinsurance related to same country risks written
by certain insurance companies not applicable here) exceeds 75%
of the gross amount of all premiums or other consideration in
respect of all risks. PXRE cannot assure you that PXRE or its
non-U.S. subsidiaries
will not be classified as CFCs. PXRE believes that because of
the anticipated dispersion of its common share ownership,
provisions in PXREs organizational documents that limit
voting power and other factors, no United States person who
(i) owns PXREs shares directly or indirectly through
one or more
non-U.S. entities
and (ii) has not received a waiver from PXREs board
of directors of provisions in PXREs organizational
documents that limit voting power, should be treated as owning
(directly, indirectly through
non-U.S. entities
or constructively) 10% or more of the total voting power of all
classes of the shares of PXRE or any of its
non-U.S. subsidiaries.
Due to the attribution provisions of the Code regarding
determination of beneficial ownership, there is a risk that the
IRS could assert that PXRE or one or more of its
non-U.S. subsidiaries
are CFCs and that U.S. holders of PXREs shares who
own 10% or more of the value of PXREs shares should be
treated as owning 10% or more of the total voting power of PXRE,
and/or its
non-U.S. subsidiaries,
notwithstanding the reduction of voting power discussed above.
See Material Tax Considerations Taxation of
PXRE Shareholders Following the Merger United
States Classification of PXRE or its
non-U.S. subsidiaries
as CFCs beginning on page 125.
If one
or more of PXREs
non-U.S. subsidiaries
is determined to have related person insurance income, which we
refer to as RPII, you may be subject to U.S. taxation on
your pro rata share of such income.
If the RPII of any of PXREs
non-U.S. insurance
subsidiaries were to equal or exceed 20% of such companys
gross insurance income in any taxable year and direct or
indirect insureds (and persons related to such insureds) own,
directly or indirectly through entities, 20% or more of
PXREs voting power or value, then a U.S. person who
owns PXREs shares (directly or indirectly through
non-U.S. entities)
on the last day of the taxable year would be required to include
in its income for U.S. federal income tax purposes such
persons pro rata share of such
non-U.S. insurance
subsidiarys RPII for the entire taxable year, determined
as if such RPII were distributed proportionately only to
U.S. persons at that date regardless of whether such income
is distributed. In addition, any RPII that is includible in the
income of a U.S. tax-exempt organization may be treated as
unrelated business taxable income. The amount of RPII earned by
the
non-U.S. insurance
subsidiaries (generally, premium and related investment income
from the direct or indirect insurance or reinsurance of any
direct or indirect U.S. holder of common shares or any
person related to such holder) will depend on a number of
factors, including the identity of persons directly or
indirectly insured or reinsured by the
non-U.S. insurance
subsidiaries. PXRE believes that the gross RPII of each
non-U.S. insurance
subsidiary did not in prior years of operation and is not
expected in the foreseeable future to equal or exceed 20% of
such subsidiarys gross insurance income. Additionally,
PXRE does not expect the direct or indirect insureds of its
non-U.S. insurance
subsidiaries (and persons related to such insureds) to directly
or indirectly own 20% or more of either the voting power or
value of its shares. No assurance can be given
53
that this will be the case because some of the factors that
determine the existence or extent of RPII may be beyond
PXREs knowledge
and/or
control.
The RPII rules provide that if a U.S. person disposes of
shares in a
non-U.S. insurance
corporation in which U.S. persons own 25% or more of the
shares (even if the amount of RPII is less than 20% of the
corporations gross insurance income and the ownership of
its shares by direct or indirect insureds and related persons is
less than the 20% threshold), any gain from the disposition will
generally be treated as ordinary income to the extent of the
U.S. persons share of the corporations
undistributed earnings and profits that were accumulated during
the period that the U.S. person owned the shares (whether
or not such earnings and profits are attributable to RPII). In
addition, such U.S. person will be required to comply with
certain reporting requirements, regardless of the amount of
shares owned by the U.S. person. These RPII rules should
not apply to dispositions of PXREs shares because PXRE
will not itself be directly engaged in the insurance business.
The RPII provisions, however, have never been interpreted by the
courts or the U.S. Treasury Department in final
regulations, and regulations interpreting the RPII provisions of
the Code exist only in proposed form. It is not certain whether
these regulations will be adopted in their proposed form or what
changes or clarifications might ultimately be made thereto or
whether any such changes, as well as any interpretation or
application of RPII by the IRS, the courts or otherwise, might
have retroactive effect. The U.S. Treasury Department has
authority to impose, among other things, additional reporting
requirements with respect to RPII. Accordingly, the meaning of
the RPII provisions and the application of those provisions to
PXRE and its
non-U.S. subsidiaries
are uncertain. See Material Tax Considerations
Taxation of PXRE Shareholders Following the Merger
United States The RPII CFC Provisions
beginning on page 126.
If
PXRE is classified as a passive foreign investment company,
which we refer to as PFIC, your taxes would
increase.
If PXRE is classified as a PFIC, it would have material adverse
tax consequences for U.S. persons that directly or
indirectly own PXREs shares, including subjecting such
U.S. persons to a greater tax liability than might
otherwise apply and subjecting such U.S. persons to tax on
amounts in advance of when tax would otherwise be imposed. PXRE
believes that it should not be, and currently does not expect to
become, a PFIC for U.S. federal income tax purposes;
however, PXRE cannot assure you that it will not be deemed a
PFIC by the IRS based, in part, on PXREs recent limited
operations. There are currently no regulations regarding the
application of the PFIC provisions to an insurance company. New
regulations or pronouncements interpreting or clarifying these
rules may be forthcoming. PXRE cannot predict what impact, if
any, such guidance would have on persons subject to
U.S. federal income tax that directly or indirectly own
PXREs shares. See Material Tax
Considerations Taxation of PXRE Shareholders
Following the Merger United States
Passive Foreign Investment Companies beginning on
page 129.
The
reinsurance agreements between PXRE and PXREs
U.S. subsidiaries (including any that may be entered into
with Argonaut and its U.S. subsidiaries upon completion of
the merger) may be subject to recharacterization or other
adjustment for U.S. federal income tax purposes, which may
have a material adverse effect on PXREs financial
condition and operating results.
Under Section 845 of the Code, the IRS may allocate income,
deductions, assets, reserves, credits and any other items
related to a reinsurance agreement among certain related parties
to the reinsurance agreement, recharacterize such items, or make
any other adjustment, in order to reflect the proper source,
character or amount of the items for each party. No regulations
have been issued under Section 845 of the Code.
Accordingly, the application of such provisions is uncertain and
PXRE cannot predict what impact, if any, such provisions may
have on it and its subsidiaries either before or after
completion of the merger.
U.S. tax-exempt
organizations that own PXREs shares may recognize
unrelated business taxable income.
A U.S. tax-exempt organization may recognize unrelated
business taxable income if a portion of PXREs insurance
income is allocated to the organization. In general, insurance
income will be allocated to a U.S. tax-exempt organization
if either PXRE is a CFC and the tax-exempt shareholder is a 10%
U.S. Shareholder or there is RPII and certain exceptions do
not apply. Although PXRE does not believe that any
U.S. persons should be allocated such insurance income,
PXRE cannot be certain that this will be the case. See
Material Tax
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Considerations Taxation of PXRE Shareholders
Following the Merger United States
Tax-Exempt Shareholders beginning on page 128.
U.S. tax-exempt investors should consult their tax advisors
as to the U.S. tax consequences of any allocation of
PXREs insurance income.
The
payment of the special cash dividend to Argonaut shareholders
could result in adverse U.S. federal income tax
consequences to shareholders and to PXRE under certain
circumstances.
Argonaut intends to take the position that the amount paid as
the special cash dividend is treated as a distribution with
respect to the Argonaut common stock, and not as consideration
in the merger. Although Argonaut believes its position with
respect to the special cash dividend is correct, the IRS may
take a contrary position, and to the extent the IRS were to
prevail, the amount paid as the special cash dividend would be
treated as additional cash received in connection with the
merger and not as a distribution for U.S. federal income
tax purposes. In such a case, holders of Argonaut common stock
could have adverse U.S. tax consequences, such as corporate
holders not being entitled to a dividends received deduction. In
addition, if the special cash dividend were to be treated as
merger consideration, it is possible that the special cash
dividend would be deemed to be paid from Argonaut to PXRE, in
which case a U.S. 30% withholding tax would be imposed on
such payment.
Holders of Argonaut common stock should consult their advisors
as to the U.S. tax consequences of the special cash
dividend.
If
completed, the merger may have adverse U.S. federal income
tax consequences on PXRE under
certain
circumstances.
Section 7874 of the Code was added in 2004 by the American
Jobs Creation Act of 2004 to address inversion transactions,
which refer in relevant part to transactions where a
U.S. corporation becomes a subsidiary of a foreign
corporation. This provision provides that in certain instances a
foreign corporation may be treated as a domestic corporation for
U.S. federal income tax purposes.
Because the former holders of Argonaut common stock are not
expected to own 80 percent or more of the stock (by vote or
value) of PXRE immediately after the acquisition, PXRE and
Argonaut believe that neither PXRE nor any of its
non-U.S. affiliates
should be treated as a domestic corporation subject to
U.S. taxation under Section 7874 of the Code.
Moreover, although the former holders of Argonaut common stock
are expected to hold more than 60 percent of the stock (by
vote and value) of PXRE immediately after the inversion
transaction, both PXRE and Argonaut believe that neither of them
should recognize current gain under Section 7874 of the
Code or otherwise as a result of the acquisition of Argonaut by
PXRE. It is possible that, as a result of certain transfers or
licenses of stock or other property, as the case may be, during
the applicable period (including the transfer of any income
received or accrued during the applicable period by reason of a
license of any property by Argonaut), Argonaut could recognize
inversion gain during the applicable period. However, PXRE and
Argonaut do not anticipate such transfers taking place and thus
do not expect to recognize any inversion gain during the
applicable period.
Changes
in U.S. federal income tax law could be retroactive and may
subject PXRE or its
non-U.S. subsidiaries
to U.S. federal income taxation.
Legislation has been introduced in the U.S. Congress
intended to eliminate certain perceived tax advantages of
companies (including insurance companies) that have legal
domiciles outside the United States but have certain
U.S. connections. There are currently pending legislative
proposals which, if enacted, could have a material adverse
effect on PXRE or its shareholders. It is possible that
broader-based or new legislative proposals could emerge in the
future that could have an adverse effect on PXRE or its
shareholders.
The tax laws and interpretations regarding whether a company is
engaged in a U.S. trade or business or whether a company is
a CFC or PFIC or has RPII or subject to the inversion tax rules
are subject to change, possibly on a retroactive basis. There
are currently no regulations regarding the application of the
PFIC rules to an insurance company. Additionally, the
regulations regarding RPII are still in proposed form and the
regulations regarding inversion transactions are in temporary
form. New regulations or pronouncements interpreting or
clarifying such rules will likely be forthcoming from the IRS.
PXRE is not able to predict if, when or in what form such
guidance will be provided and whether such guidance will be
applied on a retroactive basis.
55
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document contains various forward-looking statements and
includes assumptions concerning PXREs, Argonauts and
the resulting companys operations, future results and
prospects. Statements included herein, as well as statements
made by PXRE or Argonaut or on PXREs or Argonauts
behalf in press releases, written statements or other documents
filed with the SEC, or in PXREs or Argonauts
communications and discussions with investors and analysts in
the normal course of business through meetings, phone calls and
conference calls, which are not historical in nature are
intended to be, and are hereby identified as,
forward-looking statements for purposes of the safe
harbor provided by Section 21E of the Exchange Act. These
forward-looking statements, identified by words such as
intend, believe, anticipate,
or expects or variations of such words or similar
expressions are based on current expectations, speak only as of
the date thereof, and are subject to risk and uncertainties. In
light of the risks and uncertainties inherent in all future
projections, the forward-looking statements in this joint proxy
statement/prospectus should not be considered as a
representation by either PXRE or Argonaut or any other person
that PXREs or Argonauts objectives or plans will be
achieved. PXRE and Argonaut caution you that actual results or
events could differ materially from those set forth or implied
by the forward-looking statements and related assumptions,
depending on the outcome of certain important factors,
including, but not limited to, the following:
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PXRE and Argonaut may not obtain the approval of their
shareholders at their respective shareholder meetings;
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PXRE and Argonaut may be unable to obtain regulatory approvals
required for the merger, or required regulatory approvals may
delay the merger or result in the imposition of conditions that
could have a material adverse effect on the resulting company or
cause us to abandon the merger;
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PXRE and Argonaut may be unable to complete the merger or
completing the merger may be more costly than expected because,
among other reasons, conditions to the closing of the merger may
not be satisfied;
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problems may arise with the ability to successfully integrate
PXREs and Argonauts businesses, which may result in
the resulting company not operating as effectively and
efficiently as expected;
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the resulting company may not be able to achieve the expected
synergies from the merger or it may take longer than expected to
achieve those synergies;
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the merger may involve unexpected costs or unexpected
liabilities, or the effects of purchase accounting may be
different from our expectations;
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PXRE faces significant litigation related to alleged securities
law violations and PXRE may be subject to further securities
litigation, administrative proceedings or both being brought
against PXRE;
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PXREs investment portfolio is subject to significant
market and credit risks which could result in an adverse impact
on PXREs financial condition or operating results;
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PXRE has exited the finite reinsurance business, but claims in
respect of finite reinsurance could have an adverse effect on
PXREs operating results;
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PXREs and Argonauts reserving for losses includes
significant estimates which are also subject to inherent
uncertainties;
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because of exposure to catastrophes, PXREs and
Argonauts financial results may vary significantly from
period to period;
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PXRE may be overexposed to losses in certain geographic areas
for certain types of catastrophe events;
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PXRE may be overexposed to smaller catastrophe losses and for
certain geographic areas and perils due to the cancellations of
a substantial portion of our assumed reinsurance contracts
following PXREs recent ratings downgrades;
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PXRE and Argonaut operate in a highly competitive environment
and no assurance can be given that PXRE, Argonaut or the
resulting company will be able to compete effectively in this
environment;
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reinsurance prices may decline, which could affect PXREs,
Argonauts or the resulting companys profitability;
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PXREs reliance on reinsurance brokers exposes PXRE to
their credit risk;
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PXRE may be adversely affected by foreign currency fluctuations;
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reinsurance and retrocessional coverage subjects PXRE and
Argonaut to credit risk and may become unavailable on acceptable
terms;
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PXRE has exhausted its retrocessional coverage with respect to
Hurricane Katrina, leaving PXRE exposed to further losses;
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recoveries under portions of PXREs collateralized
facilities are triggered by modeled loss to a notional
portfolio, rather than PXREs actual losses arising from a
catastrophe event, which creates a potential mismatch between
the risks assumed through PXREs inwards reinsurance
business and the protection afforded by these facilities;
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PXREs inability to provide the necessary collateral could
affect PXREs ability to offer reinsurance in certain
markets;
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the insurance and reinsurance business is historically cyclical,
and PXRE and Argonaut may experience periods with excess
underwriting capacity and unfavorable premium rates; conversely,
PXRE may have a shortage of underwriting capacity when premium
rates are strong;
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regulatory constraints may restrict PXREs and
Argonauts ability to operate their businesses;
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the effects of claim and coverage issues on PXREs and
Argonauts businesses are uncertain;
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Argonaut may have significant exposure for terrorist acts;
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as a result of the recent decline in PXREs ratings and
decline in capital, more than 75% of PXREs clients as of
January 1, 2006, measured by premium volume, may have the
right to cancel their reinsurance contracts and, as of
December 31, 2006, almost all of PXREs reinsurance
contracts had either been cancelled, non-renewed or expired;
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the downgrades in, and withdrawal of, the ratings of PXREs
reinsurance subsidiaries by rating agencies which has materially
and negatively impacted, and will continue to materially and
negatively impact, PXREs business and operating results;
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the decline in, and withdrawal of, PXREs ratings and
reduction in PXREs surplus will allow clients to terminate
their contracts with PXRE and, with respect to ceded
reinsurance, may require PXRE to transfer premiums retained by
PXRE into a beneficiary trust;
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the lowering of one or more of the credit ratings of the
resulting company or its subsidiaries may have an adverse impact
on the resulting companys or its subsidiaries
ability to raise capital and on its liquidity and financial
condition;
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the lowering of one or more of the insurer financial strength
ratings of the resulting companys insurance subsidiaries
may have an adverse impact on the premium writings, policy
retention and profitability of our insurance subsidiaries or the
resulting company;
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the actual financial position and operating results of the
resulting company may differ significantly from the pro forma
financial data contained in this joint proxy
statement/prospectus;
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future legislative, regulatory or tax changes, both domestic and
foreign, including changes to statutory reserves
and/or
risk-based capital requirements, may affect the cost of, or
demand for, the resulting companys products or the
required amount of reserves
and/or
surplus, or otherwise affect our ability to conduct business;
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the initiation of legal or regulatory proceedings against PXRE,
Argonaut or the resulting company and the outcome of any legal
or regulatory proceedings, such as proceedings related to
present or past business
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practices common in businesses in which we compete; proceedings
brought by federal and state authorities; proceedings involving
extra-contractual and class action damages; new decisions which
change the law; and unexpected trial court rulings;
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competitive conditions that may affect the level of premiums and
fees that the resulting company will be able to charge for its
products;
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future loss of management or other key employees, agents or
brokers;
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future changes in general economic or business conditions, both
domestic and foreign, that may be less favorable than expected
and may affect premium levels, claims experience, the level of
pension benefit costs and funding, investment results and
foreign exchange rates;
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the market price of PXREs common shares has declined and
may decline further as a result of PXREs announcements of
increased loss estimates for losses due to Hurricanes Katrina,
Rita and Wilma and the ratings downgrades PXRE has experienced;
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any determination by the IRS that PXRE or PXREs
non-U.S. subsidiaries
are subject to U.S. taxation could result in a material
adverse impact on PXREs financial position or
results; and
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any changes in tax laws, tax treaties, tax rules and
interpretations could result in a material adverse impact on
PXREs financial condition or operating results.
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The risks included here are not exhaustive. The annual reports
on
Form 10-K,
subsequent quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and other documents filed by PXRE and Argonaut with the SEC and
incorporated herein by reference include additional factors
which could impact PXREs, Argonauts and the
resulting companys businesses and financial performance.
Moreover, PXRE and Argonaut operate in a rapidly changing and
competitive environment. New risk factors emerge from time to
time and it is not possible for management to predict all such
risk factors.
Further, it is not possible to assess the impact of all risk
factors on PXREs, Argonauts or the resulting
companys business or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements. Given these risks and uncertainties, you should not
place undue reliance on forward-looking statements as a
prediction of actual results. In addition, PXRE and Argonaut
disclaim any obligation to update any forward-looking statements
to reflect events or circumstances that occur after the date of
this joint proxy statement/prospectus, except as may be required
by law.
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MATERIAL
CONTRACTS BETWEEN PXRE AND ARGONAUT
With the exception of the merger agreement and the voting
agreement, currently there are no material arrangements between
Argonaut or its subsidiaries, on the one hand, and PXRE or its
subsidiaries, on the other hand. However, prior to the
completion of the merger, Peleus Re and Argonaut may choose to
enter into agreements, including quota share reinsurance
agreements, for the reinsurance by Peleus Re of certain business
of the insurance subsidiaries of Argonaut, and similar
agreements in the ordinary course of business.
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PXRE
SPECIAL GENERAL MEETING
General
This joint proxy statement/prospectus is being provided to PXRE
shareholders as part of a solicitation of proxies by the PXRE
board of directors for use at the PXRE special general meeting
and at any adjournment thereof. This joint proxy
statement/prospectus provides PXRE shareholders with the
information they need to know to be able to vote or instruct
their vote to be cast at the PXRE special general meeting.
Date,
Time and Place of the PXRE Special General Meeting
The PXRE special general meeting will be held at
10:30 a.m., local time, on July 25, 2007, at PXRE
House, 110 Pitts Bay Road, Pembroke HM 08, Bermuda.
Purposes
of the PXRE Special General Meeting and Voting Rights
At the PXRE special general meeting, the PXRE shareholders are
being asked to consider and vote on the following proposals:
Proposal in connection with the proposed merger:
1. To approve the issuance of common shares of PXRE
pursuant to the merger agreement;
Proposals conditioned upon and subject to the completion of
the merger:
2. To approve the reverse split of the common shares of
PXRE at a ratio of one share of PXRE for each ten shares of PXRE
held or entitled to be received in the merger;
3. To approve the change of name of PXRE Group
Ltd. to Argo Group International Holdings,
Ltd.;
4. To approve an increase in the authorized share capital
of PXRE from $380 million to $530 million;
5. To increase the maximum number of directors of PXRE from
11 directors to 13 directors (if the affirmative vote
of 66
2/3%
of the voting power of the outstanding shares is obtained) or to
12 directors;
6. To approve an amendment and restatement of PXREs
memorandum of association;
7. To approve an amendment and restatement of PXREs
bye-laws (some of which amendments require the affirmative vote
of 66
2/3%
of the voting power of the outstanding shares);
Adjournments of the Meeting; Other Action:
8. To approve adjournments of the PXRE special general
meeting to a later date, if necessary, to permit further
solicitation of proxies if there are not sufficient votes at the
time of the special general meeting to approve the above
proposals; and
9. To approve actions upon any other business that may
properly come before the special general meeting or any
reconvened meeting following an adjournment of the special
general meeting.
Certain of the foregoing proposals also require separate
approvals of the holders of certain series of PXREs
convertible preferred shares and convertible common shares
voting separately, or in some instances, together, as a single
class. However, pursuant to the voting agreement, such holders
have provided their consent to such proposals. See The
Voting Agreement beginning on page 140.
Record
Date; Shares Entitled to Vote; Outstanding Shares
PXREs board of directors has fixed the close of regular
trading on the NYSE on June 4, 2007 as the record date for
the determination of shareholders entitled to receive notice of,
and to vote at, PXREs special general meeting. This means
that you must have been a shareholder of record of PXRE common
shares at the close of regular trading
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on the NYSE on that date in order to vote at the special
general meeting. As of the record date,
(i) 63,712,264 common shares were issued and
outstanding and held of record by approximately
125 shareholders; (ii) 8,855,347 convertible common
shares were issued and outstanding and held of record by
9 shareholders; and (iii) 5,813.20 convertible
preferred shares were issued and outstanding and held of record
by 8 shareholders. The presence at the special general
meeting in person or by proxy of the holders representing a
majority of the outstanding shares (giving effect to the
limitations on voting referred to below) carrying the right to
vote on a matter is necessary to constitute a quorum for the
transaction of business at PXREs special general meeting.
Each common share entitles the holder thereof to one vote on
each matter to be voted upon at the special general meeting;
provided that, if a person (directly, indirectly, beneficially
or through attribution) owns more than 9.9% of the total voting
power of all issued and outstanding shares entitled to vote on
such matter, absent a board waiver the voting rights with
respect to such shares will be limited, in the aggregate, to
voting power of 9.9%, as specified in PXREs bye-laws. The
PXRE board has determined to waive this requirement with respect
to Capital Z, but not with respect to any other holder of
convertible preferred shares, convertible common shares, or
common shares. Due to limitations on voting power discussed
above, as of the record date, the aggregate votes that may be
cast represented at the special general meeting on all matters
submitted is 76,764,996. As of the record date, holders of the
common shares are entitled to exercise approximately 81.7% of
the votes that may be cast at the special general meeting on all
matters submitted.
Each convertible common share entitles the holder thereof to one
vote on a fully converted basis with common shares and
convertible preferred shares, together as a class, on all of the
matters which are being submitted to a vote of shareholders at
the special general meeting. As of the record date, PXRE
convertible common shareholders are entitled to exercise
approximately 11.5% of the votes that may be cast at the special
general meeting on all matters submitted.
Each convertible preferred share entitles the holder thereof to
vote on a fully converted basis with the common shares and
convertible common shares, together as a class, on all of the
matters which are being submitted to a vote of the shareholders
at the special general meeting. The convertible preferred shares
outstanding on the record date would be convertible into
5,199,642 common shares based on the conversion price on the
record date of $11.18. As of the record date, holders of the
convertible preferred shares are entitled to exercise
approximately 6.8% of the votes that may be cast at the special
general meeting on all matters submitted. The voting agreement
provides for the conversion of the convertible preferred shares
into common shares at the reduced conversion price of $6.24
immediately prior to the effective time of the merger. See
The Voting Agreement beginning on page 140.
Pursuant to the voting agreement, PXRE preferred shareholders
and PXRE convertible common shareholders have agreed to vote in
favor of and consent to the merger and the transactions
contemplated thereby. See The Voting Agreement
beginning on page 140.
A complete list of PXRE shareholders entitled to vote at the
PXRE special general meeting will be available for inspection at
the executive offices of PXRE during regular business hours for
at least five business days before the special general meeting.
Quorum
A quorum of shareholders is necessary to hold a valid special
general meeting of PXRE. A majority of all outstanding shares of
PXRE entitled to vote and be present, in person or by proxy, at
the special general meeting constitutes a quorum. All PXRE
common shares represented at the special general meeting,
including abstentions and broker non-votes, will be counted for
purposes of determining whether a quorum is present. Once a
share is represented for any purpose at the special general
meeting, it will be deemed present for quorum purposes for the
remainder of the meeting (including any meeting resulting from
an adjournment of the special general meeting).
For a discussion of how broker non-votes and abstentions will
affect the outcome of the vote on these proposals, see
Voting; Proxies Voting
Shares Held in Street Name and
Voting; Proxies Voting
Requirements beginning on page 62.
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Voting by
PXREs Directors and Executive Officers
As of the record date for the PXRE special general meeting,
PXREs directors and executive officers and their
affiliates were entitled to vote approximately
341,000 shares of the then-outstanding PXRE common shares,
8,855,347 of the convertible common shares and
5,813.20 shares of the then-outstanding PXRE convertible
preferred shares at the PXRE special general meeting which
represented less than one percent, 100% and 100%, respectively,
of each of the PXRE common shares, PXRE convertible common
shares and PXRE convertible preferred shares outstanding and
entitled to vote at the meeting.
Voting;
Proxies
You may vote in person at the PXRE special general meeting or by
proxy, which may be done by mail. We recommend you vote by proxy
even if you plan to attend the special general meeting. If you
vote by proxy, you may change your vote if you attend the
special general meeting. If you own PXRE common shares in your
own name, you are an owner of record. This means
that you may use the enclosed proxy/voting instruction card to
tell the persons named as proxies how to vote your shares. If
you properly complete, sign and date your proxy/voting
instruction card, your proxy/voting instruction card will be
voted in accordance with your instructions. The named proxies
will vote all shares at the meeting that have been properly
voted and not revoked. If you sign and return your proxy/voting
instruction card but do not mark your proxy/voting instruction
card to tell the proxies how to vote your shares on each
proposal, your proxy/voting instruction card will be voted FOR
each of the proposals presented.
Voting
Shares Held in Street Name
If your PXRE shares are held in street name through
a broker, bank or other nominee, please follow the voting
instructions provided by your broker, bank or other nominee.
Generally, a broker, bank or other nominee, which we refer to as
your broker, may only vote the common stock that it holds in
street name for you in accordance with your
instructions. However, if your broker has not received your
instructions, your broker has the discretion to vote on certain
matters that are considered routine.
If you wish to vote on the proposals set forth above, including
the proposal to approve the issuance of PXRE common shares in
the merger, you must provide instructions to your broker. If you
do not provide your broker with instructions, your broker will
not be authorized to vote on the proposals.
If you wish to vote on the proposal to approve adjournments of
the PXRE special general meeting, you should provide
instructions to your broker. If you do not provide instructions
to your broker, your broker will not be authorized to vote on
any proposal to adjourn the special general meeting solely
relating to the solicitation of proxies to approve the
transactions contemplated by the merger agreement.
Voting
Requirements
All matters referenced in this joint proxy statement/prospectus
upon which the shareholders of PXRE will be asked to consider
and vote upon, other than certain of the bye-law amendments and
the increase in the size of the PXRE board of directors to
13 directors, will, in accordance with the PXRE bye-laws,
be decided by an ordinary resolution. An ordinary resolution is
a resolution that has been passed by a simple majority of votes
cast, in person, by a representative or by proxy, at a general
meeting of which not less than 21 clear days notice has
been given. Certain of the bye-law amendments and the increase
in the size of the PXRE board of directors to 13 directors
will be decided by special resolution. A special resolution is a
resolution that has been passed by the affirmative vote of
shareholders holding not less than 66
2/3%
of the voting power of the then outstanding shares entitled to
vote, cast by such shareholders in person or, in the case of
such shareholders as are corporations, by their respective duly
authorized representative or, where proxies are allowed, by
proxy, at a general meeting of which not less than 21 clear
days notice, specifying the intention to propose the
resolution as a special resolution, has been duly given. A
resolution put to a vote at the special general meeting will be
decided on by a show of hands, unless a poll has been demanded
pursuant to PXREs bye-laws.
PXRE shares represented at the special general meeting that
abstain from voting, and shares that are represented by
broker non-votes (that is shares held by brokers
that are represented at the special general
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meeting but with respect to which the broker has not received
voting instructions from the beneficial owner and is not
empowered to vote on a particular proposal) are not included in
the tabulation of the PXRE shares voting on such matter, but are
counted for quorum purposes.
With respect to the proposal to approve certain amendments to
PXREs bye-laws and the proposal to increase the size of
the PXRE board of directors to 13 directors, each of which
require a special resolution, a PXRE shareholders
abstention from voting and a broker non-vote will have the same
effect as a vote against those proposals.
How to
Vote
You can vote by mail by signing, dating and mailing your
proxy/voting instruction card in the postage-paid envelope
included with this joint proxy statement/prospectus.
Revoking
Your Proxy/Voting Instruction Card
You can revoke your proxy/voting instruction card at any time
before its exercise by:
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sending a written notice to the Corporate Secretary of PXRE, at
PXRE House, 110 Pitts Bay Road, Pembroke HM 08, Bermuda, bearing
a date later than the date of the proxy/voting instruction card,
that is received at least two (2) hours prior to the
commencement of the PXRE special general meeting and states that
you revoke your proxy/voting instruction card;
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signing another proxy/voting instruction card bearing a later
date and mailing it so that it is received prior to the special
general meeting; or
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attending the special general meeting and voting in person,
although attendance at the special general meeting will not, by
itself, revoke a proxy/voting instruction card.
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If your shares are held in street name, you will
need to contact your broker to revoke your proxy/voting
instruction card.
Other
Voting Matters
Voting
in Person
If you plan to attend the PXRE special general meeting and wish
to vote in person, we will give you a ballot at the special
general meeting. However, if your shares are held in
street name, you must first obtain a legal proxy
authorizing you to vote the shares in person, which you must
bring with you to the special general meeting.
Electronic
Access to Proxy Materials
This joint proxy statement/prospectus is available on the
SECs Internet site at www.sec.gov or on PXREs
Internet site at www.pxre.com.
Proxy
Solicitations
PXRE is soliciting proxies for the PXRE special general meeting
from PXRE shareholders. PXRE will bear the entire cost of
soliciting proxies from PXRE shareholders, except that PXRE and
Argonaut will share equally the expenses incurred in connection
with the filing of the registration statement of which this
joint proxy statement/prospectus forms a part with the SEC and
the printing of this joint proxy statement/prospectus. In
addition to the mailing of this joint proxy
statement/prospectus, PXREs directors, officers and
employees (who will not receive any additional compensation for
their services) may solicit proxies personally, electronically
or by telephone. PXRE has also engaged Georgeson, Inc., which we
refer to as Georgeson, for a fee of $15,000 (plus certain other
charges related to direct telephone solicitation of PXRE
shareholders) and reimbursement of certain expenses, to assist
in the solicitation of proxies. PXRE and its proxy solicitor
will also request that banks, brokerage houses and other
custodians, nominees and fiduciaries send proxy materials to the
beneficial owners of PXRE common shares and will, if requested,
reimburse the record holders for their reasonable
out-of-pocket
expenses in doing so. The
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extent to which these proxy-soliciting efforts will be necessary
depends upon how promptly proxies are submitted. You should
promptly submit your completed proxy/voting instruction card by
mail.
Shareholders should not submit any share certificates with
their proxy/voting instruction card.
Adjournments
If a quorum is not present at the special general meeting, the
chairman of the meeting will have the authority to adjourn the
special general meeting to solicit additional proxies without
the approval of shareholders. If a quorum is present at the
special general meeting but there are not sufficient votes at
the time of the special general meeting to approve the issuance
of PXRE common shares or the other proposals in connection with
the merger, holders of PXRE common shares may be asked to vote
on a proposal to approve the adjournment of the special general
meeting to permit further solicitation of proxies. Approval by a
majority of the votes cast on the proposal to adjourn the
meeting will be required. In addition, if the new date, time or
place of the new meeting is not given at the adjourned meeting
or if after the adjournment a new record date is fixed for an
adjourned meeting, which it must be if the meeting is adjourned
to a date more than 120 days after the date fixed for the
original meeting, notice of the adjourned meeting must be given
to each shareholder of record entitled to vote at such special
general meeting.
Assistance
If you need assistance in completing your proxy/voting
instruction card or have questions regarding PXREs special
general meeting, please contact Georgeson, PXREs proxy
solicitor, at
(866) 577-4838
(toll-free) or write to Georgeson, Inc., 17 State Street, New
York, NY 10004.
Proposals
to be Considered at the PXRE Special General Meeting
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Item 1
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Issuance
of Shares in the Merger
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At the PXRE special general meeting, PXRE shareholders are being
asked to consider and vote on a proposal to approve the issuance
of common shares of PXRE pursuant to the merger agreement. The
merger agreement provides for the merger of PXREs direct,
wholly owned subsidiary PXMS with and into Argonaut, with
Argonaut surviving as a direct, wholly owned subsidiary of PXRE.
At the effective time of the merger, Argonaut shareholders will
be entitled to receive newly issued PXRE common shares for their
shares of Argonaut common stock. The number of PXRE common
shares that Argonaut shareholders will receive will be based on
an exchange ratio. The exchange ratio as specified in the merger
agreement provides that Argonaut shareholders will be entitled
to receive 6.4672 PXRE common shares in exchange for each share
of Argonaut common stock they hold, subject to adjustment in the
event that (i) Argonauts special dividend to its
shareholders is less than $60 million, or
(ii) Argonaut pays certain other dividends, incurs losses
on sales of assets
and/or
engages in dilutive sales or purchases of Argonaut shares. The
number of PXRE common shares that Argonaut shareholders will be
entitled to receive will be adjusted, proportionately among all
PXRE common shareholders, upon completion of a reverse share
split of PXRE shares immediately after the merger (subject to
the approval of PXREs shareholders), as described below.
PXRE will not issue fractional shares in connection with the
merger or in connection with the reverse share split. The value
of any fractional shares will be determined after completion of
the reverse share split and will be paid in cash. The reverse
share split would affect all of PXREs shareholders
uniformly, including the former shareholders of Argonaut
entitled to receive PXRE shares as merger consideration in the
merger, and will not affect any shareholders percentage
ownership interests in PXRE or proportionate voting power,
except to the extent that the reverse share split would
otherwise result in a shareholder owning a fractional share for
which it will receive cash in lieu of such fractional share.
The merger will not be completed unless PXRE shareholders
approve the issuance of common shares proposed in this
Item 1.
Pursuant to a general permission issued by the BMA in 2005, PXRE
may issue its common shares to non-residents without the prior
permission of the BMA provided its shares are listed on an
appointed stock exchange which, by definition, includes the NYSE
and NASDAQ.
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It should be noted that any person who, directly or indirectly,
becomes a holder of at least 10 percent, 20 percent,
33 percent or 50 percent of the common shares of PXRE
must notify the BMA in writing within 45 days of becoming
such a holder or 30 days from the date they have knowledge
of having such a holding, whichever is later. The BMA may, by
written notice, object to such a person if it appears to it that
the person is not fit and proper to be such a holder. The BMA
may require the holder to reduce its holding of common shares
and direct, among other things, that voting rights attaching to
such common shares shall not be exercisable. A person that does
not comply with such a notice or direction from the BMA will be
guilty of an offense.
The BMA may at any time, by written notice, object to a person
holding 10 percent or more of the common shares of PXRE if
it appears to the BMA that the person is not or is no longer fit
and proper to be such a holder. In such a case, the BMA may
require the shareholder to reduce its holding of common shares
and direct, among other things, that voting rights attaching to
such common shares shall not be exercisable. A person who does
not comply with such a notice or direction from the BMA will be
guilty of an offense.
Vote
Required for Approval of Item 1
Item 1 must be approved by an ordinary resolution, that is,
a simple majority of the votes cast on the Item, provided a
quorum is present.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the issuance of PXRE common shares
pursuant to the merger agreement.
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Item 2
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Reverse
Share Split
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At the PXRE special general meeting, PXRE shareholders are being
asked to consider and vote on a proposal to approve a reverse
share split of the common shares of PXRE at a ratio of one share
of PXRE for each ten shares of PXRE held or entitled to be
received in the merger. If approved, the reverse share split
would be effected immediately after the effective time of the
merger. No fractional shares will be issued in connection with
the reverse share split. The value of any fractional shares will
be determined after completion of the reverse share split and
will be paid in cash.
Upon completion of the reverse share split, proportionate
adjustments will be made to the per share exercise price and the
number of shares issued upon the exercise of all outstanding
options entitling the holders to purchase PXRE common shares,
which will result in approximately the same aggregate amount
being required to be paid for such options upon exercise
immediately preceding the reverse share split. The reverse share
split will be achieved under Bermuda law by (i) the
consolidation and division of PXREs shares into a larger
par value, (ii) the cancellation of the excess par value in
the amount of $9.00 per share which was created by step
(i) above, and (iii) the re-characterization of the
cancelled par value as contributed surplus.
In connection with the reverse share split, the number of
authorized and the number of issued and outstanding PXRE common
shares will be reduced based on the reverse share split ratio.
As of June 4, 2007, PXRE had 350 million authorized
common shares, approximately 72,567,611 of which were issued and
outstanding, and 30 million authorized convertible
preferred shares, 5,813.20 of which were issued and outstanding.
After the reverse share split, PXRE will have
35 million authorized common shares (excluding the
increase in authorized share capital proposed in Item 4 below),
approximately 30.8 million of which will be issued and
outstanding on a pro forma basis assuming the merger occurred
March 31, 2007 (assuming the exchange of each Argonaut
common share entitled to receive PXRE common shares in the
merger at a ratio of 6.4672 PXRE common shares for one Argonaut
common share and the conversion of the PXRE convertible
preferred shares at the conversion price of $6.24 per
share) See Unaudited Pro Forma Condensed
Combined Financial Statements Note 4
beginning on page 176, and 3 million authorized
convertible preferred shares, none of which will be issued and
outstanding. We do not currently have any plans to issue any
common shares of PXRE, other than in the merger.
The closing sale price of PXREs common shares on the NYSE
on June 4, 2007 was $4.61 and over the past 52 weeks
PXREs share price has ranged from $3.49 to $4.96. The
board of directors believes that effecting the reverse share
split on a 1 for 10 ratio is likely to increase the market price
and trading ranges for PXRE common shares as fewer shares will
be outstanding in the market.
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Certain
Risks Associated with the Reverse Share Split
There can be no assurance that the market price of PXRE common
shares after the reverse share split will increase in proportion
to the reduction in the number of PXRE common shares issued and
outstanding before the reverse share split. For example, based
on the closing price on the NYSE of PXRE common shares on
June 4, 2007 of $4.61 per share, there can be no assurance
that the post-split market price of PXRE common shares would be
at least $46.10 per share. Accordingly, the total market
capitalization of PXRE common shares after the proposed reverse
share split may be lower than the total market capitalization
before the proposed reverse share split. In the future, the
market price of PXRE common shares following the reverse share
split may not exceed or remain higher than the market price
prior to the proposed reverse share split.
Impact of
the Proposed Reverse Share Split if Effected
If approved by the PXRE shareholders, the reverse share split
will be effected immediately following the completion of the
merger and conversion of Argonaut common shares into the right
to receive PXRE common shares as merger consideration in the
merger. Therefore, the reverse share split would affect all of
PXREs shareholders uniformly, including the former
shareholders of Argonaut entitled to receive PXRE shares as
merger consideration in the merger, and will not affect any
shareholders percentage ownership interests in PXRE or
proportionate voting power, except to the extent that the
reverse share split would otherwise result in a shareholder
owning a fractional share for which it will receive cash in lieu
of such fractional share.
As described below, shareholders otherwise entitled to
fractional shares as a result of the reverse share split will
receive cash payments in lieu of such fractional shares. These
cash payments will reduce the number of post-reverse share split
shareholders to the extent there are presently shareholders who
would otherwise receive less than one PXRE common share after
the reverse share split.
The principal effects of the reverse share split will be that:
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the number of PXRE common shares issued and outstanding will be
reduced from approximately 308,370,000 to approximately
30,837,000 shares on a pro forma basis assuming the merger
occurred March 31, 2007; see Unaudited Pro Forma
Condensed Combined Financial Statements
Note 4 beginning on page 176;
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based on the reverse share split ratio, proportionate
adjustments will be made to the per share exercise price and the
number of shares issuable upon the exercise of all outstanding
options entitling the holders to purchase PXRE common shares,
which will result in approximately the same aggregate amount
being required to be paid for such options upon exercise
immediately preceding the reverse share split;
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the number of shares reserved for issuance under benefit plans
and incentive plans will be reduced proportionately based on the
reverse share split ratio; and
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the reverse share split will increase the number of shareholders
who own odd lots (less than 100 shares). Shareholders who
hold odd lots may experience an increase in the cost of selling
their shares and may have greater difficulty in executing sales.
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Effect on
Fractional Shareholders
Shareholders will not receive fractional shares in connection
with the reverse share split. Instead, the transfer agent will
aggregate all fractional shares and sell them as soon as
practicable after the effective date at the then prevailing
prices on the open market, on behalf of those holders who would
otherwise be entitled to receive a fractional share. We expect
that the transfer agent will conduct the sale in an orderly
fashion at a reasonable pace and that it may take several days
to sell all of the aggregated fractional common shares. After
completing the sale, you will receive a cash payment from the
transfer agent in an amount equal to your pro rata share
of the total net proceeds of that sale. No transaction costs
will be assessed on this sale. However, the proceeds will be
subject to federal income tax. In addition, you will not be
entitled to receive interest for the period of time between the
effective date of the reverse share split and the date you
receive your payment in respect of the fractional share to which
you otherwise would have been entitled. The payment will be made
in the form of a check in accordance with
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the procedures outlined below. After the reverse share split,
you will have no further interest in PXRE with respect to your
fractional share, and you will not have any voting, dividend or
other rights except to receive payment as described above.
NOTE: If you do not hold sufficient PXRE shares to receive
at least one share in the reverse share split and you want to
continue to hold PXRE common shares after the reverse share
split, you may do so by taking either of the following actions
far enough in advance so that it is completed by the effective
date:
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purchase a sufficient number of PXRE common shares so that you
hold at least an amount of PXRE common shares in your account
prior to the reverse share split that would entitle you to
receive at least one PXRE common share on a post-reverse share
split basis; or
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if you have PXRE common shares in more than one account,
consolidate your accounts so that you hold at least an amount of
shares of PXRE common shares in one account prior to the reverse
share split that would entitle you to receive at least one PXRE
common share on a post-reverse share split basis. Shares held in
registered form (that is, shares held by you in your own name in
PXREs share register records maintained by PXREs
transfer agent) and shares held in street name (that
is, shares held by you through a bank, broker or other nominee)
for the same investor will be considered held in separate
accounts and will not be aggregated when effecting the reverse
share split.
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You should be aware that, under the abandoned property laws of
certain jurisdictions, sums due for fractional shares that are
not timely claimed after the funds are made available may be
required to be paid to the designated abandoned property agent
for each such jurisdiction. Thereafter, shareholders otherwise
entitled to receive such funds may have to obtain the funds
directly from the designated abandoned property to which they
were paid.
Effect on
PXRE Employees and Directors
The number of shares reserved for issuance under PXREs
existing plans will be reduced proportionately based on the
reverse share split ratio. In addition, the number of shares
issuable upon the exercise of options and the exercise price for
such options will be adjusted based on the reverse share split
ratio.
Effect on
Registered and Beneficial Shareholders
The reverse share split would be effected immediately after the
effective time of the merger. Beginning on the effective date,
each share certificate representing pre-reverse share split
shares will be deemed for all corporate purposes to evidence
ownership of post-reverse share split shares.
Effect
on Registered Book-Entry Shares
PXREs registered shareholders may hold some or all of
their shares electronically in book-entry form. These
shareholders will not have share certificates evidencing their
ownership of PXRE common shares. They are, however, provided
with a statement reflecting the number of shares registered in
their accounts.
If you hold registered shares in a book-entry form, you do not
need to take any action to receive your post-reverse share split
shares or your cash payment in lieu of any fractional share, if
applicable.
If you are entitled to post-reverse share split shares, a
transaction statement will automatically be sent to your address
of record indicating the number of shares you hold.
If you are entitled to a payment in lieu of any fractional
share, a check will be mailed to you at your registered address
as soon as practicable after the effective date. By signing and
cashing this check, you will warrant that you owned the shares
for which you received a cash payment. This cash payment is
subject to applicable federal and state income tax and the
abandoned property laws of certain jurisdictions. In addition,
you will not be entitled to receive interest for the period of
time between the effective date of the reverse share split and
the date you receive your payment.
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Effect
on Registered Certificated Shares
Some registered shareholders hold all their shares in
certificate form or a combination of certificate and book-entry
form. If any of your shares are held in certificate form, you
will receive a transmittal letter from PXREs transfer
agent as soon as practicable after the effective date of the
reverse share split. The letter of transmittal will contain
instructions on how to surrender your certificate(s)
representing your pre-reverse share split shares to the transfer
agent. Upon receipt of your share certificate(s), you will be
issued the appropriate number of shares electronically in
book-entry form. No new shares in book-entry form will be issued
to you until you surrender your outstanding certificate(s),
together with the properly completed and executed letter of
transmittal, to the transfer agent. At any time after receipt of
your statement reflecting the number of shares registered in
your book-entry account, you may request a share certificate
representing your ownership interest.
If you are entitled to a payment in lieu of any fractional
share, payment will be made as described above under
Effect on Fractional Shareholders.
Effect
on Shares Held in Street Name
Upon the reverse share split, we intend to treat shareholders
holding PXRE common shares in street name, through a
broker or other nominee, which we refer to as a broker, in the
same manner as registered shareholders whose shares are
registered in their names. Brokers will be instructed to effect
the reverse share split for their beneficial holders holding
PXRE common shares in street name. However, these
brokers may apply their own specific procedures for processing
the reverse share split. If you hold your shares with a broker,
and if you have any questions in this regard, we encourage you
to contact your broker.
SHAREHOLDERS SHOULD NOT DESTROY ANY SHARE CERTIFICATE(S) AND
SHOULD NOT SUBMIT ANY SHARE CERTIFICATE(S) UNTIL REQUESTED TO DO
SO.
Federal
Income Tax Consequences of the Reverse Share Split
The following is a summary of certain material United States
federal income tax consequences of the reverse share split. It
does not purport to be a complete discussion of all of the
possible federal income tax consequences of the reverse share
split and is included for general information only. Further, it
does not address any state, local or foreign income or other tax
consequences. Also, it does not address the tax consequences to
holders that are subject to special tax rules, such as banks,
insurance companies, regulated investment companies, personal
holding companies, foreign entities, nonresident alien
individuals, broker-dealers and tax-exempt entities. The
discussion is based on the provisions of the United States
federal income tax law as of the date hereof, which is subject
to change retroactively as well as prospectively. This summary
also assumes that the pre-reverse share split shares were, and
the post-reverse share split shares will be, held as a
capital asset, as defined in the Code, as amended
(i.e., generally, property held for investment). The tax
treatment of a shareholder may vary depending upon the
particular facts and circumstances of such shareholder. Each
shareholder is urged to consult with such shareholders own
tax advisor with respect to the tax consequences of the reverse
share split. As used herein, the term United States holder means
a shareholder that is, for federal income tax purposes: a
citizen or resident of the United States; a corporation or other
entity taxed as a corporation created or organized in or under
the laws of the United States, any State of the United States or
the District of Columbia; an estate the income of which is
subject to federal income tax regardless of its source; or a
trust if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more
U.S. persons have the authority to control all substantial
decisions of the trust.
Other than the cash payments for fractional shares discussed
below, no gain or loss should be recognized by a shareholder
upon such shareholders exchange of pre-reverse share split
shares for post-reverse share split shares pursuant to the
reverse share split. The aggregate tax basis of the post-reverse
share split shares received in the reverse share split
(including any fractional post-reverse share split share deemed
to have been received) will be the same as the
shareholders aggregate tax basis in the pre-reverse share
split shares exchanged therefor. The shareholders holding
period for the post-reverse share split shares will include the
period during which the shareholder held the pre-reverse share
split shares surrendered in the reverse share split. In general,
the receipt of cash instead of a fractional PXRE common share by
a United States holder of PXRE common shares will result in a
taxable gain or loss to such holder for federal income tax
purposes based upon the difference between the amount of
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cash received by such holder and the holders adjusted tax
basis in the fractional shares as determined above. The gain or
loss will constitute a capital gain or loss and will constitute
long-term capital gain or loss if the holders holding
period is greater than one year as of the effective date.
PXREs view regarding the tax consequences of the reverse
share split is not binding on the IRS or the courts.
ACCORDINGLY, EACH SHAREHOLDER SHOULD CONSULT WITH HIS OR HER
OWN TAX ADVISOR WITH RESPECT TO ALL OF THE POTENTIAL TAX
CONSEQUENCES TO HIM OR HER OF THE REVERSE SHARE SPLIT.
Transfer
of Excess Share Capital to Contributed Surplus
Immediately following the reverse share split, all amounts of
share capital in excess of $1.00 per share, including all
amounts paid in respect of the par value attributable to the
PXRE common shares cancelled pursuant to the reverse share
split, shall be transferred to PXREs contributed surplus.
The reverse share split is conditioned upon and subject to the
completion of the proposed merger. If the merger is not
completed, the reverse share split proposed in this Item 2
will not occur.
Vote
Required for Approval of Item 2
Item 2 must be approved by an ordinary resolution, that is,
a simple majority of the votes cast on the Item, provided a
quorum is present.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the reverse share split and the
transfer of excess share capital to contributed surplus pursuant
to the merger agreement.
Item 3
Name Change
At the PXRE special general meeting, PXRE shareholders are being
asked to consider and vote on a proposal to change the name of
PXRE Group Ltd. to Argo Group International
Holdings, Ltd. The primary purpose of the name change is
to enable the resulting company to operate under a name which
better reflects the resulting company upon completion of the
merger.
Under Bermuda law, a company may change its name if the Bermuda
Registrar of Companies has approved the proposed name and the
change has been approved by both the board of directors and
shareholders of the company. On March 13, 2007, the
Registrar of Companies approved the proposed name. Also on
March 13, 2007, the PXRE board of directors unanimously
approved, effective immediately after the effective time of the
merger, a change in the name of PXRE from PXRE Group
Ltd. to Argo Group International Holdings, Ltd.
Under Bermuda law, the change of name of a company does not
affect any rights or obligations of the company, or render
defective any legal proceedings by or against it, and any legal
proceedings that might have been continued or commenced against
it in its former name may be continued or commenced against it
in its new name.
The name change is conditioned upon and subject to the
completion of the proposed merger. If the merger is not
completed, the name change proposed in this Item 3 will not
occur.
Vote
Required for Approval of Item 3
Item 3 must be approved by an ordinary resolution, that is,
a simple majority of the votes cast on the Item, provided a
quorum is present.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the name change pursuant to the
merger agreement.
Item 4
Increase Authorized Share Capital
As discussed elsewhere in this joint proxy statement/prospectus
at the PXRE special general meeting, PXRE shareholders are being
asked to consider and vote on a proposal to approve an increase
in PXREs authorized share capital from $380 million
to $530 million, effective immediately after the effective
time of the merger. The primary
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purpose of the increase in share capital is to restore
PXREs common share capital following the issuance of
common shares in the merger in order to provide PXRE with
financial flexibility in the future. We do not currently have
any plans to issue any common shares of PXRE, other than in the
merger.
In connection with the merger, PXRE would issue common shares to
Argonaut Shareholders as merger consideration. This would result
in a substantial reduction of PXREs available common share
capital. In order to allow for additional authorized share
capital, PXREs bye-laws must be amended.
The increase in authorized share capital is conditioned upon and
subject to the completion of the proposed merger. If the merger
is not completed, the increase in authorized share capital
proposed in this Item 4 will not occur.
Vote
Required for Approval of Item 4
Item 4 must be approved by an ordinary resolution, that is,
a simple majority of the votes cast on the Item, provided a
quorum is present.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the increase in authorized share
capital pursuant to the merger agreement.
Item 5
Increase in the Size of PXREs Board of
Directors
At the PXRE special general meeting, PXRE shareholders are being
asked to consider and vote on a proposal to increase the maximum
number of directors of PXRE from 11 directors to
13 directors (if the affirmative vote of
662/3%
of the voting power of the outstanding share is obtained) or to
12 directors, effective immediately after the effective
time of the merger.
PXREs board of directors is currently comprised of
11 seats. There are currently nine members and two vacant
seats. PXREs bye-laws currently set the size of
PXREs board of directors at not less than three or more
than 12 members. Increasing the size of the board above its
current size of 11 seats requires the approval of
PXREs shareholders. PXRE has agreed to use commercially
reasonable efforts to cause the board of directors of PXRE to
consist of 13 directors following the merger. Increasing
the size of the board to 13 directors requires an amendment
to PXREs bye-laws approved by
662/3%
of the voting power of the outstanding PXRE shares. Increasing
the size of the board to 12 directors requires the vote of
a simple majority of PXREs shareholders. If
662/3%
of the voting power of the outstanding PXRE shares approve this
Item 5, PXREs bye-laws will be amended to increase
the maximum size of the board to 13 directors following the
merger and the 13 directors immediately following the
merger will consist of Argonauts nine current directors
and four of PXREs current directors. A chairman will be
elected from the group of 13 directors. If this Item 5
is not approved by
662/3%
of the voting power of the outstanding PXRE shares, but is
approved by the affirmative vote of a majority of the votes
cast, the PXRE board of directors following the merger will be
increased to 12 directors and the 12 person board
immediately following the merger will consist of Argonauts
nine current directors and three of PXREs current
directors. A chairman would be elected from the group of
12 directors. In either case, the PXRE board of directors
will continue to be classified, and there will be three classes,
each to be elected for a term of three years.
Jeffrey Radke, Wendy Luscombe, Gerald L. Radke, Craig A. Huff
and Jonathan Kelly are expected to resign as members of the PXRE
board of directors immediately following the merger. F. Sedgwick
Browne, Mural R. Josephson and Bradley E. Cooper are expected to
continue as members of the PXRE board of directors immediately
following the merger if the board is increased to 12 members.
Philip R. McLoughlin is expected to continue as a member of the
PXRE board of directors immediately following the merger if the
board is increased to 13 members, and otherwise he is expected
to resign immediately following the merger. If, for any reason,
any of the PXRE directors presently expected to continue as a
member of the PXRE board is not able or willing to serve as a
director following the merger (a situation which is not
presently contemplated), one of the resigning directors would
instead continue to serve as a director immediately following
the merger.
Upon completion of the merger, Mark E. Watson III,
currently President and Chief Executive Officer of Argonaut, is
expected to become the President and Chief Executive Officer of
the resulting company. Robert P. Myron, currently Executive Vice
President, Chief Financial Officer and Treasurer of PXRE, is
expected to continue
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in those positions with the resulting company. See The
Merger PXREs Board of Directors and Management
Following the Merger beginning on page 112 for
information regarding the directors and executive officers of
PXRE and Argonaut expected to serve as directors and executive
officers of the resulting company following the merger. Jeffrey
L. Radke, currently Chief Executive Officer and President and a
director of PXRE, will leave those positions pursuant to a
letter agreement entered into between PXRE and Mr. Radke.
See The Merger Interests of PXRE Directors and
Executive Officers in the Merger Arrangements with
PXREs President and Chief Executive Officer
beginning on page 108 for information regarding the letter
agreement.
The increase in the size of PXREs board of directors is
conditioned upon and subject to the completion of the proposed
merger. If the merger is not completed, the increase in the size
of PXREs board of directors proposed in this Item 5
will not occur.
Vote
Required for Approval of Item 5
In order to increase the maximum size of the PXRE board of
directors to 13 directors, an amendment to PXREs
bye-laws must be approved by at least
662/3%
of the voting power of PXREs outstanding shares. In the
event such approval is not obtained, but this Item 5 is
approved by a simple majority of the votes cast on the Item,
provided a quorum is present, the size of the PXRE board of
directors will be increased to 12 directors.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the increase in the maximum number of
directors of PXRE from 11 directors to
13 directors.
Item 6
Amendment and Restatement of Memorandum of
Association
At the PXRE special general meeting, PXRE shareholders are being
asked to consider and vote on a proposal to approve the
amendment and restatement of PXREs memorandum of
association, effective immediately after the effective time of
the merger.
Effective December 29, 2006, the Bermuda Legislature made a
number of significant amendments to Bermuda company law. These
amendments now permit a Bermuda company, among other things, to
state in its memorandum of association that the company have
unrestricted objects, meaning that a company may be formed and
incorporated for the purpose of undertaking any lawful activity,
and that a company may have the capacity, rights, powers and
privileges of a natural person. The new provisions also now
permit Bermuda companies to hold treasury shares. The PXRE board
of directors unanimously recommends that PXRE amend its
memorandum of association in accordance with these new
provisions which will permit PXRE after such amendment to have
the corporate capacity to undertake any lawful activity, rather
than being limited to undertaking activities within the objects
that are presently specifically listed in its memorandum of
association, and to permit PXRE to hold treasury shares.
The text of the proposed amended and restated memorandum of
association is set forth in Annex B to this joint
proxy statement/prospectus. Additions to the memorandum of
association are shown as underlined text and deletions are shown
with strike through text.
The amendment and restatement of PXREs memorandum of
association is conditioned upon and subject to the completion of
the proposed merger. If the merger is not completed, the
amendment and restatement of PXREs memorandum of
association proposed in this Item 6 will not occur.
Vote
Required for Approval of Item 6
Item 6 must be approved by an ordinary resolution, that is,
a simple majority of the votes cast on the Item, provided a
quorum is present.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the amendment and restatement of
PXREs memorandum of association.
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Item 7
Amendment and Restatement of Bye-Laws
At the PXRE special general meeting, PXRE shareholders are being
asked to consider and vote on a proposal to approve the
amendment and restatement of PXREs bye-laws, effective
immediately after the effective time of the merger.
The text of the proposed amended and restated bye-laws is set
forth in Annex C to this joint proxy
statement/prospectus. Additions to the bye-laws are shown as
underlined text and deletions are shown with strike through
text. The additions and deletions requiring the approval of
at least
662/3%
of the voting power of PXREs outstanding shares are in
bold italics and will only be made if such vote is obtained. The
additions and deletions requiring the approval by an ordinary
resolution, that is, a simple majority of votes cast, are in
bold roman type. The following summary discusses the two sets of
changes to PXREs bye-laws.
PXREs bye-laws currently contain certain provisions
designed to mitigate the risk that U.S. Persons (as that
term is defined under Material Tax Considerations)
will be required to include earnings of PXRE in their
U.S. federal gross income under the controlled foreign
corporation rules (see the discussion under Material Tax
Considerations). These provisions were enacted at the time
of PXREs formation in 1999 and are generally described in
Information about PXRE Description of Share
Capital. They include voting adjustments and ownership and
transfer restrictions.
It has been proposed that these provisions be amended in order
to incorporate provisions designed to further mitigate the risk
that U.S. Persons will be required to include earnings of
PXRE in their U.S. federal gross income under the
controlled foreign corporation rules. These provisions are
generally described in Information about PXRE
Description of Share Capital. They include voting
adjustments, a subsidiary share voting provision and ownership
and transfer restrictions. The proposed amendments include the
following:
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The addition, deletion and amendment of defined terms in bye-law
1;
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The deletion in bye-law 2(2) of a limitation on the amount of
voting shares that can be held by any person (the
Ownership Limitation);
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The addition in bye-law 3 of (i) language clarifying that
shareholders voting rights are subject to adjustment under
bye-law 20 and (ii) a provision permitting the board of
directors to prohibit the issuance or grant of shares, options
or warrants, if the board of directors determines that such
issuance or grant may result in a non-de minimis adverse
tax, legal or regulatory consequence to PXRE, any subsidiary of
PXRE or any direct or indirect shareholder or its affiliates;
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The addition in bye-law 4(2) and 4(4), respectively, of
(i) a provision permitting the board of directors to
prohibit the issuance or grant of convertible preferred shares,
options or warrants, if the board of directors determines that
such issuance or grant may result in a non-de minimis
adverse tax, legal or regulatory consequence to PXRE, any
subsidiary of PXRE or any direct or indirect shareholder or its
affiliates and (ii) a provision permitting the board of
directors to prohibit the consolidation, division or subdivision
of convertible preferred shares, if the board of directors
determines that such consolidation, division or subdivision may
result in a non-de minimis adverse tax, legal or
regulatory consequence to PXRE, any subsidiary of PXRE or any
direct or indirect shareholder or its affiliates;
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The addition in bye-law 6(1) of a provision permitting the board
of directors to prohibit the repurchase or acquisition of PXRE
shares, if the board of directors determines that such
repurchase or acquisition may result in a non-de minimis
adverse tax, legal or regulatory consequence to PXRE, any
subsidiary of PXRE or any direct or indirect shareholder or its
affiliates;
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The amendment of bye-law 7 to (i) include a provision
permitting the board of directors to prohibit the alteration of
rights of any class of shares, if the board of directors
determines that such alteration of rights may result in a
non-de minimis adverse tax, legal or regulatory
consequence to PXRE, any subsidiary of PXRE or any direct or
indirect shareholder or its affiliates and (ii) remove a
provision that interacts with the Ownership Limitation;
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The amendment of bye-law 8(1) to (i) include a provision
permitting the board of directors to prohibit the issuance of
warrants, if the board of directors determines that such
issuance may result in a non-de minimis adverse tax,
legal or regulatory consequence to PXRE, any subsidiary of PXRE
or any direct or indirect shareholder or its affiliates and
(ii) remove a provision that interacts with the Ownership
Limitation;
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The amendment of bye-law 13 to (i) include a provision
permitting the board of directors to prohibit the transfer of
shares, if the board of directors determines that such transfer
may result in a non-de minimis adverse tax, legal or
regulatory consequence to PXRE, any subsidiary of PXRE or any
direct or indirect shareholder or its affiliates and
(ii) remove a provision that interacts with the Ownership
Limitation;
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The amendment of bye-law 14(2) to (i) include a provision
permitting the board of directors to decline to approve or
register or permit the registration of shares, if the board of
directors determines that such registration may result in a
non-de minimis adverse tax, legal or regulatory
consequence to PXRE, any subsidiary of PXRE or any direct or
indirect shareholder or its affiliates and (ii) remove a
provision that interacts with the Ownership Limitation;
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The revision of the voting cut-back provisions of bye-law 20 to
incorporate procedures designed to further mitigate the risk
that U.S. Persons will be required to include earnings of
PXRE in their U.S. federal gross income under the
controlled foreign corporation rules while allowing more
flexibility and simplifying the analysis, including
(i) reducing the vote a U.S. person can hold from 9.9%
to 9.5%, (ii) analysis by an accounting firm,
(iii) not extending the analysis to purely constructive
owners, (iv) not applying the cut-back to
non-U.S. persons,
(v) board of directors override provisions and
(vi) confidentiality safeguards;
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The addition of a new bye-law 20A providing for a
push-up
of the vote with respect to all material PXRE subsidiary
shareholder matters to the PXRE shareholders; and
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The deletion of bye-law 40, which allows the waiver of the
Ownership Limitation, the voting cut-back provisions and
assorted related provisions.
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PXREs bye-laws also contain restrictions in bye-law 27(12)
with respect to the use of unanimous written resolutions by the
board of directors which are designed to mitigate the risk that
PXRE will be characterized as engaged in a U.S. trade or
business and subject to U.S. federal income tax and the
additional branch profits tax (see Material Tax
Considerations beginning on page 118). It has been
proposed that bye-law 27(12) be amended in order to allow more
flexibility for the board of directors to utilize unanimous
written resolutions with respect to ministerial matters.
PXREs bye-laws currently contain a provision in bye-law 41
requiring a special resolution, that is the approval of at least
662/3%
of the voting power of PXREs outstanding shares, to amend
certain bye-laws. It has been proposed that this provision be
amended to eliminate the requirement for a special resolution to
amend any bye-law in order to allow a majority vote of
shareholders to determine the appropriateness of amendments to
the bye-laws.
In addition to the foregoing U.S. federal income tax
related bye-law amendment proposals, non-material clarifying
bye-law amendments have been proposed to the following bye-laws:
1(1), 1(2), 1(3), 1(4), 2, 7(1), 7(3), 9(1),
10(1), 11, 13(1), 17(1), 18(1), 22(1), 22(8), 25(3), 26(1),
26(4), 27(2), 27(9), 28(1), 33(10), 33(13), 36(3) and 41.
As noted above, PXREs bye-laws were enacted at the time of
PXREs formation in 1999, since that time certain changes
have been made to the Companies Act 1981 of Bermuda. In order to
bring PXREs bye-laws up to date with these changes,
amendments have been proposed in particular to bye-laws 6(2) and
31. Bye-law 6(2) now permits PXRE to purchase and hold its
shares as treasury shares. As respects the proposed changes to
bye-law 31, it is no longer a mandatory requirement under
Bermuda law that deeds or other documents be executed under seal
in order to be effective as a matter of Bermuda law. While the
corporate seal still has a role, that role is now limited and
the revised bye-law provides for increased flexibility for its
use. In addition, updating amendments have been proposed to
bye-laws 8(3), 13(6), 13(7), 20(3), 20(9), 20(21) and 26(5)
through 26(11).
The proposed amendments to bye-laws 1, 3, 4,
13, 17, 18, 20, 22, 40 and 41 require a special
resolution of the PXRE shareholders, that is, the approval of at
least
662/3%
of the voting power of PXREs outstanding shares.
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The amendment and restatement of PXREs bye-laws is
conditioned upon and subject to the completion of the proposed
merger. If the merger is not completed, the amendment and
restatement of PXREs bye-laws proposed in this Item 7
will not occur.
Vote
Required for Approval of Item 7
As noted, the amendments to the bye-laws in bold italics in
Annex C require the approval of at least
662/3%
of the total voting power of PXREs outstanding shares. The
remaining proposed bye-law amendments, reflected in bold roman
type in Annex C, must be approved by an ordinary
resolution, that is, a simple majority of the votes cast,
provided a quorum is present.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the amendment and restatement of
PXREs bye-laws.
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Item 8
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Approve
Adjournments of the Special Meeting to a Later Date, if
Necessary, to Permit Further Solicitation of
Proxies
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PXRE shareholders may be asked to consider and vote on a
proposal to adjourn the special general meeting to a later date,
if necessary, to permit further solicitation of proxies if there
are not sufficient votes at the time of the special general
meeting to approve the foregoing proposals. See the discussion
regarding adjournments above in Other Voting
Matters Adjournments beginning on page 64.
Vote
Required for Approval of Item 8, if Necessary
Item 8, if necessary, must be approved by an ordinary
resolution, that is, a simple majority of the votes cast on the
Item, provided a quorum is present.
The PXRE board of directors unanimously recommends that PXRE
shareholders vote FOR the proposal to adjourn, if
necessary, the PXRE special general meeting.
74
ARGONAUT
SPECIAL MEETING
General
This joint proxy statement/prospectus is being provided to
holders of Argonaut common stock as part of a solicitation of
proxies by Argonauts board of directors for use at
Argonauts special meeting and at any adjournment thereof.
In addition, this joint proxy statement/prospectus is being
furnished to Argonaut shareholders as a prospectus for PXRE in
connection with its issuance of PXRE common shares to Argonaut
shareholders in connection with the merger. This joint proxy
statement/prospectus provides Argonaut shareholders with the
information they need to know to be able to vote or instruct
their vote to be cast at the Argonaut special meeting.
Date,
Time and Place of the Argonaut Special Meeting
The Argonaut special meeting will be held at 10:30 a.m., local
time, on Wednesday, July 25, 2007, at 10101 Reunion
Place, San Antonio, Texas in the Union Square First Floor
Conference Room.
Purposes
of the Argonaut Special Meeting
At the Argonaut special meeting, Argonaut shareholders will be
asked:
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to approve the merger agreement;
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to approve adjournments of the Argonaut special meeting, to a
later date if necessary, to permit further solicitation of
proxies if there are not sufficient votes at the time of
Argonauts special meeting to approve the above
proposal; and
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to consider and vote upon other matters that may properly be
submitted to a vote at the Argonaut special meeting or any
reconvened meeting following an adjournment of the special
meeting.
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Record
Date; Shares Entitled to Vote; Outstanding Shares
The record date for the special meeting for Argonaut
shareholders was June 4, 2007. This means that you must
have been a shareholder of record of Argonaut common stock at
the close of business on June 4, 2007 in order to vote at
the special meeting. You are entitled to one vote for each share
of Argonaut common stock you own on the record date. On
Argonauts record date, Argonaut had 34,072,750 shares
of Argonaut common stock outstanding.
A complete list of Argonaut shareholders entitled to vote at the
Argonaut special meeting, arranged in alphabetical order for
each class of stock showing the address of each such shareholder
and the number of shares registered in such shareholders
name, shall be open to the examination of any such shareholder,
for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting
is to be held.
The stock list shall also be kept at the place of the meeting
during the whole time thereof and shall be open to the
examination of any such shareholder who is present. This list
shall presumptively determine the identity of the shareholders
entitled to vote at the meeting and the number of shares held by
each of them.
Quorum
and Voting Rights
A quorum of shareholders is necessary to hold a valid special
meeting of Argonaut. A majority of all outstanding shares of
Argonaut entitled to vote and be present, in person or by proxy,
at the special meeting constitutes a quorum. All shares of
Argonaut common stock represented at the special meeting,
including abstentions and broker non-votes, will be counted for
purposes of determining whether a quorum is present.
Broker non-votes are shares held by a broker that
are represented at the meeting, but with respect to which the
beneficial owner has not instructed the broker on the particular
proposal and the broker does not have discretionary voting power
on such proposal. Once a share is represented for any purpose at
the special meeting, it will be deemed present for quorum
purposes for the remainder of the meeting (including any meeting
resulting from an
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adjournment of the special meeting, unless a new record date is
set). For purposes of voting on each of the proposals set forth
below, the owners of shares of Argonaut common stock vote
together as one class.
The votes required to approve the respective proposals at the
Argonaut special meeting are:
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the affirmative vote of a majority of the outstanding shares of
Argonaut common stock voting together as a single class is
required to adopt the merger agreement; and
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approval of any necessary adjournment of the special meeting to
a later date, if necessary, to permit further solicitation of
proxies if there are not sufficient votes at the time of the
Argonaut special meeting to approve the above proposals, may be
obtained by the affirmative vote of the holders of a majority of
the shares present in person or by proxy, even if less than a
quorum.
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Item 1
The Merger
As discussed elsewhere in this joint proxy statement/prospectus,
Argonaut shareholders are considering and voting on a proposal
to approve the merger agreement. You should read carefully this
joint proxy statement/prospectus in its entirety for more
detailed information concerning the merger agreement and the
merger. In particular, you are directed to the merger agreement,
which is attached to this joint proxy statement/prospectus as
Annex A.
The Argonaut board of directors unanimously recommends that
Argonaut shareholders vote FOR the merger agreement.
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Item 2
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Approve
Adjournments of the Special Meeting to a Later Date, If
Necessary, to Permit Further Solicitation of
Proxies
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Shareholders may be asked to vote on a proposal to adjourn the
special meeting to a later date, if necessary, to permit further
solicitation of proxies if there are not sufficient votes at the
time of the special meeting to approve the above proposal.
The Argonaut board of directors unanimously recommends that
Argonaut shareholders vote FOR the proposal to adjourn, if
necessary, the Argonaut special meeting.
Voting by
Argonauts Directors and Executive Officers
As of the record date for the Argonaut special meeting,
Argonauts directors and executive officers and their
affiliates were entitled to vote approximately
1,254,546 shares of the then outstanding Argonaut common
stock at the Argonaut special meeting, which represented 3.7% of
the Argonaut common stock outstanding and entitled to vote at
the meeting.
Voting;
Proxies
You may vote in person at the Argonaut special meeting or by
proxy. We recommend that you vote by proxy even if you plan to
attend the special meeting. If you vote by proxy, you may change
your vote if you attend the special meeting. If you own Argonaut
common stock in your own name, you are an owner of
record. This means that you may use the enclosed
proxy/voting instruction card to tell the persons named as
proxies how to vote your shares. If you properly complete, sign
and date your proxy/voting instruction card, or vote by
telephone or over the Internet, your proxy/voting instruction
card will be voted in accordance with your instructions. The
named proxies will vote all shares at the meeting that have been
properly voted (whether by Internet, telephone or mail) and not
revoked. If you sign and return your proxy/voting instruction
card but do not mark your proxy/voting instruction card to tell
the proxies how to vote your shares on each proposal, your
proxy/voting instruction card will be voted FOR each of the
proposals presented.
If you hold Argonaut shares in a stock brokerage account or
through a broker, bank or other nominee, or, in other words, in
street name, please follow the voting instructions
provided by your broker, bank or other nominee. Also, see
Voting Shares Held in Street
Name beginning on page 77.
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Voting
Shares Held in Street Name
Generally, a broker, bank or other nominee may only vote the
common stock that it holds in street name for you in
accordance with your instructions. However, if your broker has
not received your instructions, your broker has the discretion
to vote on certain matters that are considered routine.
If you wish to vote on the proposal to approve the merger
agreement, you must provide instructions to your broker because
this proposal is not routine. If you do not provide your broker
with instructions, your broker will not be authorized to vote on
the proposal to approve the merger agreement. Abstentions and
broker non-votes will count as votes against the merger
agreement. However, they will be deemed as votes present for
quorum purposes.
If you wish to vote on any proposal to approve adjournments of
the Argonaut special meeting, you should provide instructions to
your broker. If you do not provide instructions to your broker,
your broker generally will have the authority to vote on
proposals such as the adjournment of meetings. However, your
broker will not be authorized to vote on any proposal to adjourn
the special meeting solely relating to the solicitation of
proxies to approve the merger agreement.
Abstaining
from Voting
Your abstention from voting will have the following effects:
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Abstentions will have the same effect as a vote against the
approval of the merger agreement. Abstentions will, however,
increase the percentage of votes cast on the proposal and thus
could have the effect of causing the proposal to pass if the
majority of the votes otherwise cast on the proposal have been
voted in favor of the proposal and the abstentions cause the
percentage of votes cast on the proposal to total more than 50%
of the outstanding shares.
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Abstentions will have no effect on any proposal to approve
adjournments of the Argonaut special meeting.
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How to
Vote
You have three voting options:
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Internet: You can vote over the
Internet at the Internet address shown on your proxy/voting
instruction card. Internet voting is available 24 hours a
day. If you vote over the Internet, do not return your
proxy/voting instruction card.
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Telephone: You can vote by telephone by
calling the toll-free number on your proxy/voting instruction
card. Telephone voting is available 24 hours a day.
Easy-to-follow
voice prompts allow you to vote your shares and confirm that
your instructions have been properly recorded. If you vote by
telephone, do not return your proxy/voting instruction card.
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Mail: You can vote by mail by simply
signing, dating and mailing your proxy/voting instruction card
in the postage-paid envelope included with this joint proxy
statement/prospectus.
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A number of brokerage firms and banks participate in a program
that also permits shareholders whose shares are held in
street name to direct their vote over the Internet
or by telephone. This option, if available, will be reflected in
the voting instructions from the brokerage firm or bank that
accompany this joint proxy statement/prospectus. If your shares
are held in an account at a brokerage firm or bank that
participates in such a program, you may direct the vote of these
shares by the Internet or telephone by following the voting
instructions enclosed with the proxy form from the brokerage
firm or bank. Directing the voting of your shares will not
affect your right to vote in person if you decide to attend the
Argonaut special meeting; however, you must first obtain a
signed and properly executed legal proxy from your broker, bank
or other nominee to vote your shares held in street
name at the special meeting. Requesting a legal proxy will
automatically cancel any voting directions you have previously
given to your broker, bank or other nominee by the Internet or
by telephone with respect to your shares.
77
Revoking
Your Proxy/Voting Instruction Card
You can revoke your proxy/voting instruction card at any time
before its exercise by:
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sending a written notice to Craig S. Comeaux, the Corporate
Secretary of Argonaut, at 10101 Reunion Place, Suite 500,
San Antonio, Texas 78216, bearing a date later than the
date of the proxy/voting instruction card, that is received
prior to the Argonaut special meeting and states that you revoke
your proxy/voting instruction card;
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voting again over the Internet or by telephone;
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signing another proxy/voting instruction card bearing a later
date and mailing it so that it is received prior to the Argonaut
special meeting; or
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attending the Argonaut special meeting and voting in person,
although attendance at the special meeting will not, by itself,
revoke a proxy/voting instruction card.
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If your shares are held in street name, you will
need to contact your broker, bank or other nominee to revoke
your proxy/voting instruction card.
Other
Voting Matters
Voting
in Person
If you plan to attend the Argonaut special meeting and wish to
vote in person, we will give you a ballot at the special
meeting. However, if your shares are held in street
name, you must first obtain a legal proxy authorizing you
to vote the shares in person, which you must bring with you to
the special meeting.
Electronic
Access to Proxy Materials
This joint proxy statement/prospectus is available on the
SECs Internet site at www.sec.gov or on Argonauts
Internet site at www.argonautgroup.com.
Proxy
Solicitations
Argonaut is soliciting proxies for the Argonaut special meeting
from Argonaut shareholders. Argonaut will bear the entire cost
of soliciting proxies from Argonaut shareholders, except that
Argonaut and PXRE will share equally the expenses incurred in
connection with the filing of the registration statement of
which this joint proxy statement/prospectus forms a part with
the SEC and the printing and mailing of this joint proxy
statement/prospectus. In addition to this mailing,
Argonauts directors, officers and employees (who will not
receive any additional compensation for their services) may
solicit proxies personally, electronically or by telephone.
Argonaut has also engaged Georgeson, for a fee of $10,000 and
reimbursement of certain expenses, to assist in the solicitation
of proxies. Argonaut and its proxy solicitor will also request
that banks, brokerage houses and other custodians, nominees and
fiduciaries send proxy materials to the beneficial owners of
Argonaut common stock and will, if requested, reimburse the
record holders for their reasonable
out-of-pocket
expenses in doing so. The extent to which these proxy-soliciting
efforts will be necessary depends upon how promptly proxies are
submitted. You should promptly vote by telephone or over the
Internet or submit your completed proxy/voting instruction card
by mail.
Adjournments
If a quorum is not present at the special meeting, the chairman
of the meeting or the holders of a majority of the shares of
stock entitled to vote who are present, in person or by proxy,
will have the authority to adjourn the meeting to another place,
date, or time without notice other than announcement at the
meeting, until a quorum shall be presented or represented.
When a meeting is adjourned to another place, date or time,
written notice need not be given of the adjourned meeting if the
place, date and time thereof are announced at the meeting at
which the adjournment is taken; provided, however, that if the
date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or
if a new record date is fixed for the adjourned meeting, written
notice of the
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place, date, and time of the adjourned meeting shall be given in
conformity herewith. At any adjourned meeting, any business may
be transacted which might have been transacted at the original
meeting.
Assistance
If you need assistance in completing your proxy/voting
instruction card or have questions regarding Argonauts
special meeting, please contact Argonaut Investor Relations at
(210) 321-8555
or write to Argonaut Group, Inc., Investor Relations, 10101
Reunion Place, Suite 500, San Antonio, Texas 78216, or
contact Georgeson, Argonauts proxy solicitor, at
(866) 574-4071
(toll-free) or write to Georgeson, Inc., 17 State Street, New
York, NY 10004.
79
THE
MERGER
The following discussion contains material information
pertaining to the merger. This discussion is subject and
qualified in its entirety by reference to the merger agreement
and the related documents attached as Annexes to this joint
proxy statement/prospectus. We urge you to read the entirety of
those documents as well as the discussion in this joint proxy
statement/prospectus.
Effect of
the Merger; Consideration to be Received in the Merger;
Treatment of Options and Other Equity-Based Awards
At the effective time of the merger, Argonaut shareholders will
be entitled to receive newly issued PXRE common shares for their
shares of Argonaut common stock. The number of PXRE common
shares that Argonaut shareholders will receive will be based on
an exchange ratio. The exchange ratio as specified in the merger
agreement provides that Argonaut shareholders will be entitled
to receive 6.4672 PXRE common shares in exchange for each share
of Argonaut common stock they hold, subject to adjustment in the
event that (i) Argonauts special dividend to its
shareholders is less than $60 million, or
(ii) Argonaut pays certain other dividends, incurs losses
on sales of assets
and/or
engages in dilutive sales or purchases of Argonaut shares. The
number of PXRE common shares that Argonaut shareholders will be
entitled to receive will be adjusted, proportionately among all
PXRE common shareholders, upon completion of a reverse share
split of PXRE shares immediately after the merger (subject to
the approval of PXREs shareholders). See PXRE
Special General Meeting Proposals to be Considered
at the PXRE Special General Meeting
Item 2 Reverse Share Split Impact
of the Proposed Reverse Share Split if Effected beginning
on page 66. PXRE will not issue fractional shares in
connection with the merger or in connection with the reverse
share split. The value of any fractional shares will be
determined after completion of the reverse share split and will
be paid in cash. The reverse share split would affect all of
PXREs shareholders uniformly, including the former
shareholders of Argonaut entitled to receive PXRE shares as
merger consideration in the merger, and will not affect any
shareholders percentage ownership interests in PXRE or
proportionate voting power, except to the extent that the
reverse share split would otherwise result in a shareholder
owning a fractional share for which it will receive cash in lieu
of such fractional share.
The exchange ratio will not be adjusted based on changes in
market price, although the exchange ratio is subject to
adjustment to prevent dilution under certain circumstances.
Because we cannot predict the market price of PXRE common shares
at the effective time of the transactions, we cannot predict the
value of the PXRE common shares Argonaut shareholders will
receive. The value of the consideration received for each share
of Argonaut common stock at that time, based on reported market
prices, may be significantly higher or lower than the value of
the consideration on the date of this joint proxy
statement/prospectus.
Upon completion of the merger, we estimate that PXREs
shareholders will own approximately 27% and Argonaut
shareholders will own approximately 73% of the then-outstanding
PXRE common shares.
Prior to or following the closing of the merger, the parties
intend to review the capital structure of the resulting company
and consider financing alternatives. As a result of such review,
the parties may seek to incur additional indebtedness either
through the issuance of public or private debt or through bank
or other financing. The funds raised by the incurrence of such
additional indebtedness may be used to repay existing
indebtedness of the parties, including amounts borrowed under
Argonauts credit facility to fund the special dividend,
PXREs outstanding trust preferred securities and
Argonauts outstanding trust preferred securities, or for
general corporate purposes of the resulting company, including
additions to working capital, capital expenditures, investments
in subsidiaries or acquisitions.
When we complete the merger, all outstanding options to purchase
PXRE common shares held by existing option holders will become
exercisable and will continue in full force and effect. All
outstanding restricted shares will vest and continue outstanding
except for 165,880 restricted shares granted in 2007 to
non-executive officers, which vest over four years.
The Argonaut Amended and Restated Stock Incentive Plan, which we
refer to as the Argonaut stock incentive plan, provides that all
unvested stock options and restricted stock awards granted
thereunder will terminate upon the effective time of the merger
unless the Argonaut board of directors affirmatively acts to
implement one or more of the alternative arrangements enumerated
therein. As noted in The Merger Resulting
Companys Initial Annual General Meeting
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Following the Merger Replacement of Certain PXRE
and Argonaut Benefit Plans with New Resulting Company Benefit
Plans beginning on page 117, the board of directors
of Argonaut has determined that it is in the best interests of
Argonaut and its shareholders to avoid early termination of
grants made under the Argonaut stock incentive plan by reason of
the merger. Accordingly, the merger agreement provides for the
Argonaut stock incentive plan to be adopted by Argo Group and
for all outstanding awards under the Argonaut stock incentive
plan to be assumed by Argo Group, as of the effective time of
the merger, thereby avoiding the termination of any existing
grant.
With the exception of the possible acceleration of vesting of
certain outstanding equity awards held by the five executive
officers named in Argonauts annual proxy statement dated
March 30, 2007 and one other executive officer of Argonaut
as described below, when we complete the merger, all equity
awards outstanding as of the effective time of the merger will
be converted into equivalent equity awards of Argo Group. Each
outstanding vested and unvested option to acquire shares of
Argonaut common stock will be automatically converted into an
option to acquire a number of whole common shares of PXRE equal
to the product of the number of shares of Argonaut common stock
that were subject to the original Argonaut stock option
multiplied by the exchange ratio (rounded down to the nearest
whole share) at a per share exercise price of the original
Argonaut stock option divided by the exchange ratio (rounded up
to the nearest whole cent). Upon completion of the reverse share
split, proportionate adjustments will be made to the per share
exercise price and the number of shares issued upon the exercise
of all outstanding options entitling the holders to purchase
Argo Group common shares, which will result in approximately the
same aggregate amount being required to be paid for such options
upon exercise immediately preceding the reverse share split.
Each converted Argonaut stock option will otherwise continue
unaltered and have substantially the same terms and conditions
as were in effect immediately prior to the completion of the
transactions, including, as applicable, vesting and term of
exercise. The unvested number of shares in a restricted stock
grant will be converted into a number of whole common shares of
a Argo Group restricted share grant equal to the product of the
number of unvested shares of Argonaut stock that were subject to
the original Argonaut restricted stock grant multiplied by the
exchange ratio (rounded down to the nearest whole share). The
resulting number of shares will then be divided by ten to
reflect the reverse share split and rounded down to the nearest
whole share to eliminate fractional shares. No fractional shares
will be issued and no cash payment for fractional shares will be
made to holders of unvested restricted stock grants. No other
change will be made to each unvested restricted stock grant, and
the terms and conditions in effect immediately before the
completion of the transactions, including vesting, will be
unchanged.
With respect to the five executive officers named in
Argonauts annual proxy statement dated March 30, 2007
and one other executive officer of Argonaut, the Argonaut board
of directors has determined that it is in the best interests of
Argonaut and its shareholders to provide for the accelerated
vesting of certain unvested stock options and unvested
restricted stock grants held by them, provided that each
executive officer agrees (i) to exercise all of their
outstanding stock options (other than certain out of the
money options, as described below) prior to the effective
time of the merger (including those vested in the ordinary
course prior to the acceleration) and (ii) to enter into a
lockup agreement with Argo Group restricting transfer of a
substantial portion of the Argo Group common shares owned by
such executive officer for a period of three years following the
effective time of the merger (a period that generally exceeds
the previous vesting period for the accelerated grants), and
provided further that suitable arrangements are made for the
orderly disposition of any shares sold prior to the effective
time of the merger to cover the exercise price and income tax
liability payable by each such executive officer in connection
with any accelerated vesting of their grants. To the extent any
out of the money options held by the executive
officers are not vested, each executive officer, as part of
their agreement with the Company, may elect whether or not to
have such options accelerated. Out of the money
stock options are the options held by an executive officer that
have an exercise price, as defined in the applicable option
award agreement, in excess of the price at which the stock last
traded on the date the executive officer makes the election.
The number of Argo Group common shares subject to the three-year
restriction on transfer will be equal in value to 140% to 150%
of the net after-tax value of the accelerated unvested grants
immediately prior to the effective time of the merger. As a
result, it is anticipated that substantially all of the Argo
Group common shares received by each such executive officer as a
result of the accelerated vesting will be subject to the lockup
agreements. In addition, a substantial portion of the shares of
Argonaut common stock already beneficially owned and freely
transferable by each such executive officer prior to the merger
may become subject to the lockup upon
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conversion to Argo Group common shares following the merger.
Shares required to be held pursuant to the lockup agreements,
while not subject to forfeiture, will remain subject to the
restrictions on transfer regardless of whether the executive
officer remains employed by Argo Group during the three-year
period. Exceptions to the duration of the lockup period and/or
of the value of the Argo Group common shares required to be held
may be made by the Argo Group board of directors with respect to
certain executive officers who elect to retire or to assume
different functions within the organization, and for other
appropriate reasons.
The Argonaut board of directors believes that the above measures
relating to such key executive officers will further the
long-term incentive goals of the executive compensation programs
pursuant to which the original equity grants to these executive
officers were made and promote continued alignment of the
economic interests of these executive officers with Argo
Groups shareholders following the merger. In reaching this
determination, the Argonaut board of directors also took into
consideration the possibility that the value of all outstanding
options, vested and unvested, as well as the value of all
unvested restricted shares, beneficially owned by each of these
executive officers upon conversion to equivalent grants of Argo
Group equity, could be subject to a 15% excise tax payable by
each executive officer if Section 4985 of the Code applies
to the merger. Pursuant to the merger agreement, Argo Group has
an indemnification obligation to the officers and directors of
both PXRE and Argonaut in the event any such officer or director
incurs additional tax liability solely as a result of the
merger. However, Argo Group will not indemnify any tax liability
incurred by any executive officer with respect to any
unexercised out of the money options, including any
out of the money options that are not vested and to
which the executive officer elected not to have accelerated. If
Section 4985 applies to the merger, the excise tax would
not apply to the value of any grant for which all taxable income
and gain has been recognized by such officer or director. The
measures described above will result in the recognition of a
taxable event by each of the executive officers who could be
affected by the excise tax under Section 4985 and the
payment of any applicable taxes on income or gains associated
with equity grants that otherwise would have remained unvested
or unexercised at the time of merger. If the excise tax were to
be levied on unvested or unexercised equity grants held by the
six key executive officers following the effective time of the
merger, the indemnity obligation of Argo Group to such executive
officers could be as much as $9 million. This compares to
no additional cash expense to Argonaut if the unvested stock
options and unvested restricted stock are accelerated. However,
as a result of the acceleration of vesting of the outstanding
equity awards held by such executive officers, Argonaut will
incur approximately $10.2 million in non-cash compensation
expense in 2007 that otherwise would have been incurred in
future periods over the normal vesting periods of the
accelerated grants.
If Section 4985 applies to the merger, the measures
described above do not address any excise tax that could be
levied on the value of deferred stock units beneficially owned
at the time of the merger by certain Argonaut directors pursuant
to the Argonaut Deferred Compensation Plan for Non-Employee
Directors, which will not be accelerated. In the event excise
taxes became payable by these Argonaut directors with respect to
the deferred stock units as a result of the merger, the
indemnification obligation of Argo Group to such directors could
amount to approximately $400,000. Stock options granted to
certain Argonaut directors under the Argonaut Non-Employee
Director Stock Option Plan will not be accelerated as they will,
by their terms, already be vested, and are expected to be
exercised, prior to the effective time of the merger. If such
stock options are not exercised prior to the effective time of
the merger, and an excise tax were to be levied on the
unexercised stock options held by these Argonaut directors
following the effective time of the merger, the indemnification
obligation of Argo Group to such directors could be as much as
an additional $600,000.
Background
of the Merger
Hurricane
Losses and Ratings Downgrades
PXRE incurred a net loss before convertible preferred share
dividends of $697.6 million in the year ended
December 31, 2005. The primary cause of this net loss was
the net impact of catastrophe losses arising from Hurricanes
Katrina, Rita and Wilma of $806.9 million, after
reinsurance recoveries on PXREs outwards reinsurance
program and the impact of inwards and outwards reinstatements
and additional premiums.
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Hurricane Katrina made its second landfall in the United States
on August 29, 2005 and Hurricane Rita struck Texas on
September 24, 2005. As a result of these hurricanes, PXRE
reported a net loss before convertible preferred share dividends
of $317.3 million during the quarter ended
September 30, 2005.
Hurricane Wilma then occurred, making landfall in Mexico on
October 21, 2005 and Florida on October 24, 2005. As
of December 31, 2005, the net impact of Hurricane Wilma was
$138.0 million, after reinsurance recoveries on PXREs
outwards reinsurance program and the impact of inwards and
outwards reinstatements and additional premiums.
In the beginning of 2006, as part of PXREs
2005 year-end closing process, PXRE reassessed its
liability for claims arising from Hurricanes Katrina and Rita.
As part of this year-end assessment, PXRE determined that claims
reported by clients relating to Hurricanes Katrina and Rita were
significantly higher than expected, especially following a
significant influx of reported claims beginning in late November
through January 2006. PXREs year-end assessment of
Hurricane Katrina and Rita also included a review of the loss
information included in the underwriting submission information
provided by clients as part of the January 1, 2006 renewal
process.
As a result of this year-end review, on February 16, 2006,
PXRE announced that PXRE would be increasing its estimates of
the net pre-tax impact of Hurricanes Katrina, Rita and Wilma on
PXREs operating results for the year ended
December 31, 2005. PXRE recorded an additional net
liability in the fourth quarter of $238.1 million with
respect to Hurricane Katrina and $48.2 million with respect
to Hurricane Rita, in each case net of reinsurance recoveries on
its outwards reinsurance program and the impact of inwards and
outwards reinstatements and additional premiums. PXRE also first
announced its intention to explore strategic alternatives due to
concerns about the hurricane losses and the resulting potential
negative impact on PXREs credit ratings. Following these
announcements, in February 2006 PXREs counterparty credit
and financial strength ratings were downgraded by each of the
major rating agencies to a level that was generally unacceptable
to many of PXREs reinsurance clients. These ratings
downgrades have had a significant negative impact on PXREs
operating results and profitability because they have impaired
PXREs ability to retain and renew PXREs existing
reinsurance business. In light of the negative consequences of
rating downgrades, PXREs board of directors decided to
retain Lazard (which has since been succeeded by KBW) as its
financial advisor to assist in the process.
On February 23, 2006, S&P further downgraded its
counterparty credit and financial strength rating on PXRE
Reinsurance and PXRE Bermuda from BBB+ to
BBB-. On February 24, 2006, A.M. Best
further downgraded its financial strength rating on these
entities from B++ to B+ with a negative
implication. On February 28, 2006, Moodys further
downgraded its insurance financial strength rating of PXRE
Reinsurance from Baa2 to Baa3 and placed
this rating under review for possible further downgrade.
On April 11, 2006, PXRE announced that PXRE had requested
that the major credit rating agencies withdraw their financial
strength and claims paying ratings of PXRE and its operating
subsidiaries after finding that operational ratings below the
critical A category provided little value for a
reinsurer. In the wake of this request, A.M. Best
downgraded its financial strength ratings of PXRE Reinsurance
and PXRE Bermuda from B+ to B and then
withdrew these ratings; S&P downgraded its counterparty
credit and financial strength rating on PXRE Reinsurance and
PXRE Bermuda from BBB− to BB+ and
then withdrew these ratings; and Moodys downgraded its
insurance financial strength rating of PXRE Reinsurance from
Baa3 to Ba2 and then withdrew this
rating.
Ratings have become an increasingly important factor in
establishing the competitive position of reinsurance companies.
Due to these recent ratings downgrades and withdrawal of the
operational ratings of PXREs reinsurance subsidiaries by
A.M. Best, S&P and Moodys, PXREs
competitive position in the reinsurance industry has suffered
and PXRE has been unable to retain its reinsurance portfolio or
renew many of PXREs existing reinsurance agreements. This
has resulted in a substantial loss of business as ceding
companies and brokers that place such business move to other
reinsurers with higher ratings. As PXREs revenue from
non-premium sources has historically not been sufficient to
offset PXREs operating expenses and interest expenses, and
PXREs ability to write new business has been impaired due
to the recent ratings downgrades and withdrawal of the
operational ratings of PXREs reinsurance subsidiaries,
PXRE has been faced with incurring net operating losses in
future periods unless it is successful in executing a strategic
alternative other than runoff. If such operating losses were to
occur, this would result in a decline in PXREs
shareholders equity.
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Events
Leading to Transaction
Between February of 2006 and PXREs engagement of KBW in
August of 2006, Lazard approached a number of potentially
interested parties regarding a strategic transaction with PXRE.
Of the over 60 parties contacted, 17 parties executed
non-disclosure agreements. Seven of these parties submitted
proposals for transactions with PXRE. None of these proposals
were deemed adequate by the board of directors of PXRE. During
this process, Argonaut executed a nondisclosure agreement and
received preliminary due diligence materials in connection with
this process, but elected not to participate further at that
time.
In April 2006, Mark Watson, President and Chief Executive
Officer of Argonaut, contacted Jeffrey Radke, President and
Chief Executive Officer of PXRE, to propose a strategic alliance
between the two companies in lieu of an outright purchase or
merger transaction. Mr. Radke invited Mr. Watson to
present his proposal to the board of directors of PXRE.
On May 8, 2006, at a regularly scheduled meeting of the
board of directors of PXRE, representatives from Argonaut made a
presentation regarding their proposal for a strategic alliance
between the parties. The transaction discussed at the time
involved an investment by Argonaut in PXRE and formation of a
new reinsurance subsidiary of PXRE that would enter into certain
quota share reinsurance agreements with Argonaut.
The representatives of Argonaut and PXRE continued discussions
and in August 2006, developed a joint business plan, which
contemplated the formation of a new Bermuda-based property
casualty reinsurer (later named Peleus Re). Pursuant to the
business plan, initially the business of Peleus Re was to
consist of casualty reinsurance pursuant to a quota share
agreement with Argonaut, and property reinsurance of other
third-party cedents. These discussions continued into the fall
of 2006, and included extensive discussions with A.M. Best
regarding the rating that Peleus Re might be assigned. However,
no final agreement between PXRE and Argonaut was reached.
In late November 2006, prior to reaching final agreement on the
terms of the Peleus Re transaction, Argonaut advised PXRE that
it would prefer to pursue a business combination with PXRE. On
November 26, 2006, Mr. Radke met with Mr. Watson
to discuss the possibility of continuing discussions regarding a
possible transaction. At this meeting, Mr. Watson stated
that Argonaut would be interested in pursuing a merger with PXRE.
In order to avoid potential conflicts relating to the
negotiation of a separation agreement with Mr. Radke which
would provide for certain payments and benefits in the event of
the completion of a transaction and the potential that preferred
shareholders, including those of which certain directors of PXRE
are affiliates, might receive treatment which would be different
from the treatment of other shareholders of PXRE in connection
with the completion of a transaction, in late November 2006
PXREs board of directors authorized the creation of a
special committee comprised entirely of independent directors,
which we refer to as the special committee, to evaluate the
merger. Appointed to the PXRE special committee were Philip R.
McLoughlin (as chairman), Wendy Luscombe, Mural R. Josephson and
F. Sedgwick Browne. From the time of the creation of the PXRE
special committee until the signing of the merger agreement, the
special committee met a total of 25 times to evaluate the
merger, the terms of the related agreements, alternatives to the
merger and related issues impacting PXRE and its shareholders.
Since being engaged as financial advisor in August of 2006, KBW
interacted with a number of interested parties at the direction
of the board of directors and, subsequent to its creation,
solely at the direction of the special committee. In December
2006, under the direction of the PXRE special committee,
representatives of KBW met with representatives of
Argonauts financial advisor, Bear Stearns, who stated that
Argonaut would be willing to make a proposal to acquire PXRE in
a transaction that would value PXRE at 0.9x book value and
Argonaut at 1.4x book value. In further discussions between the
PXRE special committee, Argonaut and their financial advisors,
Argonaut provided further terms to their proposal. The proposal
provided for a 100% stock, fixed exchange ratio transaction that
would value PXRE at 0.9x book value as of September 30,
2006, and Argonaut at 1.4x book value as of the same date. In
addition, it contemplated that a special dividend of
approximately $60 million would be distributed to Argonaut
shareholders immediately prior to the closing of such a
transaction and was conditioned upon receiving certain specified
financial strength ratings for Peleus Re and Argonaut.
Since December 2006, two additional parties submitted proposals
for transactions with PXRE. However, such proposals included
conditions or contingencies which, after careful consideration
and consultation with its advisors, caused the special committee
to deem such proposals unacceptable. On December 18, 2006,
PXRE, Argonaut and
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their respective advisors commenced their due diligence
investigations of one another, which continued until just prior
to signing the merger agreement on March 14, 2007.
From late December until the signing of the merger agreement,
representatives of the PXRE special committee and Argonaut, and
their respective advisors, negotiated the terms of the merger
agreement. In addition, the PXRE special committee and its
advisors negotiated the terms of the voting agreement with the
holders of convertible preferred shares and convertible common
shares of PXRE. As such holders had the power to reject the
merger, Argonaut required execution of the voting agreement as a
condition to signing the merger agreement. Throughout this
period, PXRE and Argonaut negotiated with each other to
determine the appropriate exchange ratio and other issues of the
transaction. The parties legal representatives continued
to revise the proposed definitive agreements.
At various times during this period, the PXRE special committee
met to review the status of the transaction, including the
proposed exchange ratio, the results of the due diligence
investigations conducted by Argonaut and its advisors on PXRE,
the results of the financial, accounting, actuarial and legal
due diligence investigations conducted by PXRE and its advisors
on Argonaut, the terms of the merger agreement, the terms of the
voting agreement and other proposed transactions. During these
meetings, the special committee received briefings on the
proposed merger from PXREs senior management and
representatives of KBW and Dewey Ballantine LLP, which we refer
to as Dewey Ballantine, legal counsel to the special committee,
on the status of the proposed merger. The special committee
considered the strategic benefits of the proposed business
combination, the opportunities it created for PXRE and the
potential value created for PXREs shareholders.
From May 2006 through December 2006, Argonauts board of
directors met on eight occasions to review and discuss the
status of proposals for a possible transaction with PXRE, as
well as to review information regarding other potential
strategic transactions which did not involve PXRE. During these
meetings, the board of directors received briefings on each
potential transaction from Argonauts senior management,
including the structure, key legal and financial terms, and
results of the due diligence investigations associated with such
proposals.
On February 6, 2007, representatives of LeBoeuf, Lamb,
Greene & MacRae LLP, which we refer to as LeBoeuf
Lamb, legal counsel to Argonaut in the PXRE transaction, met
with Argonauts board of directors and presented
information and answered questions regarding the potential tax
implications to shareholders, directors and officers with
respect to business combinations involving foreign corporations.
LeBoeuf Lamb also gave a presentation regarding the fiduciary
duties of directors as they relate to the type of transaction
being considered by Argonaut and responded to questions on this
issue. At the same meeting, representatives of Bear Stearns
provided an update on the status of negotiations with both PXRE
and the other potential strategic partners. Argonauts
board of directors also met on February 21 and February 27,
2007 to receive updates from Argonauts senior management
on due diligence on PXRE and the progress of negotiations with
the PXRE transaction and other potential strategic partners and
to discuss the strategic benefits of the proposed business
combinations, including the possible accounting and tax effects
of the various transactions being considered, the opportunities
created for Argonaut and the potential value created for
Argonaut shareholders.
At a meeting of Argonauts board of directors on
March 7, 2007, Bear Stearns provided its preliminary views
about the financial aspects of the proposed transaction with
PXRE. LeBoeuf Lamb reviewed for Argonauts board of
directors its fiduciary obligations and the terms of the merger
agreement, the voting agreement and certain other transaction
agreements. Ernst & Young LLP reported on the results
of certain financial due diligence inquiries on PXRE it
conducted for Argonaut under engagements separate from its role
as Argonauts independent audit firm.
On March 12, 2007, the representatives from KBW made a
financial presentation and delivered its oral opinion to the
PXRE special committee, which was subsequently confirmed in
writing, to the effect that, based upon and subject to the
considerations set forth in such opinion, as of March 12,
2007, the merger consideration, after giving effect to the
transactions contemplated by the voting agreement, was fair,
from a financial point of view, to the common shareholders of
PXRE (other than the PXRE common shareholders party to the
voting agreement). Dewey Ballantine and Conyers Dill &
Pearman, Bermuda counsel to the special committee, reviewed for
the special committee its fiduciary obligations and the terms of
the merger agreement, the voting agreement and certain other
transaction agreements. On March 13, 2007, after KBW made
its financial presentation to the full PXRE board of directors
confirming its opinion dated as of March 12, 2007, the PXRE
special committee, after further discussion and deliberation,
unanimously recommended that the board of directors of PXRE
approve the merger agreement
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and the related transactions, including the issuance of PXRE
common shares in the merger, and recommend to the shareholders
of PXRE to vote to approve such transactions. On March 13,
2007, the PXRE board of directors unanimously declared advisable
the merger agreement and the related transactions, including the
issuance of PXRE common shares in the merger and resolved to
recommend to the shareholders of PXRE to vote to approve the
transactions contemplated by the merger agreement, including the
issuance of PXRE common shares in the merger, subject to the
completion of the definitive documentation. The parties
continued discussions on March 13, 2007.
On March 14, 2007, Bear Stearns made its presentation to
Argonauts board of directors regarding the financial
aspects of the proposed transaction with PXRE and delivered its
oral opinion, which was subsequently confirmed in writing, that
as of that date and based upon and subject to the assumptions,
qualifications and limitations set forth in the written opinion,
the exchange ratio was fair from a financial point of view to
the shareholders of Argonaut. Argonauts board of
directors, after receiving a presentation from LeBoeuf Lamb
regarding the material terms of the final merger agreement,
discussion and deliberation, unanimously approved the merger
agreement and the related transactions, and unanimously
recommended to the shareholders of Argonaut that they vote to
approve such transactions, subject only to completion of
definitive documentation. Later in the day on March 14,
2007, the parties finalized the definitive documentation, and
PXRE and Argonaut signed the merger agreement and issued a joint
press release announcing that they had entered into the merger
agreement.
PXREs
Reasons for the Merger and Recommendation of PXREs Board
of Directors
The PXRE board of directors believes that the merger agreement
and the transactions contemplated by the merger agreement,
including the merger and the issuance of PXRE common shares in
the merger, are in the best interests of PXRE and its
shareholders and are consistent with, and in furtherance of, the
long-term business strategies and goals of PXRE. Accordingly,
the PXRE board of directors has unanimously approved the merger
agreement and recommends that PXRE shareholders vote FOR
approval of the issuance of PXRE common shares and the other
proposals in connection with the merger.
The PXRE board of directors, in reaching its decision to approve
the merger agreement, acted upon the unanimous recommendation of
the special committee, consulted with its management, as well as
with its financial, accounting, actuarial and legal advisors,
carefully reviewed a significant amount of information and
considered a variety of factors weighing positively towards the
merger, including, without limitation, the following:
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The strategic nature of the merger, which will combine highly
complementary businesses to create a resulting company with:
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broadened product portfolios, combining Argonauts strength
in Excess and Surplus Lines, Select Markets and Public Entity
insurance businesses, with PXREs strength in reinsurance
products and services to a worldwide marketplace through PXRE
wholly owned subsidiary operations located in Bermuda, Europe,
and the United States;
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an attractive platform for growth fueled by a larger and more
diversified earnings base with a mix of insurance and
reinsurance earnings and equity-driven earnings, which could
create a natural hedge against interest rate exposure and equity
market risk exposure;
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strong capital flexibility and attractive risk profile;
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financial flexibility to pursue further strategic and product
initiatives; and
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access to a proven management team.
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Its analysis of the business, operations, financial condition,
earnings and prospects of both PXRE and Argonaut, including the
results of PXREs due diligence review of Argonaut and its
business.
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The continuity of certain members of PXREs senior
management in the resulting company as well as three or four of
PXREs current directors on the resulting companys
board of directors.
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The probability that the financial strength ratings for the
resulting company will be more favorable than the current
comparable ratings for PXRE.
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The alternatives reasonably available to PXRE, including:
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remaining a stand-alone entity and pursuing acquisitions of
strategic assets or engaging in a capital reorganization;
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the sale of PXRE or substantially all of its assets to a third
party;
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the possibility of pursuing an alternative strategic business
combination with a third party; and
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placing the reinsurance operations of PXRE into runoff and
eventually commencing an orderly winding up and liquidation of
PXRE operations over some period of time.
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The potential for the merger to be accretive to PXREs
earnings in the first year following completion of the merger
(excluding one-time costs), which will inure to a significant
degree to the benefit of PXREs shareholders as well as
Argonauts shareholders.
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The financial opinion of KBW described in the section entitled
Opinions of PXREs Financial
Advisor beginning on page 91, to the effect that, as
of the date of their opinion and based on and subject to the
assumptions, limitations and qualifications described in their
opinion, the merger consideration under the merger agreement was
fair from a financial point of view to the holders of PXRE
common shares (other than PXRE common shareholders party to the
voting agreement).
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The terms of the merger agreement relating to third-party
offers, including:
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the limitation on PXREs ability to solicit offers for
alternative business combinations; and
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the ability of PXREs board of directors to change its
recommendation to shareholders to vote in favor of PXRE issuing
shares in the merger to the extent that PXREs board of
directors reasonably determines (upon advice of outside legal
counsel) that such change of recommendation complies with its
fiduciary duties under applicable law.
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The other terms of the merger agreement, including:
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the representations and warranties of Argonaut;
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the covenants of PXRE and Argonaut and their effect on the
operations of PXRE and Argonaut prior to the merger; and
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the conditions required to be satisfied prior to completion of
the merger. See The Merger Agreement beginning on
page 131.
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The expectation that the merger will be treated as a
reorganization for United States federal income tax purposes as
described in the section entitled Material Tax
Considerations beginning on page 118.
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The prospects for the merger receiving necessary regulatory
approvals and the anticipated timing and conditions of those
approvals.
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The current and prospective industry, economic and market
conditions and trends, including increased competition in the
industry in which PXRE operates, and the belief that the
resulting company with greater size, scale and diversification
would be better positioned to succeed in an industry in which
critical mass and market presence are increasingly important.
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The prospects of providing PXRE with greater brand awareness by
aligning PXRE with Argonaut, a strong, well-established brand
name in the insurance industry.
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In addition to these factors, the PXRE board of directors also
considered the potential adverse impact of other factors
weighing negatively against the merger. These included the
following:
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The challenges of combining the businesses and workforces of
Argonaut and PXRE.
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The risk inherent in businesses that will be new to PXRE
shareholders, such as the Excess and Surplus Lines, Select
Markets and Public Entity insurance businesses of Argonaut,
including, without limitation, the significantly increased
exposure to potential equity market volatility.
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The risk that the cost savings, synergies and other benefits
expected to be obtained in the transaction might not be fully
realized.
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The disparities in compensation levels and operating philosophy
that may pose cultural and management challenges for the
resulting company.
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The potential disruption to PXREs business that could
result from the announcement of the merger, including the
potential loss of existing customers and employees.
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The limitations imposed in the merger agreement on the conduct
of business by PXRE prior to completion of the merger.
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The risk that the merger might not be completed and the effect
of the resulting public announcement of the termination on:
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the market price of PXRE common shares;
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PXREs operating results, particularly in light of the
costs incurred in connection with the proposed transaction,
including the potential requirement to make a termination
payment;
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PXREs ability to attract and retain key personnel; and
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PXREs ability to complete an alternative transaction.
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The possibility of significant costs and delays resulting from
seeking regulatory approvals necessary for completion of the
proposed merger and the possibility of not completing the merger
if these approvals are not obtained, including any approval by a
state insurance regulatory authority.
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The impact of the terms of the voting agreement, including the
reduction in conversion price of the convertible preferred
shares from $11.28, the conversion price as of December 31,
2006, to $6.24 and dilution resulting therefrom, on the common
shareholders of PXRE.
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The PXRE board of directors, in reaching its decision to approve
the merger agreement and the transactions contemplated thereby,
also considered the interests that certain PXRE executive
officers and directors may have with respect thereto, in
addition to their interests as PXRE shareholders generally. The
PXRE board of directors considered the fact that certain
directors are affiliates of certain shareholders that are
parties to the voting agreement. In addition, the PXRE board of
directors considered the terms and conditions of the agreements
entered into in connection with the merger, including the voting
agreement, and the effect on the PXRE shareholders of the
conversion of the convertible preferred shares at a reduced
conversion price and the conversion of the convertible common
shares on the terms provided in the voting agreement.
The PXRE board of directors concluded that the positive aspects
of the merger significantly outweighed the negative factors.
This discussion of the information and factors considered by the
PXRE board of directors includes all the material positive and
negative factors considered by the PXRE board of directors, but
it is not intended to be exhaustive and may not include all of
the factors considered by the PXRE board of directors. The PXRE
board of directors did not quantify or assign any relative or
specific weights to the various factors that it considered in
reaching its determination that the merger agreement and the
merger are advisable and in the best interests of PXRE and its
shareholders. Rather, the PXRE board of directors viewed its
position and recommendation as being based on the totality of
the information presented to and factors considered by it. In
addition, individual members of the PXRE board of directors may
have given differing weights to different factors.
In considering the recommendation of the PXRE board of directors
with respect to the merger agreement, the merger and the
issuance of PXRE common shares in the merger, you should be
aware that certain PXRE directors and executive officers have
arrangements that cause them to have interests in the
transaction that are different from, or are in addition to, the
interests of PXRE shareholders generally. See
Interests of PXRE Directors and Executive
Officers in the Merger beginning on page 107.
88
Argonauts
Reasons for the Merger and Recommendation of Argonauts
Board of Directors
In reaching its decision to approve the merger agreement and
proceed with the business combination with PXRE, Argonauts
board of directors consulted with Argonauts management and
legal, accounting, actuarial and financial advisors regarding
the strategic, operational and financial aspects of the merger.
In the course of reaching its decision to approve the merger
agreement, the board of directors considered a variety of
factors, including the following material factors:
Strategic
Considerations. Argonauts board of
directors believes that the merger of Argonaut with a subsidiary
of PXRE will provide a number of significant opportunities and
benefits, including the following:
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the capabilities and competitiveness of the combined group will
be enhanced in the following ways:
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the combined group will have a more extensive distribution
network and greater range of products, thus being able to better
serve customers;
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the complementary operations and capabilities of Argonaut and
PXRE should allow the combined group to benefit from economies
of scale and other efficiencies in certain functional
disciplines;
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the merger will strengthen the combined groups competitive
position vis-à-vis multinational diversified commercial
lines peer companies; and
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the greater scale, scope and reach of the combined group should
make it a more attractive partner for potential customers with
national or international business models;
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the merger will result in a company that, because of increased
size and economies of scale, will have greater capital
flexibility, a greater ability to respond to competitive
pressures, greater diversification opportunities and an enhanced
ability to compete profitably, which may result in better debt
and financial ratings;
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the combination of Argonauts and PXREs businesses
through the merger will result in greater product offerings and
improved market position;
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the addition of a reinsurance platform will provide Argonaut
access to a multi-billion dollar business segment and should
allow us to better serve our customers;
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the establishment of a Bermuda domicile should provide Argonaut
with a strategic platform for further expansion; and
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the combination has the potential to increase return on equity
for shareholders of Argonaut over the long term and be accretive
to Argonaut shareholders in terms of book value per converted
share in Argo Group after the merger.
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Other Factors Considered by the Argonaut
Board. In addition to considering the
strategic factors listed above, the Argonaut board of directors
considered the following additional factors:
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the environments in which Argonaut and PXRE operate, including
national and regional insurance industry, economic and market
conditions and trends, and the likely effect of these factors on
Argonauts potential growth, development, productivity and
profitability;
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the likelihood of continuing consolidation and increased
competition in the insurance industry;
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the strategic fit between PXRE and Argonaut;
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the execution risk of the merger;
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the potential financial benefits to Argonaut and Argonauts
shareholders;
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the financial analyses of Argonauts financial advisor and
its opinion that, as of March 14, 2007, and based upon and
subject to the assumptions, qualifications and limitations set
forth in its written opinion, the exchange ratio was fair, from
a financial point of view, to the shareholders of Argonaut;
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the likelihood that the merger will be completed on a timely
basis, including the likelihood that the merger will receive all
necessary antitrust and other regulatory approvals without
unacceptable conditions on a timely basis; and
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the board and management structure of the resulting company
provided for under the merger agreement, including
Argonauts board representation and the staffing of the
executive positions of the resulting company, as described in
greater detail under PXREs Board of
Directors and Management Following the Merger.
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Argonauts board of directors also considered the potential
adverse impact of other factors, including the following:
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the risk that the cost savings synergies and other benefits
expected to be obtained in the transaction might not be fully
realized;
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the risk of diverting managements attention from other
strategic priorities to implement merger integration plans;
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the risk associated with the
start-up
nature of Peleus Re, which carries a degree of execution risk
that is higher than the risk related to Argonauts existing
book of business;
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the possibility that the merger will increase Argonauts
correlated property risk beyond projected levels;
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the risk that the combined group will have a level of volatility
higher than Argonauts following the merger as a result of
additional catastrophe risk exposure; and
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the possibility that the trading multiple of the combined group
will contract due to a change in the business model.
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The foregoing discussion of the information and factors
considered by Argonauts board of directors is not meant to
be exhaustive but is believed to describe the more prominent
economic and operational issues considered by it in connection
with its determination that the terms of the merger agreement,
including the merger, are advisable and in the best interests of
Argonaut and its shareholders. Argonauts board also
considered each of the factors contained in the Bear
Stearns fairness opinion discussed on pages 100 through
107 below, as well as a variety of legal, accounting and tax
factors presented to the board of directors by management, its
counsel, LeBoeuf Lamb, and its auditors, Ernst & Young
LLP. In view of the wide variety of factors considered in
connection with its evaluation of the merger and the complexity
of these matters, the Argonaut board of directors did not find
it useful, and did not attempt, to quantify, rank or otherwise
assign relative weights to these and other factors. In addition,
the Argonaut board of directors did not undertake to make any
specific determination as to whether any particular factor, or
any aspect of any particular factor, was favorable or
unfavorable to its ultimate decision, but rather the Argonaut
board of directors conducted an overall analysis of the factors
described above, including through discussions with, and the
questioning of, Argonauts management team and outside
financial, actuarial and legal advisors. In considering the
factors described above, individual members of the Argonaut
board of directors may have given different weight to different
factors.
In considering the recommendation of the Argonaut board of
directors with respect to the merger agreement and the merger,
you should be aware that certain Argonaut directors and
executive officers have arrangements that cause them to have
interests in the transaction that are different from, or are in
addition to, the interests of Argonaut shareholders generally.
See Risk Factors Risks Related to the
Merger General Some directors and
executive officers of PXRE and Argonaut have interests and
arrangements that are different from, or in addition to, those
of PXRE and Argonaut shareholders beginning on
page 23.
Opinions
of Financial Advisors
PXRE engaged KBW as its financial advisor in August of 2006. KBW
acted on behalf of PXRE until the creation of the special
committee in late November 2006, at which time KBWs
engagement with PXRE was rescinded and the special committee
engaged KBW as its financial advisor in connection with the
merger. Once engaged on behalf of the special committee, KBW
acted solely on behalf of the special committee. Argonaut
90
retained Bear Stearns pursuant to an engagement letter dated
March 6, 2007, as its financial advisor in connection with
the merger. A summary of their respective opinions and related
financial analyses appears below.
Opinion
of PXREs Financial Advisor
KBW acted as the financial advisor to the special committee in
connection with the merger. On March 12, 2007, KBW
delivered its oral opinion to the special committee, which was
subsequently confirmed by delivery of a written opinion, dated
as of March 12, 2007, that, as of that date and based upon
and subject to the factors and assumptions set forth in the
written opinion, the consideration paid in the merger, after
giving effect to the transactions contemplated by the voting
agreement, was fair from a financial point of view to the
holders of PXRE common shares (other than the PXRE common
shareholders party to the voting agreement).
The full text of the written opinion of KBW, which sets forth
assumptions made, procedures followed, matters considered and
limitations on the review undertaken in connection with the
opinion, is attached as Annex E to this joint proxy
statement/prospectus and is incorporated by reference.
KBWs opinion was intended for the use and benefit of the
special committee in connection with its consideration of the
merger, does not address the merits of the underlying decision
by PXRE to enter into the merger agreement or any of the
transactions contemplated thereby, including the merger, and
does not constitute a recommendation to any PXRE shareholder as
to how that shareholder should vote on, or take any action with
respect to, the merger or any related matter. KBW was not asked
to address nor does its opinion address the fairness to, or any
other consideration of, the holders of any class of securities,
creditors or other constituencies of PXRE. Additionally, KBW
expresses no opinion as to the prices at which the common shares
of either PXRE or Argonaut will trade following the announcement
of the merger or at which the common shares of PXRE will trade
following the consummation of the merger, or to any legal, tax,
regulatory, actuarial or accounting matters. This summary of
KBWs opinion is qualified in its entirety by reference to
the full text of the opinion attached to this joint proxy
statement/prospectus as Annex E.
In preparing its opinion to the special committee, KBW performed
various financial and comparative analyses, including those
described below. The summary set forth below does not purport to
be a complete description of the analyses underlying KBWs
opinion or the presentation made by KBW to the special committee
or the PXRE board of directors. The preparation of a fairness
opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to
the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, KBW did not attribute
any particular weight to any analysis or factor considered by
it, but rather made its determination as to fairness on the
basis of its experience and professional judgment after
considering the results of all of its analyses. Accordingly, KBW
believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, or focusing
on information presented in tabular format, without considering
all of the analyses and factors or the narrative description of
the analyses, would create a misleading or incomplete view of
the process underlying its opinion.
In connection with rendering the opinion described above and
performing its related financial analyses, KBW reviewed, among
other things:
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the merger agreement;
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the voting agreement;
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PXREs annual reports to shareholders and annual reports on
Form 10-K
for the years ended December 31, 2003, 2004 and 2005, a
draft of its
Form 10-K
for the year ended December 31, 2006, its quarterly reports
on
Form 10-Q
for the periods ended March 31, 2006, June 30, 2006
and September 30, 2006, a draft of its financial statements
for the year ended December 31, 2006 and its current
reports on
Form 8-K
filed since December 31, 2005;
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Argonauts annual reports to shareholders and annual
reports on
Form 10-K
for the years ended December 31, 2004, 2005 and 2006 and
its current reports on
Form 8-K
filed since December 31, 2006;
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market prices and valuation multiples for PXRE and compared them
with those of certain publicly traded companies that KBW deemed
relevant;
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the results and operations of PXRE and compared them with those
of certain publicly traded companies that KBW deemed relevant;
and
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other financial information concerning the business and
operations of PXRE and Argonaut furnished to KBW by PXRE and
Argonaut for the purposes of its analysis.
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KBW also held discussions with members of PXREs and
Argonauts senior management and PXREs board of
directors regarding the past and current business operations,
regulatory relations, financial condition and future prospects
of their respective companies and such other matters as KBW has
deemed relevant to its inquiry. In addition, KBW compared
certain financial and stock market information for PXRE and
Argonaut with similar information for certain other companies
the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the
financial institutions industry and performed such other studies
and analyses as KBW considered appropriate. KBW was also advised
as to the status of various legal proceedings by PXREs
counsel and relied thereon. KBWs opinion is necessarily
based upon market, economic and other conditions as they existed
and could be evaluated on the date of its opinion and the
information made available to it through the date of its opinion.
In conducting its review and arriving at its opinion, KBW relied
upon the accuracy and completeness of all of the financial,
accounting, legal, actuarial, tax and other information provided
to it or publicly available and it has not assumed any
responsibility for independently verifying the accuracy or
completeness of any such information. KBW relied upon the
management of PXRE and Argonaut as to the reasonableness and
achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to
it, and KBW has assumed that such forecasts and projections
reflect the best currently available estimates and judgments of
such managements and that such forecasts and projections will be
realized in the amounts and in the time periods currently
estimated by such managements. KBW is not an actuarial firm and
is not an expert in the independent verification of the adequacy
of reserves for loss and loss adjustment expenses and its
services did not include any actuarial determination or
evaluation or any attempt to evaluate actuarial assumptions. KBW
relied on PXREs actuaries with respect to the adequacy of
reserves for loss and loss adjustment expenses and it assumed,
with the consent of PXRE, that the aggregate reserves for loss
and loss adjustment expenses for PXRE and Argonaut are adequate
to cover such losses. In that regard, KBW made no analysis of,
and expressed no opinion as to, the adequacy of reserves for
loss and loss adjustment expenses. In rendering its opinion, KBW
did not make or obtain any evaluations or appraisals of the
property of PXRE or Argonaut, nor did it examine any individual
production or underwriting files of PXRE or Argonaut. In
addition, KBW has not assumed any obligation to conduct any
physical inspection of the properties or facilities of PXRE or
Argonaut.
Certain
Assumptions
In rendering its opinion, KBW was instructed by PXRE to assume
that:
(i) all representations and warranties in the merger
agreement and the voting agreement were accurate and all
covenants and agreements to and from PXRE, Argonaut and the PXRE
preferred shareholders will be satisfied, such that no
indemnification obligations from PXRE, Argonaut or the PXRE
preferred shareholders will arise;
(ii) as of March 12, 2007 PXRE no longer carried any
credit ratings and did not expect to achieve credit ratings
sufficient to attract new business, which will continue to limit
its ability to write new business, thereby impacting the value
of PXREs ongoing franchise:
(a) On February 16, 2006, S&P downgraded its
counterparty credit and financial strength rating on PXRE
Reinsurance and PXRE Bermuda from A− to
BBB+ and placed these ratings on CreditWatch with
negative implications. A.M. Best also downgraded its financial
strength rating from A− to B++
with a negative outlook. On February 17, 2006, Moodys
downgraded its insurance financial strength rating of PXRE
Reinsurance from Baa1 to Baa2 and placed
this rating under review for possible further downgrade;
(b) Subsequently in February, 2006, S&P further
downgraded its counterparty credit and financial strength rating
on PXRE Reinsurance and PXRE Bermuda from BBB+ to
BBB-, and A.M. Best
92
further downgraded its financial strength rating on these
entities from B++ to B+ with a negative
implication. Moodys further downgraded its insurance
financial strength rating of PXRE Reinsurance from
Baa2 to Baa3 and placed this rating
under review for possible further downgrade;
(c) In April, 2006, after finding that operational ratings
below the critical A category provided little value
for a reinsurer, PXRE announced that it had requested that the
major credit rating agencies withdraw their financial strength
and claims paying ratings of PXRE and its operating
subsidiaries. As a result of these historical actions by the
rating agencies and PXREs internal projections, PXRE did
not anticipate achieving credit ratings sufficient to write new
business, and instructed KBW to make that assumption in its
analysis;
(iii) if a transaction which included the continuation of
PXREs past property catastrophe reinsurance business
strategy were not announced by the filing of its 2006
10-K, PXRE
would potentially have (A) incurred, as of
December 31, 2006, a $26.8 million charge due to lack
of certainty concerning its ability to utilize certain ceded
reinsurance treaties in prospective periods as contemplated
under the Peleus Re business plan, (B) terminated
PXREs second catastrophe bond transaction
(A&W II) with an effective date of March 31,
2007, thus incurring a $5.8 million termination charge in
the first quarter of 2007, and (C) been subject to certain
PXRE preferred shareholders seeking to cause PXRE to pursue an
expedited liquidation of PXRE via a loss portfolio transfer of
its loss reserves, commutation of its remaining treaties,
and/or an
accelerated runoff of its reserves, the execution of which may
not have been in the best interests of PXREs common
shareholders;
(iv) the PXRE convertible preferred shares have a
conversion price as of December 31, 2006 of $11.28, and
such convertible preferred shares, which are mandatorily
convertible on April 4, 2008, would convert at such
conversion price, assuming no additional adjustments to the
conversion price as provided for in the certificate of
designation for the convertible preferred shares;
(v) given PXREs lack of any credit ratings on
March 12, 2007, regulatory concerns and cash and available
collateral positions, PXREs ability to retain customers,
vendors and key employees would continue to deteriorate;
(vi) if PXRE pursued a strategy of runoff
and/or
liquidation, there would be significant risk and uncertainty in
the amount and timing of potential cash flows available to meet
PXREs policyholder obligations, operating expenses,
financial obligations, and ability to pay dividends or
distributions to its PXRE preferred shareholders and PXRE common
shareholders; and
(vii) in the runoff scenario, (1) the initial
liquidation dividend would be paid after the conversion of the
convertible preferred shares (assumed to convert on
March 31, 2008 at the contractual conversion price as of
December 31, 2006 of $11.28); (2) the maximum
allowable dividend from PXREs operating subsidiaries would
be paid to PXRE and thereafter dividended to shareholders on
March 31 of each year; (3) the payout pattern on
existing reserves would be 48%, 18%, 9%, 8% and 17% in each of
2007 through 2011, respectively; (4) in the upside case,
reserves would develop favorably by 5.8% and claims would be
settled quickly, enabling a terminal dividend to be paid to
shareholders on December 31, 2009; (5) in the base
case, reserves would develop and claims would be settled as per
the expected actuarial results, enabling a terminal dividend to
be paid on December 31, 2010; and (6) in the downside
case, reserves would develop unfavorably by 8.8% plus an
additional $51 million related to the 2005 hurricanes, and
claims would be settled more slowly, enabling a terminal
dividend to be paid to shareholders on December 31, 2011.
KBW did not express any opinion as to the prices at which the
common shares will trade at any time following completion of the
merger and its opinion did not address the relative merits of
the merger as compared to any alternative transaction that might
be available to PXRE. KBW did not express any opinion as to the
transactions contemplated by the voting agreement. In rendering
its opinion, KBW assumed that the merger and the transactions
contemplated thereby will be completed, and that all
governmental, regulatory or other consents and approvals
necessary for completion of the merger will be obtained, without
any adverse effect on PXRE or on the expected benefits of the
merger in any way meaningful to KBWs analysis.
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Transaction
Process and Various Analyses
The following is a summary of the transaction process and
various financial analyses reviewed by KBW with the special
committee in connection with KBW rendering its opinion. The
following summary, however, does not purport to be a complete
description of the transaction process or financial analyses
reviewed by KBW with the PXRE board of directors or by KBW for
purposes of its analysis.
The assumptions set forth in clauses (i) through
(vii) under Certain Assumptions above were
particularly important to KBWs analysis. The order of
analyses described below does not represent relative importance
or weight given to those analyses by KBW. Some of the summaries
of the financial analyses include information presented in
tabular format. The tables must be read together with the full
text of each summary and are alone not a complete description of
the financial analyses. Except as otherwise noted, the following
quantitative information, to the extent that it is based on
market data, is based on market data as it existed on or before
March 12, 2007, and is not necessarily indicative of
current market conditions.
Overview
of Key Events in the Transaction Process
KBW reviewed with the special committee the key events in the
transaction leading up to the proposed merger. This included a
review of the broad solicitation process undertaken in which
over 60 parties were contacted, of which 17 parties signed a
confidentiality agreement with PXRE. KBW noted that in addition
to the bid by Argonaut, a total of nine bids were received by
PXRE, two of which were received during the period of
negotiations with Argonaut. All of the nine proposals included
conditions or contingencies deemed unacceptable by the PXRE
board of directors or the special committee.
Calculation
of Transaction Value
KBW reviewed the financial terms of the merger agreement, and
noted that PXRE will issue to Argonaut shareholders according to
the preliminary exchange ratio, 6.4672 PXRE common shares for
each share of Argonaut common stock. The preliminary exchange
ratio was calculated based on an effective value of $33.44 for
each share of Argonaut common stock and a price of $5.17 for
each PXRE common share outstanding as of December 31, 2006.
PXREs implied aggregate valuation is computed to be
$422.3 million, or approximately 85% of reported
shareholders equity as of December 31, 2006. The
preliminary exchange ratio is fixed, and would be recalculated
only in certain extraordinary circumstances, as discussed in
Section 4.6 of the merger agreement. For purposes of the
determination of fairness, KBW compared the calculated
transaction value per share to PXREs common shareholders
in the merger ($5.17 per common share) to an estimate of
the value of PXRE in runoff on a per share basis under three
different scenarios (see PXRE Estimate of
Company Value in Runoff beginning on page 98).
Review
of PXRE
Historical
Stock Trading Analysis
KBW reviewed with the special committee and the PXRE board of
directors PXREs share price performance since
August 1, 2005, the first trading day of the month in which
Hurricane Katrina made landfall. KBW noted events of
significance that may have impacted the trading price of the
PXRE shares, such as (i) Hurricane Katrina making its
second landfall in the United States on August 29, 2005,
(ii) the initial announcement by PXRE of the estimated
losses due to Hurricane Katrina on September 11, 2005,
(iii) the recapitalization by PXRE through the sale of
$375 million of exchangeable perpetual preferred securities
and the sale of $114.7 million of common shares, on
September 30, 2005 and October 7, 2005, respectively,
and (iv) the announcement by PXRE of an increase to loss
estimates related to Hurricanes Katrina, Rita and Wilma and the
exploration of strategic alternatives, on February 16, 2006.
Historical
Price to Book Value Ratio Analysis
KBW analyzed PXREs
price-to-book
value ratio since September 11, 2001, which before
Hurricane Katrina reached a high of 1.28x book value and
averaged 0.91x book value. From August 29, 2005, the date
on which Hurricane Katrina made its second landfall, to
March 9, 2007, PXRE traded at an average of approximately
65% of book value.
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Historical
Financial Performance
KBW reviewed with the special committee PXREs historical
financial performance for the five year period ending in 2006.
KBW noted PXREs positive results in 2002 and 2003, and the
unfavorable results in 2004 due to major catastrophe events
related to hurricanes, and in 2005 due to hurricanes Katrina,
Rita and Wilma.
Review
of Argonaut
Historical
Financial Performance
KBW reviewed Argonauts historical financial statements for
the years ended December 31, 2002 through 2006. KBW also
reviewed with the special committee and the PXRE board of
directors, Argonauts quarterly premium growth and
underwriting results since the first quarter of 2000, the
quarter during which Mark Watson was named President &
Chief Executive Officer of Argonaut. The appointment of Mark
Watson as Argonauts President & Chief Executive
Officer is important as he has successfully pursued a
diversification strategy for Argonaut, transforming it from a
monoline workers compensation insurer into a leading
specialist underwriter.
Historical
Stock Trading Analysis
KBW reviewed the historical daily trading prices and volumes for
the shares of Argonauts common stock for the period from
January 25, 2000, the date Mark Watson was named
Argonauts President & Chief Executive Officer,
through March 9, 2007. KBWs analysis showed the
following concerning the historical prices for Argonaut:
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Argonaut
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Prior day price
(3/9/07)
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$
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34.17
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Trading period high
(2/8/07)
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$
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37.30
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Trading period low
(4/11/03)
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$
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7.70
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Historical
Price to Book Value Ratio Analysis
KBW reviewed the historical price to book ratio for the shares
of Argonauts common stock for the period from
September 12, 2001 through March 9, 2006. KBW chose
this date range because it believes that valuation levels for
specialty property and casualty insurance companies changed
after the events of September 11, 2001. KBWs analysis
showed the following prices relative to book value for Argonaut:
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Argonaut
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Median P/BV ratio since
9/11/01
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0.96x
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Median P/BV ratio for last twelve
months
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1.35x
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P/BV ratio as of
3/9/07
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1.42x
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Selected
Companies Analysis
Using publicly available information, KBW compared the financial
performance, financial condition and market valuation of
Argonaut to those of a group of specialty companies. These
companies were selected based on KBWs professional
judgment considering characteristics such as the type of
insurance written, historical and prospective operating
performance, and market capitalization. None of the selected
companies are directly comparable to Argonaut, and therefore,
the results of the selected companies analysis and regression
analysis are primarily financial calculations rather than
detailed analyses of the differences in operating
characteristics and business mixes of the various companies.
Appropriate use of the data includes qualitative judgments
concerning, among other things, differences among the companies.
Companies included in this group of specialty companies were:
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W.R. Berkeley Corporation;
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Markel Corporation;
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HCC Insurance Holdings, Inc.;
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Philadelphia Consolidated Holdings Corporation;
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RLI Corp.;
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United America Indemnity, Ltd.;
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Navigators Group, Inc.;
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Tower Group, Inc.; and
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James River Group Inc.
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Among other statistics, KBWs analysis showed the following
concerning Argonauts financial performance and financial
condition:
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Group
|
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|
Argonaut
|
|
Median
|
|
2006 to 2007 estimated earnings
per share growth
|
|
|
10.3
|
%
|
|
|
4.8
|
%
|
2007 estimated return on average
equity (excluding AOCI(1))
|
|
|
11.7
|
%
|
|
|
16.2
|
%
|
2008 estimated return on average
equity (excluding AOCI(1))
|
|
|
11.3
|
%
|
|
|
15.3
|
%
|
|
|
|
(1) |
|
Accumulated other comprehensive income. |
KBWs analysis showed the following concerning
Argonauts market valuation:
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Group
|
|
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Argonaut
|
|
Median
|
|
Stock price to GAAP book value per
share (excluding AOCI(1))
|
|
|
1.42
|
x
|
|
|
2.03x
|
|
Stock price to 2007 estimated
earnings per share
|
|
|
11.4
|
x
|
|
|
11.8x
|
|
Stock price to 2008 estimated
earnings per share
|
|
|
10.5
|
x
|
|
|
10.5x
|
|
|
|
|
(1) |
|
Accumulated other comprehensive income. |
KBW also performed a regression analysis comparing the 2007
estimated return on equity for the comparable companies to the
price to book value per share multiple excluding AOCI. This
analysis indicated that, based on Argonauts estimated
return on equity of 11.7% for 2007, the implied price to book
value ratio for Argonaut was 1.41x.
Pro
Forma Transaction Analysis
KBW conducted a review of the relative historical stock prices
of both PXRE and Argonaut, public market valuations of selected
companies, a pro forma earnings analysis and peer regression
analysis. KBW calculated a mathematically implied trading value
for the pro forma resulting company using the regression
analysis of
price-to-book
value ratio and estimated pro forma 2008 return on average
equity, based on the projected pro forma earnings of the
resulting company, excluding transaction-related expenses and
before purchase accounting adjustments. KBWs analyses were
based on information provided by PXRE, including unaudited,
non-public GAAP financial statements for the year ended
December 31, 2006, detailed long-term financial forecasts
prepared by the managements of PXRE and Argonaut, and actuarial
reviews of PXRE and Argonaut completed by third parties.
KBWs analysis also relied on audited GAAP financial
statements of Argonaut for the year ended December 31,
2006, as found in Argonauts 2006
10-K, and
financial forecasts prepared by Argonauts management and
supplied by Argonaut.
Historical
Stock Trading Analysis and Relative Stock Price
Ratio
KBW reviewed the historical trading prices for PXRE common
shares for the period from September 11, 2001 to
March 12, 2007 and for the period from August 1, 2005
(shortly prior to the landfall of Hurricane Katrina) to
March 12, 2007 and for shares of Argonaut common stock for
the period from January 25, 2000 to March 12, 2007
(January 25, 2000 represents the date on which Mark Watson
was appointed CEO of Argonaut). KBW also analyzed the historical
trading ratio of the respective common stock of PXRE and
Argonaut for various periods during the period from
February 17, 2006 to March 12, 2007 as set forth in
the table below, and compared it to the preliminary
96
exchange ratio of 6.4672 PXRE common shares for each share of
Argonaut common stock to be paid pursuant to the merger
agreement:
|
|
|
|
|
Relevant Period
|
|
Stock Price Ratio
|
|
Current (as of March 12, 2007)
|
|
|
7.5765x
|
|
12-month average
|
|
|
8.1132x
|
|
Merger Agreement Preliminary
Exchange Ratio
|
|
|
6.4672x
|
|
Accretion/Dilution
Analysis
Using publicly available information and information provided by
management of PXRE and Argonaut, KBW derived the pro forma
financial projections for the resulting company incorporating
financial information provided by management of each of PXRE and
Argonaut, and including certain assumptions provided by members
of PXRE management. KBW compared the pro forma per share
earnings of the resulting company for 2008 and the pro forma
book value per share estimated as of December 31, 2007 to
the per share data for the same periods estimated for PXRE and
Argonaut on a stand-alone basis. The results of the analysis are
as follows:
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|
|
|
|
|
|
|
|
|
Accretion/Dilution
|
|
Accretion/Dilution
|
Factor
|
|
to PXRE Shareholders
|
|
to Argonaut Shareholders
|
|
12/31/07
BVPS
|
|
|
−25.5
|
%
|
|
|
7.6
|
%
|
2008E EPS
|
|
|
NM
|
(1)
|
|
|
29.8
|
%
|
|
|
|
(1) |
|
PXRE is projected to generate negative earnings in 2007 and
2008; therefore, the accretion/dilution analysis is not
meaningful on an earnings basis. |
Mathematically
Implied Trading Value for the Pro Forma Resulting
Company
Using publicly available information and information provided by
management of PXRE and Argonaut, KBW derived the pro forma
financial projections for the resulting company incorporating
financial information provided by management of each of PXRE and
Argonaut, and including certain assumptions provided by members
of PXRE management. KBW determined that the merger would result
in a pro forma return on equity for the resulting company,
excluding transaction-related expenses and before purchase
accounting adjustments, of 9.8% in 2007 and 13.8% in 2008,
compared to 11.7% and 11.3%, currently projected for Argonaut on
a stand-alone basis for 2007 and 2008, respectively, based on
consensus analyst earnings estimates.
KBW compared the projected financial performance of the pro
forma resulting company to those of a group of specialty
companies and diversified reinsurance companies. These companies
were selected based on KBWs professional judgment
considering characteristics such as the type of insurance
written, historical and prospective operating performance, and
market capitalization. KBW considered the diversified
reinsurance companies based on the assumption that a portion of
the business of the pro forma company will be constituted by
reinsurance, including property catastrophe reinsurance. None of
the selected companies are directly comparable to Argonaut, and
therefore, the results of the selected companies analysis and
regression analysis are primarily financial calculations rather
than detailed analyses of the differences in operating
characteristics and business mixes of the various companies.
Appropriate use of the data includes qualitative judgments
concerning, among other things, differences among the companies.
Companies included in the group of specialty companies and
Bermuda reinsurance companies, respectively, were:
97
|
|
|
Specialty Insurance
Companies
|
|
|
|
W.R. Berkeley Corporation
|
|
|
Markel Corporation
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|
|
HCC Insurance Holdings, Inc.
|
|
|
Philadelphia Consolidated Holdings
Corporation
|
|
|
RLI Corp.
|
|
|
United America Indemnity, Ltd.
|
|
|
Navigators Group, Inc.
|
|
|
Tower Group, Inc.
|
|
|
James River Group, Inc.
|
|
|
|
Diversified Reinsurance
Companies
|
|
|
|
ACE Limited
|
|
|
XL Capital Ltd
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|
|
Everest Re Group, Ltd.
|
|
|
AXIS Capital Holdings Limited
|
|
|
Arch Capital Group Ltd.
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|
|
PartnerRe Ltd.
|
|
|
Allied World Assurance Company
|
|
|
Aspen Insurance Holdings Limited
|
|
|
Odyssey Re Holdings Corp.
|
|
|
Max Re Ltd.
|
KBW performed a regression analysis comparing the 2008 estimated
return on average equity for the selected specialty companies
and the diversified reinsurance companies to their respective
price-to-book
value ratios (excluding AOCI). This analysis indicated that
based on the pro forma resulting companys estimated return
on average equity for 2008 of 13.8%, the calculated price to
book value ratio for the pro forma resulting company according
to the regression analyses would be as follows:
|
|
|
|
|
Implied P/BV Ratio
Specialty Companies
|
|
|
1.90x
|
|
Implied P/BV Ratio
Diversified Reinsurance Companies
|
|
|
1.31x
|
|
KBW also compared the median ratios of
price-to-book
value and
price-to-2008
earnings for the group of specialty companies and the group of
diversified reinsurance companies, and mathematically derived a
range of implied trading values for the pro forma resulting
company, based on relevant projected per share values. The
mathematically derived range of trading values with the values
implied by the diversified reinsurance companies representing
the low end of the range and the values implied by the specialty
companies representing the high end of the range, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Median
|
|
|
Regression
|
|
Median
|
|
P/2008E
|
|
|
Analysis
|
|
P/BV Ratio
|
|
EPS Ratio
|
|
Implied Ratio Low
|
|
|
1.31
|
x(1)
|
|
|
1.33
|
x
|
|
|
7.5
|
x
|
Implied Ratio High
|
|
|
1.90
|
x(1)
|
|
|
2.03
|
x
|
|
|
10.5
|
x
|
Implied Value per
Share Low
|
|
$
|
5.41
|
|
|
$
|
5.52
|
|
|
$
|
5.26
|
|
Implied Value per
Share High
|
|
$
|
7.86
|
|
|
$
|
8.42
|
|
|
$
|
7.37
|
|
|
|
|
(1) |
|
Represents the P/BV Ratio calculated based on the aforementioned
regression analyses. |
PXRE
Estimate of Company Value in Runoff
KBW reviewed the runoff analysis prepared by management, and
analyzed three scenarios, which included a base case, an upside
case and a downside case. In connection therewith, KBW made and
confirmed with management certain assumptions in the runoff
valuation analysis:
Global
Assumptions
In all scenarios, KBW made the following assumptions:
(i) PXRE remains independent and continues not to write new
policies and is placed into runoff as of January 1, 2007;
(ii) the initial liquidation dividend is paid after the
conversion of the convertible preferred shares (assumed to
convert on March 31, 2008); (iii) as determined by
current regulatory requirements, the maximum allowable dividend
from PXREs operating subsidiaries is paid to PXRE and
thereafter dividended to shareholders on March 31 each
year; (iv) per current management projections, based on a
review by an independent third-party actuarial firm, the payout
pattern on existing reserves is as follows: 48% paid in 2007 and
18%, 9%, 8% and 17% paid in 2008, 2009, 2010 and 2011,
respectively; and (v) the terminal dividend to shareholders
consists of remaining book value as of the payment date in each
respective scenario, paid at 1.00x book value.
98
Base
Case Assumptions
Claims develop and losses are paid per the current expected
actuarial results. PXREs terminal dividend to shareholders
is paid on December 31, 2010.
Upside
Case Assumptions
PXRE benefits from an estimated 5.8% reserve redundancy realized
as of December 31, 2008 per the estimated actuarial range,
according to management, as of December 31, 2006.
PXREs terminal dividend to shareholders is paid on
December 31, 2009.
Downside
Case Assumptions
PXRE is affected by an 8.8% reserve deficiency as per the
estimated actuarial reserve range, according to management, as
of December 31, 2006 and recognized as of December 31,
2008. Additionally, management has estimated an additional
requirement for $51 million in reserves related to the 2005
hurricanes, recognized as of December 31, 2008, as per the
ground up reserve analysis as presented in PXREs 2006
10-K. The
terminal dividend to shareholders is paid on December 31,
2011.
The runoff analysis was based on several assumptions that may
differ materially from actual results. Realization of the runoff
value was highly dependent on the payment of liquidating
dividends, for which the timing and availability may be subject
to a number of factors beyond PXREs control. The table
below sets forth the illustrative present value of runoff values
on an aggregate and per share basis assuming 13% and 17%
discount rates under various operating scenarios. KBW selected
this range based on a calculation of the weighted average cost
of equity estimated for PXRE, which KBW calculated to be 14.7%.
13% represents the low end of the selected range of discount
rates and 17% represents the high end of the selected range of
discount rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present Value in
|
|
Present Value Per
|
Runoff Scenario
|
|
Discount Rate
|
|
Aggregate
|
|
Diluted Share
|
|
Base case scenario
|
|
|
13
|
%
|
|
$
|
328.2
|
|
|
$
|
4.23
|
|
Upside case scenario
|
|
|
13
|
%
|
|
$
|
367.0
|
|
|
$
|
4.73
|
|
Downside case scenario
|
|
|
13
|
%
|
|
$
|
249.2
|
|
|
$
|
3.22
|
|
Base case scenario
|
|
|
17
|
%
|
|
$
|
301.0
|
|
|
$
|
3.88
|
|
Upside case scenario
|
|
|
17
|
%
|
|
$
|
338.7
|
|
|
$
|
4.37
|
|
Downside case scenario
|
|
|
17
|
%
|
|
$
|
229.2
|
|
|
$
|
2.96
|
|
Source: PXRE.
Other
Factors Considered
KBW explored comparable company and comparable transactions
analyses in its review of the merger. Given the facts that PXRE
(i) has not written any new business since January 1,
2006; (ii) continues not to write any new business due to
the absence of financial strength ratings from any credit rating
service; and (iii) is expected to continue to generate GAAP
net losses for the foreseeable future, PXRE, on a stand-alone
basis, does not have prospects to generate positive returns on
average common equity. Furthermore, there has not been an
acquisition of 100% of a Bermuda-domiciled publicly traded
insurance company since 1999, nor are there relevant transaction
precedents in which a recently active reinsurer entered into a
transaction to leverage its platform to reengage in underwriting
operations. Accordingly, KBW believes that neither a comparable
companies analysis of PXRE nor a comparable transactions
analysis is relevant for assessing the fairness of the
consideration paid in the merger.
Miscellaneous
KBW also made its determination as to fairness on the basis of
its experience and professional judgment after considering the
results of all of the foregoing analyses. KBW reviewed the
foregoing analyses for purposes of providing its opinion to the
special committee as to the fairness from a financial point of
view to PXRE of the consideration paid in the merger, after
giving effect to the transactions contemplated by the voting
agreement, to the
99
holders of PXRE common shares (other than the PXRE common
shareholders party to the voting agreement). These analyses do
not purport to be appraisals nor do they necessarily reflect the
prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such
analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond
the control of the parties or their respective advisors, none of
PXRE, KBW or any other person assumes responsibility if future
results are materially different from those forecast.
The preliminary exchange ratio specified in the merger agreement
was determined through arms-length negotiations between
the special committee and Argonaut and was approved by the PXRE
board of directors based upon the recommendation of the special
committee. KBW provided advice to the special committee during
these negotiations. KBW did not, however, recommend any specific
investment amount, conversion price per PXRE convertible
preferred share or exchange ratio to the special committee or
the full board of directors of PXRE or that any specific
investment amount, conversion price per convertible preferred
share or exchange ratio constituted the only appropriate
investment amount, conversion price per convertible preferred
share or exchange ratio for the transaction.
As described above, KBWs opinion to the special committee
was one of many factors taken into consideration by the special
committee and the PXRE board of directors in making its
determination to approve the merger agreement. The foregoing
summary does not purport to be a complete description of the
analyses performed and reviewed by KBW in connection with the
fairness opinion and is qualified in its entirety by reference
to the written opinion of KBW attached as Annex E to
this joint proxy statement/prospectus.
The special committee selected KBW to render a fairness opinion
because KBW is an internationally recognized investment banking
firm with substantial experience in transactions similar to the
merger. KBW and its affiliates, as part of their investment
banking business, are continually engaged in performing
financial analyses with respect to businesses and their
securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and other transactions
as well as valuations for corporate and other purposes.
KBW acted as financial advisor to the special committee in
connection with the merger and will receive a fee from PXRE for
its services upon completion of the merger pursuant to a letter
agreement dated as of December 15, 2006, between KBW and
the special committee, which superseded a letter agreement dated
August 8, 2006 between KBW and PXRE. Pursuant to this
letter agreement, PXRE has paid KBW for its services a fee upon
delivery of its opinion. The opinion fee is not contingent upon
the completion of the merger. In addition, PXRE has agreed to
indemnify KBW for certain liabilities arising out of its
engagement. PXRE has also agreed to reimburse KBW for its
reasonable expenses, including attorneys fees and
disbursements. KBW has, in the past, provided financing services
to PXRE
and/or its
affiliates and may continue to do so and has received, and may
continue to receive, fees for the rendering of such services.
In addition, KBW may actively trade PXRE common shares and other
securities of PXRE, as well as Argonaut common stock and other
securities of Argonaut, for its own account and for the accounts
of its customers and, accordingly, KBW may at any time hold a
long or short position in such securities.
Opinion
of Argonauts Financial Advisor
Overview
Bear Stearns commenced work in November 2006 as Argonauts
financial advisor with respect to, among other things, a
possible business combination between Argonaut and PXRE and
entered into an engagement letter dated March 6, 2007 with
respect to such a possible business combination. In selecting
Bear Stearns, Argonauts board of directors considered,
among other things, the fact that Bear Stearns is an
internationally recognized investment banking firm with
substantial experience advising companies in the insurance
industry as well as substantial experience providing strategic
advisory services. Bear Stearns, as part of its investment
banking business, is continuously engaged in the evaluation of
businesses and their debt and equity securities in connection
with mergers and acquisitions, underwritings, private placements
and other securities offerings, senior credit financings,
valuations and general corporate advisory services.
100
At the March 14, 2007 meeting of Argonauts board of
directors, Bear Stearns delivered to the board its oral opinion,
which was subsequently confirmed in writing, that as of
March 14, 2007, and based upon and subject to the
assumptions, qualifications and limitations set forth in the
written opinion, the exchange ratio was fair, from a financial
point of view, to the shareholders of Argonaut.
The full text of Bear Stearns written opinion to the
Argonaut board is attached as Annex F to this joint
proxy statement/prospectus and is incorporated by reference. The
following summary is qualified in its entirety by reference to
the full text of the opinion, and you should read the opinion
carefully and in its entirety. The opinion sets forth the
assumptions made, some of the matters considered, qualifications
to and limitations of the review undertaken by Bear Stearns.
Bear Stearns opinion is subject to the assumptions and
conditions contained therein and is necessarily based on
economic, market and other conditions and the information made
available to Bear Stearns as of the date of the Bear
Stearns opinion, and Bear Stearns assumes no
responsibility for updating or revising its opinion based on
circumstances or events occurring after the date of the
opinion.
In reading the discussion of the fairness opinion set forth
below, you should be aware that Bear Stearns opinion:
|
|
|
|
|
was provided to Argonauts board of directors for its
benefit and use;
|
|
|
|
did not constitute a recommendation to the board of directors of
Argonaut or any holders of Argonauts common stock as to
how to vote in connection with the merger or otherwise; and
|
|
|
|
did not address Argonauts underlying business decision to
pursue the merger, the relative merits of the merger as compared
to any alternative business strategies that might exist for
Argonaut, the special cash dividend or the effects of any other
transaction in which Argonaut might engage.
|
Argonaut did not provide specific instructions to, or place any
limitations on, Bear Stearns with respect to the procedures to
be followed or factors to be considered in performing its
analyses or providing its opinion.
In connection with rendering its opinion, Bear Stearns:
|
|
|
|
|
reviewed drafts of the merger agreement and the voting
agreement, each dated March 14, 2007;
|
|
|
|
reviewed Argonauts annual reports to shareholders and
annual reports on
Form 10-K
for the years ended December 31, 2004, 2005 and 2006 and
its current reports on
Form 8-K
filed since December 31, 2006;
|
|
|
|
reviewed PXREs annual reports to shareholders and annual
reports on
Form 10-K
for the years ended December 31, 2003, 2004 and 2005, a
draft of its
Form 10-K
for the year ended December 31, 2006, its quarterly reports
on
Form 10-Q
for the periods ended March 31, 2006, June 30, 2006
and September 30, 2006, a draft of its financial statements
for the year ended December 31, 2006 and its current
reports on
Form 8-K
filed since December 31, 2005;
|
|
|
|
reviewed certain operating, financial and actuarial information
relating to Argonauts business and prospects, including
projections for the four years ended December 31, 2010 (the
Argonaut stand-alone projections), all as prepared
and provided to Bear Stearns by Argonauts management;
|
|
|
|
reviewed certain operating, financial and actuarial information
relating to PXREs business and prospects, including
projections for the four years ended December 31, 2010 and
certain actuarial projections for the 24 years ended
December 31, 2030 (together, the PXRE stand-alone
projections), all as prepared and provided to Bear Stearns
by PXREs management;
|
|
|
|
reviewed certain operating, financial and actuarial information
relating to the business and prospects of Argo Group (Argonaut
and PXRE on a combined basis after the merger), including
projections, synergy estimates and other combination benefits
for the four years ended December 31, 2010 and certain
actuarial projections for the 24 years ended
December 31, 2030 (the Argo Group combined
projections and, together with the Argonaut stand-alone
projections and the PXRE stand-alone projections, the
projections), all as prepared and provided to Bear
Stearns by Argonauts management;
|
101
|
|
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|
|
met with certain members of Argonauts senior management to
discuss Argonauts and PXREs respective businesses,
operations, historical and projected financial results and
future prospects;
|
|
|
|
met with certain members of PXREs senior management to
discuss PXREs business, operations, historical and
projected financial results and future prospects;
|
|
|
|
reviewed the historical prices, trading multiples and trading
volumes of the shares of Argonaut common stock and PXRE common
shares;
|
|
|
|
reviewed publicly available financial data, stock market
performance data and trading multiples of companies which Bear
Stearns deemed generally comparable to Argonaut and PXRE;
|
|
|
|
performed various discounted cash flow analyses based on the
projections furnished to Bear Stearns;
|
|
|
|
reviewed the terms of recent mergers and acquisitions involving
companies which Bear Stearns deemed generally comparable to PXRE;
|
|
|
|
reviewed the pro forma financial results, financial condition
and capitalization of Argo Group, giving effect to the merger;
and
|
|
|
|
conducted such other studies, analyses, inquiries and
investigations as Bear Stearns deemed appropriate.
|
In preparing its opinion, Bear Stearns:
|
|
|
|
|
relied upon and assumed, without independent verification, the
accuracy and completeness of the financial, actuarial and other
information provided to or discussed with Bear Stearns by
Argonaut and PXRE or obtained by Bear Stearns from public
sources, including, without limitation, the projections referred
to above;
|
|
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|
with respect to the projections, relied on representations that
the projections had been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the
senior management of Argonaut
and/or PXRE,
as the case may be, as to the expected future performance of
Argo Group, Argonaut and PXRE; and
|
|
|
|
did not assume any responsibility for the independent
verification of any such information, including, without
limitation, the projections, and further relied upon the
assurances of the senior management of Argonaut
and/or PXRE,
as the case may be, that they were unaware of any facts that
would have made the information and the projections incomplete
or misleading.
|
In arriving at its opinion, Bear Stearns did not perform or
obtain any independent appraisal of the assets or liabilities
(contingent or otherwise) of Argonaut and PXRE, nor was Bear
Stearns furnished with any such appraisals. Bear Stearns is not
an actuarial firm and its services did not include any actuarial
determination or evaluation by Bear Stearns or any attempt to
evaluate actuarial assumptions. Bear Stearns relied on
Argonauts and PXREs actuaries with respect to the
adequacy of reserves for Argonauts and PXREs
insurance liabilities.
Bear Stearns assumed that (i) except as otherwise required
by Section 367 of the Code, the merger will qualify as a
reorganization within the meaning of
Section 368(a) of the Code; (ii) Argonaut, PXRE and
PXMS should not recognize any gain or loss for U.S. federal
income tax purposes solely as a result of the merger pursuant to
Sections 367 and 368 of the Code; (iii) the merger
should not cause PXRE or any of its affiliates to be treated as
a domestic corporation under Section 7874(b) of the Code;
(iv) the accounting treatment of the merger pursuant to
U.S. generally accepted accounting principles will not
require the accrual of any liability for income taxes pursuant
to the Financial Accounting Standards Board Interpretation
No. 48; and (v) certain class action investor lawsuits
and other litigation in which PXRE
and/or its
affiliates are currently defendants will not have a material
adverse effect on PXREs business, financial condition and
future prospects. Bear Stearns further assumed that the merger
will be completed in a timely manner and in accordance with the
terms of the merger agreement without any limitations,
restrictions, conditions, amendments or modifications,
regulatory or otherwise, that collectively would have a material
effect on Argo Group, Argonaut or PXRE.
102
Bear Stearns did not express any opinion as to the price or
range of prices at which the shares of common stock of Argonaut
and PXRE may trade subsequent to the announcement of the merger
or the price or range of prices at which the shares of common
stock of Argo Group may trade subsequent to completion of the
merger.
Consistent with applicable legal and regulatory requirements,
Bear Stearns has adopted policies and procedures to establish
and maintain the independence of Bear Stearns research
departments and personnel. As a result, Bear Stearns
research analysts may hold views, make statements or investment
recommendations
and/or
publish research reports with respect to Argo Group, Argonaut,
PXRE, the merger and other participants in the transaction that
differ from the views of Bear Stearns investment banking
personnel.
In the ordinary course of business, Bear Stearns and its
affiliates may actively trade, for its own account and for the
accounts of its customers, equity and debt securities, bank debt
and/or other
financial instruments issued by Argonaut
and/or PXRE
and their respective affiliates, as well as derivatives thereof,
and accordingly, may at any time hold long or short positions in
such securities, bank debt, financial instruments and
derivatives.
Summary
of Bear Stearns Analyses
The following is a summary of the principal financial and
valuation analyses performed by Bear Stearns and presented to
Argonauts board of directors in connection with rendering
its fairness opinion. The following summary, however, does not
purport to be a complete description of the financial and
valuation analyses performed by Bear Stearns, and the order of
analyses described does not represent the relative importance or
weight given to the analyses performed by Bear Stearns.
Some of the financial and valuation analyses summarized below
include summary data and information presented in tabular
format. In order to understand fully the financial and valuation
analyses, the summary data and tables must be read together with
the full text of the analyses. Considering the summary data and
tables alone could create a misleading or incomplete view of
Bear Stearns financial analyses.
Transaction
Valuation Overview
Bear Stearns reviewed the implied transaction prices for each
common share of PXRE, based on the negotiated exchange ratio of
6.4672x, the one time pre-closing special cash dividend of
$60 million to be paid to Argonauts shareholders and
Argonauts actual spot stock price as of March 13,
2007 and Argonauts
10-day
volume-weighted average stock price as of March 13, 2007.
Bear Stearns further calculated the implied premium in relation
to a range of PXREs stock prices that were based on
(i) the closing,
10- and
20-day
volume-weighted average stock prices as of March 13, 2007
and (ii) the high and low closing stock prices for the one
year period ending March 13, 2007. Bear Stearns also
calculated the implied price/book value valuation multiples for
PXRE with respect to the merger.
Transaction
Valuation, Implied Premia and Implied Multiples
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Transaction Valuation Implied
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by Argonauts Stock Price
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PXRE
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Spot Price
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10-Day VWAP
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Data
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@
3/13/2007
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@
3/13/2007
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Value of Merger Consideration
Being
Offered to PXRE Shareholders
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$
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4.95
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$
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5.04
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Premium/(Discount) to:
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Closing Price on
3/13/2007
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$
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4.47
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10.7
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%
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12.7
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%
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10-Day
Volume-Weighted Average
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4.54
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8.9
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10.9
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20-Day
Volume-Weighted Average
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4.56
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8.6
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10.5
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52-Week High Price
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4.94
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0.1
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1.9
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52-Week Low Price
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3.17
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56.0
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58.9
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Price/Book Value Multiple (Book
Value as of
12/31/2006)
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$
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6.08
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0.81
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x
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0.83
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x
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103
PXRE
Sum-of-the-Parts
Valuation Analysis
Bear Stearns analyzed the value of PXRE using a
sum-of-the-parts
valuation approach as described below. For purposes of Bear
Stearns review and analyses, Bear Stearns utilized, among
other things, the PXRE stand-alone projections and the Argo
Group combined projections. Bear Stearns
sum-of-the-parts
valuation analysis was based on the following four components:
(i) the runoff value of PXREs existing book of
business; (ii) new PXRE business expected to be facilitated
by the merger; (iii) tax efficiencies expected to be
generated by the merger and (iv) cost synergies expected to
be realized from the merger, net of cost to achieve such
synergies and certain transaction-related expenses. Each of
these components was analyzed assuming completion of the merger
between Argonaut and PXRE.
Based on the
sum-of-the-parts
analysis as described below, Bear Stearns calculated the total
sum-of-the-parts
valuation of PXRE to be $640.6 to $774.6 million, or $7.84
to $9.49 per PXRE common share. Bear Stearns noted that
such
sum-of-the-parts
valuation compared favorably to the merger consideration being
offered by Argonaut to PXREs shareholders (i.e.,
$4.95-$5.04 as described above).
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Runoff Value of PXREs Existing Book of Business
Assuming Completion of the Merger Between Argonaut and
PXRE: The cash flows associated with the runoff
of PXREs existing book of business are composed of
earnings (i) that are expected to be generated from
investment income earned on existing loss reserves less
associated expenses and (ii) the releases of excess capital
supporting these loss reserves as such reserves are paid down,
including an assumed initial release of capital of
$275.0 million sufficient to bring the ratio of minimum
loss reserves/total shareholders equity to 3 to 1. This
analysis was performed for the years ended December 31,
2007 to 2030, the year in which all of PXREs current loss
reserves are projected to be fully paid down. These cash flows
were discounted to present value using a cost of equity ranging
from 12.0% to 15.0%. This cost of equity range was based on
several assumptions regarding factors such as the inherent
business risk of PXRE and the resulting equity beta (determined
after reviewing the historical and projected betas of PXRE and
certain comparable companies in the reinsurance industry) and
PXREs prospective capital structure. Based on the
foregoing, Bear Stearns calculated an implied value of the
runoff of PXREs existing book of business of
$502.2 million to $528.8 million, or $6.15 to
$6.48 per PXRE common share.
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New PXRE Business Facilitated By the
Merger: Bear Stearns evaluated the new earning
streams that are expected to be facilitated by the merger and
generated by PXRE. Such earning streams were projected by
Argonauts management for the years ended December 31,
2007 to 2010. In order to calculate a terminal value of such
business, Bear Stearns applied terminal value multiples ranging
from 6.5x to 7.5x to the estimated 2010 GAAP earnings and 1.15x
to 1.25x to estimated December 31, 2010 GAAP book value.
Bear Stearns chose these terminal value multiples based on:
(i) a review of trading data for comparable reinsurance
public companies (as outlined below) and (ii) Bear
Stearns overall experience in valuing insurance companies.
The earning streams and terminal value were discounted to
present value using a cost of equity ranging from 12.0% to
15.0%. This cost of equity range was based on several
assumptions regarding factors such as the inherent business risk
of PXRE and the resulting equity beta (determined after
reviewing the historical and projected betas of PXRE and certain
comparable companies in the reinsurance industry) and
PXREs prospective capital structure. Based on the
foregoing, Bear Stearns calculated an implied value of the new
business to be facilitated by the merger of $16.6 to
$79.6 million, or $0.20 to $0.97 per PXRE common
share. The following publicly traded reinsurance comparable
companies were used in the analysis of PXRE:
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RenaissanceRe Holdings
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Aspen Insurance Holdings Limited
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Montpelier Re Holdings Ltd.
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IPC Holdings Ltd.
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ACE Limited
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XL Capital Ltd.
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Everest Re Group Ltd.
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AXIS Capital Holdings Limited
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Arch Capital Group Ltd.
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PartnerRe Ltd.
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104
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Endurance Specialty Holdings Ltd.
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Platinum Underwriters Holdings Ltd.
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Bear Stearns calculated the following trading multiples for the
above comparable companies:
Selected
Comparable Public Companies
Trading Multiples Reinsurance Companies
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Stock Price/
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Stock Price/
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Book Value
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2007E EPS
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2008E EPS
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Ratio
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High
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8.3
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x
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8.1
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x
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1.50
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x
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Mean
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7.2
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7.0
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1.27
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Median
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7.2
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7.1
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1.23
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Low
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6.3
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6.1
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1.04
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Tax Efficiencies Generated From the
Merger: Bear Stearns evaluated the stream of
incremental earnings associated with certain tax efficiencies
expected to be generated from the merger. Such incremental
earnings were projected to be a result of Argonauts ceding
some of its gross written premium to Peleus Re. Bear Stearns
calculated a terminal value based on multiples ranging from 8.0x
to 10.0x PXREs estimated tax synergies expected to be
achieved in 2010. Bear Stearns chose these terminal values based
on multiples based on (i) the implied perpetual growth
rates of cash available to equity holders derived from such
multiples; (ii) Bear Stearns review of trading data
for comparable public reinsurance companies (as detailed above)
and public excess and surplus insurance companies (as detailed
below); and (iii) Bear Stearns overall experience in
valuing insurance companies. The earning streams and terminal
values were discounted to present value using a cost of equity
ranging from 12.0% to 15.0%. This cost of equity range was based
on several assumptions regarding factors such as the inherent
business risk of PXRE and Argonaut and the resulting equity beta
(for PXRE determined after reviewing the historical and
projected betas of PXRE and certain comparable companies in the
reinsurance industry and for Argonaut determined after reviewing
its historical and projected beta) and PXREs and
Argonauts prospective capital structures. Based on the
foregoing, Bear Stearns calculated an implied value of the
identified tax synergies from the merger of $105.1 million
to $139.3 million, or $1.29 to $1.71 per PXRE common
share.
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The following publicly traded excess and surplus insurance
comparable companies were used in the analysis of Argonaut:
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W. R. Berkley Corporation
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Philadelphia Consolidated Holding Corp.
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RLI Corp.
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United America Indemnity, Ltd.
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Markel Corporation
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HCC Insurance Holdings, Inc.
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The Midland Company
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Tower Group, Inc.
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James River Group, Inc.
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105
Bear Stearns calculated the following trading multiples for the
above comparable companies:
Selected
Comparable Public Companies
Trading Multiples Excess and Surplus
Companies
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Stock Price/
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Stock Price/
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2007E EPS
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2008E EPS
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Book Value Ratio
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High
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15.0
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x
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15.0
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x
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3.57
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x
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Mean
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11.9
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11.3
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2.03
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Median
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12.5
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10.9
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1.88
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Low
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8.9
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8.6
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1.17
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Cost Synergies, Net of Cost to Achieve Such Synergies and
Certain Transaction-Related Expenses: Bear
Stearns evaluated the stream of cash flows associated with cost
synergies expected to be realized from the merger based on
estimates prepared by Argonauts management. Bear Stearns
valued these cash flows as a perpetuity using a cost of equity
ranging from 12.0% to 15.0%. This cost of equity range was based
on several assumptions regarding factors such as the inherent
business risk of PXRE and Argonaut and the resulting equity beta
(for PXRE determined after reviewing the historical and
projected betas of PXRE and certain comparable companies in the
reinsurance industry and for Argonaut determined after reviewing
its historical and projected beta) and PXREs and
Argonauts prospective capital structures. Bear Stearns
also evaluated Argonauts management estimates of the cost
to achieve such synergies and certain transaction-related
expenses. Based on the foregoing, Bear Stearns calculated an
implied value of the identified cost synergies from the merger,
net of cost to achieve and certain transaction-related expenses,
of $35.3 million to $45.6 million, or $0.20 to
$0.33 per PXRE common share.
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Selected
Precedent Merger and Acquisition Transactions
Analysis
Bear Stearns reviewed and analyzed selected precedent merger and
acquisition transactions involving property and casualty
reinsurance companies since January 1999. Given that PXRE is
presently in a runoff mode and the scarcity of relevant
precedent transactions data available, Bear Stearns did not rely
on this methodology in valuing PXRE.
Pro
Forma Accretion/Dilution Analysis
Bear Stearns analyzed the potential pro forma accretion or
dilution of the merger on Argonauts estimated earnings per
share for 2007 through 2010 and on book value per share for 2007
through 2010. Bear Stearns noted that the merger would be
dilutive to Argonauts earnings per share for year 2007,
neutral to Argonauts earnings per share for 2008 and
accretive to Argonauts earnings per share in each of the
next two years and accretive to Argonauts book value per
share in each year during the 2007 to 2010 period.
Other
Considerations
The preparation of a fairness opinion is a complex process and
involves various judgments and determinations as to the most
appropriate and relevant assumptions and financial and valuation
analyses and the application of those methods to the particular
circumstances involved. Such an opinion is therefore not readily
susceptible to partial analysis or summary description, and
taking portions of the analyses set out above, without
considering the analysis as a whole, would in the view of Bear
Stearns create an incomplete and misleading picture of the
processes underlying the analyses considered in rendering the
Bear Stearns opinion. Bear Stearns based its analysis on
assumptions that it deemed reasonable, including assumptions
concerning general business and economic conditions and
industry-specific factors. Bear Stearns did not form a view as
to whether any individual analysis or factor, whether positive
or negative, considered in isolation, supported or failed to
support its opinion. In arriving at its opinion, Bear Stearns
considered the results of all its analyses and did not attribute
any particular weight to any one analysis or factor, except that
Bear Stearns did not rely on its analysis of selected precedent
merger and acquisition transactions for the reasons set forth
above. Bear Stearns arrived at its opinion based on the results
of all analyses undertaken by it and assessed as a whole and
believes that the totality of the factors considered and
analyses performed by Bear Stearns in connection with its
opinion operated collectively to support its determination
106
as to the fairness of the exchange ratio, except its analysis of
selected precedent merger and acquisition transactions as noted
above.
The analyses performed by Bear Stearns, particularly those based
on estimates and projections, are not necessarily indicative of
actual values or actual future results, which may be
significantly more or less favorable than suggested by such
analyses. None of the public companies used in the comparable
company analyses described above are identical to Argonaut or
PXRE, and none of the precedent mergers and acquisitions
transactions used in the precedent mergers and acquisitions
transactions analysis described above are identical to the
merger. Accordingly, an analysis of publicly traded comparable
companies and precedent mergers and acquisitions transactions is
not mathematical; rather it involves complex considerations and
judgments concerning the differences in financial and operating
characteristics of the companies and precedent mergers and
acquisitions transactions and other factors that could affect
the value of Argonaut, PXRE and the public trading values of the
companies and precedent mergers and acquisitions transactions to
which they are compared. The analyses do not purport to be
appraisals or to reflect the prices at which any securities may
trade at the present time or at any time in the future.
The Bear Stearns opinion was just one of the many factors taken
into consideration by Argonauts board of directors.
Consequently, Bear Stearns analysis should not be viewed
as determinative of the decision of Argonauts board of
directors with respect to the fairness of the exchange ratio.
Pursuant to the terms of Bear Stearns engagement letter,
Argonaut has agreed to pay Bear Stearns (i) a cash fee of
$400,000 payable upon the formation of Peleus Re; (ii) a
cash fee of $1,250,000 payable upon the earlier of the rendering
by Bear Stearns of the fairness opinion or the execution of a
definitive acquisition transaction agreement; and (iii) a
cash fee equal to $5,000,000 (less any fees paid pursuant to
clauses (i) and (ii)) payable upon the completion of the
merger. In addition, Argonaut has agreed to reimburse Bear
Stearns for certain expenses and to indemnify Bear Stearns
against certain liabilities arising out of Bear Stearns
engagement. Bear Stearns has been previously engaged by Argonaut
to provide investment banking and other services on matters
unrelated to the transaction, for which Bear Stearns has
received (or expects to receive) customary fees. Bear Stearns
may also provide or otherwise assist Argonaut in obtaining
financing for the special dividend for which it would expect to
receive certain customary compensation. Bear Stearns may seek to
provide Argo Group, Argonaut
and/or PXRE
and their respective affiliates certain investment banking and
other services unrelated to the transaction in the future.
Argonauts
Arrangements with Prior Financial Advisors
Pursuant to an engagement letter Argonaut entered into with
Friedman, Billings, Ramsey & Co., Inc., which we refer to
as Friedman Billings, Argonaut has agreed to pay Friedman
Billings a cash fee of $600,000 payable upon completion of the
merger.
Interests
of PXRE Directors and Executive Officers in the Merger
Certain members of the PXRE board of directors and executive
officers of PXRE, in their capacities as such, have certain
interests in the merger that are in addition to or different
from their interests as PXRE shareholders generally. PXREs
board of directors was aware of these interests and considered
them, among other matters, in approving the merger agreement and
the transactions contemplated thereby and to recommend that
shareholders vote in favor of the transactions contemplated by
the merger agreement. As a result of these interests, these
directors and executive officers may be more likely to support
and to vote to approve the merger agreement and the transactions
contemplated thereby than if they did not have these interests.
Shareholders should consider whether these interests may have
influenced those directors and executive officers to support or
recommend approval of the merger. As of the close of business on
the record date for the PXRE special general meeting,
PXREs directors and executive officers and their
affiliates were entitled to vote approximately
341,000 shares of the then-outstanding PXRE common shares,
8,855,347 of the convertible common shares and
5,813.20 shares of the then-outstanding PXRE convertible
preferred shares at the PXRE special general meeting which
represented less than one percent, 100 percent and
100 percent, respectively, of the PXRE common shares, PXRE
convertible common shares and PXRE convertible preferred shares
outstanding and entitled to vote at the meeting. These interests
are described below.
107
Arrangements
with PXREs President and Chief Executive
Officer
On March 14, 2007, PXRE and Mr. Radke entered into a
letter agreement, which we refer to as the separation agreement,
providing that Mr. Radkes last day of employment and
service as a director with PXRE, which we refer to as the
separation date, will be the earliest of:
(i) December 28, 2007; (ii) the date of the
closing of the merger, or in the event such closing does not
occur, the date of the closing of an alternative transaction;
(iii) the date Mr. Radke terminates his employment
under certain circumstances constituting good
reason; or (iv) the date Mr. Radkes
employment is terminated by PXRE under certain circumstances
constituting cause.
Provided that prior to the separation date, Mr. Radke does
not terminate his employment with PXRE other than on account of
good reason and PXRE does not terminate his
employment for cause, he will be entitled to the
following:
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A lump sum severance payment of $1,687,634.46 payable on the
first business day following the six-month anniversary of the
separation date;
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the full vesting on the separation date of his 56,138 unvested
options (which have a weighted average exercise price of $19.88)
and his 198,239 restricted shares (valued at $919,829 based on
an estimated fair market value of $4.64 per share);
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a lump sum payment of accrued and unused vacation, at
$3,076.92 per day, payable by PXRE in cash on the
separation date;
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the cost of one year of medical, dental, disability and life
insurance coverage to be obtained for himself and his eligible
dependents, up to a maximum of $30,000, payable by PXRE in cash
on the first business day following the six month anniversary of
the separation date;
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he will not be entitled to any annual bonus for 2006 or 2007;
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$40,000 in cash in lieu of any obligation to permit him to
continue to participate in any compensation, 401(k), retirement
and other benefit plans, payable by PXRE on the first business
day following the six-month anniversary of the separation
date; and
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reimbursement for reasonable legal fees he incurred in
connection with the negotiation of the separation agreement, up
to a maximum of $25,000, payable by PXRE upon execution of the
separation agreement.
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The employment agreement between PXRE and Mr. Radke dated
as of June 23, 2005 provided for many of these severance
benefits, but they originally were payable over 24 months.
Mr. Radke, on behalf of himself and Indica Consulting Ltd.,
which we call Indica, in which he owns a controlling interest
and of which he is the chief executive and a director, agreed to
continue to comply with covenants relating to the protection of
PXREs ideas, non-competition with PXRE and
non-solicitation of PXREs employees and customers for a
period of twelve (12) months after the separation date.
PXRE agreed that Mr. Radke may engage in Indica consulting
activities provided that such engagement does not result in a
breach of any of these obligations, except to the extent that
PXRE consents to any such breach. He also agreed, on behalf of
himself and Indica, to keep confidential all non-public
information concerning PXRE, with customary exceptions,
including as required by law or in connection with the
enforcement of the separation agreement.
Mr. Radke will continue to be entitled to
gross-up
payments for excise taxes incurred under Sections 280G or
409A of the Code as a result of payments to him, as set forth in
his employment agreement. He will also continue to be entitled
to indemnification for any claims arising out of his services as
a director or officer of PXRE. Except for these and other
specified provisions, Mr. Radkes employment agreement
was terminated.
PXRE is currently negotiating a consulting agreement with
Mr. Radkes consulting company, Indica, which is
expected to be effective upon the merger, upon terms and
conditions to be mutually agreed upon. Mr. Radke owns a
controlling interest in and is the chief executive officer and a
director of Indica.
PXRE is currently negotiating a licensing arrangement with
Indica, which is expected to be effective upon the merger, upon
terms and conditions to be mutually agreed upon. The licensing
agreement would provide for the licensing by PXRE to Indica of
PXREs proprietary software for catastrophe risk modeling
and management, which
108
is called CRUCIBLE, and the use of the names
CRUCIBLE and Mid-Atlantic Risk Systems
or MARS, under which the CRUCIBLE software would be
marketed by Indica.
Change
of Control Provisions in Employment Agreements
PXRE Reinsurance Company, PXREs
U.S.-based
operating subsidiary, and Bruce J. Byrnes are parties to an
employment agreement dated as of June 4, 2006. This
employment agreement provides that, in the event of the
occurrence of a change of control (which, as defined in the
employment agreement, would include the merger), if
Mr. Byrnes provides written notice of resignation within
60 days of the closing of the transaction that constituted
such change of control, Mr. Byrnes will be entitled to:
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a lump sum cash payment equal to 50% of his annualized base
salary in effect on the termination date (as defined in
Mr. Byrnes employment agreement) payable within ten
business days of the termination date;
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continued participation for Mr. Byrnes and his eligible
dependents in the medical, dental, life and disability benefit
programs for the one year period following the termination date
on the same basis that such coverage has been provided to him
prior to termination; provided, that PXRE may instead pay to him
a lump sum amount which, after taxes, will enable him to
purchase equivalent benefits for such one-year period;
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all stock options, restricted shares and other equity grants
held by Mr. Byrnes shall become non-forfeitable, and all
restrictions on them shall lapse, as of the termination date and
all stock options (and comparable instruments) shall become
fully exercisable as of the termination date, and shall remain
exercisable for the maximum period permitted in the
circumstances under the terms of the applicable equity
plan; and
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if the severance payments made to Mr. Byrnes result in the
imposition of an excise tax under Sections 4999 or 409A of
the Code, then he will be entitled to receive an additional
payment which we call a
gross-up
payment, prior to the date on which any excise tax is due
(through withholding or otherwise) in an amount such that after
payment by him of all income, excise, employment and other taxes
on the
gross-up
payment (and any interest and penalties imposed with respect
thereto) he would retain an amount of the
gross-up
payment equal to the excise tax imposed.
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On March 13, 2007, the human resources committee of the
board of directors of PXRE made a retention grant to
Mr. Byrnes of $200,000 in cash payable at the closing of
the merger. Upon completion of the merger, the
13,739 restricted shares held by Mr. Byrnes, valued at
$63,749 based on an estimated fair market value of $4.64 per
share, will vest.
PXRE and Mr. Myron are parties to an employment agreement
dated as of December 27, 2005. This employment agreement
provides that, in the event that Mr. Myrons
employment is terminated within twelve months after a change of
control (which, as defined in the employment agreement, would
include the merger) either (i) by PXRE other than for
cause, permanent disability or death; or (ii) by PXRE
giving notice of non-renewal to Mr. Myron under his
employment agreement, Mr. Myron will be entitled to:
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a cash payment equal to two times Mr. Myrons
annualized base salary of $364,000 in effect on the termination
date;
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a cash payment equal to his housing allowance of
$10,000 per month (including a
gross-up tax
payment) provided pursuant to such named executive
officers employment agreement for the one year period
following such termination;
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continued participation for Mr. Myron and his eligible
dependents in PXREs benefit programs (e.g.,
qualified and non-qualified retirement, 401(k), Bermuda pension,
deferred compensation, health, medical, life, disability or
similar plans or benefits made available to senior executives)
for the one year period following such termination of
employment; provided, that PXRE may instead pay to
Mr. Myron an amount which, after taxes, will enable
Mr. Myron to purchase equivalent benefits for such one-year
period;
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all stock options, restricted shares and other equity grants
held by Mr. Myron will become non-forfeitable, and all
restrictions on them shall lapse, as of the termination date and
options (and comparable instruments) shall become fully
exercisable as of the termination date and shall remain
exercisable for the maximum period permitted in the
circumstances under the terms of the applicable equity
plan: and
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if the severance payments made to Mr. Myron result in the
imposition of an excise tax under Sections 4999 or 409A of
the Code, then he will be entitled to receive a
gross-up
payment prior to the date on which any excise tax is due
(through withholding or otherwise) in an amount such that after
payment by him of all income, excise, employment and other taxes
on the
gross-up
payment (and any interest and penalties imposed with respect
thereto) he would retain an amount of the
gross-up
payment equal to the excise tax imposed.
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On March 13, 2007, the human resources committee of the
board of directors of PXRE made a retention grant to
Mr. Myron of $250,000 in cash payable on March 15,
2008. Upon completion of the merger, the 5,101 restricted
shares held by Mr. Myron, valued at $23,669 based on an
estimated fair value of $4.64 per share, will vest.
Continued
Service on the Board of Directors of the Resulting
Company
Jeffrey Radke, Wendy Luscombe, Gerald L. Radke, Craig A. Huff
and Jonathan Kelly are expected to resign as members of the PXRE
board of directors immediately following the merger. F. Sedgwick
Browne, Mural R. Josephson and Bradley E. Cooper are expected to
continue as members of the PXRE board of directors immediately
following the merger if the board is increased to 12 members.
Philip R. McLoughlin is expected to continue as a member of the
PXRE board of directors immediately following the merger if the
board is increased to 13 members, and otherwise he is expected
to resign immediately following the merger. If, for any reason,
any of the PXRE directors presently expected to continue as a
member of the PXRE board is not able or willing to serve as a
director following the merger (a situation which is not
presently contemplated), one of the resigning directors would
instead continue to serve as a director immediately following
the merger. See PXREs Board of Directors
and Management Following the Merger beginning on
page 112.
Vesting
of PXRE Restricted Shares, and Options
The 2002 Officer Incentive Plan provides that all options and
restricted shares thereunder shall immediately vest in the event
of a change of control, as defined in such plan. The completion
of the merger is considered a change of control under the plan,
and therefore, all restricted shares and unvested options issued
under such plan will become fully vested upon completion of the
merger.
The Incentive Bonus Compensation Plan provides that upon a
change of control (which term includes the completion of the
merger), any restrictions upon restricted shares issued pursuant
to such plan shall lapse. The Director Stock Plan provides that
all options and restricted shares issued thereunder shall
immediately vest in the event of a change of control, as defined
in the plan. The approval by the PXRE shareholders of the
issuance of PXRE common shares in connection with the merger is
a change of control, and the plan was recently amended to
provide that all options that were then
out-of-the-money
may be exercised for a period of 3 years after the
resignation of any of the current directors.
As of the record date, there were approximately
90,213 shares underlying outstanding unvested options
granted to directors and executive officers under PXREs
equity incentive plans. As of the record date, there were
approximately 237,921 restricted shares granted under PXRE
equity incentive plans to directors and executive officers.
Reduction
of Conversion Price of PXREs Convertible Preferred
Shares
In April 2002, PXRE sold convertible preferred shares to Capital
Z Partners, Ltd. and affiliates, Reservoir Capital Management
L.L.C. and affiliates and RER Reinsurance Holdings, L.P., which
we collectively refer to as the PXRE preferred shareholders. The
PXRE preferred shareholders also hold PXRE convertible common
shares and PXRE common shares. The PXRE preferred shareholders
have a right to nominate four directors for election to the PXRE
board of directors. Currently, there are three directors serving
on the PXRE board of directors who were so nominated: Bradley E.
Cooper and Jonathan Kelly, who are partners of Capital Z
Partners, Ltd., and Craig A. Huff, who is President and
co-founder of Reservoir Capital Group.
The terms of the PXRE convertible preferred shares provide the
PXRE preferred shareholders with the ability to veto certain
corporate actions by PXRE, including the merger with Argonaut.
In addition, in the course of the merger negotiations between
PXRE and Argonaut, Argonaut requested that PXRE have only one
class of equity securities outstanding following the merger. The
special committee conducted lengthy negotiations with the PXRE
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preferred shareholders in an effort to obtain the consent of
the PXRE preferred shareholders to the merger and to provide for
the conversion of the convertible preferred shares and
convertible common shares into PXRE common shares. After taking
into account the terms of the merger agreement, alternatives to
the merger and the interests of the common shareholders of PXRE,
the special committee recommended, and the PXRE board of
directors approved, that PXRE enter into a voting agreement with
Argonaut and the PXRE preferred shareholders. Pursuant to the
voting agreement, the PXRE preferred shareholders consented to
the merger and the convertible preferred shares will be
converted into common shares of PXRE immediately prior to the
merger at a reduced conversion price of $6.24. The reduction of
the conversion price to $6.24 per share will result in
dilution to PXRE common shareholders of approximately 5.0% more
than what would have resulted from the conversion of the
convertible preferred shares at $11.18 per share, the
conversion price which otherwise would have been applicable as
of March 31, 2007.
Mr. Cooper, a PXRE director who is a partner of Capital Z
Partners, Ltd., one of the PXRE preferred shareholders, is
expected to continue as a director of the resulting company
after the merger.
A copy of the voting agreement is attached as
Annex D to this joint proxy statement/prospectus.
PXRE and Argonaut encourage you to read the voting agreement
carefully.
Indemnification
of PXRE Directors and Executive Officers and Directors and
Officers Liability Insurance
The merger agreement provides for the continued indemnification
of PXREs directors and officers for all claims occurring
prior to the completion of the merger, the maintenance of
directors and officers liability insurance for six
years to cover any such claims (subject to certain cost
limitations), and indemnification for any increase in the total
state or federal income or excise tax liability resulting from
the transactions contemplated by the merger.
Interests
of Argonauts Directors and Executive Officers in the
Merger
When considering the recommendations by the Argonaut board of
directors, you should be aware that a number of Argonaut
executive officers and directors have interests in the merger
that are different from those of other Argonaut shareholders.
These interests include:
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becoming executive or senior officers of PXRE after the
transaction (subject to receipt of Bermuda work permits as
described in Risk Factors Risks Related to the
Resulting Companys Operations After the Completion of the
Merger Risks Related to Regulation beginning
on page 45);
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appointment of nine Argonaut directors to the PXRE board of
directors following the merger;
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possible acceleration of the vesting of outstanding equity
awards held by certain executive officers of Argonaut, as
described in The Merger Effect of the Merger;
Consideration to be Received in the Merger; Treatment of Options
and Other Equity-Based Awards beginning on page
80; and
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the continued indemnification of Argonauts directors and
officers for all claims occurring prior to the completion of the
merger, the maintenance of directors and officers
liability insurance for six years to cover any such claims
(subject to certain cost limitations), and indemnification for
any increase in the total state or federal income or excise tax
liability resulting from the transactions contemplated by the
merger (other than the vesting of certain restricted stock and
the vesting and exercise of certain options).
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Argonauts board of directors was aware of these interests
and considered them, among other matters, in approving the
merger agreement and the transactions contemplated thereby and
to recommend that shareholders vote in favor of the approval of
the merger agreement. As a result of these interests, these
directors and executive officers may be more likely to support
and to vote to approve the merger agreement and the transactions
contemplated thereby than if they did not have these interests.
Shareholders should consider whether these interests may have
influenced those directors and executive officers to support or
recommend approval of the merger. As of the close of business on
the record date for the Argonaut special meeting,
Argonauts directors and executive officers and their
affiliates were entitled to vote 3.7 percent of the
then-outstanding shares of Argonaut common stock.
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PXREs
Board of Directors and Management Following the Merger
PXREs board of directors is currently comprised of
11 seats. There are currently nine members and the board
has two vacant seats. PXREs bye-laws currently set the
size of PXREs board of directors at not less than three or
more than 12 members. Increasing the size of the board above its
current size of 11 seats requires the approval of
PXREs shareholders. PXRE has agreed to use commercially
reasonable efforts to cause the board of directors of the
resulting company to consist of 13 directors following the
merger. Increasing the size of the board to 13 directors
requires an amendment to PXREs bye-laws approved by
662/3%
of the voting power of the outstanding PXRE shares. Increasing
the size of the board to 12 directors requires a simple
majority of the votes cast. If PXRE receives the affirmative
vote of
662/3%
of the voting power of the outstanding PXRE shares to increase
the size of the board to 13 directors, the
13 directors immediately following the merger will consist
of Argonauts nine current directors who would be appointed
to the classes identified below and four of PXREs current
directors who are in or will be appointed to the classes
identified below. A chairman will be elected from the group of
13 directors. If PXRE does not receive the affirmative vote
of
662/3%
of the voting power of the outstanding PXRE shares to increase
the size of the board to 13 directors, but does receive the
affirmative vote of a simple majority of the votes cast
approving an increase of the size of the board to
12 directors, the board immediately following the merger
will consist of Argonauts nine current directors and three
of PXREs current directors. A chairman would be elected
from the group of 12 directors.
Jeffrey Radke, Wendy Luscombe, Gerald L. Radke, Craig A. Huff
and Jonathan Kelly are expected to resign as members of the PXRE
board of directors immediately following the merger. F. Sedgwick
Browne, Mural R. Josephson and Bradley E. Cooper are expected to
continue as members of the PXRE board of directors immediately
following the merger if the board is increased to 12 members.
Philip R. McLoughlin is expected to continue as a member of the
PXRE board of directors immediately following the merger if the
board is increased to 13 members, and otherwise he is expected
to resign immediately following the merger. If, for any reason,
any of the PXRE directors presently expected to continue as a
member of the PXRE board is not able or willing to serve as a
director following the merger (a situation which is not
presently contemplated), one of the resigning directors would
instead continue to serve as a director immediately following
the merger.
Upon completion of the merger, Mark E. Watson III,
currently President and Chief Executive Officer of Argonaut,
will become the President and Chief Executive Officer of the
resulting company. Robert P. Myron, currently Executive Vice
President, Chief Financial Officer and Treasurer of PXRE, will
continue in those positions with the resulting company. Jeffrey
L. Radke, currently Chief Executive Officer and President and a
director of PXRE, will leave those positions pursuant to a
letter agreement entered into between PXRE and Mr. Radke.
See The Merger Interests of PXRE Directors and
Executive Officers in the Merger Arrangements with
PXREs President and Chief Executive Officer
beginning on page 108 for information regarding the letter
agreement.
Following is information regarding the persons who are expected
to serve as directors or executive officers of the resulting
company after the merger.
Directors
and Executive Officers
Mural R. Josephson (58) is expected to continue to serve as
a Class II director of the resulting company following the
merger. Mr. Josephson was appointed to the board of
directors of PXRE in August 2004. Mr. Josephson retired
from Kemper Insurance Companies in 2002. During his
5-year
tenure at Kemper, he held key management positions, including
senior vice president and chief financial officer and senior
vice president of finance. Prior to joining Kemper,
Mr. Josephson held several senior level positions at KPMG,
including 19 years as a senior audit partner. While at
KPMG, he was a member of the National Insurance Practice
Committee and a member of the Professional Practice Review
Committee. Mr. Josephson is currently a member of the board
of directors and chairman of the Audit Committee of
HealthMarkets, Inc., an insurance holding company. He also
serves on the board of directors of SeaBright Insurance
Holdings, Inc., a NASDAQ traded insurance holding company, and
its wholly owned subsidiary, SeaBright Insurance Company, and is
the Chairman of their Audit Committee.
F. Sedgwick Browne (64) is expected to continue to
serve as a Class III director of the resulting company
following the merger. Mr. Browne has been a director of
PXRE since 1999. Mr. Browne has been Vice-Chairman of
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the board of directors of PXRE since 2003. He retired as counsel
at Sidley Austin Brown & Wood LLP (now known as Sidley
Austin LLP), a law firm, on September 30, 2004.
Mr. Browne previously was a partner at Morgan,
Lewis & Bockius LLP and prior thereto at Lord
Day & Lord, Barrett Smith, where he specialized in the
insurance and reinsurance industry.
Bradley E. Cooper (40) is expected to continue to serve as
a director of the resulting company following the merger, and
will be appointed as a Class I director. Mr. Cooper
has been a director of PXRE since April 2002. Mr. Cooper is
a Partner of Union Square Partners, an investment firm he joined
as a founding partner upon its formation in February 2007. He
previously held similar positions at Capital Z Partners (which
he joined as a founding partner in 1998), and before that at
Insurance Partners, L.P. and International Insurance Advisers,
L.P. Mr. Cooper serves on the board of directors of
Universal American Finance Corp. and NewStar Financial, Inc.
Philip R. McLoughlin (60) is expected to continue to serve
as a Class II director of the resulting company following
the merger provided that the size of the PXRE board of directors
is increased to 13 members. Mr. McLoughlin has been a
director of PXRE since its organization in 1999 and was elected
a director of PXRE Delaware in 1986. Mr. McLoughlin was a
director, Chairman and Chief Executive Officer of Phoenix
Investment Partners, Ltd. from October 1995 to September 2002.
Mr. McLoughlin was also Executive Vice President, Chief
Investment Officer and a director of The Phoenix Companies, Inc.
from November 2000 to July 2002. He also served in various
positions, including Chief Investment Officer, for Phoenix Life
Insurance Company and its subsidiaries until September 2002.
Mr. McLoughlin currently serves as a director of many of
Phoenixs mutual funds.
Gary V. Woods (63) is expected to be appointed to serve as
a Class III director of the resulting company following the
merger. Mr. Woods has been a director of Argonaut since
March 2000 and Chairman of the board of directors of Argonaut
since April 2001. Mr. Woods is President of McCombs
Enterprises and currently serves on the board of the Cancer
Therapy and Research Center, which is based in San Antonio,
Texas.
H. Berry Cash (68) is expected to be appointed to
serve as a Class I director of the resulting company
following the merger. Mr. Cash has been a director of
Argonaut since May 2005. Mr. Cash has been a general
partner of InterWest Partners, a venture capital fund, since
1985. Mr. Cash currently serves on the board of directors
of the following publicly held companies: Ciena Corporation,
Silicon Laboratories Inc., i2 Technologies, Inc., Staktek
Holdings, Inc. and First Acceptance Corporation.
Hector De Leon (60) is expected to be appointed to serve as
a Class III director of the resulting company following the
merger. Mr. De Leon has been a director of Argonaut since
February 2003. Mr. De Leon is the managing partner of De
Leon, Boggins & Icenogle, P.C., a law firm in
Austin, Texas, which he founded in 1977. Prior to 1977,
Mr. De Leon was General Counsel of the Texas State
Insurance Board and previously served as a director of Titan
Holdings, Inc., a publicly traded property and casualty
insurance company based in San Antonio, Texas.
Allan W. Fulkerson (73) is expected to be appointed to
serve as a Class II director of the resulting company
following the merger. Mr. Fulkerson has been a director of
Argonaut since May 2004. Mr. Fulkerson is currently a
managing member of Red Hill Capital, LLC. Mr. Fulkerson was
President and a director of Century Capital Management, Inc.,
which we refer to as CCMI, a registered investment advisor that
specialized in the insurance industry until January 2004. He has
been associated with CCMI and its successor in interest, Century
Capital Management, LLC, for at least the last five years.
Mr. Fulkerson is a director of Asset Allocation &
Management Company, L.L.C., HCC Insurance Holdings, Inc. and
Montpelier Re Holdings, Ltd.
David Hartoch (68) is expected to be appointed to serve as
a Class II director of the resulting company following the
merger. Mr. Hartoch has been a director of Argonaut since
May 2004. Mr. Hartoch is currently the Chairman of
Swett & Crawford. From April 1, 2005 until
November 15, 2005, Mr. Hartoch was the acting Chairman
and Chief Executive Officer of Swett & Crawford, where
he had served as Chairman and Chief Executive Officer from 1997
to 2003. Between January 1, 2004 and April 1, 2005,
Mr. Hartoch served as a consultant to Swett &
Crawford. He was elected President of the NAPSLO trade
association from 1993 to 1994 and was President and Chief
Operating Officer of Sherwood Insurance Services from 1991 to
1997.
Frank Maresh (68) is expected to be appointed to serve as a
Class II director of the resulting company following the
merger. Mr. Maresh was appointed to the board of directors
of Argonaut in December 2003. Mr. Maresh is a consultant,
investor and owner in numerous private enterprises. He is a
Certified Public Accountant and was
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formerly the Vice Chairman of KPMG in the United States.
Mr. Maresh sat on the Texas State Board of Public
Accountancy from 1993 to 1999 where he served as both Chairman
of the Board and Chairman of the Major Case Committee. In
addition, Mr. Maresh is a member of the board of Eagle
Materials, Inc., a member of the board of the McCombs School of
Business at the University of Texas, a member of the board of
the University of Texas Accounting Department and a trustee of
Schreiner University.
John R. Power, Jr. (51) is expected to be appointed to
serve as a Class III director of the resulting company
following the merger. Mr. Power has been a director of
Argonaut since January 2000. He is President of the Patrician
Group, a private investment firm located in Lisle, Illinois.
Mr. Power currently serves as a board member of Case
Corporations financial subsidiary.
Fayez S. Sarofim (78) is expected to be appointed to serve
as a Class I director of the resulting company following
the merger. Mr. Sarofim has been a director of Argonaut
since 1986. He is Chairman of the Board and President of Fayez
Sarofim & Co., a registered investment advisor. He is
currently a director of Kinder Morgan, Inc. and Unitrin, Inc.
Mark E. Watson III (43) is expected to be appointed to
serve as President and Chief Executive Officer and as a
Class I director of the resulting company following the
merger. Mr. Watson has been a director of Argonaut since
June 1999 and Argonauts President and Chief Executive
Officer since January 2000. Mr. Watson joined Argonaut as
Vice President in September 1999. He was a principal of Aquila
Capital Partners, a San Antonio, Texas-based investment
firm in 1998 and 1999, and served from 1992 to 1998 as a
director and Executive Vice President, General Counsel and
Secretary of Titan Holdings, Inc., a publicly traded property
and casualty insurance holding company.
Robert P. Myron (38) is expected to continue as Executive
Vice President, Chief Financial Officer and Treasurer of the
resulting company following the merger. Mr. Myron has been
Executive Vice President and Chief Financial Officer of PXRE
since 2005, Treasurer of PXRE since 2003, and Chief Financial
Officer of PXRE Reinsurance Ltd., PXREs Bermuda-based
operating subsidiary, since 2003. From 1999 to 2003,
Mr. Myron served as an officer of Select Reinsurance Ltd.,
a privately held Bermuda-based reinsurance company, most
recently as President and a Director of that company. From 1991
to 1999, he worked in the Boston and Bermuda offices of
PricewaterhouseCoopers, principally for clients in the financial
services arena. Mr. Myron is a certified public accountant.
Accounting
Treatment
The merger will be accounted for as a business combination using
the purchase method of accounting. Argonaut will be the acquirer
for financial accounting purposes.
No
Dissenters/Appraisal Rights
No holders of record of PXRE or Argonaut capital stock will be
entitled to dissenters or appraisal rights in connection
with the merger. See Risk Factors Risks
Related to the Merger Argonaut may be required to
offer appraisal rights to its shareholders in connection with
the merger, which may require the renegotiation of the merger
agreement and the postponement of the Argonaut special meeting,
possibly causing a delay in the completion of the merger. More
than a minimal amount of cash payments in respect of the
exercise of appraisal rights by Argonaut shareholders could have
a material adverse effect on the financial condition of the
resulting company beginning on page 24.
Delisting
of PXRE Common Shares from the NYSE; Listing of PXRE Common
Shares on the NASDAQ
If the merger is completed, the PXRE common shares will be
delisted from the NYSE. Application has been made to list the
PXRE common shares on the NASDAQ under the trading symbol
AGII, conditioned on and subject to the merger.
Initially, a fifth character D will be appended to
the AGII symbol for 20 trading days to reflect the
reverse share split.
Delisting
and Deregistration of Argonaut Common Stock
If the merger is completed, Argonaut common stock will be
delisted from the NASDAQ and will be deregistered under the
Exchange Act, and Argonaut will no longer be required to file
periodic and other reports
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with the SEC. The Argonaut shareholders will become PXRE
shareholders and their rights as shareholders will be governed
by applicable Bermuda law and by PXREs amended and
restated memorandum of association and amended and restated
bye-laws as approved by PXRE shareholders at the PXRE general
special meeting. See Comparison of Shareholder Rights and
Corporate Governance Matters beginning on page 151.
Regulatory
Approvals Required for the Merger
Antitrust
Under the HSR Act and the rules promulgated under that act by
the FTC, the merger may not be completed until notifications
have been given and information furnished to the FTC and the
Antitrust Division of the DOJ, and until the specified waiting
period has expired or been terminated. PXRE and Argonaut each
filed notification and report forms under the HSR Act with the
FTC and the Antitrust Division of the DOJ on April 5, 2007.
The waiting period for those filings expired on April 17,
2007. At any time before or after completion of the merger, the
FTC or the Antitrust Division of the DOJ could take any action
under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin completion of
the merger or seeking divestiture of substantial assets of PXRE
or Argonaut. The merger is also subject to review under state
antitrust laws and could be the subject of challenges by private
parties under the antitrust laws.
Insurance
Regulations
The insurance laws and regulations of all 50 U.S. states
and the District of Columbia generally require that, prior to
the acquisition of an insurance company, either through the
acquisition of or merger with the insurance company or a holding
company of that insurance company, the acquiring company must
obtain approval from the insurance commissioner of the insurance
companys state of domicile or obtain an exemption from
such insurance commissioner from the filing and approval
requirements. Accordingly, the necessary applications (or
exemption requests) have been made with the insurance
commissioners of Illinois, Louisiana, Ohio, Pennsylvania and
Virginia, the states of domicile of Argonauts
U.S. insurance company subsidiaries. The Connecticut
insurance regulator has determined that a prior approval filing
will be required to be filed by Argonaut with respect to
PXREs U.S. insurance company subsidiary, which is
domiciled in Connecticut. This filing has been submitted to the
Connecticut insurance regulators by Argonaut.
Obtaining
Regulatory Approvals
Although Argonaut and PXRE do not expect that any of the
foregoing regulatory authorities will raise any significant
concerns in connection with their review of the merger, there
can be no assurance that PXRE and Argonaut will obtain all
required regulatory approvals, or that those approvals will not
include terms, conditions or restrictions that may have an
adverse effect on Argonaut or PXRE.
Other than the filings described above, neither Argonaut nor
PXRE is aware of any regulatory approvals required to be
obtained, or waiting periods that must expire, to complete the
merger. If they discover that other approvals or waiting periods
are necessary, they will seek to comply with them. If any
additional approval or action is needed, however, Argonaut or
PXRE may not be able to obtain it, as is the case with respect
to other necessary approvals. Even if Argonaut and PXRE do
obtain all necessary approvals, conditions may be placed on any
such approval that could cause either Argonaut or PXRE to
abandon the merger.
Exchange
of Share Certificates
At or prior to the effective time of the merger, an exchange
agent will be appointed to handle the exchange of share
certificates. Promptly after the effective time of the merger
and the reverse share split, the exchange agent will send a
letter of transmittal and instructions to each shareholder
explaining the procedure for surrendering share certificates.
Shareholders should not destroy any share certificate(s) and
should not submit any share certificate(s) until requested to do
so.
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Effect
of Merger on Registered and Beneficial
Shareholders
After the effective time of the merger, each certificate that
previously represented shares of Argonaut common stock will
represent only the right to receive a certificate representing
the PXRE common shares into which the shares of Argonaut common
stock have been converted. In addition, after the effective time
of the merger, Argonaut will not register any transfers of the
shares of Argonaut common stock.
Effect
of Reverse Share Split on Registered and Beneficial
Shareholders
If approved by the PXRE shareholders, the reverse share split
would be effected immediately after the effective time of the
merger and conversion of Argonaut common shares into the right
to receive PXRE common shares as merger consideration in the
merger. Beginning on the effective date, each share certificate
representing pre-reverse share split shares will be deemed for
all corporate purposes to evidence ownership of post-reverse
share split shares. The reverse share split would affect all of
PXREs shareholders uniformly, including the former
shareholders of Argonaut entitled to receive PXRE shares as
merger consideration in the merger, and will not affect any
shareholders percentage ownership interests in PXRE or
proportionate voting power, except to the extent that the
reverse share split would otherwise result in a shareholder
owning a fractional share for which it will receive cash in lieu
of such fractional share. See PXRE Special General
Meeting Item 2 Reverse Share
Split beginning on page 65.
Transfer
Agent and Registrar
The transfer agent and registrar for the PXRE shares is American
Stock Transfer & Trust Company.
Federal
Securities Laws Consequences; Resale Restrictions
All PXRE common shares that will be distributed to Argonaut
shareholders in the merger will be freely transferable, except
for restrictions applicable to affiliates of
Argonaut and except that resale restrictions may be imposed by
securities laws in
non-U.S. jurisdictions
insofar as subsequent trades are made within these
jurisdictions. Persons who are deemed to be affiliates of
Argonaut may resell PXRE common shares received by them only in
transactions permitted by the resale provisions of Rule 145
of the rules and regulations promulgated under the Securities
Act or as otherwise permitted under the Securities Act. Persons
who may be deemed to be affiliates of Argonaut generally include
executive officers, directors and holders of more than 10% of
the outstanding shares of Argonaut. The merger agreement
requires Argonaut to use its reasonable best efforts to cause
each of its directors and executive officers who Argonaut
believes may be deemed to be affiliates of Argonaut to execute a
written agreement to the effect that those persons will not
sell, assign or transfer any of the PXRE common shares issued to
them in the merger unless that sale, assignment or transfer has
been registered under the Securities Act, is in conformity with
Rule 145 or is otherwise exempt from the registration
requirements under the Securities Act.
This joint proxy statement/prospectus does not cover any resales
of the PXRE common shares to be received by Argonaut
shareholders in the merger, and no person is authorized to make
any use of this joint proxy statement/prospectus in connection
with any resale.
Certain
Litigation
Several class action lawsuits have been filed against PXRE,
Jeffrey Radke, PXREs Chief Executive Officer, and John
Modin, PXREs former Chief Financial Officer, in the
U.S. District Court for the Southern District of New York
on behalf of a putative class consisting of investors who
purchased the publicly traded securities of PXRE between
July 28, 2005 and February 16, 2006. Each of the class
action complaints asserts nearly identical claims and alleges
that during the purported class period certain PXRE executives
made a series of materially false and misleading statements or
omissions about PXREs business, prospects and operations,
thereby causing investors to purchase PXREs securities at
artificially inflated prices, in violation of
Sections 10(b) and 20(a) of the Exchange Act, and
Rule 10b-5
promulgated under the Exchange Act. The class action complaints
allege, among other things, that PXRE failed to disclose and
misrepresented the following material adverse facts:
(1) the full impact on PXREs business of hurricanes
Katrina, Rita and Wilma, which we refer to as the 2005
Hurricanes; (2) the doubling of PXREs cost of the
2005 Hurricanes to an estimated $758 million to
$788 million; and (3) the magnitude of the loss to
PXRE and PXREs potential loss of its financial-strength
and credit ratings from A.M. Best. Further, the
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complaints allege, based on the foregoing asserted facts, that
PXREs statements with respect to its loss estimates for
the 2005 hurricane season lacked any reasonable basis. The class
actions seek an unspecified amount of damages, as well as other
forms of relief. Pursuant to an opinion and order of the United
States District Court for the Southern District of New York
dated March 30, 2007, these lawsuits have been consolidated
into one proceeding.
On February 21, 2007, PXRE entered into a tolling and
standstill agreement with certain institutional investors in
connection with potential claims arising out of the private
placement of Series D Perpetual Non-voting Preferred Shares
of PXRE that were issued on October 7, 2005.
Resulting
Companys Initial Annual General Meeting Following the
Merger
Following the merger and the completion of the related
transactions described in this joint proxy statement/prospectus,
shareholders will receive notice of the initial annual general
meeting of the resulting company, Argo Group. At this initial
annual general meeting, shareholders will be asked to consider
and vote on certain matters pertaining to the resulting company,
including the matters described below.
Election
of Directors of the Resulting Company
Argo Groups amended and restated bye-laws will continue to
provide for a classified board of directors divided into 3
classes, Class I, Class II and Class III. The
directors of the class elected at each annual general meeting
will hold office for a term of three years, with the term of
each class expiring at successive annual general meetings of
shareholders. At the initial annual general meeting of Argo
Group following the merger, shareholders will be asked to
consider and vote on a proposal to elect those persons who will
be Class III directors of the resulting company upon the
completion of the merger, namely, F. Sedgwick Browne, Gary V.
Woods, Hector DeLeon and John R. Power, Jr. Information
with respect to these persons is set forth above under
PXREs Board of Directors and Management
Following the Merger.
Replacement
of Certain PXRE and Argonaut Benefit Plans with New Resulting
Company Benefit Plans
At the initial annual general meeting of Argo Group following
the merger, shareholders will be asked to consider and vote on a
proposal to adopt certain benefit plans to replace certain PXRE
and Argonaut benefit plans.
The Argo Group board of directors will adopt, effective as of
the time of the merger, the Argonaut Amended and Restated Stock
Incentive Plan, Argonaut Annual Incentive Compensation Plan,
Argonaut Employee Stock Purchase Plan, Argonaut Non-Employee
Director Stock Option Plan and Argonaut Deferred Compensation
Plan for Non-Employee Directors and will assume all outstanding
Argonaut stock options and other outstanding Argonaut
stock-based awards granted under the Argonaut plans. At the time
of the merger, these outstanding Argonaut stock options and
other Argonaut stock-based awards will therefore remain in
effect and will be converted to Argo Group stock options and
Argo Group stock-based awards, respectively, based on the
exchange ratio applicable under the merger agreement and
adjusted for the reverse share split, as explained above. No new
awards or deferrals, however, will be made under the Argonaut
plans after the merger.
No new awards or deferrals will be made after the merger under
the PXRE 2002 Officer Incentive Plan, PXRE 2004 Incentive Bonus
Compensation Plan, PXRE Director Stock Plan and PXRE Director
Equity and Deferred Compensation Plan. Outstanding awards and
deferrals made under the PXRE plans will remain in effect after
the merger and will be adjusted for the reverse share split, as
explained above.
Following the merger, it is expected that the Argo Group board
of directors will consider and adopt new benefit plans, the
terms of which are expected to be substantially similar to those
of the Argonaut plans, and will seek shareholder approval of
those new plans to the extent it is required.
Appointment
of the Independent Auditors for the Resulting
Company
At the initial annual general meeting of Argo Group following
the merger, shareholders will be asked to approve the
recommendation of the audit committee of Argo Groups board
of directors regarding the appointment of independent auditors
for Argo Group and to refer the determination of the independent
auditors remuneration to the audit committee of Argo
Groups board of directors.
117
MATERIAL
TAX CONSIDERATIONS
The following summary is based upon current law and is for
general information only. Legislative, judicial or
administrative changes may be forthcoming that could affect this
summary.
The following is a summary of the material United States federal
income, Bermuda and Irish taxation of PXRE and the material
United States federal income and Bermuda tax consequences of the
merger, the special cash dividend and the ownership and
disposition of PXRE common shares by Argonaut shareholders that
exchange their shares for shares of PXRE common shares in the
merger. This discussion addresses only shareholders who are
U.S. Holders (as defined below) and hold their
shares as capital assets for United States federal income tax
purposes (generally, assets held for investment). This summary
is for the general information of the shareholders only and does
not purport to be a complete analysis of all potential tax
effects of the merger, nor does it constitute tax advice to any
particular shareholder. For example, it does not consider the
effect of any applicable state, local or
non-U.S. tax
laws, or of any non-income tax laws. In addition, this
discussion does not address the tax consequences of transactions
effectuated prior to or after the merger (whether or not such
transactions occur in connection with the merger), including,
without limitations, any exercise of an Argonaut option or the
acquisition or disposition of Argonaut stock other than in
exchange for PXRE common shares pursuant to the merger. This
discussion does not address all of the United States federal
income tax consequences that may be relevant to a particular
shareholder in light of individual circumstances or to
shareholders that are subject to special treatment under United
States federal income tax laws, including, without limitation:
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financial institutions, regulated investment companies, real
estate investment trusts and insurance companies;
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tax-exempt organizations;
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shareholders who are not U.S. Holders;
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partnerships, limited liability companies that are not treated
as corporations for United States federal income tax purposes,
subchapter S corporations and other pass-through entities
and investors in such entities;
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dealers, brokers and traders in securities or foreign currencies;
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shareholders who hold Argonaut common stock as part of a hedge,
appreciated financial position, straddle, constructive sale or
conversion transaction or other integrated investment;
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shareholders who acquired their shares of common stock pursuant
to the exercise of employee stock options, in connection with
employee stock purchase plans or otherwise as compensation;
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persons liable for the alternative minimum tax;
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U.S. Holders whose functional currency is not
the U.S. dollar; or
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persons who are considered with respect to PXRE United
States shareholders for purposes of the CFC rules of the
Code (generally, a U.S. Person, as defined below, who owns
or is deemed to own 10% or more of the total combined voting
power of all classes of PXRE shares entitled to vote (that is,
10% U.S. Shareholders)).
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For purposes of this discussion, U.S. Holder
refers to a beneficial holder that is, for United States federal
income tax purposes, a U.S. Person and a U.S. Person
is (i) an individual citizen or resident of the United
States, (ii) a partnership or corporation or other entity
taxable as a corporation for United States federal income tax
purposes, created or organized in or under the laws of the
United States, any state thereof or the District of Columbia,
(iii) an estate the income of which is subject to United
States federal income taxation regardless of its source,
(iv) a trust (x) the administration of which is
subject to the primary supervision of a court within the United
States and as to which one or more U.S. Persons have the
authority to control all substantial decisions or (y) that
has a valid election in effect under applicable United States
Treasury Regulations to be treated as a United States person
under the Code or (v) any other person or entity that is
treated for U.S. federal income tax purposes as if it were
one of the foregoing.
If an entity treated as a partnership for United States federal
income tax purposes holds Argonaut common stock, the tax
treatment of a person holding interests in such entity generally
will depend upon the status of that
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person and the activities of that entity. Such entities and
persons holding interests in such entities should consult a tax
advisor regarding the tax consequences of the merger.
The following discussion is based on the Code, the applicable
Treasury Regulations, administrative interpretations and court
decisions, each as in effect as of the date of this joint proxy
statement/prospectus and all of which are subject to change,
possibly with retroactive effect. Any such change could
materially alter the tax consequences described herein. We have
not requested, nor will we obtain, any rulings from the IRS with
respect to the tax consequences of the proposed transaction
described herein. There can be no assurances that the IRS will
not take positions concerning tax consequences of the proposed
transaction that differ from the consequences described herein
or that the IRS would not prevail if it were to take such
positions. This discussion does not purport to be a
comprehensive analysis or description of all potential United
States federal income tax consequences of the proposed
transaction. It is not binding on the IRS, and there can be no
assurance that the IRS (or a court, in the event of an IRS
challenge) will agree with the conclusions stated herein.
The following legal discussion (including and subject to the
matters and qualifications set forth in such summary) of the
material tax considerations is based upon the advice of counsel.
The advice of counsel, however, does not include any factual or
accounting matters, determinations or conclusions including
amounts and computations of RPII and amounts or components
thereof or facts relating to PXREs business or activities.
Statements contained herein as to the beliefs, expectations and
conditions of PXRE or its subsidiaries as to the application of
such tax laws or facts represent the view of management as to
the application of such laws and do not represent the opinions
of counsel.
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE PROPOSED TRANSACTION IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, INCLUDING THE
APPLICABILITY AND EFFECT OF UNITED STATES FEDERAL, STATE, LOCAL
AND
NON-U.S. INCOME
AND OTHER TAX LAWS.
Tax
Consequences of the Merger
Bermuda
Under current Bermuda law, there is no income, corporate or
profits tax or withholding tax, capital gains tax or capital
transfer tax, estate or inheritance tax payable by PXRE or the
common shareholders of PXRE or Argonaut arising solely as a
result of the merger.
United
States
United
States Federal Income Tax Consequences to Argonaut and PXRE
Solely as a Result of the Merger
Tax Opinions. PXREs obligation to
complete the merger is conditioned upon its receipt from Dewey
Ballantine LLP of a tax opinion, dated as of the effective date
of the merger, in form and substance reasonably satisfactory to
PXRE, to the effect that (i) PXRE should not recognize gain
or loss for U.S. federal income tax purposes solely as a
result of the merger and (ii) the merger should not cause
PXRE or any
non-U.S. affiliate
of PXRE to be treated as a domestic corporation under
Section 7874(b) of the Code. Argonauts obligation to
complete the merger is conditioned upon its receipt from
LeBoeuf, Lamb, Greene & MacRae LLP, in form and
substance reasonably satisfactory to Argonaut, to the effect
that (i) Argonaut should not recognize gain or loss for
U.S. federal income tax purposes solely as a result of the
merger and (ii) the merger should not cause PXRE or any
non-U.S. affiliate
of PXRE to be treated as a domestic corporation under
Section 7874(b) of the Code.
The opinions to be provided by Dewey Ballantine LLP and LeBoeuf,
Lamb, Greene & MacRae LLP, respectively, will be based
on factual representations and covenants made by PXRE and
Argonaut (including those contained in tax representation
letters to be provided by PXRE and Argonaut) and on certain
facts and customary assumptions set forth in the opinions. These
tax opinions will not be binding on the IRS or any court and
will not preclude the IRS from asserting, or a court from
sustaining, a contrary conclusion. No rulings have been or will
be obtained from the IRS with respect to any of the matters
discussed herein.
119
Inversion Transactions. Section 7874 of
the Code was added in 2004 by the American Jobs Creation Act of
2004 to address inversion transactions, which refers in relevant
part to transactions where a U.S. corporation becomes a
subsidiary of a foreign corporation.
Section 7874 of the Code provides that in certain instances
a foreign corporation may be treated as a domestic corporation
for U.S. federal income tax purposes. Specifically,
Section 7874(b) provides that a foreign corporation will be
treated as a domestic corporation if, pursuant to a plan or a
series of related transactions:
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the foreign corporation acquires, directly or indirectly,
substantially all of the properties held directly or indirectly
by a domestic corporation;
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after the acquisition, at least 80% of the stock (by vote or
value) of the foreign corporation is held by former shareholders
of the domestic corporation by reason of holding stock in the
domestic corporation; and
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after the acquisition, the expanded affiliated group which
includes the foreign corporation does not have substantial
business activities in the foreign country in which the foreign
corporation is organized.
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Alternatively, if under the above test, former shareholders of
the expatriated domestic corporation own at least
60 percent, but less than 80 percent of the stock (by
vote or value) of the foreign corporation after the acquisition,
Section 7874 of the Code will instead impose a minimum
level of tax on the inversion gain of the expatriated entity.
Specifically, Section 7874(a) of the Code provides that the
taxable income of an expatriated entity for any tax year that
includes any portion of the applicable period,
generally the
10-year
period that begins with a corporate inversion transaction,
cannot be less than the inversion gain of the entity for that
tax year. Generally, inversion gain is defined as (1) the
income or gain recognized by reason of the transfer during the
applicable period of stock or other properties by an expatriated
entity and (2) any income received or accrued during the
applicable period by reason of a license of any property by an
expatriated entity. Section 7874(e)(1) of the Code provides
that this tax on inversion gain cannot be offset by net
operating losses, foreign tax credits or other tax attributes.
After the effective time of the merger, the former shareholders
of Argonaut are expected to hold more than 60 percent but
less than 80 percent of the stock of PXRE. Because the
former Argonaut shareholders are not expected to own
80 percent or more of the stock (by vote or value) of PXRE
immediately after the acquisition, PXRE and Argonaut believe
that neither PXRE nor any of its
non-U.S. affiliates
should be treated as a domestic corporation subject to
U.S. tax under Section 7874 of the Code. Moreover,
although the former shareholders of Argonaut are expected to
hold more than 60 percent of the stock (by vote and value)
of PXRE immediately after the inversion transaction, both PXRE
and Argonaut believe that neither of them should recognize
current gain under Section 7874 of the Code or otherwise as
a result of the acquisition of Argonaut by PXRE. It is possible
that, as a result of certain transfers or licenses of stock or
other properties, as the case may be, during the applicable
period (including the transfer of any income received or accrued
during the applicable period by reason of a license of any
property by Argonaut), Argonaut could recognize inversion gain
during the applicable period. However, PXRE and Argonaut do not
anticipate such transfers taking place and thus do not expect to
recognize any inversion gain during the applicable period.
As described above, tax counsel for PXRE and Argonaut will
render opinions to the effect that the merger should not cause
PXRE or any
non-U.S. affiliate
of PXRE to be treated as a domestic corporation under
Section 7874(b) of the Code. It is uncertain whether the
IRS will agree with the opinions rendered by tax counsel and the
conclusions of PXRE and Argonaut, each as described above. If
the IRS were to challenge one or more of those positions, and if
such a challenge were upheld, PXRE
and/or
Argonaut could incur substantial tax liability as a result of
the acquisition. We have not requested, nor will we obtain, any
rulings from the IRS with respect to the tax consequences of the
merger described herein. There can be no assurances that the IRS
will not take positions concerning tax consequences of the
merger that differ from the consequences described herein or
that the IRS would not prevail if it were to take such positions.
In June 2006, the IRS and the Treasury Department published
temporary regulations under Section 7874 of the Code,
which, in their present form do not adversely affect the
conclusions reached above. However, it is uncertain whether,
when or in what form such regulations will be finalized and
whether they will apply to the transaction between PXRE and
Argonaut.
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U.S. Federal
Income Tax Treatment of the Special Cash Dividend
Argonaut intends to take the position that the amount paid as
the special cash dividend is treated as a distribution with
respect to the Argonaut common stock, and not as consideration
in the merger. Although Argonaut believes its position with
respect to the special cash dividend is correct, the IRS may
take a contrary position, and to the extent the IRS were to
prevail, the amount paid as the special cash dividend would be
treated as additional cash received in connection with the
merger and not as a distribution as described in the succeeding
paragraph.
Assuming the special cash dividend is treated as a distribution
with respect to Argonaut common stock, the gross amount paid to
U.S. Holders will be characterized as dividend income to
the extent paid out of Argonauts current or accumulated
earnings and profits (as determined for U.S. federal income
tax purposes). Argonaut does not expect to be able to determine
the amount of its current and accumulated earnings and profits
by the time required for supplying
Form 1099-DIV
to shareholders, and so anticipates that it will be required to
report the entire amount of the special cash dividend as a
taxable dividend for U.S. federal income tax purposes.
Dividend income will be includible in a U.S. Holders
gross income on the day received by such holder. Under current
legislation, which is scheduled to expire with respect to
taxable years ending after December 31, 2010, this income
will generally be taxed to a U.S. Holder that is a
non-corporate taxpayer at the rates applicable to long-term
capital gains, provided that a minimum holding period and other
requirements are satisfied. Corporate U.S. Holders may be
entitled to a dividends-received deduction with respect to
distributions treated as dividend income for U.S. federal
income tax purposes, subject to limitations and conditions. In
addition, U.S. Holders that are corporations should consult
their tax advisors regarding the potential applicability of the
extraordinary dividend provisions of the Code.
Distributions in excess of earnings and profits will be treated
first as a return of capital that reduces a
U.S. Holders tax basis in the Argonaut common stock,
and then as gain from the sale or exchange of Argonaut common
stock. This gain will be capital gain provided that the Argonaut
common stock is held by the U.S. Holder as a capital asset
as of the time of the special cash dividend.
U.S. Holders are urged to consult their tax advisors as to
the U.S. federal income tax treatment of the special cash
dividend.
United
States Federal Income Tax Consequences of the Merger to PXRE
Shareholders
Because holders of PXRE common shares will retain their shares
in the merger and will not be treated as receiving any
consideration pursuant to the merger, holders of PXRE common
shares will not recognize gain or loss solely as a result of the
merger; however, PXRE shareholders will recognize gain or loss
on any cash received in lieu of fractional shares they would be
entitled to receive as a result of the reverse share split.
United
States Federal Income Tax Consequences of the Merger to Argonaut
Common Shareholders
General. PXRE and Argonaut expect that the
merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code for U.S. federal
income tax purposes and that PXRE and Argonaut will each be a
party to that reorganization within the meaning of
Section 368(b) of the Code. Even if the merger qualifies as
such a reorganization, due to the application of
Section 367 of the Code and the Treasury Regulations
promulgated thereunder, as described below, it is expected the
merger will result in the following consequences to holders of
Argonaut common stock for U.S. federal income tax purposes:
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a holder of Argonaut common stock will recognize gain (but not
loss) on the exchange of Argonaut common stock for PXRE common
shares pursuant to the merger (such gain will be the difference
between the fair market value, at the time of the exchange, of
the PXRE common shares received and the adjusted basis of the
Argonaut common stock exchanged);
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a holder of Argonaut common stock will recognize gain or loss to
the extent that they receive cash instead of fractional shares
of PXRE common shares.
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the tax basis of the PXRE common shares received by each holder
of Argonaut common stock pursuant to the merger will be equal to
the tax basis of the Argonaut common stock surrendered in
exchange therefore (plus the amount of any gain recognized on
the exchange); and
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the holding period of the PXRE common shares received by each
holder of Argonaut common stock will include the holding period
for the Argonaut common stock surrendered in exchange therefore.
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If, contrary to the expectations of PXRE and Argonaut, the
merger does not qualify as a reorganization within the meaning
of Section 368(a) of the Code, U.S. Holders of
Argonaut common stock will for U.S. federal income tax
purposes recognize gain or loss on the exchange of Argonaut
common stock for PXRE common shares pursuant to the merger (such
gain or loss will be the difference between the fair market
value, at the time of the exchange, of the PXRE common shares
received and the adjusted basis of the Argonaut common stock
exchanged). Further, the tax basis of the PXRE common shares
received will be equal to the fair market value of such shares
and the holding period will not include the holding period for
the Argonaut common stock surrendered in exchange therefore.
Impact of Section 367 of the
Code. Section 367 of the Code and the
Treasury Regulations promulgated thereunder impose additional
requirements for shareholder reorganization treatment to
shareholders on transactions where, as is the case in the
merger, a U.S. Holder exchanges stock in a domestic
corporation for stock in a foreign corporation. In general, for
an exchange of Argonaut common stock for PXRE common shares by a
U.S. Holder in the merger to qualify as nontaxable to the
U.S. Holder, in addition to meeting the requirements of
Section 368 of the Code, each of the following conditions
must be met:
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no more than 50 percent of both the total voting power and
the total value of the shares of PXRE are received in the
transaction, in the aggregate, by U.S. Holders of Argonaut
shares;
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no more than 50 percent of each of the total voting power
and the total value of the PXRE common shares is owned, in the
aggregate, immediately after the transfer by U.S. persons
that are either officers or directors of Argonaut or that are
five-percent target shareholders;
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Either (A) the U.S. Holder is not a five-percent PXRE
shareholder (as defined in the applicable Treasury Regulations)
immediately after the transfer; or (B) the U.S. Holder
is a five-percent PXRE shareholder immediately after the
transfer and enters into a five-year agreement to recognize gain
with respect to the Argonaut common stock it exchanged; and
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PXRE directly, or indirectly through a qualified
subsidiary or a qualified partnership as
defined in Treasury Regulations, satisfies the active
trade or business test, as defined in Treasury
Regulation Section 1.367(a)-3(c)(3).
In general, three elements are required to satisfy the active
trade or business test:
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PXRE or a qualified subsidiary or a qualified partnership is
engaged in an active trade or business outside the United States
for the entire 36 month period immediately before the
merger;
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at the time of the merger, neither the holders of Argonaut
common stock nor PXRE (and, if applicable, the qualified
subsidiary or qualified partnership engaged in the active trade
or business) have an intention to substantially dispose of or
discontinue such trade or business; and
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at the time of the merger, the fair market value of PXRE must be
equal to or greater than the fair market value of Argonaut, each
such fair market value to be determined in accordance with
special rules set forth in Treasury Regulations.
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Because it is expected that (i) more than 50 percent
of both the total voting power and the total value of the shares
of PXRE will be received in the transaction, in the aggregate,
by U.S. Holders of Argonaut stock
and/or
(ii) at the time of the merger, the fair market value of
PXRE will not be equal to or greater than the fair market value
of Argonaut, as determined in accordance with special rules set
forth in the applicable Treasury Regulations,
Section 367(a) of the Code will apply resulting in the
U.S. Holders of Argonaut common stock recognizing gain (but
not loss) for U.S. federal income tax purposes on the
exchange of Argonaut common stock for PXRE common shares
pursuant to the merger.
Shareholder
Reporting Requirements
U.S. Holders of Argonaut common stock receiving PXRE common
shares in the merger will be required to attach to their
U.S. federal income tax returns for the taxable year in
which the merger occurs a statement, and maintain a permanent
record, of certain facts relating to the exchange of shares in
connection with the merger,
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including the holders adjusted tax basis in the Argonaut
common stock transferred to PXRE, the fair market value of the
PXRE common shares received and the amount of cash received by
such holder, if any, pursuant to the merger.
Taxation
of PXRE and its Subsidiaries Following the Merger
Bermuda
Under current Bermuda law, there is no income, corporate or
profits tax or withholding tax, capital gains tax or capital
transfer tax, estate or inheritance tax payable by PXRE. PXRE
and its Bermuda domiciled subsidiaries have each obtained from
the Minister of Finance under The Exempted Undertaking Tax
Protection Act 1966, as amended, an assurance that, in the event
that Bermuda enacts legislation imposing tax computed on
profits, income, any capital asset, gain or appreciation, or any
tax in the nature of estate duty or inheritance, then the
imposition of any such tax shall not be applicable to PXRE and
its Bermuda domiciled subsidiaries or to any of their operations
or their shares, debentures or other obligations, until
March 28, 2016. PXRE and its Bermuda domiciled subsidiaries
could be subject to taxes in Bermuda after that date. This
assurance is subject to the proviso that it is not to be
construed so as to prevent the application of any tax or duty to
such persons as are ordinarily resident in Bermuda or to prevent
the application of any tax payable in accordance with the
provisions of the Land Tax Act 1967 or otherwise payable in
relation to any property leased to PXRE and its Bermuda
domiciled subsidiaries. PXRE and its Bermuda domiciled
subsidiaries each pay annual Bermuda government fees, and
PXREs Bermuda domiciled insurance subsidiaries pay annual
insurance license fees. In addition, all entities employing
individuals in Bermuda are required to pay a payroll tax and
there are other sundry taxes payable, directly or indirectly, to
the Bermuda government.
Ireland
PXRE Ireland is an Irish incorporated company established as a
holding company and is governed by the Companies Acts 1963 to
2003. Under Irish law, PXRE Ireland is subject to tax on its
worldwide income. The tax rate is a function of the nature of
the income of PXRE Ireland. Income in respect of trading (active
income) is subject to tax at the rate of 12.5%. Income arising
in respect of investments (passive income) is subject to tax in
Ireland at a rate of 25%. In relation to a company which acts as
a holding company in Ireland, certain exemptions and reliefs are
available in respect of gains produced by the disposal of
qualifying subsidiaries and the receipt of dividend income from
such subsidiaries.
United
States
A
non-U.S. corporation
that is engaged in the conduct of a U.S. trade or business
will be subject to U.S. federal income tax as described
below, unless entitled to the benefits of an applicable tax
treaty. Whether business is being conducted in the United States
is an inherently factual determination. Because the Code,
regulations and court decisions do not definitively identify
activities that constitute being engaged in a trade or business
in the United States, PXRE cannot be certain that the IRS will
not contend successfully that PXRE
and/or its
non-U.S. subsidiaries
are or will be engaged in a trade or business in the United
States for U.S. federal income tax purposes. A
non-U.S. corporation
deemed to be so engaged would be subject to U.S. federal
income tax at regular corporate rates, as well as the branch
profits tax, on its income which is treated as effectively
connected with the conduct of that trade or business unless the
corporation is entitled to relief under the permanent
establishment provision of an applicable tax treaty, as
discussed below. Such income tax, if imposed, would be based on
effectively connected income computed in a manner generally
analogous to that applied to the income of a
U.S. corporation, except that a
non-U.S. corporation
generally may be entitled to deductions and credits only if it
files a U.S. federal income tax return. PXRE and its
non-U.S. subsidiaries
have filed and intend to continue to file protective
U.S. federal income tax returns. The highest marginal
federal income tax rates currently are 35% for a
corporations effectively connected income and 30% for the
additional branch profits tax.
If PXREs Bermuda domiciled insurance subsidiaries are
entitled to benefits under the income tax treaty between the
United States and Bermuda (the Bermuda Treaty),
PXREs Bermuda domiciled insurance subsidiaries would not
be subject to U.S. federal income tax on any income found
to be effectively connected with a
123
U.S. trade or business unless that trade or business is
conducted through a permanent establishment in the United
States. No regulations interpreting the Bermuda Treaty have been
issued. PXREs Bermuda domiciled insurance subsidiaries
currently intend to conduct their activities so that they do not
have permanent establishments in the United States, although
PXRE cannot be certain that this result will be achieved.
An insurance enterprise resident in Bermuda generally will be
entitled to the benefits of the Bermuda Treaty if (i) more
than 50% of its shares are owned beneficially, directly or
indirectly, by individual residents of the United States or
Bermuda or U.S. citizens and (ii) its income is not
used in substantial part, directly or indirectly, to make
disproportionate distributions to, or to meet certain
liabilities to, persons who are neither residents of either the
United States or Bermuda nor U.S. citizens. PXRE cannot be
certain that its Bermuda domiciled insurance subsidiaries will
be eligible for Bermuda Treaty benefits immediately following
the merger or in the future because of factual and legal
uncertainties regarding the residency and citizenship of
PXREs shareholders. PXRE would not be eligible for treaty
benefits because it is not an insurance company. Accordingly,
PXRE and its Bermuda domiciled insurance subsidiaries have
conducted and intend to conduct substantially all of their
operations outside the United States and to limit their
U.S. contacts so that neither PXRE nor its Bermuda
domiciled insurance subsidiaries should be treated as engaged in
the conduct of a trade or business in the United States.
Non-U.S. insurance
companies carrying on an insurance business within the United
States have a certain minimum amount of effectively connected
net investment income, determined in accordance with a formula
that depends, in part, on the amount of U.S. risk insured
or reinsured by such companies. If PXREs Bermuda domiciled
insurance subsidiaries are considered to be engaged in the
conduct of an insurance business in the United States and are
not entitled to the benefits of the Bermuda Treaty in general
(because they fail to satisfy one of the limitations on treaty
benefits discussed above), the Code could subject a significant
portion of their investment income to U.S. federal income
tax. In addition, while the Bermuda Treaty clearly applies to
premium income, it is uncertain whether the Bermuda Treaty
applies to other income such as investment income. If
PXREs Bermuda domiciled insurance subsidiaries are
considered engaged in the conduct of an insurance business in
the United States and is entitled to the benefits of the Bermuda
Treaty in general, but the Bermuda Treaty is interpreted to not
apply to investment income, a significant portion of their
investment income could be subject to U.S. federal income
tax.
Under the Irish Treaty, PXRE Holdings (Ireland) Limited, if
entitled to the benefits of the Irish Treaty, will not be
subject to U.S. federal income tax on any income determined
to be effectively connected with a U.S. trade or business
unless that trade or business is conducted through a permanent
establishment in the United States. PXRE Holdings (Ireland)
Limited would generally be entitled to the benefits of the Irish
Treaty if, among other requirements, (i) at least 50% of
the shares of PXRE Holdings (Ireland) Limited, measured by both
vote and value, are owned, directly or indirectly, by
U.S. or Irish residents (that are qualified
persons under the Irish treaty) or U.S. citizens or
residents and less than 50% of such companys gross income
for the relevant taxable period is paid or accrued directly or
indirectly to persons who are not U.S. or Irish residents
(that are qualified persons under the Irish Treaty)
or U.S. citizens in the form of payments that are
deductible for Irish income tax purposes or (ii) PXRE
Holdings (Ireland) Limited is considered as engaged in the
active conduct of a trade or business in Ireland and its
effectively connected income is connected with or incidental to
that trade or business. Although PXRE cannot be certain that
PXRE Holdings (Ireland) Limited will be eligible for Irish
Treaty benefits because of factual and legal uncertainties
regarding (i) the residency and citizenship of PXREs
shareholders and (ii) the interpretation of what
constitutes an active trade or business in Ireland and income
incidental or connected thereto, PXRE Holdings (Ireland) Limited
will endeavor to so qualify. PXRE Holdings (Ireland) Limited has
conducted and intends to conduct its activities in a manner so
that it should not have a permanent establishment in the United
States and should not be engaged in a trade or business in the
United States, although PXRE cannot be certain that this result
will be achieved.
Non-U.S. corporations
not engaged in a trade or business in the United States are
nonetheless subject to a U.S. income tax imposed by
withholding on certain fixed or determinable annual or
periodic gains, profits and income derived from sources
within the United States (such as dividends and certain interest
on investments), subject to exemption under the Code or
reduction by applicable treaties. Generally, the Irish Treaty
reduces the withholding rate on dividends from (i) less
than 10% owned corporations to 15%, and (ii) more than 10%
owned corporations to 5%, and eliminates the
U.S. withholding tax on interest. In this regard PXRE takes
the position that PXRE Holdings (Ireland) Limited is entitled to
the benefits of the Irish Treaty and accordingly believes that
124
dividend payments paid to it from its U.S. subsidiaries are
subject to the U.S. withholding tax at a 5% rate. The
Bermuda Treaty does not reduce the U.S. federal withholding
rate on
U.S.-sourced
investment income.
The United States also imposes an excise tax on
(i) insurance and reinsurance premiums paid to
non-U.S. insurers
or reinsurers with respect to risks of a U.S. entity or
individual risks located wholly or partly with the United States
and (ii) with respect to risks of a foreign entity or
individual engaged in a trade or business in the United States,
risks located within the United States. The rates of tax
applicable to premiums paid to
non-U.S. insurers
are 4% for casualty insurance premiums and 1% for reinsurance
premiums, unless exempted under an applicable tax treaty. The
Bermuda Treaty does not provide for such an exemption.
Each of PXREs U.S. domiciled subsidiaries will be
subject to taxation in the United States at regular corporate
rules.
With respect to related party cross border reinsurance,
Section 845 of the Code allows the IRS to allocate income,
deductions, assets, reserves, credits and any other items
related to a reinsurance agreement among certain related parties
to the reinsurance agreement, recharacterize such items, or make
any other adjustment, in order to reflect the proper source,
character or amount of the items for each party. No regulations
have been issued under Section 845 of the Code.
Accordingly, the application of such provisions to PXRE and
PXREs subsidiaries is uncertain and PXRE cannot predict
what impact, if any, such provisions may have on it and its
subsidiaries.
Taxation
of PXRE Shareholders Following the Merger
Bermuda
Currently, there is no Bermuda income, corporate or profits tax
or withholding tax, capital gains tax or capital transfer tax,
estate or inheritance tax or other tax payable in Bermuda by
holders of the PXRE common shares except insofar as such taxes
apply to persons ordinarily resident in Bermuda.
United
States
Taxation
of Distributions
Subject to the discussions below relating to the potential
application of the CFC, RPII and PFIC rules, cash distributions,
if any, made with respect to the PXRE common shares will
constitute dividends for U.S. federal income tax purposes
to the extent paid out of current or accumulated earnings and
profits of PXRE (as computed using U.S. tax principles).
Subject to the possibility of enactment of certain legislative
proposals (See Risk Factors Risks Related to
Taxation beginning on page 52), dividends paid by
PXRE to non-corporate holders on its common shares before 2011
are generally eligible for reduced rates of tax up to a maximum
of 15% as qualified dividend income, subject to the
satisfaction of certain holding period and other requirements.
Qualified dividend income is subject to tax at capital gains
rates. Dividends paid by PXRE to corporate holders will not be
eligible for the dividends received deduction. To the extent
cash distributions, if any, made with respect to PXRE common
shares exceed PXREs earnings and profits, they will be
treated first as a return of the shareholders basis in
their shares to the extent thereof, and then as gain from the
sale of a capital asset.
Classification
of PXRE or its
non-U.S. subsidiaries
as CFCs
Each 10% U.S. Shareholder of a
non-U.S. corporation
that is a CFC for an uninterrupted period of 30 days or
more during a taxable year, and who owns shares in the CFC,
directly or indirectly through
non-U.S. entities,
on the last day of the CFCs taxable year, must include in
its gross income for U.S. federal income tax purposes its
pro rata share of the CFCs subpart F
income, even if the subpart F income is not distributed.
Subpart F income of a
non-U.S. insurance
corporation typically includes foreign personal holding company
income (such as interest, dividends and other types of passive
income), as well as insurance and reinsurance income (including
underwriting and investment income). A
non-U.S. corporation
is considered a CFC if 10% U.S. Shareholders own (directly,
indirectly through
non-U.S. entities
or by attribution by application of the constructive ownership
rules of Section 958(b) of the Code (that is,
constructively)) more than 50% of the total combined
voting power of all classes of voting shares of such
non-U.S. corporation,
or more than 50% of the total value of all shares of such
corporation on any day of the taxable year of such corporation.
125
For purposes of taking into account insurance income, a CFC also
includes a
non-U.S. insurance
company in which more than 25% of the total combined voting
power of all classes of shares or more than 25% of the total
value of all shares is owned (directly, indirectly through
non-U.S. entities
or constructively) by 10% U.S. Shareholders on any day of
the taxable year of such corporation, if the gross amount of
premiums or other consideration for the reinsurance or the
issuing of insurance or annuity contracts (other than certain
insurance or reinsurance related to same country risks written
by certain insurance companies not applicable here), exceeds 75%
of the gross amount of all premiums or other consideration in
respect of all risks.
PXRE believes, subject to the discussion below, that because of
the anticipated dispersion of PXREs share ownership,
provisions in PXREs organizational documents that limit
voting power (these provisions are described in
Information about PXRE Description of Share
Capital) and other factors, no U.S. Person who
acquires PXRE common shares in the merger directly or indirectly
through
non-U.S. entities
should be treated as owning (directly, indirectly through
non-U.S. entities
or constructively) 10% or more of the total voting power of all
classes of shares of PXRE or its
non-U.S. subsidiaries.
It is possible, however, that the IRS could challenge the
effectiveness of the provisions in PXREs organizational
documents and a court could sustain such a challenge.
Accordingly, no assurance can be given that a U.S. Person
who owns PXRE common shares (directly, indirectly through
non-U.S. entities
or constructively) will not be characterized as a 10%
U.S. Shareholder.
The
RPII CFC Provisions
The following discussion generally is applicable only if the
RPII of a PXRE
non-U.S. insurance
subsidiary, determined on a gross basis, is 20% or more of its
gross insurance income for the taxable year and the 20%
Ownership Exception (as defined below) is not met. The following
discussion generally would not apply for any taxable year in
which each PXRE
non-U.S. insurance
subsidiarys RPII falls below the 20% threshold or the 20%
Ownership Exception is met. Although PXRE cannot be certain,
PXRE believes that each PXRE
non-U.S. insurance
subsidiary should meet the 20% Ownership Exception and the gross
RPII of each
non-U.S. insurance
subsidiary as a percentage of its gross insurance income should
be for the foreseeable future below the 20% threshold for each
tax year.
RPII is any insurance income (as defined below) attributable to
policies of insurance or reinsurance with respect to which the
person (directly or indirectly) insured is an RPII shareholder
(as defined below) or a related person (as defined below) to
such RPII shareholder. In general, and subject to certain
limitations, insurance income is income (including
premium and investment income) attributable to the issuing of
any insurance or reinsurance contract which would be taxed under
the portions of the Code relating to insurance companies if the
income were the income of a domestic insurance company. The term
RPII shareholder means any U.S. Person who owns
(directly or indirectly through
non-U.S. entities)
any amount of PXRE shares or the shares of any PXRE
non-U.S. insurance
subsidiary. Generally, the term related person for
this purpose means someone who controls or is controlled by the
RPII shareholder or someone who is controlled by the same person
or persons which control the RPII shareholder. Control is
measured by either more than 50% in value or more than 50% in
voting power of shares applying certain constructive ownership
principles. A corporations pension plan is ordinarily not
a related person with respect to the corporation unless the
pension plan owns, directly or indirectly through the
application of certain constructive ownership rules, more than
50% measured by vote or value, of the shares of the corporation.
Each PXRE
non-U.S. insurance
subsidiary will be treated as a CFC under the RPII provisions if
RPII shareholders are treated as owning (directly, indirectly
through
non-U.S. entities
or constructively) 25% or more of the shares of PXRE by vote or
value.
RPII Exceptions. The special RPII rules do not
apply to a PXRE
non-U.S. insurance
subsidiary if (i) direct and indirect insureds and persons
related to such insureds, whether or not U.S. Persons, are
treated as owning (directly or indirectly through entities) less
than 20% of the voting power and less than 20% of the value of
the shares of PXRE (the 20% Ownership Exception),
(ii) RPII, determined on a gross basis, is less than 20% of
the gross insurance income of the PXRE
non-U.S. insurance
subsidiary for the taxable year (the 20% Gross Income
Exception), (iii) the subsidiary elects to be taxed
on its RPII as if the RPII were effectively connected with the
conduct of a U.S. trade or business and to waive all treaty
benefits with respect to RPII and meet certain other
requirements or (iv) the subsidiary elects to be treated as
a U.S. corporation and waives all treaty benefits and meets
certain other requirements. The PXRE
non-U.S. insurance
subsidiaries do not intend to make these elections. Where
126
none of these exceptions applies, each U.S. Person owning
directly or indirectly through
non-U.S. entities,
any shares in PXRE (and therefore indirectly, in each PXRE
non-U.S. insurance
subsidiary) on the last day of the subsidiarys taxable
year will be required to include in its gross income for
U.S. federal income tax purposes its share of the RPII of
the relevant PXRE
non-U.S. insurance
subsidiaries for the portion of the taxable year during which
the relevant PXRE
non-U.S. insurance
subsidiaries were CFCs under the RPII provisions, determined as
if all such RPII were distributed proportionately only to such
U.S. Persons at that date, but limited by each such
U.S. Persons share of the relevant PXRE
non-U.S. subsidiarys
current-year earnings and profits as reduced by the
U.S. Persons share, if any, of certain prior-year
deficits in earnings and profits. The PXRE
non-U.S. insurance
subsidiaries intend to operate in a manner that is intended to
ensure that they each qualify for the 20% Ownership Exception
and 20% Gross Income Exception; however, it is possible that the
PXRE
non-U.S. insurance
subsidiaries will not be successful in qualifying under either
exception.
Computation of RPII. In order to determine how
much RPII a PXRE
non-U.S. insurance
subsidiary has earned in each taxable year (for purposes of
providing this information to RPII shareholders), PXRE may
obtain and rely upon information from insureds and reinsureds to
determine whether any of the insureds, reinsureds or persons
related thereto own (directly or indirectly through
non-U.S. entities)
shares of PXRE and are U.S. Persons. PXRE may not be able
to determine whether any of the underlying direct or indirect
insureds are RPII shareholders or related persons to such RPII
shareholders. Consequently, PXRE may not be able to determine
accurately the gross amount of RPII each PXRE
non-U.S. subsidiary
earns in a given taxable year or whether the 20% Ownership
Exception or 20% Gross Income Exception is met. For any year in
which the 20% Ownership Exception does not apply and the 20%
Gross Income Exception is not met, PXRE may also seek
information from its shareholders as to whether beneficial
owners of its shares at the end of the year are
U.S. Persons so that the RPII may be determined and
apportioned among such persons; to the extent PXRE is unable to
determine whether a beneficial owner of its shares is a
U.S. Person, PXRE may assume that such owner is not a
U.S. Person, thereby increasing the per share RPII amount
for all known RPII shareholders. The amount of RPII includible
in the income of a RPII shareholder is based upon the net RPII
income for the year after deducting related expenses such as
losses, loss reserves and operating expenses.
Apportionment of RPII to
U.S. Persons. Every RPII shareholder who
directly or indirectly owns shares of a PXRE
non-U.S. insurance
subsidiary on the last day of any taxable year of such
subsidiary in which the 20% Ownership Exception does not apply
and the 20% Gross Income Exception is not met should expect that
for such year the RPII shareholder will be required to include
in gross income its share of such subsidiarys RPII for the
portion of the taxable year during which the subsidiary was a
CFC under the RPII provisions, whether or not distributed, even
though such shareholders may not have owned the shares
throughout such period. A RPII shareholder who owns common
shares during such taxable year but not on the last day of the
taxable year is not required to include in gross income any part
of a relevant PXRE
non-U.S. insurance
subsidiarys RPII.
Basis Adjustments. A RPII shareholders
tax basis in its shares will be increased by the amount of any
RPII that the shareholder includes in income. The RPII
shareholder may exclude from income the amount of any
distributions by PXRE out of previously taxed RPII income. The
RPII shareholders tax basis in its common shares will be
reduced by the amount of such distributions that are excluded
from income.
Uncertainty as to Application of RPII. The
RPII provisions have never been interpreted by the courts or the
U.S. Treasury Department in final regulations, and
regulations interpreting the RPII provisions of the Code exist
only in proposed form. It is not certain whether these
regulations will be adopted in their proposed form or what
changes or clarifications might ultimately be made thereto or
whether any such changes, as well as any interpretation or
application of the RPII provisions by the IRS, the courts or
otherwise, might have retroactive effect. These provisions
include the grant of authority to the U.S. Treasury
Department to prescribe such regulations as may be
necessary to carry out the purpose of this subsection including
. . . regulations preventing the avoidance of this
subsection through cross insurance arrangements or
otherwise. Accordingly, the meaning of the RPII provisions
and the application thereof to PXRE is uncertain. In addition,
PXRE cannot be certain that the amount of RPII or the amounts of
the RPII inclusions for any particular RPII shareholder, if any,
will not be subject to adjustment based upon subsequent IRS
examination. U.S. Persons should consult their tax advisors
as to the effects of these provisions.
127
Information
Reporting
Under certain circumstances, U.S. Persons who own (directly
or indirectly) shares in a
non-U.S. corporation
are required to file IRS Form 5471 with their
U.S. federal income tax returns. Generally, information
reporting on IRS Form 5471 is required by (i) a person
who is treated as a RPII shareholder, (ii) a 10%
U.S. Shareholder of a
non-U.S. corporation
that is a CFC for an uninterrupted period of 30 days or
more during any tax year of the
non-U.S. corporation,
and who owned the shares of such
non-U.S. corporation
on the last day of that year and (iii) under certain
circumstances, a U.S. Person who acquires shares in a
non-U.S. corporation
and as a result thereof owns 10% or more of the voting power or
value of such
non-U.S. corporation,
whether or not such
non-U.S. corporation
is a CFC. For any taxable year in which PXRE determines that the
20% Gross Income Exception is not met and the 20% Ownership
Exception does not apply to a PXRE
non-U.S. insurance
subsidiary, PXRE will make available to all U.S. Persons a
completed IRS Form 5471 or the relevant information
necessary to complete the form. Failure to file IRS
Form 5471 may result in penalties.
Tax-Exempt
Shareholders
Tax-exempt entities will generally be required to treat certain
subpart F insurance income, including RPII, that is includible
in U.S. federal gross income by the tax-exempt entity as
unrelated business taxable income. Prospective investors that
are tax exempt entities are urged to consult their tax advisors
as to the potential impact of the unrelated business taxable
income provisions of the Code. A tax-exempt organization that is
treated as a 10% U.S. Shareholder or a RPII shareholder
also must file IRS Form 5471 in the circumstances described
above.
Dispositions
of Common Shares
Subject to the discussions below relating to the potential
application of the Section 1248 of the Code and PFIC rules,
U.S. Persons of PXRE common shares generally should
recognize capital gain or loss for U.S. federal income tax
purposes on the sale, exchange or other disposition of such
shares in the same manner as on the sale, exchange or other
disposition of any other shares held as capital assets. If the
holding period for such common shares exceeds one year, any gain
will be subject to tax at a current maximum marginal tax rate of
15% for individuals (and certain other non-corporate
shareholders) and 35% for corporations. Moreover, gain, if any,
generally will be U.S. source gain and will generally
constitute passive income for foreign tax credit
limitation purposes.
Section 1248 of the Code provides that if a
U.S. Person sells or exchanges shares in a
non-U.S. corporation
and such person owned (directly, indirectly through
non-U.S. entities
or constructively) 10% or more of the voting power of the
corporation at any time during the five-year period ending on
the date of disposition when the corporation was a CFC, any gain
from the sale or exchange of the shares will be treated as a
dividend to the extent of the CFCs earnings and profits
(determined under U.S. federal income tax principles)
during the period that the shareholder held the shares and while
the corporation was a CFC (with certain adjustments). PXRE
believes that, because of the anticipated dispersion of
PXREs share ownership, provisions in PXREs
organizational documents that limit voting power and other
factors, no U.S. shareholder of PXRE should be treated as
owning (directly, indirectly through
non-U.S. entities
or constructively) 10% or more of the total voting power of
PXRE; to the extent this is the case, the application of
Section 1248 of the Code under the regular CFC rules should
not apply to dispositions of PXRE common shares. It is possible,
however, that the IRS could challenge the effectiveness of these
provisions and that a court could sustain such a challenge. A
10% U.S. Shareholder may in certain circumstances be
required to report a disposition of shares of a CFC by attaching
IRS Form 5471 to the U.S. federal income tax or
information return that it would normally file for the taxable
year in which the disposition occurs. In the event this is
determined necessary, PXRE will provide a completed IRS
Form 5471 or the relevant information necessary to complete
the Form.
Section 1248 of the Code also applies to the sale or
exchange of shares in a
non-U.S. corporation
if the
non-U.S. corporation
would be treated as a CFC for RPII purposes regardless of
whether the shareholder is a 10% U.S. Shareholder or
whether the 20% Gross Income Exception is met or the 20%
Ownership Exception applies. Existing proposed regulations do
not address whether Section 1248 of the Code would apply if
a
non-U.S. corporation
is not a CFC but the
non-U.S. corporation
has a subsidiary that is a CFC and that would be taxed as an
insurance company if it were a domestic corporation. PXRE
believes, however, that this application of Section 1248
128
of the Code under the RPII rules should not apply to
dispositions of PXRE common shares because PXRE will not be
directly engaged in the insurance business. PXRE cannot be
certain, however, that the IRS will not interpret the proposed
regulations in a contrary manner or that the U.S. Treasury
Department will not amend the proposed regulations to provide
that these rules will apply to dispositions of PXRE common
shares. Prospective investors should consult their tax advisors
regarding the effects of these rules on a disposition of PXRE
common shares.
Passive
Foreign Investment Companies
In general, a
non-U.S. corporation
will be a PFIC during a given year if (i) 75% or more of
its gross income constitutes passive income (the
75% test) or (ii) 50% or more of its assets
produce (or are held for the production of) passive income (the
50% test).
If PXRE were characterized as a PFIC during a given year, each
U.S. Holder holding common shares would be subject to a
penalty tax at the time of the sale (at a gain) of, or receipt
of an excess distribution with respect to, their
shares, unless such holder is a 10% U.S. Shareholder or
made a qualified electing fund election. It is
uncertain that PXRE would be able to provide its shareholders
with the information necessary for a U.S. Holder to make a
qualified electing fund election. In addition, if PXRE were
considered a PFIC, upon the death of any U.S. individual
owning shares, such individuals heirs or estate would not
be entitled to a
step-up
in the basis of their shares that might otherwise be available
under U.S. federal income tax laws. In general, a
shareholder receives an excess distribution if the
amount of the distribution is more than 125% of the average
distribution with respect to the shares during the three
preceding taxable years (or shorter period during which the
taxpayer held the shares). In general, the penalty tax is
equivalent to the generally applicable U.S. federal income
tax and an interest charge on taxes that are deemed due during
the period the shareholder owned the shares, computed by
assuming that the excess distribution or gain (in the case of a
sale) with respect to the shares was taken in equal portion at
the highest applicable tax rate on ordinary income throughout
the shareholders period of ownership. In addition, a
distribution paid by a PFIC to U.S. Holders that is
characterized as a dividend and is not characterized as an
excess distribution would not be eligible for a reduced rate of
tax as qualified dividend income.
For the above purposes, passive income generally includes
interest, dividends, annuities and other investment income. The
PFIC provisions contain a look-through rule under which a
non-U.S. corporation
shall be treated as if it received directly its
proportionate share of the income . . . and as
if it held its proportionate share of the
assets . . . of any other corporation
in which it owns at least 25% of the value of the shares. Under
the look-through rule, PXRE should be deemed to own its
proportionate share of the assets and to have received its
proportionate share of the income of its direct and indirect
subsidiaries for purposes of the 75% test and the 50% test. PXRE
expects that the passive income and assets of its non-insurance
direct and indirect subsidiaries should be de
minimis. The PFIC rules also provide that income
derived in the active conduct of an insurance business by
a corporation which is predominantly engaged in an insurance
business . . . is not treated as passive income.
The insurance income exception is intended to ensure that income
derived by a bona fide insurance company is not treated as
passive income, except to the extent such income is attributable
to financial reserves in excess of the reasonable needs of the
insurance business. PXRE expects, for purposes of the PFIC
rules, that each PXRE insurance subsidiary will be predominantly
engaged in the active conduct of an insurance business and is
unlikely to have financial reserves in excess of the reasonable
needs of its insurance business in each year of operations.
Accordingly, PXRE believes it should not be characterized as a
PFIC although the result is not free from doubt due to the
recent limited activities of PXRE Reinsurance Ltd., PXRE
Reinsurance (Barbados) Ltd. and PXREs U.S. insurance
operations and the status of Peleus Re as a start up company.
PXRE cannot be certain, however, as there are currently no
regulations regarding the application of the PFIC provisions to
an insurance company and new regulations or pronouncements
interpreting or clarifying these rules may be forthcoming, that
the IRS will not challenge this position and that a court will
not sustain such challenge. U.S. Holders should consult
their tax advisor as to the effects of the PFIC rules.
Foreign
Tax Credit
If U.S. Persons will own a majority of PXREs shares,
only a portion of the current income inclusions, if any, under
the CFC, RPII and PFIC rules and of dividends paid by PXRE
(including any gain from the sale of common
129
shares that is treated as a dividend under Section 1248 of
the Code) will be treated as foreign source income for purposes
of computing a shareholders U.S. foreign tax credit
limitations. PXRE will consider providing shareholders with
information regarding the portion of such amounts constituting
foreign source income to the extent such information is
reasonably available. It is also likely that substantially all
of the subpart F income, RPII and dividends that are foreign
source income will constitute either passive or
general income. Thus, it may not be possible for
most shareholders to utilize excess foreign tax credits to
reduce U.S. tax on such income.
Proposed
U.S. Tax Legislation
Legislative proposals have been introduced in the
U.S. Congress intended to eliminate certain perceived tax
advantages of companies (including insurance companies) that
have legal domiciles outside the United States but have certain
U.S. connections. Moreover, currently proposed tax
legislation, if enacted, could have a material adverse effect on
PXRE or its shareholders. More specifically, a current
legislative proposal would eliminate the application of the
reduced rates of tax to dividends paid by any corporation
organized under the laws of a foreign country which does not
have a comprehensive income tax system, such as Bermuda. It is
possible that broader-based or new legislative proposals could
emerge in the future that could have an adverse effect on PXRE
or its shareholders.
Additionally, the U.S. federal income tax laws and
interpretations regarding whether a company is engaged in a
trade or business within the United States or is a PFIC, or
whether U.S. Persons would be required to include in their
gross income the subpart F income or the RPII of a CFC, or
whether a company is subject to the inversion tax rules are
subject to change, possibly on a retroactive basis. There are
currently no regulations regarding the application of the PFIC
rules to insurance companies, the regulations regarding RPII are
still in proposed form and the regulations regarding inversion
transactions are in temporary form. New regulations or
pronouncements interpreting or clarifying such rules may be
forthcoming. PXRE cannot be certain if, when or in what form
such regulations or pronouncements may be provided and whether
such guidance will have a retroactive effect.
Information
Reporting and Backup Withholding
In general, information reporting requirements may apply to the
amounts paid to U.S. Holders in connection with the special
cash dividend, distributions with respect to PXRE common shares,
proceeds received from the sale or exchange of Argonaut common
stock in connection with the merger and to proceeds received
from the sale or exchange of PXRE common shares, unless an
exemption applies. Backup withholding may be imposed (currently
at a 28% rate) on the above payments if a U.S. Holder
(1) fails to provide a taxpayer identification number or
certificate of exempt status or (2) fails to report certain
types of income in full.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or credit against applicable
U.S. federal income tax liability provided the required
information is furnished to the IRS.
THE FOREGOING DISCUSSION OF UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS NOT INTENDED TO CONSTITUTE A COMPLETE
DESCRIPTION OF ALL TAX CONSEQUENCES RELATING TO THE MERGER, THE
SPECIAL CASH DIVIDEND OR THE OWNERSHIP OR DISPOSITION OF PXRE
COMMON SHARES. TAX MATTERS ARE VERY COMPLICATED AND THE TAX
CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND UPON THE FACTS OF
YOUR PARTICULAR SITUATION. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY
DIFFER, WE URGE YOU TO CONSULT WITH YOUR TAX ADVISOR REGARDING
THE APPLICABILITY TO YOU OF THE RULES DISCUSSED ABOVE AND
THE PARTICULAR TAX EFFECTS TO YOU OF THE PROPOSED TRANSACTION,
INCLUDING THE APPLICATION OF STATE, LOCAL AND
NON-U.S. TAX
LAWS.
130
THE
MERGER AGREEMENT
The following summarizes the material provisions of the
merger agreement, which is attached as Annex A to
this joint proxy statement/prospectus and is incorporated by
reference herein. The rights and obligations of the parties to
the merger agreement are governed by the express terms and
conditions of the merger agreement and not by this summary or
any other information contained in this joint proxy
statement/prospectus. PXRE and Argonaut shareholders are urged
to read the merger agreement carefully and in its entirety as
well as the voting agreement and this joint proxy
statement/prospectus before making any decisions regarding the
merger. The merger agreement has been attached to this joint
proxy statement/prospectus to provide PXRE and Argonaut
shareholders with information regarding its terms and
conditions. It is not intended to provide any other factual
information about PXRE or Argonaut. In particular, the
assertions embodied in the representations and warranties
contained in the merger agreement (and summarized below) are
qualified by information in confidential disclosure schedules
provided by PXRE and Argonaut to each other in connection with
the signing of the merger agreement. These disclosure schedules
contain information that modifies, qualifies and creates
exceptions to the representations and warranties set forth in
the merger agreement. Moreover, certain representations and
warranties in the merger agreement were made as of a specific
date, may be subject to a contractual standard of materiality
different from what might be viewed as material by shareholders,
or may have been used for the purpose of allocating risk between
PXRE and Argonaut rather than establishing matters as facts.
Accordingly, you should not rely on the representations and
warranties in the merger agreement (or the summaries below) as
characterizations of the actual state of facts about PXRE or
Argonaut.
The
Merger
The merger agreement among PXRE, PXMS and Argonaut provides for
the merger of PXMS with and into Argonaut, with Argonaut
surviving as a wholly owned subsidiary of PXRE, and the
conversion of each share of common stock of Argonaut into the
right to receive a number of common shares of PXRE equal to the
exchange ratio. The preliminary exchange ratio is 6.4672, which
would mean that an Argonaut shareholder would be entitled to
receive 6.4672 common shares of PXRE for each share of Argonaut
common stock owned. The preliminary exchange ratio is subject to
adjustment if the special cash dividend that Argonaut has
declared is less than $60 million due to regulatory
restrictions or other reasons.
The preliminary exchange ratio is also subject to adjustment in
the event that Argonaut issues or purchases any of its shares of
common stock or securities convertible into or exchangeable for
such shares of common stock, declares a dividend on its shares
of common stock, or disposes of any of its assets or any of the
assets or capital stock of any of its subsidiaries (subject in
each case to limited exceptions set forth in the merger
agreement). If any of those events occur between the date of the
merger agreement and the completion of the merger, then Argonaut
shall prepare a recalculated exchange ratio pursuant to the
terms of the merger agreement. The final exchange ratio will be
the lesser of the preliminary exchange ratio (as adjusted for a
special cash dividend of less than $60 million) and the
recalculated exchange ratio. As of the date of this joint proxy
statement/prospectus, Argonaut has not taken any actions that
would require it to prepare a recalculated exchange ratio, but
Argonaut is permitted to, and may, take any of those actions
prior to the completion of the merger, and thus would be
required to prepare a recalculated exchange ratio. If the
recalculated exchange ratio is less than the preliminary
exchange ratio (as adjusted for a special cash dividend of less
than $60 million), the number of PXRE common shares to
which an Argonaut shareholder would be entitled for each share
of Argonaut common stock owned would be reduced.
The merger agreement provides that, at the effective time of the
merger, the shares of Argonaut common stock shall automatically
be cancelled and shall cease to exist, and each certificate
representing shares of Argonaut common stock shall thereafter
represent only the right to receive PXRE common shares (and cash
in lieu of fractional shares).
131
Representations
and Warranties
The merger agreement contains representations and warranties
given by each of PXRE and Argonaut to the other, many of which
are qualified by materiality. The representations and warranties
relate to, among other topics, the following:
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organization, standing and corporate power, charter documents
and ownership of subsidiaries;
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capital structure;
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authorization, execution, delivery and enforceability of the
merger agreement and related matters;
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consents, approvals and the non-violation of the merger
agreement of certain charters and agreements;
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filing with the SEC and accuracy of information contained in
financial statements;
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statutory statements;
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absence of certain changes or events;
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absence of material litigation except as previously disclosed;
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absence of undisclosed liabilities;
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title to all property owned or leased;
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insurance policies;
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accuracy of information supplied for or to be supplied for
inclusion or incorporation by reference in the registration
statement or this joint proxy statement/prospectus;
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broker and other similar fees;
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contracts;
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compliance with applicable law;
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reserves;
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reinsurance matters;
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tax matters and the payment of taxes;
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validity of permits required to do business;
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employee benefit plan matters;
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intellectual property matters;
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information technology;
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beneficial ownership of common shares; and
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opinions of financial advisors.
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None of the representations or warranties in the merger
agreement survives the completion of the merger.
Conduct
of Business
Each of PXRE and Argonaut has undertaken certain covenants in
the merger agreement restricting the conduct of their respective
businesses between the date of the merger agreement and the
effective time of the merger. In general, each of PXRE and
Argonaut has agreed that, during the period from the date of the
agreement to the effective time of the merger, PXRE and Argonaut
and their respective subsidiaries will carry on their businesses
in the ordinary course consistent with past practice, use their
commercially reasonable efforts to preserve intact their current
business organizations and current business relationships, keep
available the services of their current key employees, and
maintain each rating classification, published or indicative,
assigned by A.M. Best and S&P.
132
PXRE has also agreed to various specific restrictions relating
to the conduct of business of PXRE and its subsidiaries between
the date of the merger agreement and the effective time of the
merger. Subject to specified exceptions, without the prior
written consent of Argonaut, PXRE has agreed to limit its and
its subsidiaries ability to:
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adopt or propose any material change to its organizational
documents;
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declare, set aside or pay any shareholder dividend or other
distribution;
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enter into any business combination transaction with any third
party or acquire capital stock or assets of any third party;
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sell, lease, license, subject to an encumbrance, or otherwise
surrender, any assets other than in the ordinary course of
business;
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issue, sell, grant, pledge or otherwise encumber any of its
capital shares or other securities;
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split, combine or reclassify any of its capital shares or
authorize the issuance of or issue securities in respect of, in
lieu of, or in substitution for, its capital shares;
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take any action that, if such action had been taken prior to the
date hereof, would have caused the representations and
warranties made to be untrue in any material respect;
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enter into any amendment of any material term of any of its
outstanding securities;
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accelerate the vesting of any options;
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incur, guarantee or assume any indebtedness;
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enter into any transaction with any of its affiliates;
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grant any increase in the base salary of directors and officers,
employees, consultants or agents;
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enter into or materially amend any of the benefit plans or any
severance, consulting, retention or employment agreement;
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hire or terminate the employment or contractual relationship of
any officer, employee, consultant or agent who is not terminable
at will without any penalty or cost;
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change any method of accounting or accounting principles or
practices;
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pay, discharge, settle or satisfy any actual or threatened
proceedings, liabilities or obligations;
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terminate or cancel any insurance coverage with respect to any
material assets;
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make or agree to make any new capital expenditure;
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enter into any hedging or swap agreements or contracts or other
similar financing instruments or redeem, repurchase, prepay,
defease or otherwise acquire any of PXREs indebtedness;
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fail to maintain the reinsurance agreements that PXRE has ceded,
transferred or reinsured in full force and effect;
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fail to timely file SEC or any insurance regulatory reports, or
comply with the requirements of the Sarbanes-Oxley Act of 2002,
which we refer to as the Sarbanes-Oxley Act;
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purchase or redeem any of the capital shares of PXRE or any
subsidiary of PXRE, or any other equity interests or any rights,
warrants or options to acquire any such shares or interests,
other than as otherwise contractually required;
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enter into, make any proposal for, renew, extend or amend in any
material respect, terminate, cancel, release or assign any right
or claim under, any contract or agreement which is or, if
applicable, would be material to PXRE or any of its subsidiaries;
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133
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sell, assign, license, mortgage, pledge, sublicense, encumber,
impair, abandon or fail to maintain in any material respect any
of its material intellectual property rights;
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grant, extend, amend, waive or modify any rights in or to a
material portion of its intellectual property rights;
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make any material change in its underwriting, reinsurance,
marketing, claim processing and payment, or reduce the amount of
any reserves and other liability accruals held in respect of
losses or loss adjustment expenses arising under or relating to
its insurance contracts;
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undertake any abandonment, modification, waiver or termination
of any of its permits; or
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surrender any material tax claims.
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Argonaut has also agreed to various specific restrictions
relating to the conduct of business of Argonaut and its
subsidiaries between the date of the merger agreement and the
effective time of the merger. Subject to specified exceptions,
without the prior written consent of PXRE, Argonaut has agreed
to limit its and its subsidiaries ability to:
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adopt or propose any material change to its organizational
documents;
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enter into any agreement for a business combination, acquisition
or disposition with any third party involving aggregate
consideration in excess of $300 million;
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change any method of accounting or accounting principles or
practices; or
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fail to timely file SEC or any insurance regulatory reports, or
comply with the requirements of the Sarbanes-Oxley Act.
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Alternative
Proposals
The merger agreement provides that PXRE shall not, nor shall it
authorize or permit any of its subsidiaries, or any of their
respective directors, officers or employees or any
representatives retained by it or any of its subsidiaries to,
directly or indirectly:
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solicit, initiate, facilitate or knowingly encourage any
inquiries or the making of any proposal that constitutes or
could reasonably be expected to lead to an alternative
transaction proposal (as defined below); or
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enter into, continue or otherwise participate in any discussions
or negotiations regarding, or furnish to any person any
information with respect to, or otherwise cooperate in any way
with, any alternative transaction proposal, provided that PXRE
may participate in discussions and furnish information at any
time prior to obtaining PXRE shareholder approval of the
transactions contemplated by the merger agreement, in response
to a bona fide written alternative transaction proposal, if:
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PXREs board of directors has determined in good faith,
after consultation with its financial and legal advisors, that
the alternative transaction proposal constitutes or is
reasonably likely to constitute a superior proposal
(as defined below); and
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PXRE has given written notice to Argonaut.
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The merger agreement also provides that the PXRE board of
directors shall not:
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withdraw its approval, recommendation or declaration of the
advisability of the merger, or recommend, adopt or approve any
alternative transaction proposal, unless, at any time prior to
obtaining PXRE shareholder approval of the transactions
contemplated by the merger agreement, PXREs board of
directors has determined, after consultation with its legal
advisors, that action is consistent with its fiduciary
obligations to the shareholders of PXRE; or
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approve or recommend, or allow PXRE or any of its subsidiaries
to execute or enter into, any letter of intent or agreement
constituting or that could reasonably be expected to lead to,
any alternative transaction
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proposal or requiring it to abandon, terminate or fail to
complete the merger, unless, at any time prior to obtaining PXRE
shareholder approval of the transactions contemplated by the
merger agreement:
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the PXRE board of directors has received an alternative
transaction proposal that constitutes a superior proposal;
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in light of such superior proposal, the PXRE board of directors
shall have determined in good faith after consultation with
outside counsel, that such action is consistent with the
fiduciary duties of the PXRE board of directors;
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PXRE has notified Argonaut in writing of such determination,
indicating in such notice the material terms and conditions of
the superior proposal;
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during the seventy-two hour period immediately following the
delivery of such notice, PXRE negotiates with Argonaut to make
such adjustments to the terms and conditions of the merger
agreement as would enable the parties to proceed with the
transactions contemplated thereby on such adjusted terms;
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following such seventy-two hour period, the PXRE board of
directors shall have again made the determination that such
action is consistent with its fiduciary duties; and
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PXRE pays Argonaut the applicable PXRE termination fee described
below.
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An alternative transaction proposal means any
inquiry, proposal or offer from any person relating to, or that
could reasonably be expected to lead to:
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a business combination directly involving PXRE;
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PXREs acquisition of any third party in a business
combination in which the shareholders of the third party
immediately prior to completion of such business combination
will own more than twenty-five percent (25%) of PXREs
outstanding share capital immediately following such business
combination, including the issuance by PXRE of more than
twenty-five percent (25%) of any class of its voting equity
securities as consideration for assets or securities of a third
party; or
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any direct or indirect acquisition or purchase, in a single
transaction or a series of related transactions, of assets or
properties, including by means of the acquisition of share
capital, that constitutes twenty-five percent (25%) or more of
the assets of PXRE and PXREs subsidiaries, taken as a
whole, or twenty-five percent (25%) or more of any class of
equity securities of PXRE other than the merger and the
transactions contemplated by the merger agreement.
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A superior proposal means a proposal:
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involving (i) PXREs acquisition of any third party in
a business combination in which the shareholders of the third
party immediately prior to completion of such business
combination will own more than fifty percent (50%) of
PXREs outstanding share capital immediately following such
business combination, including the issuance by PXRE of more
than fifty percent (50%) of its voting equity securities as
consideration for assets or securities of a third party or
(ii) the direct or indirect acquisition or purchase, in a
single transaction or a series of related transactions, of fifty
percent (50%) or more of the assets of PXRE and PXRE
subsidiaries, taken as a whole, or fifty percent (50%) or more
of the voting equity securities of PXRE; and
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having terms that, taking into account (as and to the extent
that the PXRE board of directors deems relevant) all legal,
financial, regulatory, fiduciary and other aspects of the
proposal and the person proposing such proposal, (i) would,
if completed, result in a transaction that is more favorable to
the holders of PXRE common shares (in their capacities as
shareholders), from a financial point of view, than the
transactions contemplated by the merger agreement and
(ii) is reasonably capable of being completed.
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The merger agreement also provides that if Argonaut or any of
its subsidiaries enters into an agreement for a business
combination, acquisition or disposition with a third party
involving aggregate consideration in excess of $300 million
without PXREs prior written consent, PXRE or Argonaut may
terminate the merger agreement.
135
Additional
Covenants
The merger agreement contains a number of additional covenants
made by PXRE
and/or
Argonaut, including covenants relating to:
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the access to information of each party to the other party;
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the preparation, filing and distribution of this joint proxy
statement/prospectus and the filing of the registration
statement on
Form S-4,
of which this joint proxy statement/prospectus is a part;
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amendments of the employees benefit plans of PXRE and Argonaut;
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timeliness in holding shareholders meetings to propose and
approve the merger agreement and the transactions contemplated
thereby, and the recommendation of the parties boards of
directors that shareholders vote in favor of the proposals;
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the delivery of comfort letters from each partys
independent registered public accounting firm;
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cooperation with respect to: (i) filings with governmental
authorities and other agencies and organizations, (ii) the
approval or waivers of third parties and legal proceedings and
(iii) any additional instruments necessary to complete the
merger, (iv) the defense of any lawsuits or other legal
proceedings challenging the merger agreement or the completion
of the merger and the other transactions contemplated by the
merger agreement;
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reasonable best efforts to take all other actions, and do all
other things necessary, to complete the transactions
contemplated in the merger agreement;
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press releases and other public statements concerning the
transactions;
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indemnification of directors and officers;
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an increase in the number of members on the board of directors
of PXRE following the merger from 11 directors to
13 directors and the composition thereof;
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the increase in PXREs authorized share capital following
the merger;
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the amendment of PXREs memorandum of association and
bye-laws following the merger;
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employee matters, including an agreement to honor all PXRE
employee benefit plans in accordance with their terms and to
provide the same base salary, bonus opportunity and employee
benefits to employees of PXRE and its subsidiaries for one year
following the merger;
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the treatment of outstanding options and restricted shares;
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tax matters; and
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affiliates of Argonaut for purposes of Rule 145 under the
Securities Act.
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Completion
of the Merger
Unless the parties agree otherwise, the closing of the merger
will take place no later than the twenty-first (21st) day after
all closing conditions have been fulfilled or waived at the
offices of Dewey Ballantine LLP, 1301 Avenue of the Americas,
New York, New York 10019. The merger will be completed when we
file a certificate of merger with the Delaware Secretary of
State, unless we agree to a later time for the completion of the
merger and specify that time in the certificate of merger.
We currently expect to complete the merger by August 31,
2007, subject to receipt of required shareholder and regulatory
approvals and satisfaction of the other conditions to completion
of the merger.
136
Conditions
to Completion of the Merger
Conditions
to Each Partys Obligation to Effect the
Merger
The respective obligation of each party to effect the merger is
subject to the satisfaction or waiver on or prior to the closing
date of the merger of the following conditions:
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the shareholders of PXRE and Argonaut shall have approved the
transactions contemplated by the merger agreement;
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any waiting period applicable to the merger under the HSR Act
shall have been terminated or shall have expired;
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all required regulatory consents and approvals must have been
obtained;
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no temporary restraining order, injunction or other judgment or
order issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition preventing completion of
the merger shall be in effect;
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the representations and warranties of the other party shall be
true and correct, subject in certain cases to the material
adverse effect standard provided in the merger agreement;
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the other party shall have complied, in all material respects,
with its obligations under the merger agreement prior to the
closing date;
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no event shall have occurred that, individually or in the
aggregate, would reasonably be expected to have any material
adverse effect, as defined in the merger agreement, with respect
to the other party;
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the other party shall have delivered a certificate signed by its
chief executive officer and its chief financial officer stating
that the three preceding conditions have been satisfied;
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PXRE and Argonaut each shall have received an opinion from its
legal advisor addressing the tax consequences of the proposed
transactions; and
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PXRE and Argonaut shall have received an opinion from
PXREs Bermuda counsel advising on the required shareholder
vote for the merger and the related shareholder proposals under
Bermuda law.
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Additional
Conditions to the Obligation of Argonaut to Effect the
Merger
The obligation of Argonaut to effect the merger is subject to
the satisfaction or waiver on or prior to the effective time of
the merger of the following additional conditions:
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the voting agreement shall be in full force and effect without
having been amended, modified or supplemented without the
consent of all of the parties thereto;
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neither PXRE nor Argonaut shall have received notice from either
A.M. Best or S&P that any rating assigned to PXRE or
Argonaut is subject to being downgraded or has been downgraded;
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all conditions precedent to the reverse split of common shares
of PXRE shall have been satisfied;
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all conditions precedent to the change of name of PXRE
Group Ltd. to Argo Group International Holdings,
Ltd. shall have been satisfied; and
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the conversion of PXREs convertible preferred shares and
convertible common shares into common shares shall have been
effected.
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Termination
The merger agreement may be terminated at any time prior to the
effective time of the merger, whether before or after approval
of matters presented in connection with the merger at the
shareholders meeting of Argonaut or the shareholders meeting of
PXRE, or any adjournment or postponement thereof:
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by mutual written consent of PXRE and Argonaut;
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by either PXRE or Argonaut:
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if the merger shall not have been completed on or before
August 31, 2007;
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if Argonauts shareholder approval shall not have been
obtained at Argonauts shareholder meeting;
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if PXRE shareholder approval shall not have been obtained at
PXRE shareholder meeting; or
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if any governmental entity shall have issued an order
permanently restraining, enjoining or otherwise prohibiting the
merger and such order is or shall have become final and
non-appealable;
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by PXRE, if the Argonaut board of directors withdraws its
approval, recommendation or declaration of the advisability of
the merger;
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by PXRE, if Argonaut or any of its subsidiaries enters into an
agreement for a business combination, acquisition or disposition
with a third party involving an aggregate consideration in
excess of $300 million without PXREs prior written
consent;
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by Argonaut, if PXRE does not provide its prior written consent
to Argonaut or any of its subsidiaries entering into an
agreement with a third party for a business combination,
acquisition or disposition involving an aggregate consideration
in excess of $300 million;
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by PXRE, if prior to the closing date there shall have been
certain breaches in or inaccuracies of any representation,
warranty, covenant or agreement on the part of Argonaut
contained in the merger agreement;
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by PXRE, if any of the conditions to PXREs obligation to
effect the merger set forth in the merger agreement shall have
become incapable of fulfillment prior to August 31, 2007
and PXRE or PXMS is not then in material breach of any
representation, warranty or covenant contained in the merger
agreement;
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by Argonaut, if the PXRE board of directors withdraws its
approval, recommendation or declaration of the advisability of
the merger, or recommends, adopts or approves any alternative
transaction proposal;
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by Argonaut, if prior to the closing date there shall have been
certain breaches or inaccuracies of any representation,
warranty, covenant or agreement on the part of PXRE or PXMS
contained in the merger agreement; or
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by Argonaut, if any of the conditions to Argonauts
obligation to effect the merger set forth in the merger
agreement, shall have become incapable of fulfillment prior to
August 31, 2007 and Argonaut is not then in material breach
of any representation, warranty or covenant contained in the
merger agreement.
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Effect of
Termination
In the event the merger agreement is terminated, the merger
agreement shall immediately become null and void and have no
effect and the obligations of the parties under the merger
agreement shall terminate, except for certain provisions of the
merger agreement, including those relating to the effects of
termination, fees and expenses, termination fee payments,
governing law, jurisdiction, waiver of jury trial and specific
performance, which will continue in effect. Also, the
termination of the merger agreement will not relieve a party
from any liabilities or damages arising out of its willful or
intentional breach of any provision of the merger agreement,
including any making of a representation of warranty with
knowledge that such representation or warranty is not true and
correct.
Termination
Fees and Expenses
Argonaut will be obligated to pay to PXRE a termination fee of
$40 million, and such amount shall constitute liquidated
damages in respect of such termination, if the merger agreement
is terminated:
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by PXRE if the Argonaut board of directors withdraws its
approval, recommendation or declaration of the advisability of
the merger;
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by PXRE if Argonaut or any of its subsidiaries enters into an
agreement for a business combination, acquisition or disposition
with a third party involving aggregate consideration in excess
of $300 million without PXREs prior written
consent; or
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by Argonaut if PXRE does not provide its written consent to
Argonaut or any of its subsidiaries entering into an agreement
with a third party for a business combination, acquisition or
disposition involving aggregate consideration in excess of
$300 million.
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PXRE will be obligated to pay to Argonaut a termination fee of
$20 million, and such amount shall constitute liquidated
damages in respect of such termination, if the merger agreement
is terminated:
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by Argonaut, if the PXRE board of directors withdraws its
approval, recommendation or declaration of the advisability of
the merger, or recommends, adopts or approves any alternative
transaction proposal;
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by PXRE if, at any time prior to receipt of the PXRE shareholder
approval of the transactions contemplated by the merger
agreement: (i) the PXRE board of directors has received an
alternative transaction proposal that constitutes a superior
proposal, (ii) in light of such superior proposal, the PXRE
board of directors shall have determined in good faith after
consultation with outside counsel, that such action is
consistent with the fiduciary duties of the PXRE board of
directors, (iii) PXRE has notified Argonaut in writing of
such determination, indicating in such notice the material terms
and conditions of such alternative transaction proposal,
(iv) during the seventy-two hour period immediately
following the delivery of such notice, PXRE negotiates with
Argonaut to make such adjustments to the terms and conditions of
the merger agreement as would enable the parties to proceed with
the transactions contemplated by the merger agreement on such
adjusted terms, (v) following such seventy-two hour period,
the PXRE board of directors shall have again made the
determination that such action is consistent with its fiduciary
duties; or
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prior to the date of the PXRE shareholders meeting, an
alternative transaction proposal shall have been made to PXRE or
directly to its shareholders generally and not withdrawn, the
merger agreement is terminated by PXRE because the merger was
not completed on or before August 31, 2007, and within six
(6) months of such termination, PXRE enters into a
definitive agreement to complete and completes the transactions
contemplated by such alternative transaction proposal (provided
that for purposes of PXREs termination fee obligations,
references to 25% in the merger agreement definition
of alternative transaction proposal shall be deemed to be
50%).
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Amendment
and Waiver
The merger agreement provides that it may not be amended except
by an instrument in writing signed on behalf of each of the
parties. At any time prior to the effective time of the merger,
with certain exceptions, any party may (a) extend the time
for performance of any obligations or other acts of the other
party, (b) waive any inaccuracies in the representations
and warranties of the other party contained in the merger
agreement or in any document delivered pursuant to the merger
agreement or (c) waive compliance by the other party with
any of the agreements or conditions contained in the merger
agreement. Any agreement by a party to an extension or waiver
must be in writing.
Governing
Law
The merger agreement is governed by, and construed in accordance
with, the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of
conflicts of laws thereof.
139
THE
VOTING AGREEMENT
The following summarizes the material provisions of the
voting agreement, which is attached as Annex D to
this joint proxy statement/prospectus and is incorporated by
reference herein. The rights and obligations of the parties to
the voting agreement are governed by the express terms and
conditions of the voting agreement and not by this summary or
any other information contained in this joint proxy
statement/prospectus. PXRE and Argonaut shareholders are urged
to read the voting agreement carefully and in its entirety as
well as the merger agreement and this joint proxy
statement/prospectus before making any decisions regarding the
merger.
Overview
In connection with the execution of the merger agreement, PXRE,
Argonaut and the PXRE preferred shareholders entered into the
voting agreement. The voting agreement provides for the
conversion of the convertible preferred shares at a reduced
conversion price ($6.24, reduced from the conversion price of
$11.18 as of March 31, 2007), the conversion of the
convertible common shares, and the agreement of the PXRE
preferred shareholders to vote in favor of and consent to the
merger and the transactions contemplated thereby.
Consents
of PXRE Preferred Shareholders
Each PXRE preferred shareholder consented to:
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the reduction of the conversion price of the convertible
preferred shares to $6.24;
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the waiver of any dividends that would have otherwise accrued on
the convertible preferred shares from and after
December 31, 2006;
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the waiver of any adjustments to the conversion price that would
have occurred as a result of casualty reserve adjustments,
issuances of additional common shares, recapitalizations or as a
result of the merger;
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the expansion by PXRE into new lines of business as a result of
the merger; and
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the increase in the number of members of the board of directors
of PXRE from 11 to 12 or 11 to 13.
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The consents are conditioned on completion of the merger on or
prior to August 31, 2007. If the merger is not completed by
August 31, 2007 or the merger agreement is terminated, the
consents will be rescinded and have no effect.
Voting of
Preferred Shares and Convertible Common Shares
Each PXRE preferred shareholder agreed to vote its convertible
preferred shares and convertible common shares, and irrevocably
granted to PXRE a proxy to vote such PXRE preferred
shareholders convertible preferred shares and convertible
common shares, in favor of the merger and the transactions
contemplated thereby, and against any other transaction that may
be presented to the shareholders of PXRE other than a
transaction that the PXRE board of directors has determined to
be more favorable to the common shareholders of PXRE. The
agreement to vote and the proxy will be revoked, and the
conversion price will not be reduced, if the merger is not
completed by August 31, 2007 or the merger agreement is
terminated.
Conversion
Upon satisfaction or waiver of all of the conditions of the
merger, each PXRE preferred shareholder agreed that at least one
business day prior to the closing date of the merger, such PXRE
preferred shareholder will:
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surrender all of its convertible preferred shares, and provide
written evidence of such PXRE preferred shareholders
election to convert all of its convertible preferred shares into
convertible common shares using the reduced conversion
price; and
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surrender all of its convertible common shares, and provide
written evidence of such PXRE preferred shareholders
election to convert all of its convertible common shares into
common shares on a
one-for-one
ratio.
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140
The conversion is conditioned on the completion of the merger on
or prior to August 31, 2007. If the merger is not completed
on or prior to August 31, 2007 or the merger agreement is
terminated, (a) the elections will be rescinded and have no
effect, (b) the PXRE preferred shareholders will continue
to hold the convertible preferred shares and convertible common
shares they held immediately prior to the elections, and
(c) the conversion terms in effect prior to entering the
voting agreement, including the existing conversion price, shall
apply.
Conversion at the reduced conversion price in connection with
the merger as provided for in the voting agreement will result
in dilution to PXRE common shareholders of approximately 5.0%
more than what would have resulted from conversion of the
convertible preferred shares at the conversion price which
otherwise would have been applicable as of March 31, 2007.
Restrictions
on Transfer
Each PXRE preferred shareholder agreed not to transfer any of
its convertible preferred shares or convertible common shares at
any time prior to the termination of the voting agreement unless
the acquirer agrees to be bound by the voting agreement and
becomes a party thereto.
Termination
The voting agreement will terminate on the earliest of
(a) the effective time of the merger, (b) the
termination of the merger agreement and (c) August 31,
2007.
Amendment
and Waiver
No supplement, modification or amendment of the voting agreement
will be binding unless made in a written instrument signed by
all of the parties thereto.
Governing
Law
The voting agreement is governed by, and construed in accordance
with, the laws of Bermuda, regardless of the laws that might
otherwise govern under applicable principles of conflicts of
laws thereof.
141
INFORMATION
ABOUT PXRE
PXRE Group Ltd.
110 Pitts Bay Road
Pembroke HM08
Bermuda
(441) 296-5858
For a detailed description of PXREs business, the latest
financial statements of PXRE, managements discussion and
analysis of PXREs financial condition and operating
results, and other important information concerning PXRE, please
refer to PXREs annual report on
Form 10-K
for the year ended December 31, 2006, and other documents
filed with the SEC, which are incorporated by reference into
this joint proxy statement/prospectus. See Where You Can
Find More Information beginning on page 183.
Unless the context otherwise requires, references to
PXRE, include PXRE Group Ltd., a Bermuda holding
company, and its subsidiaries, which principally include PXRE
Bermuda, PXRE Delaware, PXRE Reinsurance, PXRE Solutions, S.A.,
which we refer to as PXRE Europe, PXRE Holdings (Ireland)
Limited, which we refer to as PXRE Ireland and PXRE Reinsurance
(Barbados) Ltd., which we refer to as PXRE Barbados. References
to SAP refer to statutory accounting principles in either
Bermuda, where PXRE Bermuda is domiciled, or the State of
Connecticut, where PXRE Reinsurance is domiciled, as applicable.
General
PXRE is an insurance holding company organized in Bermuda and
was formed in 1999 as part of the reorganization of PXRE
Delaware. PXRE historically provided reinsurance products and
services to a worldwide marketplace through PXREs wholly
owned subsidiary operations located in Bermuda, Europe and the
United States. PXREs primary business historically has
been catastrophe and risk excess reinsurance, which accounted
for substantially all of PXREs net premiums earned.
PXREs catastrophe and risk excess business included
property catastrophe excess of loss, property catastrophe
proportional, property catastrophe retrocessional, property risk
excess and marine excess and aerospace excess reinsurance
products.
PXRE generated net income before convertible preferred share
dividends of $28.5 million in 2006 compared to a net loss
before convertible preferred share dividends of
$697.6 million in 2005. The primary cause of the
2005 net loss was the net impact of catastrophe losses
arising from Hurricanes Katrina, Rita and Wilma of
$806.9 million, after reinsurance recoveries on PXREs
outwards reinsurance program and the impact of inwards and
outwards reinstatements and additional premiums. PXRE had
$84.5 million in net premiums earned during the year ended
December 31, 2006, as compared to $388.3 million in
the prior year. PXRE had negative $5.2 million in net
premiums earned during the three months ended March 31,
2007, as compared to $77.1 million in the comparable prior
year period.
Overview
of Recent Developments
On February 16, 2006, PXRE announced that PXRE would be
increasing its estimates of the net pre-tax impact of Hurricanes
Katrina, Rita and Wilma on PXREs operating results for the
year ended December 31, 2005. PXRE also first announced
PXREs intention to explore strategic alternatives due to
concerns about the hurricane losses and the resulting potential
negative impact on PXREs credit ratings. Following these
announcements, in February 2006 PXREs counterparty credit
and financial strength ratings were downgraded by the major
rating agencies to a level that was generally unacceptable to
many of PXREs reinsurance clients. These ratings
downgrades have had a significant negative impact on PXREs
operating results and profitability because they have impaired
PXREs ability to retain and renew PXREs existing
reinsurance business. In light of the negative consequences of
rating downgrades, PXREs board of directors decided to
retain Lazard (who has since been succeeded by KBW) as a
financial advisor to assist in the process.
142
Peleus
Re
On March 14, 2007, the board of directors concluded its
strategic alternative evaluation process and announced that PXRE
had entered into the merger agreement with Argonaut.
Concurrently with the announcement of the merger, PXRE also
announced the formation of a new Bermuda based reinsurance
subsidiary, Peleus Re. Peleus Re has been rated
A− by A.M. Best and is expected to begin
writing reinsurance business. Peleus Re will focus on
underwriting medium to small commercial property reinsurance
risks on a pro rata and risk excess basis, and property
catastrophe reinsurance risk on a controlled basis. It is also
expected to provide reinsurance of casualty risks. Following the
merger, Peleus Re wil provide quota share reinsurance to
Argonaut for its property and casualty risks. Peleus Re was
initially capitalized with $213 million contributed from
the existing surplus of PXRE Bermuda, and its capitalization is
expected to increase by $27 million upon completion of the
merger. PXRE Bermuda and PXRE Reinsurance will be placed into an
orderly runoff, but will provide intercompany reinsurance
support to Peleus Re.
In addition to her position as Senior Vice President, Business
Development at Argonaut, Barbara Bufkin has been appointed
President of Peleus Re.
Status of
Reinsurance Business
As of January 1, 2006, more than 75% of PXREs
business (by premium volume) was subject to contractual
provisions allowing clients additional rights upon a decline in
PXREs ratings or capital. As of December 31, 2006,
almost all of PXREs reinsurance contracts had either been
cancelled, non-renewed or expired.
PXRE had net income before convertible preferred share dividends
of $28.5 million in 2006 compared to a net loss before
convertible preferred share dividends of $697.6 million in
2005. The primary cause of the 2005 net loss was the net
impact of catastrophe losses arising from Hurricanes Katrina,
Rita and Wilma of $806.9 million, after reinsurance
recoveries on PXREs outwards reinsurance program and the
impact of inwards and outwards reinstatements and additional
premiums. PXRE had $84.5 million in net premiums earned
during the year ended December 31, 2006, as compared to
$388.3 million in the prior year. PXRE had negative
$5.2 million in net premiums earned during the three months
ended March 31, 2007, as compared to $77.1 million in
the comparable prior year period.
As a reinsurer, PXRE generated income primarily through the
premiums from clients who purchased PXREs reinsurance
contracts and the investment income generated by PXREs
portfolio of invested assets. PXREs primary expenses are
the losses incurred under PXREs reinsurance contracts,
commissions and brokerage paid to reinsurance brokers who place
reinsurance contracts with PXRE, PXREs general operating
expenses such as salaries and rent, and interest expense on
PXREs debt. The two largest variables that determine the
profitability of PXREs business from period to period are
generally the amount of premiums generated and the size of
losses incurred.
In the event the merger is not completed, PXRE does not
anticipate that Peleus Re would be able to maintain its current
rating and implement its current business plan. Unless PXRE were
to implement a strategic alternative that would allow it to
provide clients with an acceptably rated counterparty, PXRE does
not anticipate that PXRE would be able to underwrite any
material amount of new reinsurance business in 2007 and would
therefore not be able to generate any material amount of net
premiums earned during 2007. The reduction in premium income has
and will have a material adverse effect on PXREs future
operating results, liquidity and financial condition. Net
premiums earned were PXREs primary source of revenue for
the years ended December 31, 2006 and 2005, accounting for
61% and 92% of PXREs revenue, respectively. In 2006 and
2005, revenue from non-premium sources was not sufficient to
offset operating expenses and interest expenses. PXRE therefore
expects to incur net operating losses in future periods unless
it is successful in executing the merger or a strategic
alternative other than runoff. If such operating losses were to
occur, this would result in a decline in PXREs
shareholders equity. However, PXRE currently expects that
its portfolio of short duration high credit quality fixed income
securities, totaling $570.2 million as of March 31,
2007, will provide sufficient liquidity to meet the currently
foreseen needs of PXREs counterparties.
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Status of
Credit and Financial Strength Ratings
Immediately following PXREs February 16, 2006
announcement, S&P downgraded its counterparty credit and
financial strength rating on PXRE Reinsurance and PXRE Bermuda
from A− to BBB+ and placed these
ratings on CreditWatch with negative implications.
A.M. Best, an independent insurance industry rating
organization, also downgraded its financial strength rating on
these entities from A− to B++ with
a negative outlook. On February 17, 2006, Moodys
downgraded its insurance financial strength rating of PXRE
Reinsurance from Baa1 to Baa2 and placed
this rating under review for possible further downgrade.
On February 23, 2006, S&P further downgraded its
counterparty credit and financial strength rating on PXRE
Reinsurance and PXRE Bermuda from BBB+ to
BBB− where they remain on CreditWatch with
negative implications. On February 24, 2006, A.M. Best
further downgraded its financial strength rating on these
entities from B++ to B+ with a negative
implication. On February 28, 2006, Moodys further
downgraded its insurance financial strength rating of PXRE
Reinsurance from Baa2 to Baa3 and placed
this rating under review for possible further downgrade.
On April 11, 2006, PXRE announced that PXRE had requested
that the major credit rating agencies withdraw their financial
strength and claims paying ratings of PXRE and its operating
subsidiaries after finding that operational ratings below the
critical A category provided little value for a
reinsurer. In the wake of this request, A.M. Best
downgraded its financial strength ratings of PXRE Reinsurance
and PXRE Bermuda from B+ to B and
withdrew these ratings; S&P downgraded its counterparty
credit and financial strength rating on PXRE Reinsurance and
PXRE Bermuda from BBB− to BB+ and
then withdrew these ratings; and Moodys downgraded its
insurance financial strength rating of PXRE Reinsurance from
Baa3 to Ba2 and then withdrew this
rating.
Ratings have become an increasingly important factor in
establishing the competitive position of reinsurance companies.
Due to these recent ratings downgrades and withdrawal of the
operational ratings of PXREs reinsurance subsidiaries by
A.M. Best, S&P and Moodys, PXREs
competitive position in the reinsurance industry has suffered
and PXRE has been unable to retain PXREs reinsurance
portfolio and renew many of PXREs existing reinsurance
agreements. This has resulted in a substantial loss of business
as ceding companies and brokers that place such business move to
other reinsurers with higher ratings.
On March 15, 2007, Peleus Re received a rating of
A− from A.M. Best. PXREs
reinsurance subsidiaries, PXRE Bermuda and PXRE Reinsurance were
also re-rated B+ by A.M. Best on March 15,
2007.
Description
of Share Capital
PXRE was incorporated as an exempted company under the Companies
Act. Accordingly, the rights of PXRE shareholders are governed
by Bermuda law and PXREs memorandum of association and
bye-laws. The following description of PXREs common shares
summarizes certain provisions in PXREs memorandum of
association and bye-laws. Because this is a summary, it does not
contain all the information that may be important to you and
does not purport to be complete and is subject to, and qualified
in its entirety by reference to, other documents (including
PXREs memorandum of association and bye-laws). The summary
supplements and is qualified by the description of PXREs
common shares set forth in PXREs registration statement on
Form 8-A
filed on August 23, 1999, including any amendment or report
filed for the purpose of updating the description, which is
incorporated by reference.
Current
Limitations on Voting Rights, Transfer and
Ownership
Each common share has one vote, except that if, and so long as,
the shares controlled (as described below) by any person
constitute more than 9.9% of the voting power of PXREs
outstanding shares, including common shares, the voting rights
with respect to the controlled shares owned by that
person will be limited, in the aggregate, to a voting power of
9.9%. PXREs board of directors may in its discretion waive
the 9.9% limitation on a case by case basis. PXREs board
of directors has waived the 9.9% limitation with respect to
Capital Z and certain of its affiliates.
Under PXREs bye-laws, controlled shares
include, among other things, (i) all shares of PXRE that a
person owns within the meaning of Section 958(a) of the
Code or is considered as owning by applying the rules of
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Section 958(b) of the Code, (ii) all shares of PXRE
that a person owns by applying the rules of Section 544 or
554 of the Code, and (iii) all shares of PXRE that a person
owns directly, indirectly or beneficially as a result of the
possession of sole or shared voting power within the meaning of
Section 13(d)(3) of the Exchange Act and the rules and
regulations promulgated thereunder. These voting reallocation
provisions could make it difficult or impossible for any person
or group of persons acting in concert to acquire control of PXRE
without agreement by PXREs board of directors.
PXREs bye-laws prohibit the issuance, redemption,
repurchase or transfer of any shares that results in any
shareholder (together with any persons whose stock would be
attributable to such shareholder under current or former
Sections 544, 554 and 958 of the Code or Section 13(d)
of the Exchange Act) owning or controlling more than 9.9% of all
its issued and outstanding shares. Notwithstanding the
foregoing, PXREs board of directors in its discretion and
on a case by case basis can waive the transfer restriction on
PXREs shares.
Proposed
Limitations on Voting Rights, Transfer and
Ownership
If certain amendments to PXREs bye-laws are approved
pursuant to this joint proxy statement/prospectus, the foregoing
provisions will no longer be applicable and they will be
replaced by the provisions described below.
In general, and except as provided under PXREs bye-laws
and as provided below, the common shareholders would have one
vote for each common share held by them and would be entitled to
vote, on a non-cumulative basis, at all meetings of
shareholders. However, if, and so long as, the shares of a
shareholder in PXRE are treated as controlled shares
(as determined pursuant to section 958 of the Code) of any
U.S. Person (that owns shares directly or indirectly
through
non-U.S. entities)
and such controlled shares constitute 9.5% or more of the votes
conferred by the issued shares of PXRE, the voting rights with
respect to the controlled shares owned by such U.S. Person
would be limited, in the aggregate, to a voting power of less
than 9.5%, under a formula specified in PXREs bye-laws.
The formula would be applied repeatedly until the voting power
of all 9.5% U.S. Shareholders has been reduced to less than
9.5%. In addition, the board of PXRE would be able to limit a
shareholders voting rights when it deems it appropriate to
do so to (i) avoid the existence of any 9.5%
U.S. Shareholder; and (ii) avoid certain material
adverse tax, legal or regulatory consequences to PXRE, any
subsidiary of PXRE or any direct or indirect shareholder or its
affiliates. Controlled shares would include, among
other things, all shares of PXRE that such U.S. Person is
deemed to own directly, indirectly or constructively (within the
meaning of section 958 of the Code). The amount of any
reduction of votes that would occur by operation of the above
limitations would generally be reallocated proportionately among
all other shareholders of PXRE whose shares were not
controlled shares of the 9.5% U.S. Shareholder
so long as such reallocation would not cause any person to
become a 9.5% U.S. Shareholder.
Under these provisions, certain shareholders may have their
voting rights limited, while other shareholders may have voting
rights in excess of one vote per share. Moreover, these
provisions could have the effect of reducing the votes of
certain shareholders who would not otherwise be subject to the
9.5% limitation by virtue of their direct share ownership.
PXRE would be authorized to require any shareholder to provide
information as to that shareholders beneficial share
ownership, the names of persons having beneficial ownership of
the shareholders shares, relationships with other
shareholders or any other facts the directors may deem relevant
to a determination of the number of common shares attributable
to any person. If any holder fails to respond to this request or
submits incomplete or inaccurate information, PXRE would, in its
sole discretion, be able to eliminate the shareholders
voting rights. A shareholder would be required to give notice
within ten days of the date the shareholder acquires actual
knowledge that it is the direct or indirect holder of controlled
shares of 9.5% or more of the voting power of all PXREs
issued and outstanding shares. No shareholder would be liable to
any other shareholder or to PXRE for any losses or damages
resulting from the shareholders failure to respond to, or
submission of incomplete or inaccurate information in response
to, a request from PXRE for information as to the
shareholders beneficial share ownership or from the
shareholders failure to give the notice described in the
previous sentence. All information provided by the shareholder
would be treated by the PXRE as confidential information and
would be used by PXRE solely for the purpose of establishing
whether any 9.5% U.S. Shareholder exists (except as
otherwise required by applicable law or regulation).
145
If PXRE is required or entitled to vote at an annual or special
general meeting (or to act by unanimous written consent in lieu
of a general meeting) of any directly held
non-U.S. subsidiary,
the PXRE directors would refer the subject matter of the vote to
the PXRE shareholders and seek direction from such shareholders
as to how the PXRE directors should vote on the resolution
proposed by the
non-U.S. subsidiary.
Substantially similar provisions would be contained in the
bye-laws (or equivalent governing documents) of the
non-U.S. subsidiaries.
The PXRE directors would be able to decline to register the
transfer of any shares if they have reason to believe that such
transfer may expose PXRE, any subsidiary of PXRE or any direct
or indirect shareholder or its affiliates to non-de minimis
adverse tax, legal or regulatory consequences in any
jurisdiction. Similarly, PXRE would be restricted from issuing
or repurchasing shares if the PXRE directors believe that such
issuance or repurchase may result in a non-de minimis
adverse tax, legal or regulatory consequence to PXRE, any
subsidiary of PXRE or any direct or indirect shareholder or its
affiliates.
BMA
Limitations on Ownership
Any person who, directly or indirectly, becomes a holder of at
least 10 percent, 20 percent, 33 percent or
50 percent of the common shares of PXRE must notify the BMA
in writing within 45 days of becoming such a holder or
30 days from the date they have knowledge of having such a
holding, whichever is later. The BMA may, by written notice,
object to such a person if it appears to it that the person is
not fit and proper to be such a holder. The BMA may require the
holder to reduce its holding of common shares and direct, among
other things, that voting rights attaching to such common shares
shall not be exercisable. A person that does not comply with
such a notice or direction from the BMA will be guilty of an
offense.
Finally, the BMA may at any time, by written notice, object to a
person holding 10 percent or more of the common shares of
PXRE if it appears to the BMA that the person is not or is no
longer fit and proper to be such a holder. In such a case, the
BMA may require the shareholder to reduce its holding of common
shares and direct, among other things, that voting rights
attaching to such common shares shall not be exercisable. A
person who does not comply with such a notice or direction from
the BMA will be guilty of an offense.
146
INFORMATION
ABOUT ARGONAUT
ARGONAUT GROUP, INC.
10101 Reunion Place, Suite 500
San Antonio, TX 78216
(210) 321-8500
Argonaut Group, Inc., which was incorporated in November 1986,
is a national underwriter of specialty insurance in niche areas
of the property-casualty market. Headquartered in
San Antonio, Texas, Argonaut provides a variety of
specialty products in all 50 states on both an admitted and
non-admitted basis. Through its operating subsidiaries, Argonaut
offers a full line of high quality products and services
designed to meet the unique coverage and claims handling needs
of its clients. Collectively, Colony, Argonaut Specialty
Insurance Services, which we refer to as Argonaut Specialty,
Rockwood, Argonaut Great Central Insurance Company, which we
refer to as Great Central, Grocers Insurance, which we refer to
as Grocers, Trident Insurance Services, LLC, which we refer to
as Trident, and Argonaut Insurance Company, which we refer to as
Argonaut Insurance, underwrite a full line of products in three
business segments: Excess and Surplus Lines, Select Markets, and
Public Entity.
Excess and Surplus Lines. Excess and surplus
lines carriers focus on risks that the standard (admitted)
market is unwilling or unable to underwrite due to the unique
risk characteristics of the insureds or the lack of insurers
willing to offer such coverage because of the perils involved,
the nature of the business, or the insureds loss
experience. Excess and surplus lines carriers are able to
underwrite these risks with more flexible policy terms at
unregulated premium rates on a non-admitted basis.
Two operations are included in Argonauts Excess and
Surplus Lines business segment: Colony and Argonaut Specialty.
Both operations focus on underwriting surplus lines coverage but
both may write on an admitted basis in certain classes of
business for insureds with risk profiles that meet
Argonauts underwriting standards.
Colony focuses on risks that the standard market chooses not to
underwrite. Its operations are divided into four focused
divisions: liability, property, automobile and professional
liability. Colony provides coverage to commercial enterprises
including restaurants, contractors, day care centers, apartment
complexes, condominium associations, manufacturers, and
distributors and professional coverages for healthcare providers
and other non-medical professionals. A portion of its business,
primarily commercial automobile coverage, is written on an
admitted basis. The average premium depends on the product and
ranges from a low of approximately $2,000 to a high of
$20,000 per policy. For the year ended December 31,
2006, Colony produced $606.6 million in gross written
premiums. For the three months ended March 31, 2007, Colony
produced $153.6 million in gross written premiums, compared
to $146.1 million for the three months ended March 31,
2006.
Argonaut Specialty writes risks, primarily on an excess and
surplus lines basis, which are slightly larger in size and
complexity than those traditionally targeted by Colony. It
writes primary casualty, excess/umbrella and property lines of
business for hard to place risks
and/or
distressed businesses that fall outside of the standard
insurance markets portfolio. Primary casualty risks
comprised 47% of Argonaut Specialtys premium volume in
2006 and the average premium per policy was approximately
$80,000. The excess/umbrella casualty division accounted for 45%
of Argonaut Specialtys premium volume during 2006 and the
average premium per policy was approximately $70,000. The
remainder of the premium volume in 2006 was attributable to the
property division and the average premium per policy was
approximately $50,000. For the year ended December 31,
2006, Argonaut Specialty wrote $154.9 million in gross
written premiums. For the three months ended March 31,
2007, Argonaut Specialty wrote $34.1 million in gross
written premiums, compared to $31.9 million for the three
months ended March 31, 2006.
Select Markets. This segment provides property
and casualty coverages designed to meet the specialized
insurance needs of businesses within certain well defined
markets. It targets business classes and industries with
distinct risk profiles that can benefit from specially designed
insurance programs, tailored loss control and expert claim
handling. This segment serves its targeted niche markets with a
tightly focused underwriting appetite and a unique understanding
of the businesses that it serves. Three operations are included
in Argonauts Select Markets segment: Great Central,
Rockwood and Grocers. In addition, the Corporate Account unit
continues to provide certain services formerly offered by the
Risk Management segment.
147
Great Central provides tailored insurance and risk management
products. It specializes in three broadly defined areas: food
and hospitality (restaurants, bakeries, catering, and hotels and
motels), religious and other institutions (including related
private schools and daycares), and specialty retail (dry
cleaners, commercial launderers, linen supply, and uniform
rental firms). Its commitment to developing an in-depth
understanding of customer needs and knowledge of its target
industries has earned Great Central the endorsement of several
major state trade associations. Approximately 69% of its gross
written premiums were from the food and hospitality businesses,
17% were from religious and other institutions, and 14% were
from the specialty retail businesses. Average policy size ranges
from $4,000 to $16,500 depending on industry type and coverages
offered. For the year ended December 31, 2006, Great
Central produced $99.5 million in gross written premiums.
For the three months ended March 31, 2007, Great Central
produced $18.1 million in gross written premiums, compared
to $17.0 million for the three months ended March 31,
2006.
Rockwood is recognized as a leading specialty underwriter for
the mining industry. It also writes business coverage for small
commercial businesses including office, retail operations, light
manufacturing, services, and restaurants. Rockwoods
strategy includes a strong commitment to its insureds, a highly
experienced staff, and a dedication to the individual
underwriting of risks. Rockwood distributes its products and
services through a network of independent retail and wholesale
agencies. Approximately 55% of its premiums were written in
Pennsylvania where it is the largest workers compensation
insurer of independent coal mines. Rockwood writes policies on
both a large deductible basis with average premium per policy of
approximately $870,000 and on a guaranteed cost basis for the
smaller commercial accounts with average premium per policy of
approximately $7,000. In addition, Rockwood provides supporting
general liability, pollution liability, umbrella liability,
property, commercial automobile and surety business, for certain
of its mining accounts. The supporting lines of business
represented less than 13% of Rockwoods gross written
premiums in 2006. For the year ended December 31, 2006,
Rockwood produced $88.8 million in gross written premiums.
For the three months ended March 31, 2007, Rockwood
produced $20.1 million in gross written premiums, compared
to $23.5 million for the three months ended March 31,
2006.
Grocers provides property and casualty insurance coverage to
privately-owned independent grocers throughout the United States
and currently operates in 40 states. It also provides
customized insurance products and risk management offerings to
complementary retail market segments including convenience
stores, retail shopping centers and furniture stores. It
distributes its products through agencies that are knowledgeable
about the markets it serves and also operates as a direct writer
in a limited number of states. Approximately 31% of its gross
written premiums were for property, 40% for general liability,
and 29% for workers compensation. The average premium per policy
ranges from approximately $41,200 for workers compensation
policies to $32,200 for property and liability policies.
Property and liability policies provided through Grocers are
written on a package basis while workers compensation and other
coverages are written separately. For the year ended
December 31, 2006, Grocers produced $65.9 million in
gross written premiums. For the three months ended
March 31, 2007, Grocers produced $15.8 million in
gross written premiums, compared to $13.0 million for the
three months ended March 31, 2006.
The Select Markets segment also included $63.9 million of
gross written premium related to policies formerly underwritten
by the Risk Management segment. For the three months ended
March 31, 2007, Select Markets also included
$24.3 million of gross written premiums compared to
$19.4 million for the three months ended March 31,
2006 from these policies.
Public Entity. This segment provides services
and solutions to public entity clients throughout the United
States. It offers its clients a unique and thorough
understanding of public entities and their insurance and risk
management needs. The Public Entity segment consists of business
underwritten by Trident. While Trident places most of its
business within Argonaut, it also places a limited amount of
business with outside insurance carriers.
Trident functions as a managing general underwriter and is a
nationally recognized risk management solutions provider for
small to intermediate size public entities. Trident offers a
full range of solutions including management, administration,
professional claims and loss control services on a fee basis for
pools as well as for individual government and public schools.
Its product lines include general liability, automobile
liability, automobile physical damage, property, inland marine,
crime, public officials liability, educators legal
liability, law enforcement
148
liability, inmate medical and tax interruption. Trident
partners with independent agents to deliver an integrated,
tailored product. For the year ended December 31, 2006,
Trident produced $73.7 million in gross written premiums.
For the three months ended March 31, 2007, Trident produced
$20.8 million in gross written premiums, compared to
$17.8 million for the three months ended March 31,
2006.
Argonauts growth has been achieved both organically
through a focused operational strategy and underwriting
discipline and as a result of merger and acquisition activity.
Argonaut has executed a number of mergers and acquisitions that
have diversified product offerings and geographical risk.
Argonaut focuses on producing underwriting profits through its
multi-channel business organization.
149
COMPARATIVE
SHARE PRICES AND DIVIDENDS
PXREs common shares are listed on the NYSE under the
symbol PXT. The following table sets forth, for the
periods indicated, the high and low closing sale prices for
PXREs common shares as reported by the NYSE and cash
dividends per common share declared and subsequently paid:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
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|
|
High
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|
|
Low
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|
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Declared
|
|
|
2004
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|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
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|
$
|
28.50
|
|
|
$
|
23.89
|
|
|
$
|
0.06
|
|
Second Quarter
|
|
|
27.94
|
|
|
|
23.20
|
|
|
|
0.06
|
|
Third Quarter
|
|
|
25.71
|
|
|
|
22.25
|
|
|
|
0.06
|
|
Fourth Quarter
|
|
|
25.21
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|
|
|
22.70
|
|
|
|
0.06
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
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|
$
|
27.11
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|
|
$
|
24.62
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|
|
$
|
0.06
|
|
Second Quarter
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|
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25.22
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|
|
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22.99
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|
|
|
0.12
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|
Third Quarter
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|
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25.59
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|
|
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13.46
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|
|
|
0.12
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|
Fourth Quarter
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|
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13.71
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|
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10.22
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|
|
0.12
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2006
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|
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|
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|
|
|
|
|
First Quarter
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$
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13.26
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|
|
$
|
3.01
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|
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$
|
0.00
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|
Second Quarter
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|
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4.07
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|
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3.17
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|
|
0.00
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|
Third Quarter
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4.20
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3.49
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|
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0.00
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Fourth Quarter
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4.94
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4.15
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0.00
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2007
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First Quarter
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$
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4.90
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$
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4.45
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$
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0.00
|
|
Second Quarter (through
June 7, 2007)
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4.96
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4.55
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|
|
|
0.00
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|
On June 7, 2007, the closing price of PXREs common
shares was $4.55 per share.
Argonauts common stock trades on the NASDAQ under the
symbol AGII. The following table sets forth, for the
periods indicated, the high and low closing sale prices for
Argonauts common stock as reported by the NASDAQ and cash
dividends per common share declared and subsequently paid:
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Dividend
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High
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Low
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Declared
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2004
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First Quarter
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$
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19.47
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$
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16.00
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$
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0.00
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Second Quarter
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19.92
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|
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17.06
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|
|
|
0.00
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Third Quarter
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|
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19.22
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17.76
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|
|
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0.00
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Fourth Quarter
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21.62
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|
|
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17.44
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|
|
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0.00
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2005
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|
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|
|
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|
|
First Quarter
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|
$
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24.18
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|
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$
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20.70
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|
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$
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0.00
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Second Quarter
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|
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23.09
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|
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18.91
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|
|
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0.00
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Third Quarter
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|
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27.01
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22.75
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|
|
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0.00
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|
Fourth Quarter
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|
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33.17
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|
|
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27.02
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|
|
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0.00
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2006
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|
|
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|
|
|
|
|
|
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|
|
First Quarter
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$
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36.84
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$
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33.58
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$
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0.00
|
|
Second Quarter
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|
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35.19
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28.87
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|
|
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0.00
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Third Quarter
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|
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31.81
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|
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27.71
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0.00
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Fourth Quarter
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35.23
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30.45
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|
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0.00
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2007
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|
|
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|
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First Quarter
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$
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37.35
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|
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$
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31.75
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|
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$
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0.00
|
|
Second Quarter (through
June 7, 2007)
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35.26
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|
|
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32.04
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|
|
|
0.00
|
(1)
|
|
|
|
(1) |
|
On June 6, 2007 Argonaut declared a $1.65 per share
special dividend with a record date of June 26, 2007
payable on July 10, 2007. |
On June 7, 2007, the closing price of Argonauts
common stock was $32.04 per share.
150
COMPARISON
OF SHAREHOLDER RIGHTS
AND CORPORATE GOVERNANCE MATTERS
PXRE is a Bermuda exempted company subject to the provisions of
the Companies Act. Argonaut is a Delaware corporation subject to
the provisions of the DGCL. The rights of Argonaut shareholders
are currently governed by Argonauts articles of
incorporation and bylaws and the DGCL. The rights of PXRE
shareholders are currently governed by PXREs memorandum of
association and bye-laws and the Companies Act.
Following the completion of the merger, PXREs memorandum
of association and bye-laws will be amended as set forth in the
merger agreement and described in this joint proxy
statement/prospectus. Certain key amendments to the PXRE
bye-laws are highlighted below, however, for a complete
explanation of amendments to the PXRE bye-laws, please see
PXRE Special General Meeting Proposals to be
Considered at the PXRE Special General Meeting
Item 7 Amendment and Restatement of
Bye-Laws beginning on page 72. Upon completion
of the merger, the rights of PXRE shareholders and Argonaut
shareholders, who will become PXRE shareholders, will be
governed by PXREs memorandum of association and amended
bye-laws and the Companies Act.
The following description summarizes the material differences
that may affect the rights of Argonaut and PXRE shareholders, as
well as what those differences will be after the effective time
of the merger, if applicable, because of the amendment to
PXREs bye-laws. However, the following description is not
a complete statement of all of those differences, or a complete
description of the specific provisions referred to in this
summary. In addition, the identification of some of the
differences in the rights of Argonaut and PXRE shareholders as
material is not intended to indicate that other differences do
not exist. Shareholders should read carefully the relevant
provisions of the DGCL and the Companies Act and the articles of
incorporation and bylaws of Argonaut as well as the memorandum
of association and bye-laws of PXRE. See Where You Can
Find More Information beginning on page 183. A
copy of the form of PXREs bye-laws, which will become
effective upon completion of the merger, is attached to this
joint proxy statement/prospectus as Annex C.
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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Corporate
Governance
|
|
Upon completion of the merger, the
rights of PXRE shareholders and Argonaut shareholders, who will
become PXRE shareholders, will be governed by PXREs
memorandum of association and bye-laws and Bermuda law.
|
|
The rights of Argonaut
shareholders are currently governed by Argonauts
certificate of incorporation and bylaws and the DGCL.
|
Outstanding Share
Capital
|
|
As of June 4, 2007, there were issued and outstanding: 63,712,264 common shares; 8,855,347 convertible common shares convertible into 8,855,347 common shares; and
|
|
As of June 4, 2007, Argonaut
had outstanding no shares of Argonaut Series A mandatorily
convertible preferred stock and 34,072,750 shares of common
stock. Argonauts common stock trades on the NASDAQ Global
Select Market.
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|
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5,813.20 convertible preferred shares convertible into 9,316,026 convertible common shares, which are convertible into 9,316,026 common shares, based on the adjusted conversion price of $6.24 as established in the voting agreement.
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|
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Authorized Share
Capital
|
|
$380,000,000 of authorized share capital, which consists of 350,000,000 common shares and 30,000,000 preferred shares. If the shareholders approve the proposal to increase the authorized share capital, PXRE would have $530,000,000 of authorized
|
|
The authorized capital stock of
Argonaut is 75 million shares, consisting of
70 million shares of common stock, par value $0.10 each,
and 5 million shares of preferred stock, par value $0.10
each.
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151
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Rights of PXRE Shareholders
|
|
Rights of Argonaut Shareholders
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|
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|
share capital, which would
consist of 500,000,000 common shares and
30,000,000 preferred shares.
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Dividends
|
|
Under Bermuda law, a company may
not declare or pay a dividend, or make a distribution out of
contributed surplus, if there are reasonable grounds for
believing that (i) the company is, or after such payment
would be, unable to pay its liabilities as they fall due, or
(ii) the realizable value of companys assets after
the payment or distribution would be less than the aggregate
amount of its liabilities and its issued share capital and share
premium accounts. The PXRE bye- laws provide that the PXRE board
of directors may from time to time declare dividends.
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|
Under the DGCL, the directors of every corporation, subject to any restrictions contained in its certificate of incorporation, may declare and pay dividends upon shares of its capital stock, or to its members if the corporation is a nonstock corporation, either: (1) out of its surplus, as defined in the DGCL, or (2) in case there shall be
no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
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If the capital of the corporation, computed in accordance with the DGCL, shall have been diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, the directors of
such corporation shall not declare and pay out of such net profits any dividends upon any shares of any classes of its capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
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Nothing in the relevant subsection
of the DGCL shall invalidate or otherwise affect a note,
debenture or other obligation of the corporation paid by it as a
dividend on shares of its stock, or any payment made thereon, if
at the time such note, debenture or obligation was delivered by
the corporation, the corporation had either surplus or net
profits as provided in (1) or (2) above from which the
dividend could lawfully have been paid.
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Common Stock: Under Argonauts certificate of incorporation, subject to all of the rights of preferred stock, holders of Argonaut common stock are entitled to receive dividends, when and as declared by the board of directors, out of any funds
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152
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|
|
|
|
|
|
Rights of PXRE Shareholders
|
|
Rights of Argonaut Shareholders
|
|
|
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|
|
of the corporation legally
available for the payment of such dividends.
|
Right to Call Special Meeting
of Shareholders
|
|
Under Bermuda Law, a special
general meeting of shareholders may be convened by the Board of
Directors and must be called upon the request of shareholders
holding not less than one-tenth of the paid-in capital of the
company carrying the right to vote at general meeting. The PXRE
bye-laws provide that the PXRE board of directors may call a
special general meeting of the PXRE shareholders whenever they
judge it necessary.
|
|
Under the DGCL, a special meeting
of the stockholders may be called for any purpose by the board
of directors or by any other person authorized to do so in the
certificate of incorporation or bylaws. Under Argonauts
bylaws, a special meeting of the shareholders may be called by
the board of directors, pursuant to a resolution adopted by a
majority of the directors then in office.
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Shareholder Action by Written
Consent
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Subject to the PXRE bye-laws, Bermuda law permits action by written consent of shareholders and, with the exception of a resolution to remove an auditor or director before the expiration of his or her term of office, the resolutions contained therein are passed when the written consent is signed by the majority of votes as would be required if the resolution had been voted
on at a meeting of the shareholders or if signed by all of the shareholders or such majority of the shareholders as may be provided for in the companys bye-laws. If the bye-law amendments proposed to be voted on at the PXRE special general meeting described herein are adopted, then PXREs bye-laws will provide that, notwithstanding the Companies Act, anything which may be done
by resolution of the shareholders in a general meeting shall not be done by resolution in writing.
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Argonauts bylaws provide that any action required to be taken at any annual or special meeting of stockholders of Argonaut, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.
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Notice of Shareholder Proposals
and Nomination of Director Candidates by
Shareholders
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Under Bermuda Law, shareholders
may, as set forth below, at their own expense (unless the
company otherwise resolves), require a company to give notice of
any resolution that the shareholders can properly propose at the
next annual general meeting
and/or to
circulate a statement (of not more than 1000 words) in respect
of any matter referred to in a proposed resolution or any
business to be conducted at a general meeting. The number of
shareholders necessary for such a request is either the number
of shareholders representing not less than one-twentieth of the
total voting rights of all the members having a right to vote at
the meeting to which the request relates or not less than
100 shareholders.
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At any annual or special meeting of stockholders, proposals by stockholders and persons nominated for election as directors by stockholders shall be considered only if proper for action at the meeting and if advance notice thereof has been timely given as provided in the bylaws and such proposals or nominations are otherwise proper for consideration under applicable law
and the certificate of incorporation and the bylaws. To be timely, notice of any proposal to be presented by any stockholder or of the name of any person to be nominated by any stockholder for election as a director of the corporation at any meeting of
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Rights of PXRE Shareholders
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PXRE bye-laws provide that at least 21 Clear Days notice to shareholders is required for an annual general meeting and a special general meeting. If a general meeting is called on a shorter notice, it will be deemed to have been properly called if it is so agreed by (i) all the shareholders entitled to attend and vote thereat in the case of an annual general
meeting and (ii) by a majority in number of the shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving a right to attend and vote thereat in the case of a special general meeting. PXRE bye-laws provide that nominations of persons for election to the board of PXRE may be made at a meeting
of Members called for the election of directors, or at the discretion of the board, by any nominating committee or person appointed by the board, by any member of PXRE entitled to vote for the election of director at the meeting which complies with the notice procedure provided in bye-laws of PXRE. To be timely, such a notice must be given, delivered or mailed and received at the office of PXRE not
less than 60 days prior to such meeting. Only persons who are proposed or nominated in accordance with the bye-laws of PXRE are eligible for election as directors.
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stockholders shall be delivered
to the secretary of the corporation at its principal executive
office not less than 60 nor more than 90 days prior to
the date of the meeting. However, if the date of the meeting is
first publicly announced or disclosed (in a public filing or
otherwise) less than 70 days prior to the date of the
meeting, such advance notice shall be given not more than 10
days after such date is first so announced or
disclosed.
To be in proper written form, notice of a stockholder proposal
must provide:
a brief written statement of the reasons why such
stockholder favors the proposal;
such stockholders name and address;
the number and class of all shares of each class of
stock of Argonaut beneficially owned by such stockholder; and
any material interest of such stockholder in the
proposal (other than as a stockholder).
To be in proper written form, notice of a stockholder
nomination to the Argonaut board of directors must provide:
the name of the person to be nominated;
the number and class of all shares of each class of
stock of Argonaut beneficially owned by such person;
the information regarding such person required by
paragraphs(a),(e) and(f) of Item 401 of
Regulation S-K
adopted by the SEC (or the corresponding provisions of any
regulation subsequently adopted by the SEC applicable to
Argonaut);
such persons signed consent to serve as a
director of the corporation if elected;
such stockholders name and address; and
the number and class of all shares of each class of
stock of the corporation beneficially owned by such stockholder.
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Classification of Board of
Directors
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Bermuda law permits a classified
board of directors if provided for by a companys bye-laws.
Under the bye-laws of PXRE, the board of directors shall be
divided into three classes, Class I, Class II and
Class III. The number of directors in each class shall be
the whole number contained in the quotient arrived at by
dividing the
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The DGCL permits a Delaware corporation to provide in its certificate of incorporation or bylaws that the board of directors shall be divided into as many as three classes of directors with staggered terms of office, with only one class of directors being elected each year for a maximum term of three years.
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Rights of Argonaut Shareholders
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authorized number of directors by
three and if a fraction is also contained in such quotient, then
if such fraction is one-third
(1/3)
the extra director shall be a member of a Class III and if
the fraction is two-thirds
(2/3)
one of the directors shall be member of Class III and the
other shall be a member of Class II. All directors are elected
for a term of three years ending on the third annual general
meeting after their election.
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Under Argonauts bylaws,
directors are elected by the holders of record of a plurality of
the votes cast at annual meetings of stockholders, and each
director so elected holds office until the next annual meeting
or until his or her successor is duly elected and qualified, or
until his or her earlier resignation or removal.
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Number of
Directors
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Under Bermuda law, the minimum
number of directors on the board of directors of a company is
two, although the minimum number of directors may be set higher
and the maximum number of directors may also be set in
accordance with the bye-laws of the company. The maximum number
of directors is usually fixed by the shareholders in general
meeting. Only the shareholders may increase or decrease the
number of directors seats last approved by the
shareholders. The bye- laws of PXRE currently provide that the
number of directors which shall constitute the whole board of
directors of PXRE shall not be less than three or more than
twelve as PXRE may by ordinary resolution in general meeting
determine.
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The DGCL provides that the board of directors of a Delaware corporation must consist of one or more directors as fixed by the corporations certificate of incorporation or bylaws. Under Argonauts bylaws, the board of directors shall consist of nine members, except that the number of members shall be increased to 11 at any time, and only for such time,
that the holders of the Series A preferred stock are expressly entitled, as a separate class, to elect directors pursuant to the certificate of incorporation.
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The number of directors may be changed from time to time as discussed in Amendments of Bylaws below.
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If the bye-law amendments
proposed to be voted on at the PXRE special general meeting
described herein are adopted, the number of Directors which
shall constitute the whole board of directors of PXRE shall be
such number (not less than three (3) or more than thirteen (13))
as PXRE may determine by ordinary
resolution.
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Removal of
Directors
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Under Bermuda law, subject to its
bye-laws the shareholders of a company may, at a special general
meeting called for that purpose, remove any director or the
entire board of directors provided that the notice of the
meeting is served on the director or directors concerned not
less than 14 days before such meeting. Any director given
notice of removal will be entitled to be heard at the meeting.
PXRE bye-laws provide that directors may be removed from office
for cause at a general meeting by vote of at least a majority of
the holders of shares entitled to vote thereon, provided
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Under the DGCL, stockholders holding a majority of shares entitled to vote at an election of directors may remove any directors or the entire board of directors, except that, unless the certificate of incorporation provides otherwise, in the case of a corporation whose board of directors is classified, stockholders may only remove a director for cause or at an election
of the class of directors of which such director is a part. Under Argonauts bylaws, any director or the entire board of directors may be removed, with or without cause, by the
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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that notice is given to the
director 14 days before the meeting.
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holders of a majority of shares
entitled to vote at an election of directors.
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Vacancies on the Board of
Directors
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Under PXRE bye-laws, any vacancy
in the board of directors may be filled by the election or
appointment by the shareholders at the meeting at which such
director is removed and subject to any resolution of the
shareholders to the contrary, the board of directors may also
fill any vacancy in the number left unfilled. A director so
appointed holds office until the next election of the class for
which such director shall have been chosen.
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Under the DGCL, unless a Delaware
corporations certificate of incorporation or bylaws
provide otherwise, vacancies and newly created directorships
resulting from a resignation, an increase in the authorized
number of directors or otherwise may be filled by a vote of a
majority of the directors remaining in office, even if such
majority is less than a quorum, or by the sole remaining
director.
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Under Argonauts bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director or by the stockholders entitled to vote at any annual or special meeting, and the directors so chosen hold
office until the next annual or special meeting duly called for that purpose and until their successors are duly elected and qualified, or until their earlier resignation or removal.
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Director
Liability
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Bermuda Law permits a company to
exempt any officer or auditor from loss or liability in
circumstances where it is permissible for the company to
indemnify such officer or auditor, as indicated below. PXRE
bye-laws provide that PXRE and its shareholders waive all claims
or rights of action that PXRE or its shareholders might have,
individually or by or in the right of the company, against any
director or officer for any act or failure to act in the
performance of that directors or officers duties or
supposed duties. However, PXRE bye-laws do not extend
indemnification of any director or officer of PXRE to matters in
respect of any fraud or dishonesty.
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The DGCL permits the adoption of a provision in the certificate of incorporation limiting or eliminating the monetary liability of a director to a corporation or its stockholders by reason of a directors breach of the fiduciary duty of care. However, the law does not permit any limitation of the liability of a director for:
Breaching the duty of loyalty to the corporation or its stockholders;
Failing to act in good faith;
Obtaining an improper personal benefit from the corporation; or
Paying a dividend or approving a stock repurchase that was illegal under Delaware law
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Under Argonauts articles of
incorporation, to the fullest extent permitted by Delaware law,
a director of Argonaut shall not be liable to Argonaut or its
stockholders for monetary damages for breach of fiduciary duty
as a director.
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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Indemnification of Officers,
Directors and Employees
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Bermuda law permits a company to
indemnify its officers and auditor with respect to any loss
arising or liability attaching to such person by virtue of any
rule of law concerning any negligence, default, breach of duty,
or breach of trust of which the officer or auditor may be guilty
in relation to the company or any of its subsidiaries; provided
that the company may not indemnify an officer or auditor against
any liability arising out of his or her fraud or dishonesty.
Bermuda law also permits a company to indemnify an officer or
auditor against liability incurred in defending any civil or
criminal proceedings in which judgment is given in his or her
favor or in which he or she is acquitted, or when the Bermuda
Supreme Court grants relief to such officer. Bermuda law permits
a company to advance moneys to an officer or auditor to defend
civil or criminal proceedings against them on condition that
these moneys are repaid if the allegation of fraud or dishonesty
is proved. The Court may relieve an officer from liability for
negligence, default, breach of duty or breach of trust if it
appears to the Court that such officer has acted honestly and
reasonably and, in all the circumstances, ought fairly to be
excused. PXRE bye-laws provide that the directors and officers
of PXRE shall be indemnified by PXRE, to the extent permitted by
Bermuda law.
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Under the DGCL, a Delaware corporation must indemnify its present or former directors and officers against expenses (including attorneys fees) actually and reasonably incurred to the extent that the officer or director has been successful on the merits or otherwise in defense of any action, suit or proceeding brought against him or her by reason of the fact that
he or she is or was a director or officer of the corporation. The DGCL generally permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer
of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation or entity, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually or reasonably incurred by such person in connection with such action, suit or proceeding if the person acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful.
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Argonauts certificate of incorporation and bylaws provide that each person who was or is involuntarily made a party or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or a person of whom such person is the legal
representative is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or other enterprise, including service with respect to employee benefit plans, whether the basis of such action, suit or proceeding is alleged to be action in an official capacity as a director, officer or representative, or in any other capacity while serving as a
director, officer or representative, shall be
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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indemnified and held harmless by
the corporation to the fullest extent authorized by the DGCL,
against all expenses, liability and loss (including
attorneys fees, judgments, fines, the Employee Retirement
Income Security Act of 1974, which we refer to as ERISA, excise
taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection
therewith.
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Such rights shall be a contract right and shall include the right to be paid by Argonaut expenses incurred in defending any action, suit or proceeding in advance of its final disposition in accordance with and to the fullest extent permitted by the DGCL.
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If a claim is not paid in full by the corporation within 90 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such
claim.
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It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the requirements of Delaware law have been complied with by the claimant) that the claimant has not met the standards of conduct which make it permissible under DGCL for the corporation
to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation.
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Neither the failure of Argonaut (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because such claimant has met the applicable standard of conduct set forth in the DGCL, nor an actual determination
by Argonaut (including its board of directors, independent legal counsel, or its stockholders) that the claimant had not
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158
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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met such applicable standard of conduct, shall be a defense to the action or create a presumption that such claimant had not met the applicable standard of conduct. The rights conferred by the bylaws is not exclusive of any right which such persons may have or acquire under any statute, provision of the certificate of incorporation, bylaws, agreement, vote of
the stockholders or disinterested directors or otherwise. However, the right to indemnification which any director, officer or representative may have to the extent derived from any provision of the certificate of incorporation or bylaws shall be limited to those provisions in effect at the time such director, officer or representative was acting as such.
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Under Argonauts bylaws, Argonaut may maintain insurance, at its expense, to protect itself and any such director, officer or representative against any such expense, liability or loss, whether or not Argonaut would have the power to indemnify such person against such expense, liability or loss under the DGCL.
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Amendment of Articles of
Incorporation
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Bermuda law provides that the memorandum of association of a company may be amended by a resolution passed at a general meeting of shareholders of which due notice has been given. Under Bermuda law, the holders of an aggregate of not less than 20% in par value of a companys issued share capital or any class thereof or the holders of not less than 20% of
the debentures entitled to object to amendments to the memorandum of association have the right to apply to the Bermuda Court for an annulment of any amendment to the memorandum of association adopted by shareholders at any general meeting. This does not apply to an amendment that alters or reduces a companys share capital as provided in the Companies Act. Upon such application, the alteration
will not have effect until it is confirmed by the Bermuda Court. An application for an annulment of an amendment to the memorandum of association passed in accordance with the Companies Act may be made on behalf of
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Under the DGCL, a Delaware corporations certificate of incorporation may be amended only if the proposed amendment is approved by the board of directors and the holders of a majority of the outstanding stock entitled to vote. Argonauts certificate of incorporation is silent in respect of its amendment.
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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persons entitled to make the
application by one or more of their number as they may appoint
in writing for the purpose. No application may be made by
shareholders voting in favor of the amendment.
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An amendment to PXREs memorandum of association shall be approved by the board of directors and decided on by an ordinary resolution of the members.
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Amendment of
Bye-Laws/Bylaws
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Except as provided in the bye-laws of PXRE, any amendment to the bye-laws shall be approved by the Board and decided on by ordinary resolution of the shareholders. PXREs current bye-laws provide that amendments to certain bye-laws require the approval of the board and a special resolution of the shareholders. If the bye-law amendments proposed to be voted
on at the PXRE special general meeting described herein are adopted, the aforementioned provision requiring a special resolution of the shareholders to amend certain bye-laws will not survive.
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Argonauts certificate of
incorporation provides that the board of directors is authorized
to make, alter or repeal the bylaws of the corporation.
Argonauts bylaws provide that its bylaws may be altered,
amended or repealed and new bylaws may be adopted at any meeting
of the board of directors or of the stockholders, provided
notice of the proposed change was given in the notice of
meeting.
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Business Combination
Status
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A Bermuda company may not enter
into business combinations with its large shareholders or
affiliates without obtaining prior approval from its board of
directors and, in certain instances, its shareholders. Examples
of business combinations include mergers, asset sales and other
transactions in which a large shareholder or affiliate receives
or could receive a financial benefit that is greater than that
received or to be received by other shareholders.
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Section 203 of the DGCL
prohibits a Delaware corporation from engaging in a
business combination with a person owning 15% or
more of the corporations voting stock for three years
following the time that person becomes a 15% stockholder, with
certain exceptions. Argonaut has not opted out of
Section 203 in its certificate of incorporation and is
therefore governed by the terms of this provision of the DGCL.
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Approval of Certain
Transactions
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The Companies Act is silent on whether a companys shareholders are required to approve a sale, lease or exchange of all or substantially all of a companys property and assets. Bermuda law does require, however, that shareholders approve certain forms of mergers and reconstructions. Bermuda law provides that where an offer is made for shares of a company
and within four months of the offer the holders of not less than 90% of the shares which are the subject of the offer accept the offer, the offering company may, by notice, require the non-tendering shareholders to transfer their shares on the terms of the offer.
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Stockholder approval of
business
combinations: Under
Delaware law, there is no statutory restriction on a Delaware
corporations ability to acquire the business of another
corporation. However, a merger or consolidation, sale, lease,
exchange or other disposition of all or substantially all of the
property of the corporation not in the usual and regular course
of the corporations business, or a dissolution of the
corporation, generally must be approved by the holders of a
majority of the shares entitled to vote thereon unless the
certificate of incorporation provides otherwise.
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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Dissenting shareholders may apply to the court within one month of the notice objecting to the transfer. The burden is on the dissenting shareholders to show that the court should exercise its discretion to enjoin the required transfer, which the court will be unlikely to do unless there is evidence of fraud or bad faith or collusion between the offeror and the holders
of the shares who have accepted the offer as a means of unfairly forcing out minority shareholders. Pursuant to Bermuda law, an amalgamation of two or more companies requires approval of the board of directors and the approval of the shareholders of each company by a three-fourth majority. The required vote of shareholders may be reduced to not less than a majority by a companys bye-laws.
For purposes of approval of an amalgamation, all shares whether or not otherwise entitled to vote, carry the right to vote. A separate vote of a class of shares is required if the rights of such class would be altered by virtue of the amalgamation. PXRE may acquire the business of another Bermuda exempted company or a company incorporated outside Bermuda of which the business is within the
business purposes as set forth in PXREs memorandum of association.
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Argonauts certificate of incorporation does not provide otherwise.
Absence of required vote for certain mergers: Under Delaware law, no vote of the stockholders of a corporation surviving a merger is required to approve a merger if:
the agreement of merger does not amend the charter of the corporation;
each share of stock of the corporation outstanding immediately prior to the merger is to be an identical outstanding or treasury share of the surviving corporation thereafter; and
the number of shares of common stock of the corporation to be issued in the merger, if any, does not exceed 20% of the number of shares outstanding immediately prior to the merger.
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PXRE may, with the approval of a majority of votes cast at a general meeting of shareholders at which a quorum is present, amalgamate with another Bermuda company or with a body incorporated outside of Bermuda. In the case of an amalgamation, a shareholder who did not vote in favor may apply to a Bermuda court for an appraisal of the fair value of the shareholder
s shares. The court ordinarily would not disapprove the transaction absent evidence of fraud or bad faith.
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Inspection of Books and
Records; Shareholder
Lists
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Bermuda law provides the general
public with a right of inspection of a Bermuda companys
public documents at the office of the Registrar of Companies in
Bermuda. These documents include the companys memorandum
of association, including its objects and powers and all
amendments to the memorandum of association. Bermuda
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Under Delaware law, any stockholder may inspect Argonauts books and records for a proper purpose. Under Argonauts bylaws, a complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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law also provides shareholders of
a Bermuda company with a right of inspection of the
companys bye-laws, minutes of general (shareholder)
meetings and the companys audited financial statements.
The register of shareholders is also open to inspection by the
members of the public free of charge. A Bermuda company is
required to maintain its share register at its registered office
in Bermuda or upon giving notice to the Registrar of Companies
at such other place in Bermuda. A company may, in certain
circumstances, establish a branch register outside of Bermuda. A
Bermuda company is required to keep at its registered office a
register of its directors and officers that is open for
inspection by members of the public without charge. Bermuda law
does not, however, provide a general right for shareholders to
inspect or obtain copies of any other corporate records.
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number of shares registered in such stockholders name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting,
or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.
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Dissenters
Rights
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Under Bermuda law, a dissenting
shareholder of a company participating in extraordinary
corporate transactions may, under varying circumstances, receive
cash in the amount of the fair market value of its shares (as
determined by a court), in lieu of the consideration it would
otherwise receive in the transactions. Bermuda law generally
does not condition dissenters rights to circumstances in
which a vote of the shareholders of the surviving company is
required. Bermuda law, in general, provides for dissenters
rights in an amalgamation between non- affiliated companies and
affiliated companies where one company is not a Bermuda company,
an amendment to a companys memorandum of association, a
scheme of arrangement, or reconstruction and certain other
transactions. Bermuda Law additionally provides a right of
appraisal in respect of the situations discussed under
Required Purchase and Sale of Shares; Short-Form
Merger below.
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Under Delaware law, in certain
situations, appraisal rights may be available in connection with
a merger or a consolidation. Appraisal rights are not available
under Delaware law to stockholders of the surviving corporation
when a corporation is to be the surviving corporation and no
vote of its stockholders is required to approve the merger. In
addition, no appraisal rights are available under Delaware law
to holders of shares of any class of or series of stock which is
either:
listed in a national securities exchange or
designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc.; or
held of record by more than 2,000 stockholders.
Notwithstanding the above, appraisal rights shall be available
to those stockholders who are required by the terms of the
merger or consolidation to accept for that stock anything other
than:
shares of stock of the corporation surviving or
resulting from the merger or consolidation, or depository
receipts in respect thereof;
shares of stock of another corporation, or
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Rights of PXRE Shareholders
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Rights of Argonaut Shareholders
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depository receipts in respect thereof, which, as of the effective date of the merger or consolidation, are listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 stockholders;
cash in lieu of fractional shares or fractional depository receipts in the foregoing paragraphs; or
any combination of the items listed above.
|
Derivative
Suits
|
|
Class actions and derivative
actions are generally not available to shareholders under
Bermuda law. The Bermuda courts, however, would ordinarily be
expected to permit a shareholder to commence an action in the
name of a company to remedy a wrong to the company where the act
complained of is alleged to be beyond the corporate power of the
company or illegal, or would result in the violation of the
companys memorandum of association or bye-laws.
Furthermore, consideration would be given by a Bermuda court to
acts that are alleged to constitute a fraud against the minority
shareholders or, for instance, where an act requires the
approval of a greater percentage of the companys
shareholders than that which actually approved it. However,
generally a derivative action will not be permitted where there
is an alternative action available that would provide an
adequate remedy. Any property or damages recovered by derivative
action go to the company, not to the plaintiff shareholders.
When the affairs of a company are being conducted in a manner
which is oppressive or prejudicial to the interests of some part
of the shareholders, one or more shareholders may apply to the
Supreme Court of Bermuda, which may make such order as it sees
fit, including an order regulating the conduct of the
companys affairs in the future or ordering the purchase of
the shares of any shareholders by other shareholders or by the
company or that the company be wound up.
|
|
The DGCL requires that the
stockholder bringing a derivative suit must have been a
stockholder at the time of the wrong complained or that he
received the stock by operation of law from a person who was
such a stockholder. In addition, the stockholder must remain a
stockholder throughout the litigation. Furthermore, a
stockholder may not sue derivatively unless he or she first
makes a demand on the corporation that it bring suit and such
demand has been refused, unless it is shown that the demand
would have been futile.
|
|
|
Except as mentioned above, claims against a Bermuda company by its shareholders must
|
|
|
163
|
|
|
|
|
|
|
Rights of PXRE Shareholders
|
|
Rights of Argonaut Shareholders
|
|
|
|
be based on the common law of
Bermuda. A statutory right of action is conferred on subscribers
to shares of a Bermuda company against persons (including
directors and officers) responsible for the issue of a
prospectus in respect of damage suffered by reason of an untrue
statement contained in the prospectus, but this confers no right
of action against the Bermuda company itself. In addition, a
Bermuda company itself (as opposed to its shareholders) may take
action against its officers (including directors) for breach of
their statutory and fiduciary duty to act honestly and in good
faith with a view to the best interests of the company.
|
|
|
Preemptive
Rights
|
|
Under Bermuda law, no shareholder
has a preemptive right to subscribe for additional issues of a
companys shares unless, and to the extent that, the right
is expressly granted to the shareholder under the bye-laws of a
company or under any contract between the shareholder and the
company.
|
|
Under Delaware law, security holders of a corporation only have preemptive rights as may be provided in the corporations certificate of incorporation. Common Stock: Argonauts certificate of incorporation is silent with respect to preemptive rights for holders of Argonauts common stock.
|
|
|
|
|
Preferred Stock: Argonauts certificate of incorporation permits the board of directors to determine the powers, preferences and rights and qualifications, limitations or restrictions granted or imposed on any wholly-unissued series of preferred stock. Under the certificate of designations for the Series A mandatory convertible preferred
stock, for so long as at least 100,000 shares of Series A Preferred Stock remain issued and outstanding, without the approval of the board of directors and the affirmative vote of the holders of greater than 50% (on an as-converted basis) of the outstanding Series A Preferred Stock, voting as a separate class, Argonaut shall not:
|
|
|
|
|
authorize, issue, or obligate itself to issue, or
reclassify any existing equity securities, into any equity
securities ranking senior to, or on parity with the
Series A Preferred Stock as to dividend rights, liquidation
preferences, conversion rights, voting rights or otherwise;
or
increase or decrease (other than by conversion) the
total number of
|
164
|
|
|
|
|
|
|
Rights of PXRE Shareholders
|
|
Rights of Argonaut Shareholders
|
|
|
|
|
|
authorized shares of Series A Preferred Stock; or
alter or change the rights, preference or privileges of the Series A Preferred Stock.
|
Required Purchase and Sale of
Shares; Short Form
Merger
|
|
An acquiring party is generally
able to acquire compulsorily the common shares of minority
holders in the following ways:
|
|
|
|
|
By a procedure under the Companies Act 1981 known
as a scheme of arrangement. A scheme of arrangement
could be effected by obtaining the agreement of the company and
of holders of common shares, representing in the aggregate a
majority in number and at least 75% in value of the common
shareholders present and voting at a court ordered meeting held
to consider the scheme or arrangement. The scheme of arrangement
must then be sanctioned by the Bermuda Supreme Court. If a
scheme of arrangement receives all necessary agreements and
sanctions, upon the filing of the court order with the Registrar
of Companies in Bermuda, all holders of common shares could be
compelled to sell their shares under the terms of the scheme or
arrangement.
If the acquiring party is a company it may
compulsorily acquire all the shares of the target company, by
acquiring pursuant to a tender offer 90% of the shares or class
of shares not already owned by, or by a nominee for, the
acquiring party (the offeror), or any of its subsidiaries. If an
offeror has, within four months after the making of an offer for
all the shares or class of shares not owned by, or by a nominee
for, the offeror, or any of its subsidiaries, obtained the
approval of the holders of 90% or more of all the shares to
which the offer relates, the offeror may, at any time within two
months beginning with the date on which the approval was
obtained, require by notice any nontendering shareholder to
transfer its shares on the same terms as the original offer. In
those circumstances, nontendering shareholders will be compelled
to sell their shares unless the Supreme Court of Bermuda
|
|
|
165
|
|
|
|
|
|
|
Rights of PXRE Shareholders
|
|
Rights of Argonaut Shareholders
|
|
|
|
(on application made within a
one-month period from the date of the offerors notice of
its intention to acquire such shares) orders otherwise.
Where one or more parties holds not less than 95%
of the shares or a class of shares of a company, such holder(s)
may, pursuant to a notice given to the remaining shareholders or
class of shareholders, the shares of such remaining shareholders
or class of shareholders. When this notice is given, the
acquiring party is entitled and bound to acquire the shares of
the remaining shareholders on the terms set out in the notice,
unless a remaining shareholder, within one month of receiving
such notice, applies to the Supreme Court of Bermuda for an
appraisal of the value of their shares. This provision only
applies where the acquiring party offers the same terms to all
holders of shares whose shares are being acquired.
|
|
|
166
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
The preliminary Unaudited Pro Forma Condensed Combined Balance
Sheet at March 31, 2007 combines the historical
consolidated balance sheets of PXRE and Argonaut, giving effect
to the merger as if it had been consummated on March 31,
2007. The preliminary Unaudited Pro Forma Condensed Combined
Income Statements for the three months ended March 31, 2007
and for the year ended December 31, 2006 combine the
historical consolidated statements of income of PXRE and
Argonaut giving effect to the merger as if it had occurred on
January 1, 2006. We have adjusted the historical
consolidated financial statements to give effect to pro forma
events that are (1) directly attributable to the merger,
(2) factually supportable, and (3) with respect to the
statements of income, expected to have a continuing impact on
the combined results. You should read this information in
conjunction with the:
|
|
|
|
|
accompanying notes to the preliminary unaudited pro forma
condensed combined financial statements;
|
|
|
|
|
|
PXREs separate historical unaudited financial statements
as of and for the three months ended March 31, 2007
included in PXREs Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2007;
|
|
|
|
|
|
PXREs separate historical audited financial statements as
of and for the year ended December 31, 2006 included in
PXREs Annual Report on
Form 10-K
for the year ended December 31, 2006;
|
|
|
|
|
|
Argonauts separate historical unaudited financial
statements as of and for the three months ended March 31,
2007 included in Argonauts Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2007; and
|
|
|
|
|
|
Argonauts separate historical audited financial statements
as of and for the year ended December 31, 2006 included in
Argonauts Annual Report on
Form 10-K
for the year ended December 31, 2006.
|
The preliminary unaudited pro forma condensed combined financial
statements have been prepared for informational purposes only.
The preliminary unaudited pro forma adjustments represent
managements estimates based on information available at
this time. The preliminary unaudited pro forma condensed
combined financial statements are not necessarily indicative of
what the financial position or results of operations actually
would have been had the merger been completed at the dates
indicated. In addition, the preliminary unaudited pro forma
condensed combined financial statements do not purport to
project the future financial position or operating results of
the combined company. The preliminary unaudited pro forma
condensed combined financial statements do not give
consideration to the impact of possible revenue enhancements,
expense efficiencies, synergies or asset dispositions that may
result from the merger.
The preliminary unaudited pro forma condensed combined financial
statements have been prepared using the purchase method of
accounting with Argonaut treated as the accounting acquirer.
Accordingly, Argonauts cost to acquire PXRE has been
allocated to the acquired assets, liabilities and commitments
based upon their estimated fair values at the date indicated.
The allocation of the purchase price is preliminary and is
dependent upon certain valuations and other studies that have
not progressed to a stage where there is sufficient information
to make a definitive allocation. Accordingly, the final purchase
accounting adjustments may be materially different from the
preliminary unaudited pro forma adjustments presented herein.
167
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2007
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Argo
|
|
|
|
Argonaut
|
|
|
PXRE
|
|
|
(Note 2)
|
|
|
Group
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Fixed maturities, at fair value
|
|
$
|
2,122.3
|
|
|
$
|
502.1
|
|
|
$
|
|
|
|
$
|
2,624.4
|
|
Equity securities, at fair value
|
|
|
269.3
|
|
|
|
|
|
|
|
|
|
|
|
269.3
|
|
Short-term investments, at fair
value
|
|
|
179.7
|
|
|
|
570.2
|
|
|
|
|
|
|
|
749.9
|
|
Other invested assets
|
|
|
17.0
|
|
|
|
7.7
|
|
|
|
|
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,588.3
|
|
|
|
1,080.0
|
|
|
|
|
|
|
|
3,668.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
31.6
|
|
|
|
9.5
|
|
|
|
26.9
|
(a)
|
|
|
68.0
|
|
Accrued investment income
|
|
|
19.6
|
|
|
|
4.2
|
|
|
|
|
|
|
|
23.8
|
|
Premiums receivable
|
|
|
179.9
|
|
|
|
64.6
|
|
|
|
|
|
|
|
244.5
|
|
Other receivables
|
|
|
|
|
|
|
6.7
|
|
|
|
|
|
|
|
6.7
|
|
Reinsurance recoverables
|
|
|
582.7
|
|
|
|
37.8
|
|
|
|
(1.4
|
)(b)
|
|
|
619.1
|
|
Ceded unearned premiums
|
|
|
119.2
|
|
|
|
11.3
|
|
|
|
|
|
|
|
130.5
|
|
Deferred acquisition costs, net
|
|
|
93.2
|
|
|
|
|
|
|
|
|
|
|
|
93.2
|
|
Deferred tax asset, net
|
|
|
48.2
|
|
|
|
|
|
|
|
(2.6
|
)(c)
|
|
|
45.6
|
|
Goodwill
|
|
|
106.3
|
|
|
|
|
|
|
|
|
|
|
|
106.3
|
|
Other assets
|
|
|
49.6
|
|
|
|
39.2
|
|
|
|
(8.7
|
)(d)
|
|
|
80.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,818.6
|
|
|
$
|
1,253.3
|
|
|
$
|
14.2
|
|
|
$
|
5,086.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Reserves for losses and loss
adjustment expenses
|
|
$
|
2,080.5
|
|
|
$
|
470.0
|
|
|
$
|
(1.4
|
)(b)
|
|
$
|
2,549.1
|
|
Unearned premiums
|
|
|
516.0
|
|
|
|
|
|
|
|
|
|
|
|
516.0
|
|
Reinsurance balances payable
|
|
|
60.3
|
|
|
|
34.0
|
|
|
|
|
|
|
|
94.3
|
|
Subordinated debt
|
|
|
144.3
|
|
|
|
167.1
|
|
|
|
|
|
|
|
311.4
|
|
Note payable
|
|
|
|
|
|
|
|
|
|
|
60.0
|
(e)
|
|
|
60.0
|
|
Accrued underwriting expenses
|
|
|
43.2
|
|
|
|
|
|
|
|
|
|
|
|
43.2
|
|
Deposit liabilities
|
|
|
|
|
|
|
53.5
|
|
|
|
|
|
|
|
53.5
|
|
Current income taxes payable, net
|
|
|
11.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
11.9
|
|
Other liabilities
|
|
|
80.8
|
|
|
|
37.9
|
|
|
|
19.0
|
(f)
|
|
|
137.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,936.5
|
|
|
|
763.0
|
|
|
|
77.6
|
|
|
|
3,777.1
|
|
SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
0.1
|
|
|
|
58.1
|
|
|
|
(58.2
|
)(g)
|
|
|
0.0
|
|
Common stock
|
|
|
3.3
|
|
|
|
72.6
|
|
|
|
(45.4
|
)(h)
|
|
|
30.5
|
|
Additional paid-in capital
|
|
|
304.6
|
|
|
|
873.9
|
|
|
|
(489.3
|
)(i)
|
|
|
689.2
|
|
Accumulated other comprehensive
income, net of taxes
|
|
|
43.4
|
|
|
|
1.5
|
|
|
|
(1.5
|
)(j)
|
|
|
43.4
|
|
Retained earnings (accumulated
deficit)
|
|
|
530.7
|
|
|
|
(512.1
|
)
|
|
|
527.3
|
(k)
|
|
|
545.9
|
|
Restricted stock
|
|
|
|
|
|
|
(3.7
|
)
|
|
|
3.7
|
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
882.1
|
|
|
|
490.3
|
|
|
|
(63.4
|
)
|
|
|
1,309.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
3,818.6
|
|
|
$
|
1,253.3
|
|
|
$
|
14.2
|
|
|
$
|
5,086.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements.
168
Unaudited
Pro Forma Condensed Combined Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Argo
|
|
|
|
Argonaut
|
|
|
PXRE
|
|
|
(Note 2)
|
|
|
Group
|
|
|
|
(In millions, except per share data, and shares in
thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
205.6
|
|
|
$
|
(5.2
|
)
|
|
$
|
|
|
|
$
|
200.4
|
|
Net investment income
|
|
|
28.2
|
|
|
|
13.7
|
|
|
|
|
|
|
|
41.9
|
|
Fee income
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
Realized investment and other
gains (losses), net
|
|
|
0.6
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
234.4
|
|
|
|
6.3
|
|
|
|
|
|
|
|
240.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
119.1
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
115.9
|
|
Underwriting, acquisition and
insurance expense
|
|
|
74.6
|
|
|
|
11.3
|
|
|
|
(0.3
|
)(m)
|
|
|
85.6
|
|
Other reinsurance related expense
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
1.8
|
|
Interest expense
|
|
|
3.3
|
|
|
|
3.6
|
|
|
|
0.9
|
(n)
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
197.0
|
|
|
|
13.5
|
|
|
|
0.6
|
|
|
|
211.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes and convertible preferred share
dividends
|
|
|
37.4
|
|
|
|
(7.2
|
)
|
|
|
(0.6
|
)
|
|
|
29.6
|
|
Provision for income taxes
|
|
|
12.3
|
|
|
|
|
|
|
|
(0.3
|
)(o)
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before convertible preferred share
dividends
|
|
$
|
25.1
|
|
|
$
|
(7.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred share
dividends
|
|
|
|
|
|
|
1.2
|
|
|
|
(1.2
|
)(p)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
continuing operations to common shareholders
|
|
$
|
25.1
|
|
|
$
|
(8.4
|
)
|
|
$
|
0.9
|
|
|
$
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Note 4)
|
|
$
|
0.76
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
$
|
0.58
|
|
Diluted (Note 4)
|
|
$
|
0.73
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
$
|
0.57
|
|
Weighted average number of shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Note 4)
|
|
|
32,917
|
|
|
|
72,049
|
|
|
|
|
|
|
|
30,373
|
|
Diluted (Note 4)
|
|
|
34,203
|
|
|
|
72,049
|
|
|
|
|
|
|
|
30,959
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements.
169
Unaudited
Pro Forma Condensed Combined Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Argo
|
|
|
|
Argonaut
|
|
|
PXRE
|
|
|
(Note 2)
|
|
|
Group
|
|
|
|
(In millions, except per share data, and shares in
thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
813.0
|
|
|
$
|
84.5
|
|
|
$
|
|
|
|
$
|
897.5
|
|
Net investment income
|
|
|
104.5
|
|
|
|
60.7
|
|
|
|
|
|
|
|
165.2
|
|
Fee income
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
0.4
|
|
Realized investment and other
gains (losses), net
|
|
|
21.2
|
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
938.7
|
|
|
|
137.8
|
|
|
|
|
|
|
|
1,076.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
477.6
|
|
|
|
12.4
|
|
|
|
|
|
|
|
490.0
|
|
Underwriting, acquisition and
insurance expense
|
|
|
285.1
|
|
|
|
63.9
|
|
|
|
(2.2
|
)(m)
|
|
|
346.8
|
|
Other reinsurance related expense
|
|
|
|
|
|
|
17.9
|
|
|
|
|
|
|
|
17.9
|
|
Interest expense
|
|
|
13.0
|
|
|
|
14.5
|
|
|
|
3.6
|
(n)
|
|
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
775.7
|
|
|
|
108.7
|
|
|
|
1.4
|
|
|
|
885.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes and convertible preferred share
dividends
|
|
|
163.0
|
|
|
|
29.1
|
|
|
|
(1.4
|
)
|
|
|
190.7
|
|
Provision for income taxes
|
|
|
57.0
|
|
|
|
0.6
|
|
|
|
(1.3
|
)(o)
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before convertible preferred share
dividends
|
|
$
|
106.0
|
|
|
$
|
28.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
134.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred share
dividends
|
|
|
1.0
|
|
|
|
4.9
|
|
|
|
(4.9
|
)(p)
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing
operations to common shareholders
|
|
$
|
105.0
|
|
|
$
|
23.6
|
|
|
$
|
4.8
|
|
|
$
|
133.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Note 4)
|
|
$
|
3.32
|
|
|
$
|
0.33
|
|
|
|
|
|
|
$
|
4.51
|
|
Diluted (Note 4)
|
|
$
|
3.13
|
|
|
$
|
0.33
|
|
|
|
|
|
|
$
|
4.36
|
|
Weighted average number of shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Note 4)
|
|
|
31,641
|
|
|
|
71,954
|
|
|
|
|
|
|
|
29,559
|
|
Diluted (Note 4)
|
|
|
33,900
|
|
|
|
71,959
|
|
|
|
|
|
|
|
30,792
|
|
See Accompanying Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements.
170
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements
Note 1
Basis of Pro Forma Presentation
On March 14, 2007, Argonaut Group, Inc. (Argonaut) entered
into an agreement and plan of merger with PXRE Group Ltd.
(PXRE). The transaction will be treated as a purchase business
combination by Argonaut of PXRE under accounting principles
generally accepted in the United States of America. In this
merger, the acquired entity (PXRE) will issue the equity
interests. This business combination meets the criteria of a
reverse acquisition. Each share of Argonaut common stock will be
exchanged for 6.4672 PXRE common shares (the exchange ratio)
subject to certain adjustments. PXRE convertible preferred
shares will be converted to common shares at closing at a
conversion price of $6.24.
The preliminary Unaudited Pro Forma Condensed Combined Balance
Sheet at March 31, 2007 reflects the merger as if it
occurred on March 31, 2007. The preliminary Unaudited Pro
Forma Condensed Combined Income Statements for the three months
March 31, 2007 and for the year ended December 31,
2006 reflect the merger as if it occurred on January 1,
2006. The pro forma adjustments herein reflect an exchange ratio
of 6.4672 PXRE common shares for each of the
33,111,169 shares of Argonaut common stock outstanding and
500,000 shares of Argonaut preferred stock outstanding at
March 31, 2007, along with 6.4672 PXRE common shares for
each Argonaut restricted share and option vested and exercised
in connection with the merger (see Note 4).
The stock price used in determining the preliminary estimated
purchase price is based on an average of the closing prices of
PXRE common shares for the two trading days before through the
two trading days after PXRE and Argonaut announced their merger
agreement on March 14, 2007. The preliminary estimated
purchase price also includes the fair value of the PXRE stock
options, the fair value adjustment to PXREs preferred
stock and other costs of the transaction, and is calculated as
follows:
|
|
|
|
|
Number of PXRE common shares
outstanding as of March 31, 2007 (in thousands)
|
|
|
72,588
|
|
PXREs average share price
for the two trading days before through the two trading days
after March 14, 2007, the day PXRE and Argonaut announced
their merger agreement
|
|
$
|
4.64
|
|
|
|
|
|
|
Estimated fair value of
PXREs common shares outstanding as of March 31, 2007
(in millions)
|
|
$
|
336.8
|
|
Estimated fair value of
approximately 0.9 million PXRE stock options outstanding as
of March 31, 2007 (in millions)
|
|
|
|
|
Estimated fair value of
PXREs convertible preferred shares outstanding, as of
March 31, 2007 (in millions)
($58.1 million/$6.24=9.3 million shares at $4.64)
|
|
|
43.2
|
|
Estimated transaction costs of
Argonaut (in millions)
|
|
|
12.0
|
|
|
|
|
|
|
Estimated purchase price (in
millions)
|
|
$
|
392.0
|
|
|
|
|
|
|
171
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
The preliminary estimated purchase price has been allocated as
follows based upon purchase accounting adjustments as of
March 31, 2007 (in millions):
|
|
|
|
|
Net book value of net assets
acquired prior to fair value adjustments(1)
|
|
$
|
490.3
|
|
Adjustments for fair value
|
|
|
|
|
Estimated closing costs of PXRE(2)
|
|
|
(7.0
|
)
|
Identifiable intangible assets(3)
|
|
|
7.7
|
|
Reduction related to unamortized
debt issuance costs(4)
|
|
|
(4.0
|
)
|
Increase to record equity
investment at fair value(5)
|
|
|
1.8
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
488.8
|
|
Purchase price
|
|
|
392.0
|
|
|
|
|
|
|
Negative goodwill prior to
adjustment to non-financial assets
|
|
|
(96.8
|
)
|
Adjustments to non-financial
assets(6)
|
|
|
|
|
Write-off of fixed assets
|
|
|
3.6
|
|
Write-off of intangible assets
|
|
|
7.7
|
|
Write-off of equity investment
|
|
|
2.9
|
|
|
|
|
|
|
Adjusted negative goodwill(7)
|
|
$
|
(82.6
|
)
|
|
|
|
|
|
|
|
|
(1) |
|
Represents historical net book value of PXRE. |
|
|
|
(2) |
|
Represents estimated closing costs that will be expensed by PXRE
related to the proposed transaction. |
|
|
|
(3) |
|
Represents identifiable intangible assets acquired-See
Note 3. |
|
|
|
(4) |
|
Represents write-off of unamortized debt issuance costs to
reflect subordinated debt at fair value. |
|
|
|
(5) |
|
Represents adjustment to record equity investment in the
companys Bermuda headquarters at fair value. |
|
|
|
(6) |
|
In accordance with Statement of Financial Accounting Standards
No. 141, Business Combinations these
adjustments represent reductions of non-financial assets to
reduce negative goodwill. |
|
|
|
(7) |
|
Represents pro forma negative goodwill. This pro forma amount is
recorded as an extraordinary gain upon closing of the merger and
accordingly is reflected as an increase in retained earnings in
the March 31, 2007 pro forma balance sheet. |
The preliminary unaudited pro forma condensed combined financial
statements presented herein are not necessarily indicative of
the results of operations or the combined financial position
that would have resulted had the merger been completed at the
dates indicated, nor is it necessarily indicative of the results
of operations in future periods or the future financial position
of the combined company.
The preliminary unaudited pro forma condensed combined financial
statements have been prepared assuming that the merger is
accounted for under the purchase method of accounting (referred
to as purchase accounting) with Argonaut as the acquiring
entity. Accordingly, under purchase accounting, the assets,
liabilities and commitments of PXRE are adjusted to their fair
value. For purposes of these preliminary unaudited pro forma
condensed combined financial statements, consideration has also
been given to the impact of conforming PXREs accounting
policies to those of Argonaut. Additionally, certain amounts in
the historical consolidated financial statements of PXRE have
been reclassified to conform to the Argonaut financial statement
presentation. The preliminary unaudited pro forma condensed
combined financial statements do not give consideration to the
impact of possible revenue enhancements, expense efficiencies,
synergies or asset dispositions. Also, possible adjustments
related to restructuring charges are yet to be determined and
are not reflected in the preliminary unaudited pro forma
condensed combined financial statements. Charges or credits not
expected to have a continuing impact and the related tax effects
which result directly from the transaction and which will be
included in income within twelve months succeeding the
transaction were not considered in the preliminary unaudited pro
forma condensed combined income statements; including an
estimated extraordinary gain of $82.6 million as a result
of negative
172
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
goodwill associated with the excess of fair market value of
assets and liabilities over the estimated purchase price, but
were included in the preliminary unaudited pro forma condensed
combined balance sheet.
The preliminary unaudited pro forma adjustments represent
managements estimates based on information available at
this time. Actual adjustments to the combined balance sheet and
income statement will differ, perhaps materially, from those
reflected in these preliminary unaudited pro forma condensed
combined financial statements because the assets and liabilities
of PXRE will be recorded at their respective fair values on the
date the merger is consummated, and the preliminary assumptions
used to estimate these fair values may change between now and
the completion of the merger.
The preliminary unaudited pro forma adjustments included herein
are subject to other updates as additional information becomes
available and as additional analyses are performed. The final
allocation of the purchase price will be determined after the
merger is consummated and after completion of a thorough
analysis to determine the fair values of PXREs tangible
and identifiable intangible assets and liabilities. Accordingly,
the final purchase accounting adjustments, including conforming
of PXREs accounting policies to those of Argonaut, could
be materially different from the preliminary unaudited pro forma
adjustments presented herein. Any increase or decrease in the
fair value of PXREs assets, liabilities, commitments,
contracts and other items as compared to the information shown
herein will change the purchase price allocable to negative
goodwill and may impact the combined income statement due to
adjustments in yield
and/or
amortization or accretion related to the adjusted assets or
liabilities.
Note 2
Pro Forma Adjustments
The pro forma adjustments related to the preliminary Unaudited
Pro Forma Condensed Combined Balance Sheet at March 31,
2007 assume the merger took place on March 31, 2007. The
pro forma adjustments to the preliminary Unaudited Pro Forma
Condensed Combined Income Statements for the three months ended
March 31, 2007 and for the year ended December 31,
2006 assumes the merger took place on January 1, 2006.
The following pro forma adjustments result from the allocation
of the purchase price for the acquisition based on the fair
value of the assets, liabilities and commitments acquired from
PXRE. The amounts and descriptions related to the preliminary
adjustments are as follows:
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
as of
|
|
|
|
March 31, 2007
|
|
|
|
(In millions)
|
|
|
Unaudited Pro Forma Condensed
Combined Balance Sheet
|
|
|
|
|
Assets
|
|
|
|
|
a) Cash
|
|
$
|
26.9
|
|
To reflect the net cash effect of
vesting of Argonaut restricted stock and options and related
exercise of options
|
|
|
|
|
b) Reinsurance
recoverables and reserves for loss and loss adjustment expenses
|
|
|
|
|
i. Adjustment to
eliminate the inter-company reinsurance recoverables related to
reserves for losses and loss adjustment expenses See
Note 5
|
|
$
|
(1.4
|
)
|
c) To reflect deferred
tax effect of vesting Argonaut restricted stock and options and
related exercise of options
|
|
$
|
(2.6
|
)
|
d) Other assets
|
|
|
|
|
i. Adjustment to
reduce negative goodwill by reducing fixed assets to zero
|
|
$
|
(3.6
|
)
|
ii. Adjustment to
eliminate PXREs unamortized issue costs related to
subordinated debt
|
|
|
(4.0
|
)
|
iii. Adjustment to reflect
fair market value of equity investment
|
|
|
1.8
|
|
173
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
as of
|
|
|
|
March 31, 2007
|
|
|
|
(In millions)
|
|
|
iv. Adjustment to
reduce negative goodwill by reducing equity investment to zero
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
$
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
e) Adjustment to
reflect debt incurred by Argonaut to fund the dividend declared
by Argonaut with a record date of June 26, 2007 and payable
July 10, 2007 prior to the closing
|
|
$
|
60.0
|
|
f) Other liabilities
|
|
|
|
|
i. Adjustment to
record the liability for PXREs estimated merger related
transaction costs
|
|
$
|
7.0
|
|
ii. Adjustment to
record the liability for Argonauts estimated merger
related transaction costs
|
|
|
12.0
|
|
|
|
|
|
|
|
|
$
|
19.0
|
|
|
|
|
|
|
Shareholders
Equity
|
|
|
|
|
g) Adjustment to record
the conversion of PXREs convertible preferred shares to
common shares on closing
|
|
$
|
(58.2
|
)
|
h) Adjustment to
reflect changes in common shares due to the issuance of common
shares and reverse share split
|
|
|
(45.4
|
)
|
i) Adjustment to
reflect changes in additional paid in capital, including
reclassification of PXRE retained deficit to additional paid in
capital and other adjustments
|
|
|
(489.3
|
)
|
j) Adjustment to remove
accumulated other comprehensive income of PXRE
|
|
|
(1.5
|
)
|
k) Adjustment to
eliminate PXRE accumulated deficit of $512.1 million, to
reflect the payment of the $60 million dividend declared
with a record date of June 26, 2007 and payable
July 10, 2007 by Argonaut, to reflect the impact of the
$82.6 million extraordinary gain related to negative
goodwill and to reflect vesting of Argonaut restricted stock and
options for $7.4 million
|
|
|
527.3
|
|
l) Adjustment to remove
PXREs restricted shares due to change of control vesting
provisions
|
|
|
3.7
|
|
|
|
|
|
|
|
|
$
|
(63.4
|
)
|
|
|
|
|
|
174
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
(In millions)
|
|
|
Unaudited Pro Forma Condensed
Combined Income Statement
|
Losses and Expenses
|
|
|
|
|
|
|
|
|
m) Underwriting,
acquisition and insurance expense
|
|
|
|
|
|
|
|
|
Adjustment to reverse depreciation
from the historical results due to the reduction of fair market
value of PXREs fixed assets
|
|
$
|
(0.3
|
)
|
|
$
|
(2.2
|
)
|
Interest Expense
|
|
|
|
|
|
|
|
|
n) Adjustment to record
interest expense at an expected interest rate of 6% on a
revolving credit facility drawn or other indebtedness to fund
payment of a special dividend
|
|
$
|
0.9
|
|
|
$
|
3.6
|
|
Income Taxes
|
|
|
|
|
|
|
|
|
o) Adjustment to record
a tax benefit of 35% on additional interest
|
|
$
|
(0.3
|
)
|
|
$
|
(1.3
|
)
|
Preferred Dividends
|
|
|
|
|
|
|
|
|
p) Adjustment to
reflect conversion of PXRE convertible preferred shares to
common shares at closing
|
|
$
|
(1.2
|
)
|
|
$
|
(4.9
|
)
|
The pro forma adjustments do not include an anticipated
restructuring charge in conjunction with the merger. The
preliminary estimate related to restructuring is approximately
$5 million to $8 million and is subject to final
decisions by management of the combined company. These costs may
include severance payments, asset write-offs and other costs
associated with the process of combining the companies. No
determination has been made as to the allocation of the
restructuring reserve between PXRE and Argonaut related
expenditures for purposes of the preliminary unaudited pro forma
condensed combined financial statements.
Certain other assets and liabilities of PXRE will also be
subject to adjustment to their respective fair values at the
time of the merger. Pending further analysis, no pro forma
adjustments are included herein for these assets and liabilities.
Note 3
Identified Intangible Assets
A summary of the fair value of the significant identifiable
intangible assets and their respective estimated useful lives is
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
Intangible
|
|
|
Estimated
|
|
Amortization
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Method
|
|
|
($ in millions)
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
Noncompete agreements
|
|
$
|
4.5
|
|
|
1 year
|
|
Straight line
|
State licenses
|
|
|
3.2
|
|
|
Indefinite
|
|
Not applicable
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the excess of fair market value of PXREs net assets
over the purchase price, the fair market value of PXREs
identifiable intangible assets, fixed assets and equity
investment were reduced to zero.
The fair value of PXREs Reserves for Losses and Loss
Adjustment Expenses net of related reinsurance recoverables was
analyzed at March 31, 2007, and it was determined that
after giving consideration to the future value of investment
income associated with these amounts as well as assessing the
risk premium that would be
175
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
applicable to these balances, the fair value of these amounts is
equivalent to their carried values on the March 31, 2007
consolidated balance sheet. As a result, no fair value
adjustments were applicable to these balances for these pro
forma condensed combined financial statements.
Note 4
Net Income Per Share, Weighted Shares and
Shares Outstanding
Pro forma shares outstanding at March 31, 2007 consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Historical PXRE common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
72,588
|
|
Historical PXRE convertible
preferred shares outstanding
|
|
|
|
|
|
|
5,813.2
|
|
|
|
|
|
|
|
|
×
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
¸
|
|
|
$
|
11.18
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,788
|
|
Pro forma PXRE convertible
preferred shares converted to common shares at $6.24
|
|
|
|
|
|
|
|
|
|
|
4,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Argonaut common shares
outstanding
|
|
|
|
|
|
|
33,111
|
|
|
|
|
|
Historical Argonaut preferred
shares outstanding
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,611
|
|
|
|
|
|
Argonaut restricted shares and
options vested and exercised on closing of the merger
|
|
|
|
|
|
|
1,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,017
|
|
|
|
|
|
Exchange ratio
|
|
|
|
|
|
|
6.4672
|
|
|
|
226,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group reflecting
shares outstanding before the 1:10 reverse share split
|
|
|
|
|
|
|
|
|
|
|
308,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group shares
outstanding after the 1:10 reverse share split
|
|
|
|
|
|
|
|
|
|
|
30,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group preferred
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
323
|
|
Pro forma Argo Group common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
30,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
Pro forma shares outstanding at December 31, 2006 consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Historical PXRE common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
72,351
|
|
Historical PXRE convertible
preferred shares outstanding
|
|
|
|
|
|
|
5,813.2
|
|
|
|
|
|
|
|
|
×
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
¸
|
|
|
$
|
11.28
|
|
|
|
5,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,504
|
|
Pro forma PXRE convertible
preferred shares converted to common shares at $6.24
|
|
|
|
|
|
|
|
|
|
|
4,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Argonaut common shares
outstanding
|
|
|
|
|
|
|
32,458
|
|
|
|
|
|
Historical Argonaut preferred
shares outstanding
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,458
|
|
|
|
|
|
Argonaut restricted shares and
options vested and exercised on closing of the merger
|
|
|
|
|
|
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,887
|
|
|
|
|
|
Exchange ratio
|
|
|
|
|
|
|
6.4672
|
|
|
|
225,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group reflecting
shares outstanding before the 1:10 reverse share split
|
|
|
|
|
|
|
|
|
|
|
307,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group shares
outstanding after the 1:10 reverse share split
|
|
|
|
|
|
|
|
|
|
|
30,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group preferred
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
647
|
|
Pro forma Argo Group common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
30,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For both March 31, 2007 and December 31, 2006, the pro
forma net income per common share data has been computed based
on the combined historical income of PXRE and Argonaut and the
impact of purchase accounting adjustments. Weighted average
shares were calculated using PXREs historical weighted
average common shares outstanding adjusted for the conversion of
PXREs convertible preferred shares at closing to common
shares at an exchange price of $6.24 and Argonauts
weighted average common shares outstanding multiplied by the
exchange ratio.
177
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
Pro forma weighted shares outstanding for the three months ended
March 31, 2007 and for the year ended December 31,
2006 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
March 31, 2007
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2006
|
|
|
|
(in thousands)
|
|
|
Historical PXRE weighted shares
outstanding
|
|
|
72,049
|
|
|
|
72,049
|
|
|
|
71,954
|
|
|
|
71,959
|
|
Pro forma PXRE convertible
preferred shares adjusted for conversion to common shares on
closing of the merger
|
|
|
9,316
|
|
|
|
9,316
|
|
|
|
9,316
|
|
|
|
9,316
|
|
Pro forma PXRE restricted shares
vested on closing of the merger
|
|
|
310
|
|
|
|
310
|
|
|
|
331
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,675
|
|
|
|
81,675
|
|
|
|
81,601
|
|
|
|
81,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Argonaut weighted
shares outstanding
|
|
|
32,917
|
|
|
|
34,203
|
|
|
|
31,641
|
|
|
|
33,900
|
|
Pro forma Argonaut restricted
shares and options vested and exercised on closing of the merger
|
|
|
1,419
|
|
|
|
1,038
|
|
|
|
1,448
|
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,336
|
|
|
|
35,241
|
|
|
|
33,089
|
|
|
|
34,995
|
|
Exchange ratio
|
|
|
6.4672
|
|
|
|
6.4672
|
|
|
|
6.4672
|
|
|
|
6.4672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,058
|
|
|
|
227,911
|
|
|
|
213,992
|
|
|
|
226,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group weighted
shares outstanding before reflecting the 1:10 reverse share split
|
|
|
303,733
|
|
|
|
309,586
|
|
|
|
295,593
|
|
|
|
307,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Argo Group weighted
shares outstanding after the 1:10 reverse share split
|
|
|
30,373
|
|
|
|
30,959
|
|
|
|
29,559
|
|
|
|
30,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma adjustments reflect the effect of accelerated
vesting of certain share-based compensation, under the
assumption that shares will be settled net on vesting to satisfy
tax withholding liabilities. See additional discussion in
Note 7.
Note 5
Transactions Between PXRE and Argonaut
The preliminary unaudited pro forma condensed combined financial
statements have been adjusted for the impact of transactions
between PXRE and Argonaut.
Note 6
Note Payable
On June 6, 2007, Argonaut declared a $1.65 per share
special dividend with a record date of June 26, 2007
payable on July 10, 2007. As a result, Argonaut intends to
borrow $60 million under a revolving credit facility or
other indebtedness. If the merger had closed on January 1,
2006, the rate of interest was estimated to be 6%. The actual
rate of interest may vary from the estimated amount.
178
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
Note 7
Taxes Payable
Tax expense or benefit has been recognized to the extent that
pre-tax income or expense proforma adjustments were generated by
Argonaut. To the extent that pre-tax income or expense proforma
adjustments related to the ultimate parent company, no tax
expense or benefit was recognized as Argo Group does not
consider itself to be engaged in a trade or business in the
United States and, accordingly, does not expect to be subject to
direct United States income taxation. To the extent that pre-tax
income or expense proforma adjustments related to PXRE
U.S. subsidiaries, no tax expense was recognized as those
subsidiaries have a net operating loss carry-forward with a full
valuation allowance.
The Argonaut stock incentive plan provides that all unvested
stock options and restricted stock awards granted thereunder
will terminate upon the effective time of the merger unless the
Argonaut board of directors affirmatively acts to implement one
or more of the alternative arrangements enumerated therein. As
noted in The Merger Resulting Companys
Initial Annual General Meeting Following the Merger
Replacement of Certain PXRE and Argonaut Benefits Plans with New
Resulting Company Benefit Plans beginning on
page 117, the board of directors of Argonaut has determined
that it is in the best interests of Argonaut and its
shareholders to avoid early termination of grants made under the
Argonaut stock incentive plan by reason of the merger.
Accordingly, the merger agreement provides for the Argonaut
stock incentive plan to be adopted by Argo Group and for all
outstanding awards under the Argonaut stock incentive plan to be
assumed by Argo Group, as of the effective date and time of the
merger, thereby avoiding the termination of any existing grant.
With the exception of the possible acceleration of vesting of
certain outstanding equity awards held by the five executive
officers named in Argonauts annual proxy statement dated
March 30, 2007 and one other executive officer of Argonaut
as described below, when we complete the merger, all equity
awards outstanding as of the effective time of the merger will
be converted into equivalent equity awards of Argo Group. Each
outstanding vested and unvested option to acquire shares of
Argonaut common stock will be automatically converted into an
option to acquire a number of whole common shares of PXRE equal
to the product of the number of shares of Argonaut common stock
that were subject to the original Argonaut stock option
multiplied by the exchange ratio (rounded down to the nearest
whole share) at a per share exercise price of the original
Argonaut stock option divided by the exchange ratio (rounded up
to the nearest whole cent). Upon completion of the reverse share
split, proportionate adjustments will be made to the per share
exercise price and the number of shares issued upon the exercise
of all outstanding options entitling the holders to purchase
Argo Group common shares, which will result in approximately the
same aggregate amount being required to be paid for such options
upon exercise immediately preceding the reverse share split.
Each converted Argonaut stock option will otherwise continue
unaltered and have substantially the same terms and conditions
as were in effect immediately prior to the completion of the
transactions, including, as applicable, vesting and term of
exercise. The unvested number of shares in a restricted stock
grant will be converted into a number of whole common shares of
an Argo Group restricted share grant equal to the product of the
number of unvested shares of Argonaut stock that were subject to
the original Argonaut restricted stock grant multiplied by the
exchange ratio (rounded down to the nearest whole share). The
resulting number of shares will then be divided by ten to
reflect the reverse share split and rounded down to the nearest
whole share to eliminate fractional shares. No fractional shares
will be issued and no cash payment for fractional shares will be
made to holders of unvested restricted stock grants. No other
change will be made to each unvested restricted stock grant, and
the terms and conditions in effect immediately before the
completion of the transactions, including vesting, will be
unchanged.
With respect to the five executive officers named in
Argonauts annual proxy statement dated March 30, 2007
and one other executive officer of Argonaut, the Argonaut board
of directors has determined that it is in the best interests of
Argonaut and its shareholders to provide for the accelerated
vesting of certain unvested stock options and unvested
restricted stock grants held by them, provided that each
executive officer agrees (i) to exercise all of their
outstanding stock options (other than certain out of the
money options, as described below) prior to the effective
time of the merger (including those vested in the ordinary
course prior to the acceleration) and (ii) to enter into a
lockup agreement with Argo Group restricting transfer of a
substantial portion of the Argo Group common shares owned by
such officer for a period of three years following the effective
time of the merger (a period that generally exceeds the previous
vesting period for the accelerated grants), and provided further
that suitable
179
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
arrangements are made for the orderly disposition of any shares
sold prior to the effective time of the merger to cover the
exercise price and income tax liability payable by each such
executive officer in connection with any accelerated vesting of
their grants. To the extent any out of the money
options held by the executive officers are not vested, each
executive officer, as part of their agreement with the Company,
may elect whether or not to have such options accelerated.
Out of the money stock options are the options held
by an executive officer that have an exercise price, as defined
in the applicable option award agreement, in excess of the price
at which the stock last traded on the date the executive officer
makes the election.
The number of Argo Group common shares subject to the three-year
restriction on transfer will be equal in value to 140% to 150%
of the net after-tax value of the accelerated unvested grants
immediately prior to the effective time of the merger. As a
result, it is anticipated that substantially all of the Argo
Group common shares received by each such executive officer as a
result of accelerated vesting will be subject to the lockup
agreements. In addition, a substantial portion of the shares of
Argonaut common stock already beneficially owned and freely
transferable by each such officer prior to the merger may become
subject to the lockup upon conversion to Argo Group common
shares following the merger. Shares required to be held pursuant
to the lockup agreements, while not subject to forfeiture, will
remain subject to the restrictions on transfer regardless of
whether the executive officer remains employed by Argo Group
during the three-year period. Exceptions to the duration of the
lockup period
and/or of
the value of the Argo Group common shares required to be held
may be made by the Argo Group board of directors with respect to
certain executive officers who elect to retire or to assume
different functions within the organization, and for other
appropriate reasons.
The Argonaut board of directors believes that the above measures
relating to such key executive officers will further the
long-term incentive goals of the executive compensation programs
pursuant to which the original equity grants to these executive
officers were made and promote continued alignment of the
economic interests of these executive officers with Argo
Groups shareholders following the merger. In reaching this
determination, the Argonaut board of directors also took into
consideration the possibility that the value of all outstanding
options, vested and unvested, as well as the value of all
unvested restricted shares, beneficially owned by each of these
executive officers upon conversion to equivalent grants of Argo
Group equity, could be subject to a 15% excise tax payable by
each executive officer if Section 4985 of the Code applies
to the merger. Pursuant to the merger agreement, Argo Group has
an indemnification obligation to the officers and directors of
both PXRE and Argonaut in the event any such officer or director
incurs additional tax liability solely as a result of the
merger. However, Argo Group will not indemnify any tax liability
incurred by any executive officer with respect to any
unexercised out of the money options, including any
out of the money options that are not vested and to
which the executive officer elected not to have accelerated. If
Section 4985 applies to the merger, the excise tax would
not apply to the value of any grant for which all taxable income
and gain has been recognized by such officer or director. The
measures described above will result in the recognition of a
taxable event by each of the executive officers who could be
affected by the excise tax under Section 4985 and the
payment of any applicable taxes on income or gains associated
with equity grants that otherwise would have remained unvested
or unexercised at the time of merger. If the excise tax were to
be levied on unvested or unexercised equity grants held by the
six key executive officers following the effective time of the
merger, the indemnity obligation of Argo Group to such executive
officers could be as much as $9 million. This compares to
no additional cash expense to Argonaut if the unvested stock
options and unvested restricted stock are accelerated. However,
as a result of the acceleration of vesting of the outstanding
equity awards held by such executive officers, Argonaut will
incur approximately $10.2 million in non-cash compensation
expense in 2007 that otherwise would have been incurred in
future periods over the normal vesting periods of the
accelerated grants.
If Section 4985 applies to the merger, the measures
described above do not address any excise tax that could be
levied on the value of deferred stock units beneficially owned
at the time of the merger by certain Argonaut directors pursuant
to the Argonaut Deferred Compensation Plan for Non-Employee
Directors, which will not be accelerated. In the event excise
taxes became payable by these Argonaut directors with respect to
the deferred stock units as a result of the merger, the
indemnification obligation of Argo Group to such directors could
amount to approximately $400,000. Stock options granted to
certain Argonaut directors under the Argonaut Non-Employee
Director Stock Option Plan will not be accelerated as they will,
by their terms, already be vested, and are expected to be
exercised,
180
Notes to
the Unaudited Pro Forma Condensed Combined Financial
Statements (Continued)
prior to the effective time of the merger. If such stock options
are not exercised prior to the effective time of the merger, and
an excise tax were to be levied on the unexercised stock options
held by these Argonaut directors following the effective time of
the merger, the indemnification obligation of Argo Group to such
directors could be as much as an additional $600,000.
Note 8
Subsequent Event
Preferred shareholders of Argonaut converted their convertible
preferred shares to common shares subsequent to March 31,
2007 and prior to the closing of the merger.
181
LEGAL
MATTERS
The validity of the PXRE common shares to be issued in the
merger will be passed upon for PXRE by Conyers Dill &
Pearman, Hamilton, Bermuda. The material United States federal
income tax consequences of the merger as described in
Material Tax Considerations beginning on
page 118 will be passed upon for PXRE by Dewey Ballantine,
New York, New York and for Argonaut by LeBoeuf Lamb, New York,
New York.
EXPERTS
The consolidated financial statements and schedules of PXRE as
of December 31, 2006 and 2005, and for each of the years in
the three-year period ended December 31, 2006, and PXRE
managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2006
have been incorporated by reference herein in reliance upon the
reports of KPMG LLP, independent registered public accounting
firm, incorporated by reference herein, and upon the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of Argonaut incorporated
by reference in Argonauts annual report
(Form 10-K)
for the year ended December 31, 2006 (including schedules
appearing therein) and Argonaut managements assessment of
the effectiveness of internal control over financial reporting
as of December 31, 2006 included therein, have been audited
by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their reports thereon,
incorporated by reference or included therein, and incorporated
herein by reference. Such consolidated financial statements and
Argonaut managements assessment are incorporated herein by
reference in reliance upon such reports given on the authority
of such firm as experts in accounting and auditing.
SUBMISSION
OF FUTURE SHAREHOLDER PROPOSALS
PXRE
To Be
Included in PXRE Proxy Materials
The date for PXREs 2007 annual general meeting, which is
expected to be held following the merger, has not yet been
determined. When PXRE sets the date for its 2007 annual general
meeting, notice in the form of a press release of the date, time
and place of such meeting will be provided to its shareholders.
In order for shareholder proposals to be eligible for inclusion
in the 2007 annual general meeting proxy statement, the
proposals must be received by PXREs corporate secretary a
reasonable time before PXRE begins to print and mail its proxy
materials for the annual general meeting.
To Be
Presented In Person at the Shareholder Meeting
PXREs memorandum of association
and/or
bye-laws also require advance notice for any director
nominations or any resolutions to be presented at a
shareholders meeting. Any shareholder entitled to vote at
an annual general meeting may nominate at the meeting one or
more persons for election as directors, but only if written
notice of the intent to make the nomination has been given to
the PXRE corporate secretary at least 60 days before the
meeting. PXRE will provide to its shareholders notice in the
form of a press release of the date, time and place of its 2007
annual general meeting when such date is set. Similar
60 day advance written notice to PXREs secretary is
required for any resolution to be presented at the meeting.
Argonaut
To Be
Included in Argonauts Proxy Materials
In the event that the merger is not completed and Argonaut
continues as a public company, in accordance with rules
established by the SEC, any shareholder proposal submitted
pursuant to
Rule 14a-8
under the Exchange Act intended for inclusion in the proxy
statement and form of proxy for next years annual meeting
of shareholders must be received by Argonaut no later than
December 10, 2007. Proposals should be submitted to Craig
S. Comeaux, Secretary, Argonaut Group, Inc., 10101 Reunion
Place, Suite 500, San Antonio, Texas 78216.
182
To be included in the proxy statement, the proposal must comply
with the requirements as to form and substance established by
the SEC and must be a proper subject for shareholder action
under Delaware law; provided, however, if the date of the
meeting is first publicly announced or disclosed (in a public
filing or otherwise) less than seventy (70) days prior to
the date of the meeting, shareholders must submit their
proposals not more than ten (10) days after such date is
first announced or disclosed. Any shareholder who submits a
proposal must deliver the text of the proposal to be presented
and a brief written statement of the reasons why such
shareholder favors the proposal and setting forth such
shareholders name and address, the number and class of all
shares of each class of stock of Argonaut beneficially owned by
such shareholder and any material interest of such shareholder
in the proposal (other than as a shareholder). Any shareholder
submitting a proposal which includes a recommendation to
nominate one or more directors must include additional
information.
Shareholders wishing to recommend a director candidate to serve
on the board may do so by providing advance written notice to
Argonaut. To make a director nomination at the 2008 annual
meeting, a shareholder must follow the same procedures required
for submitting a shareholder proposal. The notice must set forth:
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the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated;
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the number and class of all shares of each class of capital
stock of Argonaut beneficially owned by the person or persons to
be nominated;
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a representation that the nominating shareholder is a
shareholder of record of the companys stock entitled to
vote at such meeting, including setting forth the number and
class of all shares of each class of capital stock of Argonaut
beneficially owned by the nominating shareholder, and intends to
appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice;
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a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination
or nominations are to be made by the shareholder;
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such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the SEC, had the
nominee been nominated, or intended to be nominated, by the
board; and
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the signed consent of each nominee to serve as a director of
Argonaut if so elected.
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The presiding officer of the annual meeting of shareholders may
refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure. If you are interested
in recommending a director candidate, you may request a copy of
Argonauts bylaws by writing to Craig S. Comeaux,
Secretary, Argonaut Group, Inc., 10101 Reunion Place,
Suite 500, San Antonio, Texas 78216.
To Be
Presented in Person at the Shareholders Meeting
In addition, shareholders may present proposals which are proper
subjects for consideration at an annual meeting, even if the
proposal is not submitted by the deadline for inclusion in the
proxy statement. To do so, the shareholder must comply with the
procedures specified by Argonauts bylaws. Argonauts
bylaws require that all shareholders who intend to make
proposals at an annual meeting submit their proposals to the
Secretary of Argonaut during the period sixty (60) to
ninety (90) days before the date of the meeting.
WHERE YOU
CAN FIND MORE INFORMATION
PXRE and Argonaut file annual, quarterly and current reports,
proxy statements and other information with the SEC. In
addition, PXRE has filed a registration statement under the
Securities Act with the SEC that registers the PXRE common
shares that may be issued in the merger. This document is a part
of that registration statement. The registration statement,
including the attached exhibits and schedules, contains
additional relevant information about PXRE. The rules and
regulations of the SEC allow us to omit from this joint proxy
statement/prospectus some of the information included in the
registration statement.
183
You may read and copy reports, statements or other information
filed by Argonaut and PXRE at the SECs public reference
room:
100 F Street, N.E.
Room 1580
Washington, DC 20549
Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room.
SEC filings made by Argonaut and PXRE are also available for
free to the public on the SECs Internet website at
www.sec.gov, which contains reports, proxy and information
statements and other information regarding companies that file
electronically with the SEC.
In addition, PXREs SEC filings are also available for free
to the public on PXREs website, www.pxre.com, and
Argonauts SEC filings are also available for free to the
public on Argonauts website, www.argonautgroup.com. These
URLs and the SECs URL above are intended to be inactive
textual references only. Information contained on PXREs
website and Argonauts website is not incorporated by
reference into this joint proxy statement/prospectus, and you
should not consider information contained on those websites as
part of this joint proxy statement/prospectus.
The SEC allows PXRE and Argonaut to incorporate by
reference information into this joint proxy
statement/prospectus. This means that companies can disclose
important information to you by referring you to another
document filed separately with the SEC. The information
incorporated by reference is part of this joint proxy
statement/prospectus, except to the extent information included
in this joint proxy statement/prospectus or in a document
subsequently filed with the SEC that is incorporated by
reference supersedes it.
This joint proxy statement/prospectus incorporates by reference
the documents listed below that PXRE and Argonaut have
previously filed with the SEC. These documents contain important
information about PXRE and Argonaut and their financial
condition.
PXRE SEC
Filings (SEC File Number 1-15259)
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Quarterly report on Form 10-Q for the quarter ended
March 31, 2007;
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Annual report on
Form 10-K
or 10-K/A
for the year ended December 31, 2006;
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Current reports on
Form 8-K
or
Form 8-K/A
filed with the SEC on January 3, 2007, February 9,
2007, February 12, 2007, March 15, 2007 (filed
pursuant to Item 8.01 and 9.01), March 16, 2007 and
March 19, 2007;
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Proxy statement filed with the SEC on April 7,
2006; and
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The description of the common shares contained in PXREs
registration statement on
Form 8-A
filed on August 23, 1999 pursuant to Section 12 of the
Exchange Act, including any amendment or report filed for the
purpose of updating the description.
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Argonaut
SEC Filings (SEC File Number 0-14950)
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Quarterly report on Form 10-Q for the quarter ended
March 31, 2007;
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Annual report on
Form 10-K
for the year ended December 31, 2006;
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Current reports on
Form 8-K
or
Form 8-K/A
filed with the SEC on February 12, 2007, March 16,
2007, March 19, 2007, May 31, 2007 and June 7,
2007;
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The description of Argonaut common stock contained in
Form 10 dated September 3, 1986, filed with the SEC on
September 4, 1986, including any amendments or reports
filed for the purpose of updating that description; and
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Proxy statement filed with the SEC on March 22, 2006.
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184
We are also incorporating by reference any additional documents
that either PXRE or Argonaut may file with the SEC after the
date of this joint proxy statement/prospectus and before
July 25, 2007. These documents include reports, such as
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
as well as proxy statements. Nothing in this joint proxy
statement/prospectus shall be deemed to incorporate information
furnished but not filed with the SEC pursuant to applicable SEC
rules and forms.
PXRE has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus relating to
PXRE and Argonaut has supplied all information contained or
incorporated by reference in this joint proxy
statement/prospectus relating to Argonaut.
You can obtain any of the documents incorporated by reference in
this joint proxy statement/prospectus through PXRE or Argonaut,
as appropriate, or from the SEC through the SEC web site
referred to above. Documents incorporated by reference are
available from the applicable company without charge, excluding
any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this
joint proxy statement/prospectus. You can obtain documents
incorporated by reference in this joint proxy
statement/prospectus by requesting them in writing or by
telephone or email from the appropriate company at the following
addresses, telephone numbers and email addresses or obtaining
them from each companys website listed below:
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PXRE Group Ltd.
PXRE House
110 Pitts Bay Road
Pembroke, HM08
Bermuda
Attention: Shareholder Services
(441) 296-5858
bob.myron@pxre.com
www.pxre.com
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Argonaut Group, Inc.
10101 Reunion Place,
Suite 500
San Antonio, TX 78216
Attention: Shareholder Services
(210) 321-8400
investors@argonautgroup.com
www.argonautgroup.com
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If you would like to request documents, you must do so by
July 18, 2007, in order to receive them before the
shareholder meetings. Requested documents will be mailed to
you by first-class mail, or another equally prompt means, as
promptly as practicable after receipt of your request.
You should rely only on the information contained or
incorporated by reference into this joint proxy
statement/prospectus in voting your shares at the shareholder
meetings. We have not authorized anyone to give any information
or make any representation about the merger or our companies
that is different from, or in addition to, that contained in
this joint proxy statement/prospectus or in any of the materials
that we have incorporated into this joint proxy
statement/prospectus. If anyone does give you information of
this sort, you should not rely on it. If you are in a
jurisdiction where offers to exchange or sell, or solicitations
of offers to exchange or purchase, the PXRE common shares
offered by this joint proxy statement/prospectus or the
solicitation of proxies is unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then
the offer presented in this joint proxy statement/prospectus
does not extend to you. The information contained in this joint
proxy statement/prospectus speaks only as of the date of this
joint proxy statement/prospectus unless the information
specifically indicates that another date applies.
185
TABLE
OF CONTENTS
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ARTICLE I DEFINITIONS
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A-7
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Section 1.1
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Definitions
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A-7
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ARTICLE II THE
MERGER; CLOSING; EFFECTIVE TIME
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A-18
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Section 2.1
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The Merger
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A-18
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Section 2.2
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Closing
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A-18
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Section 2.3
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Effective Time
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A-18
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ARTICLE III THE
SURVIVING CORPORATION
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A-18
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Section 3.1
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Certificate of Incorporation
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A-18
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Section 3.2
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By-Laws
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A-18
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Section 3.3
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Directors and Officers
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A-18
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ARTICLE IV EFFECT
OF THE MERGER ON STOCK; EXCHANGE OF CERTIFICATES
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A-19
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Section 4.1
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Effect on Stock
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A-19
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Section 4.2
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Exchange of Certificates for
Merger Consideration
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A-19
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Section 4.3
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Treatment of Company Equity
Compensation
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A-21
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Section 4.4
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Employee Stock Purchase Plan
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A-21
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Section 4.5
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Fractional Shares
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A-21
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Section 4.6
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Recalculated Exchange Ratio
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A-22
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ARTICLE V REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
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A-23
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Section 5.1
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Corporate Status
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A-23
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Section 5.2
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Company Subsidiaries
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A-24
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Section 5.3
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Capitalization
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A-24
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Section 5.4
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Authority; Execution and Delivery;
Enforceability
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A-25
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Section 5.5
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Consents and Approvals; No
Violations
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A-26
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Section 5.6
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Company Financial Statements; SEC
Reports
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A-26
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Section 5.7
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Statutory Statements
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A-27
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Section 5.8
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Absence of Certain Changes or
Events
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A-27
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Section 5.9
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Litigation
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A-27
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Section 5.10
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Absence of Undisclosed Liabilities
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A-28
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Section 5.11
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Title to Property
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A-28
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Section 5.12
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Insurance
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A-28
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Section 5.13
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Disclosure Documents
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A-28
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Section 5.14
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Brokers
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A-29
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Section 5.15
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Contracts
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A-29
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Section 5.16
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Compliance with Law
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A-29
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Section 5.17
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Permits
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A-31
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Section 5.18
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Reserves
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A-32
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Section 5.19
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Reinsurance
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A-32
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Section 5.20
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Taxes
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A-32
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Section 5.21
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Benefit Plans; Employees and
Employment Practices
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A-33
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Section 5.22
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Intellectual Property
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A-34
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Section 5.23
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Information Technology
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A-35
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Section 5.24
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Parent Common Shares Ownership
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A-35
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A-2
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Section 5.25
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Investment Company
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A-35
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Section 5.26
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Opinion of Financial Advisor
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A-35
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Section 5.27
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Bids and Quotes
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A-35
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ARTICLE VI REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
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A-35
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Section 6.1
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Corporate Status
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A-35
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Section 6.2
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Parent Subsidiaries
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A-36
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Section 6.3
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Capitalization
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A-36
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Section 6.4
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Authority; Execution and Delivery;
Enforceability
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A-37
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Section 6.5
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Consents and Approvals; No
Violations
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A-38
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Section 6.6
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Parent Financial Statements; SEC
Reports
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A-38
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Section 6.7
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Statutory Statements
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A-39
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Section 6.8
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Absence of Certain Changes or
Events
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A-39
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Section 6.9
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Litigation
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A-39
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Section 6.10
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Absence of Undisclosed Liabilities
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A-40
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Section 6.11
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Title to Property
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A-40
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Section 6.12
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Insurance
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A-40
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Section 6.13
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Disclosure Documents
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A-40
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Section 6.14
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Brokers
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A-41
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Section 6.15
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Contracts
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A-41
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Section 6.16
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Compliance with Law
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A-42
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Section 6.17
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Permits
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A-44
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Section 6.18
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Reserves
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A-44
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Section 6.19
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Reinsurance
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A-45
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Section 6.20
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Taxes
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A-45
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Section 6.21
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Benefit Plans; Employees and
Employment Practices
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A-47
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Section 6.22
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Intellectual Property
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A-48
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Section 6.23
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Information Technology
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A-48
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Section 6.24
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Company Common
Shares Ownership
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A-49
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Section 6.25
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Investment Company
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A-49
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Section 6.26
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Opinion of Financial Advisor
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A-49
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Section 6.27
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Bids and Quotes
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A-49
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ARTICLE VII CONDUCT
OF BUSINESS BY COMPANY AND PARENT
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A-49
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Section 7.1
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Conduct of Business by the Company
Pending the Merger
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A-49
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Section 7.2
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Conduct of Business by Parent
Pending the Merger
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A-50
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ARTICLE VIII ADDITIONAL
AGREEMENTS
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A-52
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Section 8.1
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Access and Information
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A-52
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Section 8.2
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Preparation of Proxy Statement and
Other Filings; Shareholder Meetings
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A-53
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Section 8.3
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Parent Alternative Transaction
Proposals
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A-54
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Section 8.4
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Filings; Other Action
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A-55
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Section 8.5
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Public Announcements; Public
Disclosures; Privacy Laws
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A-57
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Section 8.6
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Indemnification Provisions
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A-57
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Section 8.7
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State Takeover Laws
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A-58
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Section 8.8
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Stock Exchange Listing
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A-58
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Section 8.9
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Parent Board
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A-58
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A-3
|
|
|
|
|
|
|
Section 8.10
|
|
Name of Parent
|
|
|
A-59
|
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Section 8.11
|
|
Employee Matters
|
|
|
A-59
|
|
Section 8.12
|
|
Tax Matters
|
|
|
A-60
|
|
Section 8.13
|
|
Affiliates
|
|
|
A-60
|
|
Section 8.14
|
|
Increase in Authorized Share
Capital
|
|
|
A-60
|
|
Section 8.15
|
|
Bye-Law Amendment and Memorandum
of Association Amendment
|
|
|
A-60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE IX CONDITIONS
TO CONSUMMATION OF THE MERGER
|
|
|
A-60
|
|
Section 9.1
|
|
Conditions to Each Partys
Obligation To Effect The Merger
|
|
|
A-60
|
|
Section 9.2
|
|
Conditions to Obligations of
Parent and Merger Sub
|
|
|
A-61
|
|
Section 9.3
|
|
Conditions to Obligation of the
Company
|
|
|
A-61
|
|
Section 9.4
|
|
Frustration of Closing Conditions
|
|
|
A-63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE X TERMINATION
|
|
|
A-63
|
|
Section 10.1
|
|
Termination
|
|
|
A-63
|
|
Section 10.2
|
|
Effect of Termination
|
|
|
A-64
|
|
Section 10.3
|
|
Fees and Expenses
|
|
|
A-64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE XI MISCELLANEOUS
|
|
|
A-65
|
|
Section 11.1
|
|
Survival of Representations,
Warranties and Agreements
|
|
|
A-65
|
|
Section 11.2
|
|
Notices
|
|
|
A-65
|
|
Section 11.3
|
|
Expenses
|
|
|
A-66
|
|
Section 11.4
|
|
Descriptive Headings
|
|
|
A-66
|
|
Section 11.5
|
|
Entire Agreement; Assignment
|
|
|
A-66
|
|
Section 11.6
|
|
Governing Law and Venue; Waiver of
Jury Trial
|
|
|
A-66
|
|
Section 11.7
|
|
Amendment
|
|
|
A-67
|
|
Section 11.8
|
|
Waiver
|
|
|
A-67
|
|
Section 11.9
|
|
Counterparts; Effectiveness
|
|
|
A-67
|
|
Section 11.10
|
|
Severability; Validity; Parties in
Interest
|
|
|
A-67
|
|
Section 11.11
|
|
Enforcement of Agreement
|
|
|
A-67
|
|
Exhibit A:
|
|
Form of Voting Agreement
|
|
|
|
|
Exhibit B:
|
|
Form of Certificate of
Incorporation
|
|
|
|
|
Exhibit C:
|
|
Form of Affiliate Agreement
|
|
|
|
|
Exhibit D:
|
|
Secretarys Certificate of
Argonaut Group, Inc.
|
|
|
|
|
A-4
LIST
OF DISCLOSURE SCHEDULES
|
|
|
|
|
|
Parent Disclosure
Schedule
|
|
1
|
.1
|
(a)
|
|
Parent Knowledge Persons
|
|
1
|
.1
|
(b)
|
|
Permitted Encumbrances
|
|
6
|
.1
|
|
|
Corporate Status
|
|
6
|
.2
|
(a)
|
|
Parent Subsidiaries
|
|
6
|
.2
|
(b)
|
|
Ownership of Parent Subsidiaries
|
|
6
|
.2
|
(c)
|
|
Parent Insurance Subsidiaries
|
|
6
|
.3
|
(a)
|
|
Capitalization
|
|
6
|
.3
|
(b)
|
|
Capitalization
Parents Stock Plans
|
|
6
|
.3
|
(c)
|
|
Capitalization
|
|
6
|
.3
|
(d)
|
|
Capitalization
Compliance with Law
|
|
6
|
.3
|
(e)
|
|
Capitalization Parent
Options
|
|
6
|
.4
|
|
|
Authority; Execution and Delivery;
Enforceability
|
|
6
|
.4
|
(d)
|
|
Required Vote
|
|
6
|
.5
|
(a)
|
|
Governmental Consents and Approvals
|
|
6
|
.5
|
(c)
|
|
No Violations
|
|
6
|
.6
|
|
|
Parent Financial Statements; SEC
Reports
|
|
6
|
.7
|
|
|
Statutory Statements
|
|
6
|
.8
|
|
|
Absence of Certain Changes or Events
|
|
6
|
.9
|
(a)
|
|
Litigation
|
|
6
|
.10
|
|
|
Absence of Undisclosed Liabilities
|
|
6
|
.11
|
(a)
|
|
List of Real Property
|
|
6
|
.11
|
(b)
|
|
Title to Property
|
|
6
|
.12
|
|
|
Insurance
|
|
6
|
.13
|
|
|
Disclosure Documents
|
|
6
|
.14
|
|
|
Brokers
|
|
6
|
.15
|
(a)
|
|
Contracts
|
|
6
|
.15
|
(b)
|
|
Contracts
|
|
6
|
.15
|
(c)
|
|
Contracts
|
|
6
|
.16
|
|
|
Compliance with Law
|
|
6
|
.17
|
(a)
|
|
Permits
|
|
6
|
.17
|
(b)
|
|
Permits
|
|
6
|
.17
|
(c)
|
|
Permits
|
|
6
|
.18
|
|
|
Reserves
|
|
6
|
.19
|
|
|
Reinsurance
|
|
6
|
.20
|
(b)
|
|
Taxes
|
|
6
|
.20
|
(e)
|
|
Taxes
|
|
6
|
.20
|
(h)
|
|
Taxes
|
|
6
|
.20
|
(k)
|
|
Taxes
|
|
6
|
.20
|
(l)
|
|
Taxes
|
|
6
|
.20
|
(m)
|
|
Taxes NOLs
|
|
6
|
.21
|
(a)
|
|
Benefit Plans; Employees and
Employment Practices
|
|
6
|
.22
|
(b)
|
|
Intellectual Property
|
|
6
|
.23
|
|
|
Information Technology
|
|
6
|
.24
|
|
|
Company Common Shares Ownership
|
|
6
|
.25
|
|
|
Investment Company
|
|
6
|
.26
|
|
|
Opinion of Financial Advisor
|
|
7
|
.2
|
(a)
|
|
Conduct of Business by Parent
Pending the Merger
|
|
8
|
.2
|
(c)
|
|
Joint Proxy Statement /
Prospectus Parent Employee Benefit Plans
|
|
8
|
.6
|
(d)
|
|
Parent Maximum Premium
|
|
8
|
.15
|
(a)
|
|
Bye-Law Amendment
|
|
8
|
.15
|
(b)
|
|
Memorandum of Association Amendment
Company Disclosure Schedule
|
Company Desclosure
Schedule
|
|
1
|
.1
|
(a)
|
|
Company Knowledge Persons;
Permitted Officer Share Transactions
|
|
1
|
.1
|
(b)
|
|
Permitted Encumbrances
|
|
5
|
.2
|
(a)
|
|
Company Subsidiaries
|
|
5
|
.2
|
(c)
|
|
Company Insurance Subsidiaries
|
|
5
|
.3
|
(b)
|
|
Company Stock Plans
|
|
5
|
.5
|
(a)
|
|
Company Required Regulatory
Approvals
|
|
5
|
.5
|
(c)
|
|
Consents and Approvals; No
Violations
|
|
5
|
.9
|
(a)
|
|
Proceedings
|
|
5
|
.11
|
(a)
|
|
Company Real Property
|
|
5
|
.15
|
(a)
|
|
Contracts
|
|
5
|
.17
|
(b)
|
|
Company Insurance
Subsidiaries Jurisdictions
|
|
5
|
.17
|
(c)
|
|
Regulatory Matters
|
|
7
|
.1
|
(a)
|
|
Conduct of Business by the Company
|
|
8
|
.2
|
(c)
|
|
Joint Proxy Statement / Prospectus
|
|
8
|
.6
|
(c)
|
|
Company Maximum Premium
|
A-5
AGREEMENT
AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is made and entered into as of
the 14th day of March, 2007, and amended and restated as of
June 8, 2007 (this Agreement) by and among PXRE
Group Ltd., a company organized under the laws of Bermuda
(Parent), PXMS Inc., a Delaware corporation
and wholly owned Subsidiary of Parent (Merger
Sub), and Argonaut Group, Inc., a Delaware corporation
(the Company).
RECITALS
WHEREAS, Parent, Merger Sub and the Company entered into an
Agreement and Plan of Merger dated as of March 14, 2007
(the Original Agreement);
WHEREAS, Parent, Merger Sub and the Company wish to amend and
restate the Original Agreement;
WHEREAS, the parties intend that Merger Sub will be merged with
and into the Company (the Merger), with the
Company surviving the Merger as an indirect wholly owned
Subsidiary of Parent in accordance with the General Corporation
Law of the State of Delaware (the DGCL);
WHEREAS, for United States federal income tax purposes it is
intended that the Merger qualify as a reorganization within the
meaning of Section 368(a) of the Code and that this
Agreement will be, and is hereby, adopted as a Plan of
Reorganization for the purposes of Section 368(a) of the
Code;
WHEREAS, Parent has agreed that the conversion as of the
Effective Time of the Parent Convertible Common Shares and
Parent Preferred Shares to Parents common shares, par
value $1.00 per share (the Parent Common
Shares) shall be a condition to the closing of the
Merger;
WHEREAS, Parent has agreed to cause a 1 for 10 reverse stock
split of the Parent Common Shares immediately after the
Effective Time;
WHEREAS, to implement the foregoing, Parent has agreed to effect
certain amendments to its Memorandum of Association and Bye-Laws
as a condition to the closing of the Merger;
WHEREAS, concurrently with the execution of this Agreement, in
order to manifest their support for this Agreement and the
transactions contemplated hereby, certain holders of the Parent
Preferred Shares and the Parent Convertible Common Shares are
entering into a voting and conversion agreement and irrevocable
proxy and waiver, dated as of the date hereof, in the form
attached hereto as Exhibit A (the Voting
Agreement);
WHEREAS, the Board of Directors of the Company (the
Company Board) has unanimously
(i) determined that this Agreement and the transactions
contemplated hereby, including the Merger, are advisable and
fair to, and in the best interests of, the Company and the
Companys stockholders, (ii) approved and declared
advisable this Agreement and the transactions contemplated
hereby, including the Merger, (iii) directed that this
Agreement be submitted to the Companys stockholders for
their adoption and (iv) resolved to recommend that the
Companys stockholders adopt this Agreement;
WHEREAS, the Special Committee (the Parent Special
Committee) of the Board of Directors of Parent (the
Parent Board) has unanimously
(i) determined that this Agreement and the transactions
contemplated hereby, including the Merger, the issuance of
Parent Common Shares in the Merger, and the Voting Agreement,
are advisable and fair to, and in the best interests of, Parent
and its shareholders and (ii) resolved to recommend that
the Parent Board approve this Agreement and the transactions
contemplated hereby, including the Merger, the issuance of
Parent Common Shares in the Merger, and the Voting Agreement;
WHEREAS, the Parent Board, upon the recommendation of the Parent
Special Committee, has unanimously (i) determined that this
Agreement and the transactions contemplated hereby, including
the Merger, the issuance of Parent Common Shares in the Merger,
the Voting Agreement and the conversion of the Parent Preferred
Shares and the Parent Convertible Common Shares into Parent
Common Shares, are advisable and fair to, and in the best
interests of, Parent and its shareholders, (ii) approved
this Agreement and the transactions contemplated hereby,
including the Merger, the issuance of Parent Common Shares in
the Merger, and the Voting Agreement, (iii) directed
A-6
that the Parent Voting Proposal be submitted to Parents
shareholders for their approval and (iv) resolved to
recommend that Parents shareholders adopt the Parent
Voting Proposal;
WHEREAS, the board of directors of Merger Sub has unanimously
approved this Agreement and the transactions contemplated
hereby, including the Merger, and the sole stockholder of Merger
Sub has adopted this Agreement and the transactions contemplated
hereby, including the Merger; and
WHEREAS, Parent, Merger Sub and the Company desire to make
certain representations, warranties, covenants and agreements in
connection with the Merger and also to prescribe certain
conditions to the Merger, as set forth herein.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained
herein, the parties agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions. For
purposes of this Agreement, the following terms have the
respective meanings set forth below:
(a) Certain Terms. Whenever used in this
Agreement (including in the Company Disclosure Schedule and the
Parent Disclosure Schedule), the following terms shall have the
respective meanings given to them below or in the Sections
indicated below:
A. M. Best has the meaning set forth in
Section 7.1(a).
Affiliate means any Person that, directly or
indirectly, controls, is controlled by or is under common
control with another Person, including such Persons
directors. For the purposes of this definition,
control (including with correlative meanings, the
terms controlling, controlled by, and
under common control with) as applied to any Person,
means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of
that Person, whether through ownership of voting securities or
by contract or otherwise.
Agreement has the meaning set forth in the
Preamble.
Applicable Law means any federal, state,
local, municipal, foreign or other law, statute, code,
constitution, legislation, rule, regulation, ruling, ordinance,
Order, edict, injunction, judgment, decree, binding resolution,
principle of common law, requirement, or treaty enacted,
adopted, promulgated, implemented, issued, enforced, entered or
otherwise put into effect by or under the authority of any
Governmental Entity applicable to the parties, or any of their
respective Affiliates, Subsidiaries, properties or assets, as
the case may be.
Business Combination Transaction means any
merger, consolidation, share exchange, business combination,
reorganization, recapitalization, liquidation, dissolution or
other similar transaction, other than the Merger and the
transactions contemplated by this Agreement.
Business Day means any day other than a
Saturday, Sunday or a day on which banks in the City of New York
or in Bermuda are permitted or obligated by law to be closed for
regular banking business.
By-Laws has the meaning set forth in
Section 3.2.
Certificate has the meaning set forth in
Section 4.1(b).
Certificate of Incorporation has the meaning
set forth in Section 3.1.
Certificate of Merger has the meaning set
forth in Section 2.3.
Closing has the meaning set forth in
Section 2.2.
Closing Date has the meaning set forth in
Section 2.2.
A-7
Code means the Internal Revenue Code of 1986,
as amended.
Company has the meaning set forth in the
Preamble.
Company Adverse Recommendation Change means
any action by the Company Board (or committee thereof) to,
directly or indirectly, withdraw (or amend or modify in a manner
adverse to Parent) or publicly propose to withdraw (or amend or
modify in a manner adverse to Parent), the approval,
recommendation or declaration of advisability by the Company
Board (or any committee thereof) of this Agreement, the Merger
or the other transactions contemplated by this Agreement.
Company Alternative Transaction means any of
the following or any agreement to do any of the following:
(i) any Business Combination Transaction involving the
Company or any of the Company Subsidiaries; (ii) any
acquisition by the Company or any of the Company Subsidiaries of
any capital stock or assets of any Third Party; or
(iii) any disposition of any capital stock or assets of the
Company or any of the Company Subsidiaries, that, in the case of
each of clauses (i), (ii) and (iii), either in a
single transaction or a series of related transactions, involves
an aggregate consideration in excess of $300 million.
Company Asset Sale means any disposition of,
or agreement to dispose, any assets of the Company or any
capital stock or assets of the Company Subsidiaries, other than
dispositions or agreements to dispose investment securities in
the Ordinary Course of Business; provided,
however, that any single disposition, group of related
dispositions or agreement to so dispose that involves a gain or
loss of less than $100,000 shall be deemed not to be a Company
Asset Sale.
Company Asset Sale Reduction Amount means the
excess of that portion of total shareholders
equity as of December 31, 2006, as set forth in the
Companys Financial Statements as of and for the year ended
December 31, 2006, attributable to the assets or capital
stock disposed or to be disposed in connection with a Company
Asset Sale, over the consideration received or to be received in
connection with such Company Asset Sale, taking into account any
tax benefit or tax detriment recognized or to be recognized with
respect to such Company Asset Sale; provided, that in the
event that the sum of all gains and losses resulting from all
such Company Asset Sales between the date hereof and the
Effective Time does not exceed $10.0 million, then the
Company Asset Sale Reduction Amount shall be zero.
Company Benefit Plan means any Company
Pension Plan, Company Welfare Plan and any other material plan,
fund, program, arrangement or agreement to provide employees,
directors, independent contractors, consultants, officers or
agents with medical, health, life, bonus, stock or stock-based
rights (option, ownership or purchase), retirement, deferred
compensation, severance, salary continuation, vacation, sick
leave, fringe, incentive, insurance or other benefits)
maintained, or contributed to, or required to be contributed to,
by the Company or any of its Subsidiaries for the benefit of any
current or former independent contractors, consultants, agents,
employees, officers or directors of the Company or any of its
Subsidiaries.
Company Board has the meaning set forth in
the Recitals.
Company Book Value means $847,700,000, which
is total shareholders equity as of
December 31, 2006, as set forth in the Company Financial
Statements as of and for the year ended December 31, 2006.
Company Common Shares has the meaning set
forth in Section 5.3(a).
Company Converted Option has the meaning set
forth in Section 4.3(a).
Company Disclosure Schedule has the meaning
set forth in Article V.
Company Dividend means any declaration by the
Company of a dividend on the Company Common Shares, other than
regular quarterly cash dividends not exceeding $0.15 per
share, the Special Dividend, and cash dividends required to be
paid pursuant to the terms of the Company Series A
Preferred Shares.
A-8
Company Dividend Amount means the aggregate
amount of Company Dividends paid or to be paid by the Company.
Company Employee Option means each right to
purchase Company Common Shares granted pursuant to any equity
compensation plan maintained by the Company to any participant
therein, that is outstanding and unexercised immediately prior
to or as of the Effective Time.
Company Financial Statements has the meaning
set forth in Section 5.6(b).
Company Indemnified Parties has the meaning
set forth in Section 8.6(a).
Company Insurance Policies means all policies
of insurance (excluding retrocession agreements and similar
agreements) maintained by the Company or by any of its
Subsidiaries as of the date hereof with respect to their
respective properties, assets, business, operations, employees,
officers or directors or managers.
Company Insurance Subsidiaries has the
meaning set forth in Section 5.2(c).
Company IP Rights has the meaning set forth
in Section 5.22(a).
Company Issuance means any issuance of, or
agreement to issue, Company Common Shares, or securities
convertible into or exchangeable for Company Common Shares,
other than issuances in connection with or pursuant to:
(i) the conversion of the Company Series A Preferred
Shares, (ii) any exercise of Company Employee Options,
(iii) any Company Benefit Plan or (iv) any Permitted
Officer Share Transaction.
Company Issuance Consideration means the
aggregate consideration received or to be received by the
Company or any of the Company Subsidiaries in connection with
any Company Issuance.
Company IT Systems means any and all
information technology and computer systems (including
computers, software, databases, middleware, firmware, servers,
workstations, routers, hubs, switches, networks, data
communications lines and hardware) relating to the transmission,
storage, organization, processing or analysis of data and
information, which technology and systems are used in or
necessary to the conduct of the business of the Company or any
of the Company Subsidiaries.
Company Material Adverse Effect means any
event, occurrence, fact, condition, change, development or
effect that is materially adverse to the business, assets,
properties, liabilities, results of operations or condition
(financial or otherwise) of the Company and the Company
Subsidiaries, taken as a whole, except to the extent that such
event, occurrence, fact, condition, change, development or
effect results from: (i) general economic, financial or
security market conditions so long as such conditions do not
have a materially disproportionate effect on the Company and the
Company Subsidiaries, taken as a whole, compared to other
similarly situated companies in the Companys industry;
(ii) changes in or events affecting the financial services
industry, insurance and insurance services industries or
brokerage industry generally so long as such conditions do not
have a materially disproportionate effect on the Company and the
Company Subsidiaries, taken as a whole, compared to other
similarly situated companies in the Companys industry;
(iii) any effect arising out of a change in U.S. GAAP,
SAP or Applicable Law so long as such conditions do not have a
materially disproportionate effect on the Company and the
Company Subsidiaries, taken as a whole, compared to other
similarly situated companies in the Companys industry;
(iv) the announcement or pendency of this Agreement and the
transactions contemplated hereby; (v) changes in the market
price or trading volume of the Company Common Shares on the
NASDAQ Global Select Market (provided that this clause (v)
shall not exclude any underlying event, change or circumstance
that itself constitutes a Company Material Adverse Effect that
may have resulted in or contributed to or is attributable to
such change in the market price or trading volume);
(vi) any failure by the Company to meet any published
estimates of revenues, earnings or other financial projections;
(vii) natural disasters so long as such natural disasters
do not have a materially disproportionate effect on the Company
and the Company Subsidiaries, taken as a whole, compared to
other similarly situated companies in the Companys
industry; (viii) the commencement, occurrence or
intensification of any engagement in hostilities, whether or not
pursuant to the declaration of a national
A-9
emergency or war, or the occurrence of any military or terrorist
attack that does not directly affect the assets or properties of
the Company or any Company Subsidiary; or (ix) compliance
by the Company with the terms and conditions of this Agreement.
Company Material Contracts has the meaning
set forth in Section 5.15(a).
Company Maximum Premium has the meaning set
forth in Section 8.6(c).
Company Non-Compete Contract has the meaning
set forth in Section 5.15(a).
Company Pension Plans means all
employee pension benefit plans (as defined in
Section 3(2) of ERISA) maintained, or contributed to, or
required to be contributed to, by the Company or any of its
Subsidiaries for the benefit of any current or former
independent contractors, consultants, agents, employees,
officers or directors of the Company or any of its Subsidiaries.
Company Permits has the meaning set forth in
Section 5.17(a).
Company Purchase means any purchase of, or
any agreement to purchase, Company Common Shares, or securities
convertible into or exchangeable for Company Common Shares, by
the Company or any of the Company Subsidiaries other than
Permitted Officer Share Transactions.
Company Purchase Consideration means the
aggregate consideration paid or to be paid by the Company or any
of the Company Subsidiaries in connection with any Company
Purchase.
Company Reinsurance Agreements has the
meaning set forth in Section 5.19(a).
Company Reports has the meaning set forth in
Section 5.6(c).
Company Required Regulatory Approvals has the
meaning set forth in Section 5.5(a).
Company Restricted Stock means Company Common
Shares granted pursuant to any equity compensation plan
maintained by the Company to any participant therein, that are
subject to vesting or other restrictions as of the Effective
Time.
Company Retrocession Agreements has the
meaning set forth in Section 5.19(b).
Company Series A Preferred Shares has
the meaning set forth in Section 5.3(a).
Company Statutory Statements has the meaning
set forth in Section 5.7(a).
Company Stockholder Approval has the meaning
set forth in Section 5.4(c).
Company Stockholders Meeting has the meaning
set forth in Section 8.2(d).
Company Subsidiaries has the meaning set
forth in Section 5.2(a).
Company Termination Fee has the meaning set
forth in Section 10.3(a).
Company Voting Debt has the meaning set forth
in Section 5.3(c).
Company Welfare Plans means all
employee welfare benefit plans (as defined in
Section 3(1) of ERISA) maintained, or contributed to, or
required to be contributed to, by the Company or any of its
Subsidiaries for the benefit of any current or former
independent contractors, consultants, agents, employees,
officers or directors of the Company or any of its Subsidiaries.
Confidentiality Agreement has the meaning set
forth in Section 8.1.
Contract means any contract, plan,
undertaking, arrangement, concession, understanding, agreement,
agreement in principle, franchise, permit, instrument, license,
lease, sublease, note, bond, indenture, deed of trust, mortgage,
loan agreement or other binding commitment, whether written or
oral, and any binding agreements amending or modifying the terms
thereof.
Controlled Group Liability has the meaning
set forth in Section 5.21(f).
DGCL has the meaning set forth in the
Recitals.
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Effective Time has the meaning set forth in
Section 2.3.
Encumbrance means any mortgage, claim,
security interest, encumbrance, license, lien, charge or other
similar restriction or limitation.
ERISA means the Employee Retirement Income
Security Act of 1974, as amended.
Exchange Act means the Securities Exchange
Act of 1934, as amended.
Exchange Agent has the meaning set forth in
Section 4.2(a)(i).
Exchange Fund has the meaning set forth in
Section 4.2(a)(i).
Exchange Ratio means the lesser of the
Preliminary Exchange Ratio and the Recalculated Exchange Ratio.
Excluded Shares has the meaning set forth in
Section 4.1(a).
Executive Contracts has the meaning set forth
in Section 5.15(a).
Form A Filings has the meaning set forth
in Section 8.4(c).
Governmental Entity means any court or
tribunal or administrative, governmental or regulatory body,
agency, commission, board, legislature, instrumentality,
division, department, public body or other authority of any
nation or government or any political subdivision thereof,
whether foreign or domestic and whether national, supranational,
state or local.
HIPAA means the United States Health
Insurance Portability and Accountability Act of 1996.
Holder has the meaning set forth in
Section 4.2(a)(i).
HSR Act means the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
Insurance Regulator means the Governmental
Entity charged with supervision of insurance companies of a
Persons jurisdiction of domicile.
Intellectual Property means any and all of
the following, and rights in, arising out of, or associated
therewith: U.S. and
non-U.S. (i) patents,
utility models, supplementary protection certificates and
applications therefor (including provisional applications,
invention disclosures, certificates of invention and
applications for certificates of invention) and divisionals,
continuations,
continuations-in-part,
patents of addition, reissues, renewals, extensions,
re-examinations, and equivalents thereof; (ii) trade
secrets, know-how, proprietary information, customer lists,
confidential information, inventions, discoveries, improvements,
methods, methodologies, technology, and research and
development, whether patentable or not; (iii) trademarks,
service marks, trade dress, trade names and Internet domain
names and registrations and applications therefor, and
equivalents thereof; (iv) copyrights, mask works, works of
authorship, software (including source code, object code and
executables), registrations and applications therefor, and
equivalents thereof together with all goodwill related to the
foregoing; and (v) other intellectual property, industrial
property and proprietary rights.
Investment Company Act has the meaning set
forth in Section 5.25.
IRS means the United States Internal Revenue
Service.
Joint Proxy Statement/Prospectus has the
meaning set forth in Section 8.2(a).
Judgment means any judgment, order or decree.
Knowledge of Parent (or
Parents Knowledge) means the actual
knowledge, after making reasonable inquiry in their respective
areas of responsibility, of any of the individuals listed on
Schedule 1.1(a) of the Parent Disclosure Schedule as
of the date hereof and, if so specified, as of the Closing.
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Knowledge of the Company (or
Companys Knowledge) means the actual
knowledge, after making reasonable inquiry in their respective
areas of responsibility, of any of the individuals listed on
Schedule 1.1(a) of the Company Disclosure Schedule
as of the date hereof and, if so specified, as of the Closing.
Merger has the meaning set forth in the
Recitals.
Merger Consideration has the meaning set
forth in Section 4.1(a).
Merger Sub has the meaning set forth in the
Preamble.
NASD means the National Association of
Securities Dealers, Inc.
NASDAQ means the National Association of
Securities Dealers Automated Quotation system.
New Plans has the meaning set forth in
Section 8.11(b).
NOL has the meaning set forth in
Section 6.20(m).
NYSE means the New York Stock Exchange.
Old Plans has the meaning set forth in
Section 8.11(b).
Order means any decree, judgment, injunction
or other order, whether temporary, preliminary or permanent.
Ordinary Course of Business means the
ordinary course of business consistent with past practice
(including with respect to frequency, scope and amount);
provided that, in the case of Parent, Ordinary Course of
Business shall mean since March 1, 2006 only.
Organizational Documents means, with respect
to any entity, the certificate or articles of incorporation and
by-laws of such entity, or any similar organizational documents
of such entity.
Original Agreement has the meaning set forth
in the Recitals.
Other Filings has the meaning set forth in
Section 8.2(a).
Outside Date has the meaning set forth in
Section 10.1(b).
Parent has the meaning set forth in the
Preamble.
Parent Adverse Recommendation Change has the
meaning set forth in Section 8.3(b).
Parent Alternative Transaction means:
(i) a Business Combination Transaction directly involving
Parent; (ii) Parents acquisition of any Third Party
in a Business Combination Transaction in which the shareholders
of the Third Party immediately prior to consummation of such
Business Combination Transaction will own more than twenty-five
percent (25%) of Parents outstanding capital stock
immediately following such Business Combination Transaction,
including the issuance by Parent of more than twenty-five
percent (25%) of any class of its voting equity securities as
consideration for assets or securities of a Third Party or
(iii) any direct or indirect acquisition or purchase, in a
single transaction or a series of related transactions, of
assets or properties, including by means of the acquisition of
capital stock, that constitutes twenty-five percent (25%) or
more of the assets of Parent and the Parent Subsidiaries, taken
as a whole, or twenty-five percent (25%) or more of any class of
equity securities of Parent other than the Merger and the
transactions contemplated by this Agreement.
Parent Alternative Transaction Proposal means
any inquiry, proposal or offer from any Person relating to, or
that could reasonably be expected to lead to, a Parent
Alternative Transaction.
Parent Benefit Plan means any Parent Pension
Plan, Parent Welfare Plan and any other material plan, fund,
program, arrangement or agreement to provide employees,
directors, independent contractors, consultants, officers or
agents with medical, health, life, bonus, stock or stock-based
rights (option, ownership or purchase), retirement, deferred
compensation, severance, salary continuation, vacation, sick
leave, fringe, incentive, insurance or other benefits)
maintained, or contributed to, or required to be
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contributed to, by the Parent or any of its Subsidiaries for the
benefit of any current or former independent contractors,
consultants, agents, employees, officers or directors of Parent
or any of its Subsidiaries.
Parent Board has the meaning set forth in the
Recitals.
Parent Common Shares has the meaning set
forth in the Recitals.
Parent Contracts has the meaning set forth in
Section 6.15(a).
Parent Convertible Common Shares has the
meaning set forth in Section 6.3(a).
Parent Disclosure Schedule has the meaning
set forth in Article VI.
Parent Employee Option means each right to
purchase Parent Common Shares or equity interests in any Parent
Subsidiary, granted pursuant to any equity compensation plan
maintained by Parent to a participant therein, that is
outstanding and unexercised immediately prior to the Effective
Time.
Parent Employees has the meaning set forth in
Section 8.11(a).
Parent Financial Statements has the meaning
set forth in Section 6.6(b).
Parent Insurance Contracts means all
Contracts, including treaties, policies, binders, slips,
certificates, annuity contracts, participation agreements, or
other written arrangements, whether individual or group
(including all applications, supplements, endorsements, riders
and ancillary agreements in connection therewith), to which
Parent or any of its Subsidiaries is a party or by or to which
any of them is bound or subject providing for insurance, in each
case as such Contract, treaty, policy or other written
arrangement may have been amended, modified or supplemented,
other than the Parent Insurance Policies, the Parent Reinsurance
Agreements or the Parent Retrocession Agreements.
Parent Insurance Policies means all policies
of insurance (excluding retrocession agreements and similar
agreements) maintained by Parent or by any of its Subsidiaries
as of the date hereof with respect to their respective
properties, assets, business, operations, employees, officers or
directors or managers.
Parent Insurance Subsidiaries has the meaning
set forth in Section 6.2(c).
Parent IP Rights has the meaning set forth in
Section 6.22(a).
Parent IT Systems means any and all
information technology and computer systems (including
computers, software, databases, middleware, firmware, servers,
workstations, routers, hubs, switches, networks, data
communications lines and hardware) relating to the transmission,
storage, organization, processing or analysis of data and
information, which technology and systems are used in or
necessary to the conduct of the business of Parent or any of the
Parent Subsidiaries.
Parent Material Adverse Effect means any
event, occurrence, fact, condition, change, development or
effect that is materially adverse to the business, assets,
properties, liabilities, results of operations or condition
(financial or otherwise) of Parent and the Parent Subsidiaries,
taken as a whole, except to the extent that such event,
occurrence, fact, condition, change, development or effect
results from: (i) general economic, financial or security
market conditions so long as such conditions do not have a
disproportionate effect on Parent and the Parent Subsidiaries,
taken as a whole, as compared to other similarly situated
companies in Parents industry; (ii) changes in or
events affecting the financial services industry, insurance and
insurance services industries generally so long as such
conditions do not have a disproportionate effect on Parent and
the Parent Subsidiaries, taken as a whole, as compared to other
similarly situated companies in Parents industry;
(iii) any effect arising out of a change in U.S. GAAP,
SAP or Applicable Law so long as such conditions do not have a
disproportionate effect on Parent and the Parent Subsidiaries,
taken as a whole, as compared to other similarly situated
companies in Parents industry; (iv) the announcement
or pendency of this Agreement and the transactions contemplated
hereby; (v) changes in the market price or trading volume
of the Parent Common Shares on the NYSE (provided that this
clause (v) shall not exclude any underlying event, change
or circumstance that itself constitutes a Parent Material
Adverse Effect that may have resulted in or contributed to or is
attributable to such change in the market price or trading
volume); (vi) the loss of any employees, brokers,
producers, independent
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contractors, customers or customer assets; (vii) natural
disasters so long as such natural disasters do not have a
materially disproportionate effect on Parent and the Parent
Subsidiaries, taken as a whole, compared to other similarly
situated companies in the Parents industry;
(viii) the commencement, occurrence or intensification of
any engagement in hostilities, whether or not pursuant to the
declaration of a national emergency or war, or the occurrence of
any military or terrorist attack that does not directly affect
the assets or properties of Parent or any Parent Subsidiary; or
(ix) compliance by Parent with the terms and conditions of
this Agreement. For the avoidance of doubt, reinsurance losses
incurred by Peleus Re, or by the Subsidiaries of Parent arising
from reinsurance provided to Peleus Re, shall not be considered
in determining whether a Parent Material Adverse Effect has
occurred.
Parent Maximum Premium has the meaning set
forth in Section 8.6(d).
Parent Pension Plans means all employee
pension benefit plans (as defined in Section 3(2) of
ERISA) maintained, or contributed to, or required to be
contributed to, by Parent or any of its Subsidiaries for the
benefit of any current or former independent contractors,
consultants, agents, employees, officers or directors of Parent
or any of its Subsidiaries.
Parent Permits has the meaning set forth in
Section 6.17(a).
Parent Preferred Consents means all of the
approvals of the holders of the Parent Preferred Shares
and/or the
holders of the Parent Convertible Common Shares required for the
consummation of the transactions contemplated by this Agreement,
as set forth in Schedule 6.4(d) of the Parent
Disclosure Schedule, other than any such approvals where such
holders are voting together with the holders of Parent Common
Shares as a single class.
Parent Preferred Shares has the meaning set
forth in Section 6.3(a).
Parent Reinsurance Agreements has the meaning
set forth in Section 6.19(a).
Parent Reports has the meaning set forth in
Section 6.6(c).
Parent Required Regulatory Approvals has the
meaning set forth in Section 6.5(a).
Parent Retrocession Agreements has the
meaning set forth in Section 6.19(b).
Parent Series A Convertible Common
Shares has the meaning set forth in
Section 6.3(a).
Parent Series A Preferred Shares has the
meaning set forth in Section 6.3(a).
Parent Series B Convertible Common
Shares has the meaning set forth in
Section 6.3(a).
Parent Series B Preferred Shares has the
meaning set forth in Section 6.3(a).
Parent Series C Convertible Common
Shares has the meaning set forth in
Section 6.3(a).
Parent Series C Preferred Shares has the
meaning set forth in Section 6.3(a).
Parent Share Conversion has the meaning set
forth in Section 9.3(d).
Parent Shareholder Approval means all of the
approvals of the holders of Parent Common Shares, Parent
Preferred Shares and Parent Convertible Common Shares voting
together as a single class required for the consummation of the
transactions contemplated by this Agreement, as set forth in
Schedule 6.4(d) of the Parent Disclosure Schedule.
Parent Shareholders Meeting has the meaning
set forth in Section 8.2(e).
Parent Special Committee has the meaning set
forth in the Recitals.
Parent Statutory Statements has the meaning
set forth in Section 6.7(a).
Parent Subsidiaries has the meaning set forth
in Section 6.2(a).
Parent Superior Proposal means a Parent
Alternative Transaction (provided, that for purposes of
this definition the term Parent Alternative Transaction shall
have the meaning assigned to such term
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except that the reference to 25% in the definition
of Parent Alternative Transaction shall be deemed to
be a reference to 50%) (a) involving
(i) Parents acquisition of any Third Party in a
Business Combination Transaction in which the stockholders of
the Third Party immediately prior to consummation of such
Business Combination Transaction will own more than fifty
percent (50%) of Parents outstanding capital stock
immediately following such Business Combination Transaction,
including the issuance by Parent of more than fifty percent
(50%) of its voting equity securities as consideration for
assets or securities of a Third Party or (ii) the direct or
indirect acquisition or purchase, in a single transaction or a
series of related transactions, of fifty percent (50%) or more
of the assets of Parent and the Parent Subsidiaries, taken as a
whole, or fifty percent (50%) or more of the voting equity
securities of Parent and (b) having terms that, taking into
account (as and to the extent that the Parent Board (or any
committee thereof making such determination) deems relevant) all
legal, financial, regulatory, fiduciary and other aspects of
such Parent Alternative Transaction and the Person proposing
such Parent Alternative Transaction, (i) would, if
consummated, result in a transaction that is more favorable to
the holders of Parent Common Shares (in their capacities as
shareholders), from a financial point of view, than the
transactions contemplated by this Agreement and (ii) is
reasonably capable of being consummated. In forming its views in
connection with clause (b) of the immediately preceding
sentence, the Parent Board (or any committee thereof making such
determination) shall consider, to the extent deemed relevant,
among other things:
(A) all financial considerations and financial aspects of
such Parent Alternative Transaction in comparison to the Merger
and other transactions contemplated hereby,
(B) all strategic considerations, including whether such
Parent Alternative Transaction is more favorable from a
long-term strategic standpoint than the Merger and the other
transactions contemplated hereby,
(C) all legal and regulatory considerations,
(D) the identity of the third party making such Parent
Alternative Transaction,
(E) the conditions and likelihood of completion of such
Parent Alternative Transaction as compared to the Merger and
other transactions contemplated hereby (taking into account any
necessary regulatory approvals),
(F) whether such Parent Alternative Transaction is likely
to impose material obligations on Parent (or the post-closing
entity in which Parent shareholders will hold securities) in
connection with obtaining necessary regulatory approvals,
(G) whether such Parent Alternative Transaction is subject
to a financing condition, and
(H) the amount of the payment of any Parent Termination
Fee, if relevant.
Parent Termination Fee has the meaning set
forth in Section 10.3(b)(iii).
Parent Voting Debt has the meaning set forth
in Section 6.3(c).
Parent Voting Proposal means the proposal
that the Parents shareholders approve the Merger and the
issuance of Parent Common Shares in connection with the Merger.
Parent Welfare Plans means all employee
welfare benefit plans (as defined in Section 3(1) of
ERISA) maintained, or contributed to, or required to be
contributed to, by Parent or any of its Subsidiaries for the
benefit of any current or former independent contractors,
consultants, agents, employees, officers or directors of Parent
or any of its Subsidiaries.
PBGC has the meaning set forth in
Section 5.21(c).
Peleus Re means Peleus Reinsurance Ltd., a
Class 3 insurance company organized under the laws of
Bermuda.
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Permitted Encumbrances means (a) with
respect to the Company, those Encumbrances listed on
Schedule 1.1(b) of the Company Disclosure Schedule
and (b) with respect to Parent, those Encumbrances listed
on Schedule 1.1(b) of the Parent Disclosure Schedule.
Permitted Officer Share Transactions means
the vesting of the unvested restricted stock, the vesting of the
unvested stock options and the exercise or purchase for cash or
through any cashless exercise or other net share settlement
process of the amount of restricted stock and options set forth
on Schedule 1.1(a) of the Company Disclosure
Schedule for each person specified on
Schedule 1.1(a) of the Company Disclosure Schedule.
Person means any individual, corporation
(including
not-for-profit),
general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, Governmental
Entity or other entity of any kind or nature.
Preliminary Exchange Ratio means the result
of the following calculation:
Preliminary Exchange Ratio = 6.4672 +
[(X ¸ 33,868,998)/5.17]
Where:
X = The positive dollar amount, if any, by which
$60 million exceeds the amount of Special Dividend paid
prior to the Closing Date.
Proceeding means any action, claim,
proceeding, suit, opposition, challenge, charge, litigation,
arbitration, or investigation.
Recalculated Exchange Ratio has the meaning
set forth in Section 4.6(a).
Registration Statement has the meaning set
forth in Section 8.2(a).
Regulatory Law means the Sherman Act of 1890,
the Clayton Antitrust Act of 1914, the HSR Act, the Federal
Trade Commission Act of 1914 and all other federal, state or
foreign statutes, rules, regulations, orders, decrees,
administrative and judicial doctrines and other Applicable Laws,
including any antitrust, competition or trade
regulation Applicable Laws, that are designed or intended
to (i) prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade or
lessening competition through merger or acquisition or
(ii) protect the national security or the national economy
of any nation.
Representatives has the meaning set forth in
Section 8.1.
SAP has the meaning set forth in
Section 5.7(b).
Sarbanes-Oxley Act means the Sarbanes-Oxley
Act of 2002, as amended.
SEC means the United States Securities and
Exchange Commission.
Securities Act means the Securities Act of
1933, as amended.
Special Dividend means a special cash
dividend to be distributed to holders, as of the relevant record
date, of outstanding Company Common Shares not to exceed
$60 million in the aggregate.
Standard & Poors has the
meaning set forth in Section 7.1(a).
Subsidiary of any Person means another
Person, in which such Person (i) owns, directly or
indirectly, more than fifty percent (50%) of the outstanding
voting securities, equity securities, profits interest or
capital interest or (ii) is entitled to elect at least a
majority of the board of directors, board of managers or similar
governing body.
Surviving Corporation has the meaning set
forth in Section 2.1.
Taxes means (i) federal, state, county,
local, foreign and other taxes, assessments, charges, duties,
fees, levies, imposts or other similar charges imposed by a
Taxing Authority, including all income, franchise, profits,
capital gains, capital stock, transfer, gross receipts,
production, customs, sales, use,
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transfer, service, occupation, ad valorem, property, excise,
severance, windfall profits, premium, stamp, license, payroll,
employment, social security, workers compensation, unemployment,
disability, environmental, alternative minimum, add-on,
value-added, capital taxes, withholding and other taxes,
assessments, deficiencies, charges, duties, fees, levies,
imposts or other similar charges of any kind whatsoever (whether
payable directly or by withholding and whether or not requiring
the filing of a Tax Return), and all estimated taxes, deficiency
assessments, additions to tax, interest, and penalties (civil or
criminal), additional amounts imposed by any Taxing Authority
and interest on or in respect of a failure to comply with any
requirement relating to such taxes or any Tax Return and
expenses incurred in connection with the determination,
settlement or litigation of any tax liability; (ii) any
liability of any Person pursuant to Treasury regulations
Section 1.1502-6
(or any similar provision of foreign, state or local law) for
the payment of amounts of a type described in clause (i)
above as a result of being a member of a group of companies that
files their Tax Returns on a consolidated, combined, affiliated,
unified, or group basis, or as a result of any obligation of
such Person under any Tax sharing arrangement or agreement
whether imposed or assessed directly on a Person (or the
business, assets, operations or items of income, gain or losses
of Person), or (iii) any liability of any Person for the
payment of amounts with respect to payments of a type described
in clauses (i) and (ii) above as a transferee,
successor, or payable pursuant to a contractual obligation or
otherwise.
Taxing Authority shall mean the IRS or any
other federal, state, cantonal, provincial, county, local or
national Governmental Entity (whether domestic or foreign) or
any subdivision or taxing agency thereof (including a United
States possession).
Tax Return shall mean any form, report,
return, document, declaration or other information or filing
required to be supplied (including any electronic submissions)
to any Taxing Authority or jurisdiction (foreign or domestic)
with respect to Taxes, including any elections, information
returns or reports, amended or corrected returns, reports,
statements or other documents, any documents required to
accompany the required filings, any principal documentation (as
described in Treasury regulations
Section 1.6662-6(d)(2)(iii)(B)
or similar state or foreign jurisdiction provisions) that was
prepared to support transfer pricing methodologies, any
documents with respect to or accompanying payments of estimated
Taxes, any documents with respect to or accompanying requests
for the extension of time in which to file any such form,
report, return, document, declaration or other information, and
including, where permitted or required, combined, consolidated
or unitary returns for any group of entities that includes any
of the parties.
Third Party means any Person not a party to
this Agreement.
U.S. GAAP means United States generally
accepted accounting principles.
Voting Agreement has the meaning set forth in
the Recitals.
WARN Act means the United States Worker
Adjustment and Retraining Notification Act.
(b) Terms Generally. The words
hereby, herein, hereof,
hereunder and words of similar import refer to this
Agreement as a whole (including any Exhibits hereto and
Schedules delivered herewith) and not merely to the specific
section, paragraph or clause in which such word appears. All
references herein to Sections, Exhibits and Schedules shall be
deemed references to Sections of, Exhibits to and Schedules
delivered with this Agreement unless the context shall otherwise
require. The words include, includes and
including shall be deemed to be followed by the
phrase without limitation. The definitions given for
terms in this Section 1.1 and elsewhere in this
Agreement 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. Except as otherwise expressly provided herein,
all references to Dollars or $ shall be
deemed references to the lawful money of the United States of
America. All references herein to parties shall be
to the parties hereto unless the context shall otherwise require.
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ARTICLE II
The Merger;
Closing; Effective Time
Section 2.1 The
Merger. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time,
Merger Sub shall be merged with and into the Company and the
separate corporate existence of Merger Sub shall thereupon
cease. The Company shall be the surviving corporation in the
Merger (sometimes hereinafter referred to as the
Surviving Corporation), and the separate
corporate existence of the Company with all its rights,
privileges, immunities, powers and franchises shall continue
unaffected by the Merger. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement, the
Certificate of Merger and the applicable provisions of the DGCL.
Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of the Company and Merger Sub
shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall
become the debts, liabilities and duties of the Surviving
Corporation.
Section 2.2 Closing. The
Closing of the Merger (the Closing) shall
take place: (a) at the offices of Dewey Ballantine LLP,
1301 Avenue of the Americas, New York, New York, at
9:00 a.m. (New York time) no later than the twenty-first
(21st) day after all of the conditions set forth in
Article IX have been fulfilled or waived (other than
those conditions that by their nature are to be satisfied at the
Closing, but subject to the fulfillment or waiver of those
conditions) in accordance with this Agreement; or (b) at
such other place and time
and/or on
such other date as the Company and Parent may agree in writing
(the Closing Date).
Section 2.3 Effective
Time. Subject to the provisions of this
Agreement, as soon as practicable on the Closing Date, the
parties shall file a Certificate of Merger as contemplated by
the DGCL (the Certificate of Merger),
together with any required related Certificates, with the
Secretary of State of the State of Delaware, in such form as
required by, and executed in accordance with the relevant
provisions of, the DGCL. The Merger shall become effective upon
the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware or at such later date and time as
the Company and Parent may agree upon and as is set forth in
such Certificate of Merger (such time, the Effective
Time).
ARTICLE III
The
Surviving Corporation
Section 3.1 Certificate
of Incorporation. The Certificate of
Incorporation of the Surviving Corporation shall be amended at
the Effective Time to be in the form of Exhibit B,
and as so amended, such Certificate of Incorporation shall be
the Certificate of Incorporation of the Surviving Corporation
(the Certificate of Incorporation) until
thereafter changed or amended as provided therein or by
Applicable Law.
Section 3.2 By-Laws. The
By-Laws of Merger Sub in effect immediately prior to the
Effective Time shall be the By-Laws of the Surviving Corporation
(the By-Laws) until thereafter amended as
provided therein or by Applicable Law.
Section 3.3 Directors
and Officers. From and after the Effective Time,
(a) the directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving
Corporation and (b) the officers of the Company immediately
prior to the Effective Time shall be the officers of the
Surviving Corporation, in each case, until their respective
successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance
with the Certificate of Incorporation and the By-Laws.
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ARTICLE IV
Effect of
the Merger on Stock;
Exchange of
Certificates
Section 4.1 Effect
on Stock.
(a) Conversion of Company Common
Shares. At the Effective Time, as a result of the
Merger and without any action on the part of the Company,
Parent, Merger Sub or the holder of any capital stock of the
Company or Merger Sub, each Company Common Share issued and
outstanding immediately prior to the Effective Time (other than
Company Common Shares (A) held in treasury by the Company
or (B) held by any Company Subsidiary (collectively, the
Excluded Shares)) shall be converted into the
right to receive in accordance with this Article IV
a number of Parent Common Shares equal to the Exchange Ratio
(the Merger Consideration). The value of any
resulting fractional shares shall be determined and paid
pursuant to Section 4.5.
(b) Cancellation of Company Common Shares.
(i) At the Effective Time, each Company Common Share
converted into the Merger Consideration pursuant to
Section 4.1(a) shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to
exist, and each certificate that immediately prior to the
Effective Time represented any such Company Common Shares (each,
a Certificate) (other than Certificates
representing Excluded Shares) shall thereafter represent only
the right to receive the Merger Consideration upon surrender of
such Certificate in accordance with this Article IV.
(ii) Each Excluded Share issued and outstanding immediately
prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the Holder thereof, cease to
be outstanding, be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(c) Reverse Stock Split. Immediately
following the conversion or cancellation of shares of the
Company securities specified in subsection (a) and
(b) of this Section 4.1, the Parent Common
Shares shall be reduced pursuant to a 1 for 10 reverse stock
split. The value of any resulting fractional shares shall be
determined and paid pursuant to Section 4.5. The par value of
Parent Common Shares shall remain at $1.00 per share and
all amounts of share capital in excess of $1.00 per share,
including all amounts paid in respect of the par value and share
premium attributable to the Parent Common Shares cancelled
pursuant to such reverse stock split, shall, subject to
shareholder approval, be transferred to Parents
contributed surplus.
(d) Merger Sub. At the Effective Time,
each share of common stock, par value $0.01 per share, of
Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into one newly issued, fully
paid and nonassessable share of common stock of the Surviving
Corporation.
Section 4.2 Exchange
of Certificates for Merger Consideration.
(a) Exchange Agent and Procedures.
(i) Prior to the Effective Time, Parent shall designate a
bank or trust company reasonably acceptable to the Company, as
paying agent (the Exchange Agent). At or
prior to the Effective Time, Parent shall deposit, or shall
cause the Surviving Corporation to deposit, with the Exchange
Agent, separate and apart from its other funds, as a trust fund
for the Holders of record of Certificates (each, a
Holder), the aggregate Merger Consideration,
consisting of certificates representing the Parent Common Shares
to be issued as Merger Consideration after giving effect to the
reverse split of Parent Common Shares (such stock certificates
being hereinafter referred to as the Exchange
Fund). Except as contemplated by
Section 4.2(c), the Exchange Fund will not be used
for any other purpose.
(ii) As promptly as practicable after the Effective Time
and the reverse split of Parent Common Shares, the Surviving
Corporation shall cause the Exchange Agent to mail (and to make
available for collection by hand) to each Holder (A) a
letter of transmittal (in a form approved by the Company), which
shall specify that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Exchange Agent and which
shall be in such form and have such other customary provisions
as Parent and the Surviving Corporation may reasonably specify
and (B) instructions for use in
A-19
effecting the surrender of the Certificates in exchange for the
Merger Consideration and the reverse split of Parent Common
Shares, together with any dividends or distributions with
respect thereto or cash in lieu of fractional shares of Parent
Common Shares to which such Holder is entitled pursuant to
Section 4.1(a).
(iii) Each Holder of a Certificate representing any Company
Common Shares that have been converted into a right to receive
the Merger Consideration set forth in Section 4.1(a)
shall, upon surrender of such Certificate for cancellation to
the Exchange Agent, together with a properly completed letter of
transmittal, duly executed in accordance with the instructions
thereto, be entitled to receive in exchange therefor a
certificate or certificates representing that number of whole
Parent Common Shares to which such Holder is entitled pursuant
to Section 4.1(a) after taking into account all
Company Common Shares held by such Holder and the reverse split
of Parent Common Shares and the Certificate(s) so surrendered
shall forthwith be marked canceled. No interest will be paid or
accrued on any Merger Consideration payable upon due surrender
of the Certificates. The Exchange Agent shall accept such
Certificates upon compliance with such reasonable terms and
conditions as the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices.
(iv) In the event of the surrender of a Certificate that is
not registered in the transfer records of the Company under the
name of the Person surrendering such Certificate, the Merger
Consideration shall be paid to such a transferee if such
Certificate is presented to the Exchange Agent and such
Certificate is duly endorsed or is accompanied by all documents
required to evidence and effect such transfer and to evidence
that any applicable stock transfer Taxes have been paid. If any
Merger Consideration is to be delivered to a Person whose name
is other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such
delivery that the Person requesting such delivery shall pay any
transfer or other Taxes required to be paid by reason of such
delivery to a Person whose name is other than that of the Holder
of the Certificate surrendered or shall establish to the
reasonable satisfaction of Parent that such Tax has been paid or
is not applicable.
(b) Closing of Transfer Books. At the
Effective Time, the stock transfer books of the Company shall be
closed, and there shall be no further registration of transfers
of the Company Common Shares outstanding immediately prior to
the Effective Time thereafter on the records of the Company.
From and after the Effective Time, the holders of Certificates
representing Company Common Shares outstanding immediately prior
to the Effective Time will cease to have any rights with respect
to such Company Common Shares, except as otherwise provided
herein or by Applicable Law. If, after the Effective Time, any
Certificates are presented to the Surviving Corporation or the
Exchange Agent for any reason, they shall be marked canceled and
exchanged as provided in this Article IV.
(c) Termination of Exchange Fund. Any
portion of the Exchange Fund that remains unclaimed by the
Holders and other eligible Persons in accordance with this
Article IV following one (1) year after the
Effective Time shall be delivered to the Surviving Corporation,
upon demand, and any Holder who has not previously complied with
this Article IV shall thereafter look only to the
Surviving Corporation for, and the Surviving Corporation shall
remain liable for, payment of its claim for Merger Consideration.
(d) Lost, Stolen or Destroyed
Certificates. In the event any Certificate shall
have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Certificate
to be lost, stolen or destroyed and, if required by Parent, the
posting by such Person of a bond in customary amount as
indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue the
Merger Consideration in exchange for such lost, stolen or
destroyed Certificate. Delivery of such affidavit and the
posting of such bond shall be deemed delivery of a Certificate
with respect to the relevant Company Common Shares for purposes
of this Article IV.
(e) Distributions with Respect to Unexchanged Parent
Common Shares. No dividends or other
distributions declared or made after the Effective Time with
respect to Parent Common Shares with a record date after the
Effective Time will be paid to the Holder of any unsurrendered
Certificate with respect to Parent Common Shares represented
thereby, and no cash payment in lieu of any fractional shares
will be paid to any such Holder pursuant to
Section 4.5, until the Holder of such Certificate
surrenders such Certificate. Subject to the effect of escheat,
tax or other Applicable Laws, following surrender of such
Certificate, there will be paid to the Holder of the
certificates
A-20
representing whole Parent Common Shares issued in exchange
therefor, without interest, (i) promptly, the amount of any
cash payable with respect to a fractional Parent Common Share to
which such Holder is entitled pursuant to
Section 4.5 and the amount of dividends or other
distributions with a record date after the Effective Time and
theretofore paid with respect to such whole Parent Common
Shares, and (ii) at the appropriate payment date, the
amount of dividends or other distributions, with a record date
after the Effective Time but prior to surrender and a payment
date occurring after surrender, payable with respect to such
whole Parent Common Shares.
(f) No Further Rights in Company Common
Shares. All Parent Common Shares issued upon
conversion of the Company Common Shares in accordance with the
terms hereof (including cash paid pursuant to
Section 4.2(e) or Section 4.5) will be
deemed to have been issued in full satisfaction of all rights
pertaining to such Company Common Shares.
(g) No Liability. None of Parent, Merger
Sub, the Surviving Corporation or the Exchange Agent shall be
liable to any Person in respect of any portion of the Exchange
Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
Section 4.3 Treatment
of Company Equity Compensation.
(a) Company Employee Options. Subject to
the terms and conditions of this Agreement, at the Effective
Time, by virtue of the Merger and without any further action on
the part of Parent, Merger Sub, the Company or any Holder of any
Company Common Shares or Company Employee Options, Company
Employee Options shall cease to represent a right to acquire
Company Common Shares and shall automatically be converted into
an option (a Company Converted Option) to
purchase Parent Common Shares. The number of Parent Common
Shares subject to each Company Converted Option shall be equal
to the product of the number of Company Common Shares subject to
such Company Employee Option multiplied by the Exchange Ratio;
provided, that any fractional Parent Common Shares
resulting from such multiplication shall be rounded down to the
nearest whole share. The exercise price per share of each
Company Converted Option shall equal the quotient of
(A) the exercise price per share under the corresponding
Company Employee Option divided by (B) the Exchange Ratio;
provided, that such exercise price shall be rounded up to
the nearest whole cent. Each such Company Converted Option will
otherwise have substantially the same terms and conditions as
the corresponding Company Employee Option, including vesting and
term of exercise.
(b) Company Restricted Stock. Subject to
the terms and conditions of this Agreement, at the Effective
Time, by virtue of the Merger and without any further action on
the part of Parent, Merger Sub, the Company or any Holder of any
Company Common Shares or Company Restricted Stock, Company
Restricted Stock shall automatically be converted in accordance
with Section 4.1(a) hereof into Parent Common
Shares, provided such Parent Common Shares will be subject to
the same restrictions that applied to the Company Restricted
Stock immediately prior to the Effective Time.
Section 4.4 Employee
Stock Purchase Plan. The Company shall take all
commercially reasonable actions necessary to cause all offering
periods under the Companys Employee Stock Purchase Plan to
end on or before five (5) business days prior to Closing.
Section 4.5 Fractional
Shares. Notwithstanding any other provision of
this Agreement to the contrary, no fractional Parent Common
Shares will be issued pursuant to the Merger or the reverse
stock split. Entitlement of holders of Parent Common Shares
after the Merger and the reverse stock split to payment in lieu
of fractional shares shall be determined after the completion of
the reverse stock split. All holders of Parent Common Shares
otherwise entitled to receive a fractional share of Parent
Common Shares pursuant to the Merger and/or the reverse stock
split shall be entitled to receive a cash payment in lieu
thereof in an amount equal to such holders pro rata
share of the total net proceeds of a sale (which shall take
place as soon as practicable after the Closing Date and the
completion of the reverse stock split) at the then prevailing
prices on the open market by the transfer agent of a number of
Parent Common Shares equal to the aggregate of all such
fractional shares. Such fractional share interests shall not
entitle the owner thereof to any dividends or other
distributions made in respect of Parent Common Shares or to the
right to vote or any other rights of a shareholder of Parent.
A-21
Section 4.6 Recalculated
Exchange Ratio.
(a) In the event that, between the date hereof and the
Effective Time, there occurs any Company Issuance, Company
Purchase, Company Dividend or Company Asset Sale, then the
Company shall prepare the following computation (the
Recalculated Exchange Ratio):
|
|
|
Recalculated Exchange Ratio =
|
|
[(1.4 ×
(A − D − F) +
B − C) ¸ G] +
[(E − I) ¸ H]
|
|
|
|
|
|
5.17
|
Where:
|
|
A = |
Company Book Value plus the proceeds received or to be
received by the Company upon exercise of all rights to receive
Company Common Shares (whether or not such rights are vested or
subject to the satisfaction of conditions precedent) other than
those rights arising from issuances, or agreements to issue, in
connection with or pursuant to (i) any exercise of Company
Employee Options, (ii) any Company Benefit Plan or
(iii) any Permitted Officer Share Transaction
|
B = Company Issuance Consideration
C = Company Purchase Consideration
D = Company Dividend Amount
|
|
E = |
The positive dollar amount, if any, by which $60 million
exceeds the amount of Special Dividend paid prior to the Closing
Date
|
|
|
F = |
Company Asset Sale Reduction Amount
|
|
|
G = |
33,560,385 plus any Company Common Shares issued pursuant
to a Company Issuance less any Company Common Shares
purchased pursuant to a Company Purchase plus any Company
Common Shares that will be deliverable upon exercise of all
rights to receive Company Common Shares (whether or not such
rights are vested or subject to the satisfaction of conditions
precedent), other than those rights arising from issuances, or
agreements to issue, in connection with or pursuant to
(i) any exercise of Company Employee Options, (ii) any
Company Benefit Plan or (iii) any Permitted Officer Share
Transaction
|
H = 33,868,998
I = $60 million
(b) Rules Applicable to Computation of Recalculated
Exchange Ratio. For purposes of the computation
to be made pursuant to Section 4.6(a), the following
provisions shall apply:
(i) Type of Consideration.
(A) Cash Consideration. In case of any
transaction described in Section 4.6(a) involving
the receipt or payment of cash, the consideration shall be
deemed to be the cash proceeds before deducting any commissions
or other expenses paid or incurred for any underwriting of, or
otherwise in connection with the issuance of any equity
securities.
(B) Non-Cash Consideration. In case of
any transaction described in Section 4.6(a)
involving the receipt or payment of consideration other than
cash, or a consideration a part of which shall be other than
cash, the amount of the consideration other than cash shall be
deemed to be the value of such consideration at the time of its
receipt or payment as determined in good faith and approved by
the Audit Committee of the Company Board, except that where the
non-cash consideration consists of the cancellation, surrender
or exchange of outstanding obligations of the Company (or where
such obligations are otherwise converted into Company Common
Shares), the value of the non-cash consideration shall be deemed
to be the principal amount of the obligations canceled,
surrendered, satisfied, exchanged or converted. If such non-cash
consideration consists in whole or in part of publicly traded
securities (i.e., in lieu of cash), the value of such non-cash
consideration shall be the aggregate fair market value of such
securities (based on the latest reported sale price) as of the
close of the day immediately preceding the date of their receipt
or payment.
A-22
(ii) Options, Warrants, Convertibles, Etc.
(A) In case of any transaction described in
Section 4.6(a) involving (1) any security that
is convertible into Company Common Shares or (2) any
rights, options or warrants to purchase Company Common Shares,
there shall be deemed to have been issued or purchased, for the
consideration described below, the number of Company Common
Shares into which such convertible security may be converted
when first convertible, or the number of Company Common Shares
deliverable upon the exercise of such rights, options or
warrants when first exercisable, as the case may be;
provided, however, that this
Section 4.6(b)(ii) shall not apply to Company
Employee Options.
(B) The consideration deemed to be received or paid at the
time of any transaction involving such convertible securities or
such rights, options or warrants shall be the consideration so
received determined as provided in Sections 4.6(b)(i)(A)
and 4.6(b)(i)(B) hereof plus (x) any consideration
or adjustment payment to be received or paid in connection with
such conversion or, as applicable, (y) the aggregate price
at which Company Common Shares are to be delivered upon the
exercise of such rights, options or warrants when first
exercisable (or, if no price is specified and such Company
Common Shares are to be delivered at an option price related to
the fair market value of the subject Company Common Shares, an
aggregate option price bearing the same relation to the fair
market value of the subject Company Common Shares at the time
such rights, options or warrants were granted).
(iii) Consideration to be Paid or
Received. In the event that any transaction
described in Section 4.6(a) is not completed prior
to the Effective Time, then the amount to be paid or received in
connection with such transaction shall be determined as of the
date of the public announcement of such transaction.
(c) Procedure. The computation of the
Recalculated Exchange Ratio shall be prepared in accordance with
this Agreement and, to the extent applicable, in accordance with
U.S. GAAP applied on a basis consistent with the Company
Financial Statements. The Company shall deliver to Parent the
computation of the Recalculated Exchange Ratio at least five
(5) Business Days prior to the Effective Time. Such
computation shall be accompanied by: (i) an explanation of
the computation and the methodology employed;
(ii) certificates of the Chief Executive Officer and Chief
Financial Officer of the Company and of Ernst & Young
LLP certifying that the computation is a true and correct
calculation, has been prepared in accordance with this Agreement
and, to the extent applicable, in accordance with U.S. GAAP
applied on a basis consistent with the Company Financial
Statements, and that, to the extent applicable, the components
of the computation are based on and consistent with the Company
Financial Statements and the books and records of the Company;
and (iii) a Certificate of the Secretary of the Company, in
the form attached hereto as Exhibit D, certifying as
to the good faith determination and approval by the Audit
Committee of the value of all non-cash consideration pursuant to
Section 4.6(b)(i)(B), attached to which shall be the
resolution or resolutions of the Audit Committee and detailed
documentation showing the calculation of such value.
ARTICLE V
Representations
and Warranties of the Company
Except as otherwise disclosed to Parent in a schedule (the
Company Disclosure Schedule) delivered to it
by the Company prior to the execution of this Agreement (it
being understood that each section or schedule of such Company
Disclosure Schedule qualifies the correspondingly numbered
representation, warranty or covenant hereof only to the extent
specified therein and such other representations, warranties or
covenants only to the extent a matter in such section or
schedule is disclosed in such a way as to make its relevance to
such other representation, warranty or covenant readily
apparent) and except as readily apparent from disclosure in the
Company Reports publicly available prior to the date hereof
(other than disclosures in the Risk Factors and
Forward Looking Statements sections of the Company
Reports and any other disclosures included in any such Company
Reports that are predictive or forward-looking in nature), the
Company represents and warrants to Parent and Merger Sub as
follows:
Section 5.1 Corporate
Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power
and authority to own, lease and operate its properties and to
carry on its business as is now being conducted. The Company is
duly qualified or
A-23
licensed to own, lease and operate its properties and to carry
on its business as is now being conducted in each jurisdiction
in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification
or licensing necessary, except where the failure to be so
qualified would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse
Effect. The Company has delivered or made available to Parent
complete and correct copies of its Organizational Documents, as
amended and in effect on the date hereof.
Section 5.2 Company
Subsidiaries.
(a) Schedule 5.2(a) of the Company Disclosure
Schedule sets forth the name of each Subsidiary owned (whether
directly or indirectly) by the Company (collectively, the
Company Subsidiaries), and the state or
jurisdiction of its organization. Each Company Subsidiary is a
corporation, limited liability company or partnership, as the
case may be, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation
or organization, as the case may be, and has all requisite
corporate, limited liability company or partnership power and
authority, as the case may be, to own, lease and operate its
properties and to carry on its business as is now being
conducted. Each Company Subsidiary is duly qualified as a
foreign corporation to do business in each jurisdiction in which
the property owned, leased or operated by it or the nature of
the business conducted by it makes such qualification necessary,
except where the failure to be so qualified would not,
individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect.
(b) The Company is, directly or indirectly, the record and
beneficial owner of all of the outstanding shares of capital
stock or other equity interests of each of the Company
Subsidiaries. All of such shares and other equity interests so
owned by the Company are validly issued, fully paid and
nonassessable and are owned by it free and clear of any
Encumbrances.
(c) Schedule 5.2(c) of the Company Disclosure
Schedule sets forth each of the Company Subsidiaries conducting
any insurance or reinsurance business (the Company
Insurance Subsidiaries) and lists the jurisdiction of
domicile of each Company Insurance Subsidiary.
Section 5.3 Capitalization.
(a) Authorized; Designations. As of the
date hereof, the authorized capital stock of the Company
consists of seventy million (70,000,000) shares of Common Stock,
par value $0.10 per share (the Company Common
Shares), and five million (5,000,000) shares of
Preferred Stock, par value $0.10 per share, of which
4,296,296 have been designated as Series A
Mandatorily Convertible Preferred Stock (the
Company Series A Preferred Shares).
(b) Issued and Outstanding. As of the
date hereof:
(i) 33,032,876 Company Common Shares were issued and
outstanding;
(ii) 500,000 Company Series A Preferred Shares were
issued and outstanding;
(iii) no Company Common Shares were held in treasury by the
Company;
(iv) 2,234,581 Company Common Shares were subject to
outstanding Company Employee Options; and
(v) 2,406,262 Company Common Shares were reserved for
issuance pursuant to the Companys stock plans listed on
Schedule 5.3(b) of the Company Disclosure Schedule.
Except as set forth above, as of the date hereof, no shares of
capital stock of the Company were issued, reserved for issuance
or outstanding. All issued and outstanding Company Common Shares
have been duly authorized and validly issued and are fully paid
and nonassessable.
(c) There are no preemptive or similar rights granted by
the Company or any Company Subsidiary on the part of any Holders
of any class of securities of the Company or any Company
Subsidiary. Except as set forth above, neither the Company nor
any Company Subsidiary has outstanding any bonds, debentures,
notes or other obligations the Holders of which have the right
to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of
the Company or any such Company Subsidiary on any matter
(Company Voting Debt). Except as set forth
above, there are not, as of the date hereof, any Company
Employee
A-24
Options, warrants, rights, convertible or exchangeable
securities, phantom stock rights, stock appreciation
rights, stock-based performance units, commitments, Contracts,
arrangements or undertakings of any kind to which the Company or
any of the Company Subsidiaries is a party or by which any of
them is bound (i) obligating the Company or any of the
Company Subsidiaries to issue, deliver or sell or cause to be
issued, delivered or sold, additional shares of capital stock
of, or other equity interests in, or any security convertible or
exercisable for or exchangeable into any capital stock of, or
other equity interest in, the Company or any Company Voting
Debt, (ii) obligating the Company or any Company Subsidiary
to issue, grant, extend or enter into any such Company Employee
Option, warrant, call, right, security, commitment, Contract,
arrangement or undertaking or (iii) that give any Person
the right to receive any economic benefit or right similar to or
derived from the economic benefits and rights accruing to
Holders of capital stock of, or other equity interests in, the
Company. As of the date hereof, there are not any outstanding
contractual obligations of the Company or any of the Company
Subsidiaries to repurchase, redeem or otherwise acquire any
shares of capital stock of the Company or any of the Company
Subsidiaries. There are no proxies, voting trusts or other
agreements or understandings to which the Company or any of the
Company Subsidiaries is a party or is bound with respect to the
voting of the capital stock of, or other equity interests in,
the Company or any of the Company Subsidiaries.
(d) All outstanding Company Common Shares, all outstanding
Company Employee Options and all outstanding shares of capital
stock of each Company Subsidiary have been issued and granted in
compliance with all Applicable Laws.
(e) The exercise price of each Company Employee Option is
no less than the fair market value of a Company Common Share as
determined on the date of grant of such Company Common Share.
All grants of Company Employee Options were properly approved by
the Company Board (or a duly and validly appointed committee
thereof) in compliance with all Applicable Law and were recorded
on the Company Financial Statements in accordance with
U.S. GAAP, and no such grants involved any back
dating, forward dating or similar practices
with respect to the effective date of grant.
(f) The Company has furnished, as of the date hereof, the
following information with respect to each Company Employee
Option outstanding as of the date hereof: (i) the name of
the optionee; (ii) the particular Company stock option plan
pursuant to which it was granted; (iii) the number of
Company Common Shares subject to it; (iv) the exercise
price; (v) the date on which it was granted; (vi) the
vesting schedule; (vii) the expiration date;
(viii) whether the exercisability will be accelerated or
redeemed in any way in connection with the transactions
contemplated by this Agreement and, if so, the extent of
acceleration or redemption; and (ix) whether it is intended
to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
Section 5.4 Authority;
Execution and Delivery; Enforceability.
(a) The Company has all requisite corporate power and
authority to execute and deliver this Agreement and, subject to
the receipt of the Company Stockholder Approval, to consummate
the transactions contemplated by this Agreement. The execution
and delivery by the Company of this Agreement and the
consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary
corporate action on the part of the Company, subject, in the
case of the Merger, to receipt of the Company Stockholder
Approval. The Company has duly executed and delivered this
Agreement, and this Agreement constitutes its legal, valid and
binding obligation, enforceable against it in accordance with
its terms.
(b) The Company Board, at a meeting duly called and held,
duly and unanimously adopted resolutions (i) approving this
Agreement, the Merger and the other transactions contemplated by
this Agreement, (ii) determining that the terms of the
Merger and the other transactions contemplated by this Agreement
are fair to and in the best interests of the stockholders of the
Company, (iii) directing that this Agreement be submitted
to a vote at a meeting of the Companys stockholders,
(iv) recommending that the Companys stockholders
adopt this Agreement and (v) declaring that this Agreement
is advisable. The approval of this Agreement, the Merger and the
other transactions contemplated hereby by the Company Board
referred to in this Section 5.4(b) constitutes
approval of the Merger for purposes of Section 203 of the
DGCL and represents the only action necessary to ensure that the
restrictions on business combinations (as such term
is defined therein) set forth in Section 203 of the DGCL
does not and will not apply to the execution or delivery of this
Agreement and the consummation of the Merger and the other
transactions contemplated hereby. No other fair
price, moratorium, control share
acquisition or other
A-25
state takeover statute or similar statute or regulation applies
or purports to apply to the Company with respect to this
Agreement, the Merger or any other transaction contemplated by
this Agreement. There is no rights agreement, poison
pill anti-takeover plan or other similar plan, device or
arrangement to which the Company or any Company Subsidiary is a
party or by which it or they are bound with respect to any
capital stock of or other equity interest in the Company.
(c) The only vote of holders of any class or series of
capital stock of the Company necessary to approve and adopt this
Agreement and the Merger is the adoption of this Agreement by
the holders of a majority of the outstanding Company Common
Shares and the Company Series A Preferred Shares (on an
as-converted basis), voting together as a single class (the
Company Stockholder Approval).
Section 5.5 Consents
and Approvals; No Violations.
(a) The execution, delivery and performance of this
Agreement by the Company and consummation of the Merger by the
Company do not and will not require any consent, approval,
authorization or permit of, or filing with or notification to,
any Governmental Entity except for (i) the approvals of the
Governmental Entities set forth on Schedule 5.5(a)
of the Company Disclosure Schedule (the Company
Required Regulatory Approvals); (ii) the
pre-merger notification requirements under the HSR Act;
(iii) the applicable requirements of the Exchange Act;
(iv) the filing of the Certificate of Merger pursuant to
the DGCL; (v) any registration, filing or notification
required pursuant to state securities or blue sky laws; and
(vi) any such consent, approval, authorization, permit,
filing, or notification, the failure of which to make or obtain
would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.
(b) Except for the Company Stockholder Approval or as
contemplated by Section 5.5(a), no consent or
approval of any other Person is required to be obtained by the
Company for the execution, delivery or performance of this
Agreement by the Company and consummation by the Company of the
transactions contemplated hereby, except where the failure to
obtain any such consent or approval would not reasonably be
expected to have a Company Material Adverse Effect.
(c) None of the execution, delivery or performance of this
Agreement by the Company or, subject to the receipt of the
Company Stockholder Approval, consummation by the Company of the
transactions contemplated hereby or compliance by the Company
with any provisions hereof, will (i) violate any provision
of the Organizational Documents of the Company or any Company
Subsidiary; (ii) result in a violation or breach of any
provision of, or constitute (with or without due notice or lapse
of time or both) a default under, or give rise to any right of
termination, cancellation, payment, acceleration or revocation
under, any Contract to which the Company or any Company
Subsidiary is a party or by which the Company or any Company
Subsidiary or any of their respective assets may be bound;
(iii) result in the creation or imposition of any
Encumbrance upon any property or asset of the Company or any
Company Subsidiary; or (iv) violate or conflict with any
law to which the Company or any Company Subsidiary, is subject,
except, in the case of clauses (ii), (iii) and (iv),
for violations, breaches, defaults, terminations, cancellations,
payments, accelerations, revocations, creations, impositions or
conflicts which would not, individually or in the aggregate,
have or be reasonably expected to have, a Company Material
Adverse Effect.
Section 5.6 Company
Financial Statements; SEC Reports.
(a) The Company Financial Statements comply as to form in
all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with U.S. GAAP
(except, in the case of unaudited financial statements, as
permitted by
Form 10-Q
of the SEC) as in effect on the respective dates thereof,
applied on a consistent basis throughout the periods presented,
subject, in the case of interim unaudited Company Financial
Statements, only to normal, recurring year-end adjustments, none
of which are expected to be material in nature. The consolidated
balance sheets included in the Company Financial Statements
present fairly in all material respects the financial position
of the Company and the Company Subsidiaries as at the respective
dates thereof, and the consolidated statements of income,
consolidated statements of stockholders equity, and
consolidated statements of cash flows included in such Company
Financial Statements present fairly in all material respects the
results of operations, stockholders equity and cash flows
of the Company and the Company Subsidiaries for the respective
periods indicated.
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(b) The term Company Financial
Statements means the consolidated financial statements
of the Company and the Company Subsidiaries included in the
Company Reports together, in the case of year-end statements,
with reports thereon by Ernst & Young LLP, the
independent auditors of the Company, including in each case a
consolidated balance sheet, a consolidated statement of income,
a consolidated statement of stockholders equity and a
consolidated statement of cash flows, and accompanying notes.
(c) The Company and each Company Subsidiary has filed or
furnished, as applicable, all reports, schedules, forms,
statements and other documents required to be filed by it or
furnished by it to the SEC since January 1, 2004 (the
Company Reports). As of its respective date,
each Company Report complied in all material respects with the
requirements of the Exchange Act or the Securities Act, as the
case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such Company Report, and
did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) With respect to each Company Report that is a report on
Form 10-K
or 10-Q or
an amendment thereto, each of the principal executive officer
and the principal financial officer of the Company has made all
certifications required by
Rule 13a-14
or 15(d) under the Exchange Act or Sections 302 and 906 of
the Sarbanes-Oxley Act and the rules and regulations of the SEC
promulgated thereunder with respect to the Company Reports.
Section 5.7 Statutory
Statements.
(a) The Company has previously furnished to Parent true and
complete copies of the following statutory statements, in each
case together with all exhibits, schedules and notes thereto and
any affirmations and certifications filed therewith:
(i) the audited annual statement of each Company Insurance
Subsidiary as at December 31 in each of the years ended
2003, 2004 and 2005 and (ii) the unaudited annual statement
of each Company Insurance Subsidiary for the year ended
December 31, 2006 (collectively, the Company
Statutory Statements).
(b) The Company Statutory Statements (i) were prepared
in conformity with statutory accounting practices prescribed or
permitted by the relevant insurance regulator applied on a
consistent basis (SAP), except as expressly
set forth within the subject financial statements and
(ii) present fairly to the extent required by and in
conformity with SAP, except as set forth in the notes, exhibits
or schedules thereto, in all material respects the statutory
financial condition and statutory results of operation of each
Company Insurance Subsidiary as of the dates and for the periods
therein specified.
Section 5.8 Absence
of Certain Changes or Events. Except as
contemplated by this Agreement, from December 31, 2006 to
the date hereof: (a) the Company and its Subsidiaries have
conducted their businesses only in the Ordinary Course of
Business; (b) there has not been any event, condition,
change, effect or development that, individually or in the
aggregate, has had or would reasonably be expected to have a
Company Material Adverse Effect; and (c) the Company and
its Subsidiaries have not taken any action (or failed to take
any action) that, if taken (or failed to be taken) during the
period from the date of this Agreement through the Effective
Time, would constitute a breach of Section 7.1.
Section 5.9 Litigation.
(a) Set forth on Schedule 5.9(a) of the Company
Disclosure Schedule is a true and complete list as of the date
hereof of all Proceedings pending or, to the Knowledge of the
Company, threatened against the Company or any Company
Subsidiary as of the date hereof, except for those Proceedings
that (i) do not and would not reasonably be expected to
impair in any material respect the ability of the Company to
perform its obligations under this Agreement, or prevent or
materially impede the consummation by the Company of the Merger
or the other transactions contemplated by this Agreement and
(ii) have not had and would not reasonably be expected to
have a Company Material Adverse Effect. There is no Proceeding
pending or, to the Knowledge of the Company, threatened against
the Company or any Company Subsidiary except those that,
individually or in the aggregate, (x) do not and would not
reasonably be expected to impair in any material respect the
ability of the Company to perform its obligations under this
Agreement, or prevent or materially impede the consummation by
the Company of the Merger or the other transactions contemplated
by this Agreement, or (y) have not had and would not
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reasonably be expected to have a Company Material Adverse
Effect, other than those Proceedings set forth on
Schedule 5.9(a) of the Company Disclosure Schedule.
(b) With respect to any Proceedings pending or threatened
against the Company or any Company Subsidiary that are set forth
on Schedule 5.9(a) of the Company Disclosure Schedule,
there has not been any change in circumstance since
December 31, 2006 except as individually or in the
aggregate, (i) do not and would not reasonably be expected
to impair in any material respect the ability of the Company to
perform its obligations under this Agreement, or prevent or
materially impede the consummation by the Company of the Merger
or the other transactions contemplated by this Agreement, or
(ii) have not had and would not reasonably be expected to
have a Company Material Adverse Effect.
(c) Neither the Company nor any Company Subsidiary nor any
of their respective properties is or are a party or subject to
or in default under any Judgment except as individually or in
the aggregate, (i) do not and would not reasonably be
expected to impair in any material respect the ability of the
Company to perform its obligations under this Agreement, or
prevent or materially impede the consummation by the Company of
the Merger or the other transactions contemplated by this
Agreement, or (ii) have not had and would not reasonably be
expected to have a Company Material Adverse Effect.
(d) To the Knowledge of the Company, since
December 31, 2006, there have been no formal or informal
SEC inquiries or investigations, other governmental inquiries or
investigations or internal investigations or material
whistle-blower complaints pending or threatened or otherwise
involving the Company or any Company Subsidiary, including,
regarding any accounting practices of the Company, any broker
compensation issues or any conduct by any executive officer of
the Company.
Section 5.10 Absence
of Undisclosed Liabilities. The Company and the
Company Subsidiaries do not have any liabilities of any nature
(whether accrued, absolute, asserted or unasserted, contingent
or otherwise), except for liabilities (a) reflected on or
reserved against in the Companys consolidated balance
sheet as of December 31, 2006 included in the Company
Financial Statements, (b) liabilities incurred in the
Ordinary Course of Business since December 31, 2006 and
(c) liabilities which, individually or in the aggregate,
have not had or would not reasonably be expected to have a
Company Material Adverse Effect.
Section 5.11 Title
to Property.
(a) Schedule 5.11(a) of the Company Disclosure
Schedule sets forth the location and description of all real
property owned by the Company or any of the Company Subsidiaries
as of the date hereof.
(b) Each of the Company and the Company Subsidiaries
(a) has good and valid title to all of its properties,
assets and other rights that would not constitute real property
(other than Intellectual Property), free and clear of all
Encumbrances and (b) owns, has valid leasehold interests in
or valid contractual rights to use, all of the assets, tangible
and intangible (other than Intellectual Property), necessary to
permit the Company and the Company Subsidiaries to carry on
their business, in each case, except for Permitted Encumbrances
or where the failure to have such good and valid title, own such
assets, have such valid leasehold interests or have such valid
contractual rights have not had or would not, individually or in
the aggregate, reasonably be expected to have a Company Material
Adverse Effect.
Section 5.12 Insurance. Copies
of all Company Insurance Policies have been provided or made
available to Parent. Except as would not, individually or in the
aggregate, reasonably be expected to have a Company Material
Adverse Effect, (a) all such policies are in full force and
effect and were in full force and effect during the periods of
time such insurance policies are purported to be in effect and
(b) neither the Company nor any Company Subsidiary
(i) is in material breach or default or (ii) has taken
any action or failed to take any action, and, to the Knowledge
of the Company, no event has occurred which, with notice or the
lapse of time, would constitute such a breach or default, or
permit termination or modification under any policy.
Section 5.13 Disclosure
Documents. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by
reference in the Registration Statement, contains or will
contain, as applicable, at the time the Registration Statement
is filed with the SEC, at any time it is amended or supplemented
or at the time it becomes effective under the Securities Act,
any untrue statement of a material fact or omit to state any
material fact
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required to be stated therein or necessary to make the
statements therein not misleading. None of the information
supplied or to be supplied by the Company for inclusion or
incorporation by reference in the Joint Proxy
Statement/Prospectus, on the date it is first mailed to the
Companys stockholders or Parents shareholders or at
the time of the Company Stockholders Meeting, the Parent
Shareholders Meeting or at the Effective Time, contains or will
contain, any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, no representation or warranty is
made by the Company with respect to statements made or
incorporated by reference in the Registration Statement or the
Joint Proxy Statement/Prospectus based on information supplied
by Parent or Merger Sub for inclusion or incorporation by
reference in the Registration Statement or the Joint Proxy
Statement/Prospectus.
Section 5.14 Brokers. Other
than Bear, Stearns & Co. Inc. and Friedman Billings
Ramsey & Co., Inc., there is no Person that may be
entitled to any brokerage, financial advisory, finders or
similar fee or commission payable by the Company or any Company
Subsidiary in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of
the Company or any Company Subsidiary. The Company has furnished
to Parent a true and complete copy of all agreements between the
Company and Bear, Stearns & Co. Inc. and Friedman
Billings Ramsey & Co., Inc. relating to the Merger or
other transactions contemplated by this Agreement.
Section 5.15 Contracts.
(a) As of the date hereof, there are no Contracts to which
the Company or any Company Subsidiary is a party, or by which
any of them is bound, which are or would be required to be filed
or listed as an exhibit to the Company Reports (any Contracts so
filed or listed or required to be so filed or listed
collectively, together with the Company Non-Compete Contracts
and the Executive Contracts, the Company Material
Contracts) which have not been so filed or listed.
There are no Contracts to which the Company or any Company
Subsidiary is a party or by which they are bound which contain
provisions restricting or limiting the Companys or any
Company Subsidiarys ability to compete or otherwise engage
in specified lines of business, in any material respect (each, a
Company Non-Compete Contract) and, except for
Contracts and dealings incident to such persons position
as a director, officer or employee of the Company or any Company
Subsidiary which are set forth in Schedule 5.15(a)
of the Company Disclosure Schedule (the Executive
Contracts), there are no material Contracts or
material business dealings between the Company or any Company
Subsidiary, on the one hand, and any director, officer or
employee of the Company or any Company Subsidiary or any entity
of which any such director, officer or employee serves as a
senior officer or director, on the other.
(b) (i) Each Company Material Contract is (assuming
due power and authority of, and due execution and delivery by,
the other party or parties thereto) valid and binding upon the
Company or the Company Subsidiary party thereto and, to the
Knowledge of the Company, each other party thereto (except as
may be limited by bankruptcy, insolvency, moratorium, or other
similar laws affecting or relating to enforcement of
creditors rights generally, or by general principles of
equity, none of which conditions, to the Knowledge of the
Company, exist as of the date hereof ) and is in full force and
effect; and (ii) there is no material default or claim of
material default under any Company Material Contract by the
Company or the Company Subsidiary party thereto, or to the
Knowledge of the Company, by any other party thereto, and, to
the Knowledge of the Company, no event has occurred which, with
the passage of time or the giving of notice (or both), would
constitute a material default thereunder by the Company or the
Company Subsidiary party thereto or by any other party thereto,
or would permit material modification, acceleration or
termination thereof.
(c) The Company has filed each Contract required to be
filed by the Company as a material contract pursuant
to Item 601(b)(10) of
Regulation S-K
under the Securities Act or disclosed by the Company on a
Current Report on
Form 8-K.
Section 5.16 Compliance
with Law.
(a) Applicable Law. The businesses of the
Company and its Subsidiaries are being, and have at all times
been, conducted in compliance, in all material respects, with
Applicable Law. No notice has been given of any violation of any
Applicable Law, except for any violation or possible violation
that, individually or in the aggregate,
A-29
has not had, and would not reasonably be expected to have, a
Company Material Adverse Effect. No investigation or review by
any Governmental Entity with respect to the Company or any of
its Subsidiaries is pending or, to the Knowledge of the Company,
threatened, nor has any Governmental Entity indicated an
intention to conduct any such investigation or review.
(b) Sarbanes-Oxley Act.
(i) The Company is in compliance, in all material respects,
with (i) the provisions of the Sarbanes-Oxley Act and
(ii) the listing and corporate governance rules and
regulations of the NASDAQ applicable to the Company as of the
date of this Agreement. Except as permitted by the Exchange Act,
including, without limitation, Sections 13(k)(2) and (3),
since the effectiveness of the Sarbanes-Oxley Act, neither the
Company nor any of its Subsidiaries has arranged any
extensions of credit to any executive officer or
director of the Company within the meaning of Section 402
of the Sarbanes-Oxley Act. The Company has previously made
available to Parent a true and complete copy of any reports by
the Companys management to the Company Board or any
committee thereof relating to compliance with the Sarbanes-Oxley
Act, as well as the reports of any outside consultant or auditor
with respect thereto, for periods after December 31, 2004.
(ii) The management of the Company has (i) designed
and implemented disclosure controls and procedures (as defined
in
Rule 13a-15(e)
of the Exchange Act) or caused such disclosure control and
procedures to be designed and implemented under their
supervision to ensure that material information relating to the
Company, including its consolidated Company Subsidiaries, is
made known to management of the Company, by others within those
entities. Since December 31, 2005, the Company has
disclosed to the Companys outside auditors and the audit
committee of the Company Board (A) any significant
deficiencies or material weaknesses in the design or operation
of internal controls over financial reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) which are reasonably likely to adversely
affect the Companys ability to record, process, summarize
and report financial information, and (B) any fraud or
allegation of fraud, whether or not material, that involves
management or other employees who have a significant role in the
Companys internal controls over financial reporting. Since
January 1, 2005, any material change in internal control
over financial reporting required to be disclosed in any Company
Report has been so disclosed.
(iii) Since December 31, 2006, (i) neither the
Company nor any Company Subsidiary nor, to the Knowledge of the
Company, any director, officer, employee, auditor, accountant or
Representative of the Company or any Company Subsidiary has
received or otherwise has Knowledge of any complaint,
allegation, assertion or claim, whether written or oral,
regarding the accounting or auditing practices, procedures,
methodologies or methods of the Company or any Company
Subsidiary or their respective internal accounting controls
relating to periods after December 31, 2006, including any
material complaint, allegation, assertion or claim that the
Company or any Company Subsidiary has engaged in questionable
accounting or auditing practices (except for any of the
foregoing after the date hereof which have no reasonable basis),
and (ii) no attorney representing the Company or any
Company Subsidiary, whether or not employed by the Company or
any Company Subsidiary, has reported evidence of a material
violation of securities Laws, breach of fiduciary duty or
similar violation, relating to periods after December 31,
2006, by the Company or any of its officers, directors,
employees or agents to the Company Board or any committee
thereof or, to the Knowledge of the Company, to any director or
officer of the Company.
(iv) As of the date hereof, to the Knowledge of the
Company, the Company has not identified any material weaknesses
in its system of internal controls over financial reporting. To
the Knowledge of the Company, there is no reason to believe that
its auditors and its chief executive officer and chief financial
officer will not be able to give the certifications and
attestations required pursuant to the rules and regulations
adopted pursuant to Section 404 of the Sarbanes-Oxley Act,
without qualification, when next due.
(c) Foreign Corrupt Practices Act. None
of the Company, any Company Subsidiary or, to the Knowledge of
the Company, any of their Affiliates or any other Persons acting
on their behalf has, in connection with the operation of their
respective businesses, (i) used any corporate or other
funds for unlawful contributions, payments, gifts or
entertainment, or made any unlawful expenditures relating to
political activity to government officials, candidates or
members of political parties or organizations, or established or
maintained any unlawful or unrecorded funds in violation of
Section 104 of the Foreign Corrupt Practices Act of 1977,
as amended, or any other similar applicable Federal, state or
foreign law, (ii) paid, accepted or received any unlawful
contributions, payments, expenditures or
A-30
gifts, or (iii) violated or operated in noncompliance with
any export restrictions, anti-boycott regulations, embargo
regulations or other applicable domestic or foreign laws and
regulations.
(d) Exchange Act. None of the
Company Subsidiaries is, or has at any time since
January 1, 2002 been, subject to the reporting requirements
of Sections 13(a) or 15(d) under the Exchange Act.
Section 5.17 Permits. (a) The
Company and each of the Company Subsidiaries has, and is in good
standing with respect to, all governmental consents, approvals,
licenses (including insurance licenses), authorizations,
permits, certificates, inspections and franchises (collectively,
the Company Permits) necessary to continue to
conduct the business of the Company or such Company Subsidiary
in the Ordinary Course of Business (including being duly
licensed to write each line of business reported as being
written in the Company Statutory Statements, if applicable) and
to own or lease and operate the assets and properties necessary
for the conduct by the Company or such Company Subsidiary of
their business in the Ordinary Course of Business, all of which
are valid and in full force and effect, except for such failures
that, individually or in the aggregate, do not have, and would
not reasonably be expected to have, a Company Material Adverse
Effect.
(b) The Company Insurance Subsidiaries are duly licensed,
authorized, approved or accredited (as required by the
respective jurisdiction) to conduct an insurance or reinsurance
business in the jurisdictions listed on
Schedule 5.17(b) of the Company Disclosure Schedule,
and are not transacting any insurance or reinsurance business in
any jurisdiction in which they are not so licensed, authorized,
approved, accredited (as the case may be) or otherwise permitted
to transact such business.
(c) Except as set forth on Schedule 5.17(c) of
the Company Disclosure Schedule:
(i) neither the Company nor any Company Subsidiary has
received any notice, oral or written, (A) that it is
required to obtain, or that it is engaging in any activity that
would require it to obtain, any Company Permits that it does not
now possess that are necessary for the conduct by the Company or
such Company Subsidiary of their business in the Ordinary Course
of Business or (B) that it is engaging in any activity that
would cause modification, limitation, nonrenewal, revocation or
suspension of any Company Permits that are necessary for the
conduct by the Company or such Company Subsidiary of their
business in the Ordinary Course of Business and no action,
inquiry, investigation or proceeding looking to or contemplating
any of the actions specified in clauses (A) and
(B) above is pending or, to the Knowledge of the Company,
threatened;
(ii) all reports, statements, documents, registrations,
filings and submissions to state insurance regulatory
authorities that are necessary for the conduct by the Company or
such Company Subsidiary of their business in the Ordinary Course
of Business submitted or made by the Company or the Company
Subsidiaries complied in all material respects with Applicable
Law in effect when filed, and in each instance were filed in all
material respects on a timely basis;
(iii) no material deficiencies have been asserted by any
such Governmental Entities with respect to any such reports,
statements, documents, registrations, filings or submissions
that have not been satisfied in all material respects; and
(iv) the Company has delivered or made available for
inspection by Parent true and complete copies of all quarterly
and annual statutory statements, reports of examinations and
market conduct studies made by the Company Subsidiaries with any
Governmental Entities since January 1, 2003, including each
Company Statutory Statement, and any reports of examination or
market conduct studies relating to any Company Subsidiary issued
by any Governmental Entities since December 31, 2003, and
all such quarterly and annual statutory statements, reports of
examinations and market conduct studies were in all material
respects true, complete and accurate when filed.
(d) The Company has delivered or made available for
inspection by Parent true and complete copies of all financial
examination, market conduct or other reports of U.S. state
insurance departments with respect to any U.S. Company
Insurance Subsidiary and any equivalent reports of Insurance
Regulators with respect to any
non-U.S. Company
Insurance Subsidiaries which have been completed since
January 1, 2003. Since January 1, 2003, no violations
material to the financial condition of any Company Insurance
Subsidiary have been asserted in writing by any Insurance
Regulator, other than any violation which has been cured or
otherwise resolved to the
A-31
satisfaction of such Insurance Regulator or which is no longer
being pursued by such Insurance Regulator following a response
by the relevant Company Insurance Subsidiary. Neither the
Company nor any of its Subsidiaries is in default under or in
violation of any Order, stipulation, decree, award or judgment
entered into with or issued by any Insurance Regulator; nor has
any of the Company or any of its Subsidiaries received any
notice of any such default or violation that remains uncorrected.
Section 5.18 Reserves. The
reserves for future payment of benefits, losses, claims,
expenses and similar purposes (including claims litigation)
under all insurance policies, reinsurance agreements or
retrocessional agreements to which any Company Insurance
Subsidiary is a party reflected in, or included with, the
financial statements set forth in the Company Statutory
Statements and Company Financial Statements (i) have been
computed in all material respects in accordance with presently
accepted actuarial standards consistently applied and prepared
in accordance with applicable SAP or U.S. GAAP, as
applicable, consistently applied; (ii) have been computed
based on actuarial assumptions that are consistent in all
material respects with applicable Contract provisions and with
those used to compute the corresponding items in the Company
Statutory Statements and the Company Financial Statements;
(iii) have been computed on the basis of assumptions
consistent with those used to compute the corresponding items in
such financial statements; and (iv) have been computed in
accordance with the requirements for reserves established by the
insurance departments of the state of domicile of each Company
Insurance Subsidiary. The Company has made available to Parent a
true and complete copy of all actuarial reports prepared by
actuaries, independent or otherwise, with respect to any Company
Insurance Subsidiary as of any date on or after
December 31, 2004, together with all attachments, addenda,
supplements and modifications thereto.
Section 5.19 Reinsurance.
(a) Copies of all retrocession and reinsurance agreement
pursuant to which a Company Subsidiary has ceded, transferred,
reinsured or assumed any obligations or liabilities under any
reinsurance or insurance agreement with respect to which such
Company Subsidiary has booked any liability or recoverable or
under which such Company Subsidiary has any contingent
liabilities or rights (collectively, the Company
Reinsurance Agreements) have been provided or made
available to Parent. Each Company Reinsurance Agreement is in
full force and effect, except as have not had, and would not
reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect. Each such Company
Reinsurance Agreement is a valid and binding agreement of the
applicable Company Subsidiary, enforceable against such Company
Subsidiary in accordance with its terms (except as may be
limited by bankruptcy, insolvency, moratorium, or other similar
laws affecting or relating to enforcement of creditors
rights generally, or by principles of equity, none of which
conditions, to the Knowledge of the Company, exist as of the
date hereof). To the Knowledge of the Company, each Company
Reinsurance Agreement is a valid and binding obligation of each
other party thereto, enforceable against such party in
accordance with the terms of such Company Reinsurance Agreement
(except as may be limited by bankruptcy, insolvency, moratorium,
or other similar laws affecting or relating to enforcement of
creditors rights generally, or by principles of equity,
none of which conditions, to the Knowledge of the Company, exist
as of the date hereof).
(b) Each Company Subsidiary party to a Company Reinsurance
Agreement pursuant to which a Company Subsidiary has ceded,
transferred or reinsured any obligations or liabilities
(Company Retrocession Agreements) is entitled
to take full credit (except as set forth on Schedule F of
such Company Subsidiarys Company Statutory Statement) in
its respective Company Statutory Statements pursuant to
Applicable Law for all reinsurance and coinsurance ceded
pursuant to any Company Retrocession Agreement to which such
Company Subsidiary is a party. No notice of intended
cancellation or termination has been received by the Company or
any of the Company Subsidiaries from any of the other parties to
such Company Retrocession Agreements.
Section 5.20 Taxes.
(a) The Company and each of the Company Subsidiaries has
timely filed, or has caused to be timely filed, in the manner
required by law (after taking into account all applicable
extensions) with the appropriate Taxing Authority all material
Tax Returns in all jurisdictions in which Tax Returns are
required to be filed, and such Tax Returns are true, correct and
complete in all material respects. Neither the Company nor any
of the Company Subsidiaries is the beneficiary of any extension
of time within which to file any material Tax Return. All
material Taxes of the Company and each of the Company
Subsidiaries (whether or not shown on any Tax Return) that have
become due or payable have been fully and timely paid in the
manner required by law (after taking into account all
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applicable extensions), or such Taxes are being contested in
good faith and proper accruals pursuant to U.S. GAAP have
been established on the Companys consolidated financial
statements with respect thereto. There are no liens for any
material amount of Taxes (other than a lien for current real
property or ad valorem Taxes not yet due and payable) on any of
the assets of the Company or any of the Company Subsidiaries.
(b) Neither the Company nor any of the Company Subsidiaries
has received any notice of any disputes, claims, audits,
examinations, assessments or proposed assessments regarding any
material amount of Taxes, and there are no disputes, claims,
audits, examinations, assessments or proposed assessments
regarding any material amount of Taxes of the Company or any of
the Company Subsidiaries or the assets of the Company or any of
the Company Subsidiaries that (i) are pending or
(ii) have been threatened in writing , unless such Taxes
are being contested in good faith and proper accruals pursuant
to U.S. GAAP have been established on the Companys
consolidated financial statements with respect thereto. Neither
the Company nor any of the Company Subsidiaries has waived any
statute of limitations in respect of any material amount of
Taxes or agreed to a material Tax assessment or deficiency.
(c) Proper accruals pursuant to U.S. GAAP have been
established (and until the Closing Date will be maintained) on
the Companys consolidated financial statements adequate to
pay all Taxes of the Company and each of the Company
Subsidiaries not yet due and payable.
(d) The Company is not now and has never been a United
States real property holding corporation within the meaning of
Section 897(c)(1)(A)(ii) of the Code.
(e) The Company and each of the Company Subsidiaries have
delivered or made available to Parent correct and complete
copies of all (i) Tax Returns filed by or including the
Company or any of the Company Subsidiaries and (ii) all
examination reports by a Taxing Authority and other relevant
written materials with respect to audits (whether proposed,
threatened, pending or concluded) related to the three taxable
years ending prior to the Closing Date of the Company or any of
the Company Subsidiaries.
Section 5.21 Benefit
Plans; Employees and Employment Practices.
(a) The Company has delivered or made available to the
Company true, complete and correct copies of each Company
Benefit Plan (or, in the case of any unwritten Company Benefit
Plans, descriptions of the material terms thereof).
(b) Each Company Benefit Plan has been established, funded,
maintained and administered in all material respects in
accordance with its terms and is in compliance with the
applicable provisions of ERISA, the Code and all other
Applicable Laws.
(c) With respect to each Company Pension Plan that is
subject to Title IV or Section 302 of ERISA or
Section 412 or 4971 of the Code, except as would not
reasonably be expected to have a Company Material Adverse
Effect: (i) there does not exist any accumulated funding
deficiency within the meaning of Section 412 of the Code or
Section 302 of ERISA, whether or not waived; (ii) on
the date of the last actuarial valuation, the fair market value
of the assets of such Company Pension Plan equals or exceeds the
actuarial present value of all accrued benefits under such
Company Pension Plan (whether or not vested) based upon the
actuarial assumptions set forth in the most recent actuarial
report for such Company Pension Plan; (iii) no reportable
event within the meaning of Section 4043(c) of ERISA for
which the
30-day
notice requirement has not been waived has occurred, and the
consummation of the transactions contemplated by this Agreement
will not result in the occurrence of any such reportable event;
(iv) all premiums to the Pension Benefit Guaranty
Corporation (PBGC) have been timely paid in
full; (v) no liability (other than for premiums to the
PBGC) under Title IV of ERISA has been or is expected to be
incurred by the Company or any of its Subsidiaries; and
(vi) the PBGC has not instituted proceedings to terminate
any such Company Pension Plan.
(d) To the Knowledge of the Company, all Company Pension
Plans have been the subject of favorable and
up-to-date
(through any applicable remedial amendment period) determination
letters from the IRS, or a timely application therefor has been
filed, to the effect that such Company Pension Plans are
qualified and exempt from federal income taxes under
Section 401(a) and 501(a), respectively, of the Code; and,
to the Knowledge of the
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Company, no circumstances exist and no events have occurred that
could adversely affect the qualification of any Company Pension
Plan or the related trust.
(e) Neither the Company nor any of its Subsidiaries has
been required at any time or is required currently to contribute
to any multiemployer plan (as defined in
Section 4001(a)(3) of ERISA).
(f) There does not now exist, nor do any circumstances
exist that could reasonably be expected to result in, any
Controlled Group Liability that would be a material liability of
the Surviving Corporation following the Closing. Without
limiting the generality of the foregoing, neither the Company
nor any of its subsidiaries, nor any of their respective ERISA
Affiliates, has engaged in any transaction described in
Section 4069 or Section 4204 or 4212 of ERISA. For
purposes hereof, Controlled Group Liability
means any and all liabilities (a) under Title IV of
ERISA, (b) under the minimum funding requirements of
Section 302 of ERISA or Section 412 of the Code,
(c) under Section 4971 of the Code, and (d) as a
result of a failure to comply with the continuation coverage
requirements of Section 601 et seq. of ERISA and
Section 4980B of the Code.
(g) Neither the Company nor its Subsidiaries has any
liability for life, health, medical or other welfare benefits
for former employees or beneficiaries or dependents thereof
under Company Benefit Plans, other than Company Pension Plans
and other than as required by Section 4980B of the Code or
Part 6 of Title I of ERISA or other Applicable Law.
(h) There are no pending or, to the Companys
Knowledge, threatened, claims, lawsuits, arbitrations or audits
asserted or instituted against any Company Benefit Plan, any
fiduciary (as defined by Section 3(21) of ERISA) thereto,
the Company, any of its Subsidiaries or any employee or
administrator thereof in connection with the existence,
operation or administration of a Company Benefit Plan, other
than routine claims for benefits.
(i) The Company and its Subsidiaries are in compliance in
all material respects with all Applicable Laws and Orders
applicable to such entity or the employees or other persons
providing services to or on behalf of such entity, as the case
may be, relating to the employment of labor, including without
limitation all such laws, regulations and orders relating to
wages, hours, employment standards, the WARN Act, Title VII
of the Civil Rights Act of 1964, Age Discrimination in
Employment Act, Americans with Disabilities Act, Equal Pay Act,
HIPAA, ERISA, Family and Medical Leave Act, discrimination,
civil rights, safety and health, workers compensation and
the collection and payment of withholding
and/or
social security taxes and any similar tax as may be necessary
for the conduct by the Company or any Company Subsidiary of
their business in the Ordinary Course of Business.
(j) The Company has provided to Parent a true and complete
list of all Company Employee Options and Company Restricted
Stock, identifying separately those Company Employee Options and
shares of Company Restricted Stock that will be accelerated or
vested prior to the Effective Time. No other Company Employee
Options or shares of Company Restricted Stock will be
accelerated or vested prior to the Effective Time.
Section 5.22 Intellectual
Property.
(a) Except as would not be reasonably expected to have a
Company Material Adverse Effect: (i) the Company or one of
the Company Subsidiaries is the owner of, free and clear of any
Encumbrance (other than Permitted Encumbrances), or has a valid
right or license to, all Intellectual Property necessary for the
conduct of its business as now conducted (all such Intellectual
Property, the Company IP Rights);
(ii) the Company and Company Subsidiaries have taken
commercially reasonable actions to protect the Company IP
Rights; (iii) to the Companys Knowledge, the rights
of the Company
and/or the
Company Subsidiaries in the Company IP Rights are valid and
enforceable; (iv) to the Companys Knowledge, neither
the Company nor any Company Subsidiary is infringing or
misappropriating, and has not infringed or misappropriated, any
Intellectual Property of any other Person; (v) the Company
IP Rights that have been licensed by the Company or the Company
Subsidiaries are being used substantially in accordance with the
applicable licenses pursuant to which the Company or the Company
Subsidiaries acquired the right to use such Company IP Rights;
and (vi) to the Companys Knowledge, no Person is
infringing or misappropriating any Company IP Rights owned by
the Company or any Company Subsidiary. Neither the Company nor
any Company Subsidiary has received any written demand, claim or
notice from any Person in respect of the Company IP Rights which
challenges the validity of, or the rights of the Company or such
Company Subsidiary in, any such Company IP Rights.
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Section 5.23 Information
Technology.
(a) Except as would not be reasonably expected to have a
Company Material Adverse Effect, the material Company IT Systems
(i) have been reasonably maintained and (ii) are in
good working condition to perform all information technology
operations necessary for the conduct of the business of the
Company or any of the Company Subsidiaries. The Company and the
Company Subsidiaries have taken commercially reasonable steps to
provide for the backup and recovery of the data and information
critical to the conduct of the business of the Company or any of
the Company Subsidiaries.
(b) To the Knowledge of the Company, the Company and each
of the Company Subsidiaries are in material compliance with all
Applicable Laws regarding the collection, use and protection of
personal information and with the Companys and the Company
Subsidiaries published and internal privacy and data
security policies and procedures.
(c) The Company and the Company Subsidiaries have
established and are in compliance with commercially reasonable
security programs that are designed to protect (A) the
security, confidentiality and integrity of transactions executed
through their computer systems, including encryption
and/or other
security protocols and techniques when appropriate and
(B) the security, confidentiality and integrity of all
confidential or proprietary data except, in each case, which
individually or in the aggregate would not reasonably be
expected to have a Company Material Adverse Effect. Neither the
Company nor any of the Company Subsidiaries has suffered a
material security breach with respect to their data or systems,
and neither the Company nor any of the Company Subsidiaries has
notified consumers or employees of any information security
breach involving in connection with such consumers
confidential information or such employees confidential
information.
Section 5.24 Parent
Common Shares Ownership. Neither the Company
nor any of its Subsidiaries beneficially owns any Parent Common
Shares or other securities convertible into or exercisable for
Parent Common Shares.
Section 5.25 Investment
Company. Neither the Company nor any of its
Subsidiaries is an investment company as defined
under the Investment Company Act of 1940, as amended (the
Investment Company Act), and neither the
Company nor any of its Subsidiaries sponsors any person that is
such an investment company.
Section 5.26 Opinion
of Financial Advisor. The Company has received an
opinion from Bear, Stearns & Co. Inc., dated as of the
date hereof, to the effect that as of the date of such opinion,
the Exchange Ratio is fair, from a financial point of view, to
the holders of Company Common Shares. A copy of this opinion has
been or will be provided to Parent as of the date hereof.
Section 5.27 Bids
and Quotes. The Company has never provided or
submitted a false, sham, phony or otherwise artificial bid or
quote with respect to prospective insurance business.
ARTICLE VI
Representations
and Warranties of Parent and Merger Sub
Except as otherwise disclosed to the Company in a schedule (the
Parent Disclosure Schedule) delivered to it
by Parent prior to the execution of this Agreement (it being
understood that each section or schedule of such Parent
Disclosure Schedule qualifies the correspondingly numbered
representation, warranty or covenant hereof only to the extent
specified therein and such other representations, warranties or
covenants only to the extent a matter in such section or
schedule is disclosed in such a way as to make its relevance to
such other representation, warranty or covenant readily
apparent) and except as readily apparent from disclosure in the
Parent Reports publicly available prior to the date hereof
(other than disclosures in Factors Affecting Future
Results of Operations, Risk Factors and
Forward Looking Statements sections of the Parent
Reports and any other disclosures included in any such Parent
Reports that are predictive or forward-looking in nature) Parent
represents and warrants to the Company as follows:
Section 6.1 Corporate
Status. Parent is a company duly organized,
validly existing and in good standing under the laws of Bermuda
and has all requisite corporate power and authority to own,
lease and operate its
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properties and to carry on its business as is now being
conducted. Parent is duly qualified or licensed to own, lease
and operate its properties and to carry on its business as is
now being conducted in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary,
except where the failure to be so qualified would not,
individually or in the aggregate, reasonably be expected to have
a Parent Material Adverse Effect. Parent has delivered or made
available to the Company complete and correct copies of its
Organizational Documents, as amended and in effect on the date
hereof.
Section 6.2 Parent
Subsidiaries.
(a) Schedule 6.2(a) of the Parent Disclosure
Schedule sets forth the name of each Subsidiary owned (whether
directly or indirectly) by Parent (collectively, the
Parent Subsidiaries), and the state or
jurisdiction of its organization. Each Parent Subsidiary is a
corporation, limited liability company or partnership, as the
case may be, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation
or organization, as the case may be, and has all requisite
corporate, limited liability company or partnership power and
authority, as the case may be, to own, lease and operate its
properties and to carry on its business as is now being
conducted. Each Parent Subsidiary is duly qualified as a foreign
corporation to do business in each jurisdiction in which the
property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification necessary,
except where the failure to be so qualified would not,
individually or in the aggregate, reasonably be expected to have
a Parent Material Adverse Effect.
(b) Parent is, directly or indirectly, the record and
beneficial owner of all of the outstanding shares of capital
stock or other equity interests of each of the Parent
Subsidiaries. All of such shares and other equity interests so
owned by Parent are validly issued, fully paid and nonassessable
and are owned by it free and clear of any Encumbrances.
(c) Schedule 6.2(c) of the Parent Disclosure
Schedule sets forth each of the Parent Subsidiaries conducting
any insurance or reinsurance business (the Parent
Insurance Subsidiaries) and lists the jurisdiction of
domicile of each Parent Insurance Subsidiary.
Section 6.3 Capitalization.
(a) Authorized; Designations. As
of the date hereof, the authorized capital stock of Parent
consists of (i) 350,000,000 Parent Common Shares of which
20,000,000 shares have been designated Class A Common
Shares (the Parent Series A Convertible Common
Shares), 16,666,666 and two-thirds shares have been
designated Class B Common Shares (the Parent
Series B Convertible Common Shares) and
13,333,333 and one-third shares have been designated
Class C Common Shares (the Parent Series C
Convertible Common Shares and, together with the
Parent Series A Convertible Common Shares and the Parent
Series B Convertible Common Shares, the Parent
Convertible Common Shares) and (ii) 30,000,000
Preferred Shares, par value $1.00 per share (the
Parent Preferred Shares), of which
7,500 shares have been designated Series A Convertible
Voting Preferred Shares (the Parent Series A
Preferred Shares), 5,000 shares have been
designated Series B Convertible Voting Preferred Shares
(the Parent Series B Preferred Shares)
and 2,500 shares have been designated Series C
Convertible Voting Preferred Shares (the Parent
Series C Preferred Shares).
(b) Issued and Outstanding. As of
the date hereof:
(i) 63,486,772 Parent Common Shares were issued and
outstanding;
(ii) 4,405,238 Parent Series A Convertible Common
Shares were issued and outstanding;
(iii) 3,399,020 Parent Series B Convertible Common
Shares were issued and outstanding;
(iv) 1,051,089 Parent Series C Convertible Common
Shares were issued and outstanding;
(v) 3,168.533 Parent Series A Preferred Shares were
issued and outstanding;
(vi) 1,588.492 Parent Series B Preferred Shares were
issued and outstanding;
(vii) 1,056.176 Parent Series C Preferred Shares were
issued and outstanding;
A-36
(viii) 891,095 Parent Common Shares were subject to
outstanding stock options; and
(ix) 2,086,163 Parent Common Shares were reserved for
issuance pursuant to Parents stock plans listed on
Schedule 6.3(b) of the Parent Disclosure Schedule.
Except as set forth above, as of the date hereof, no shares of
capital stock of Parent were issued, reserved for issuance or
outstanding. All issued and outstanding Parent Common Shares
have been duly authorized and validly issued and are fully paid
and nonassessable.
(c) There are no preemptive or similar rights granted by
Parent or any Parent Subsidiary on the part of any holders of
any class of securities of Parent or any Parent Subsidiary.
Except as set forth above, neither Parent nor any Parent
Subsidiary has outstanding any bonds, debentures, notes or other
obligations the holders of which have the right to vote (or
which are convertible into or exercisable for securities having
the right to vote) with the shareholders of Parent or any such
Parent Subsidiary on any matter (Parent Voting
Debt). Except as set forth above, there are not, as of
the date hereof, any options, warrants, rights, convertible or
exchangeable securities, phantom stock rights, stock
appreciation rights, stock-based performance units, commitments,
Contracts, arrangements or undertakings of any kind to which
Parent or any of the Parent Subsidiaries is a party or by which
any of them is bound (i) obligating Parent or any of the
Parent Subsidiaries to issue, deliver or sell or cause to be
issued, delivered or sold, additional shares of capital stock
of, or other equity interests in, or any security convertible or
exercisable for or exchangeable into any capital stock of, or
other equity interest in, Parent or any Parent Voting Debt,
(ii) obligating Parent or any Parent Subsidiary to issue,
grant, extend or enter into any such option, warrant, call,
right, security, commitment, Contract, arrangement or
undertaking or (iii) that give any Person the right to
receive any economic benefit or right similar to or derived from
the economic benefits and rights accruing to holders of capital
stock of, or other equity interests in, Parent. As of the date
hereof, there are not any outstanding contractual obligations of
Parent or any of the Parent Subsidiaries to repurchase, redeem
or otherwise acquire any shares of capital stock of Parent or
any of the Parent Subsidiaries. There are no proxies, voting
trusts or other agreements or understandings to which Parent or
any of the Parent Subsidiaries is a party or is bound with
respect to the voting of the capital stock of, or other equity
interests in, Parent or any of the Parent Subsidiaries.
(d) All outstanding Parent Common Shares, all outstanding
Parent Employee Options and all outstanding shares of capital
stock of each Parent Subsidiary have been issued and granted in
compliance with all Applicable Laws.
(e) The exercise price of each Parent Employee Option is no
less than the fair market value of a Parent Common Share as
determined on the date of grant of such Parent Common Share. All
grants of Parent Employee Options were properly approved by the
Parent Board (or a duly and validly appointed committee thereof)
in compliance with all Applicable Laws and were recorded on the
Parent Financial Statements in accordance with U.S. GAAP,
and no such grants involved any back-dating,
forward-dating or similar practices with respect to
the effective date of grant.
Section 6.4 Authority;
Execution and Delivery; Enforceability.
(a) Parent has all requisite corporate power and authority
to execute and deliver this Agreement and, subject to the
receipt of the Parent Shareholder Approval and the Parent
Preferred Consents, to consummate the transactions contemplated
by this Agreement. The execution and delivery by Parent of this
Agreement and the consummation by Parent of the transactions
contemplated hereby have been duly and validly authorized by all
necessary corporate action on the part of Parent, subject to
receipt of the Parent Shareholder Approval and the Parent
Preferred Consents. Parent has duly executed and delivered this
Agreement, and this Agreement constitutes its legal, valid and
binding obligation, enforceable against it in accordance with
its terms.
(b) The Parent Special Committee, at a meeting duly called
and held, duly and unanimously adopted resolutions
(i) determining that this Agreement and the transactions
contemplated hereby, including the Merger and the issuance of
Parent Shares in the Merger, are advisable and fair to, and in
the best interests of, Parent and its shareholders and
(ii) recommending that the Parent Board approve this
Agreement and the transactions contemplated hereby, including
the Merger and the issuance of Parent Shares in the Merger.
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(c) The Parent Board, at the recommendation of the Parent
Special Committee, at a meeting duly called and held, duly and
unanimously adopted resolutions (i) determining that this
Agreement and the transactions contemplated hereby, including
the Merger and the issuance of Parent Shares in the Merger, are
advisable and fair to, and in the best interests of, Parent and
its shareholders, (ii) approving this Agreement and the
transactions contemplated hereby, including the Merger and the
issuance of Parent Shares in the Merger, (iii) directing
that the Parent Voting Proposal be submitted to Parents
shareholders for their approval and (iv) recommending that
Parents shareholders adopt the Parent Voting Proposal.
(d) The votes or consents of holders of any class or series
of capital stock of Parent necessary to approve the Merger and
to otherwise consummate the transactions contemplated by this
Agreement are set forth in Schedule 6.4(d) of the
Parent Disclosure Schedule.
Section 6.5 Consents
and Approvals; No Violations.
(a) The execution, delivery and performance of this
Agreement by Parent and consummation of the Merger by Parent do
not and will not require any consent, approval, authorization or
permit of, or filing with or notification to, any Governmental
Entity except for (i) the approvals of the Governmental
Entities set forth on Schedule 6.5(a) of the Parent
Disclosure Schedule (the Parent Required Regulatory
Approvals); (ii) the pre-merger notification
requirements under the HSR Act; (iii) the applicable
requirements of the Exchange Act; (iv) the filing of the
Certificate of Merger pursuant to the DGCL; (v) the
applicable requirements of the NYSE; (vi) any registration,
filing or notification required pursuant to state securities or
blue sky laws and (vii) any such consent, approval,
authorization, permit, filing, or notification, the failure of
which to make or obtain would not, individually or in the
aggregate, reasonably be expected to have a Parent Material
Adverse Effect.
(b) Except for the Parent Shareholder Approval and the
Parent Preferred Consents or as contemplated by
Section 6.5(a), no consent or approval of any other
Person is required to be obtained by Parent for the execution,
delivery or performance of this Agreement by Parent and
consummation by Parent of the transactions contemplated hereby,
except where the failure to obtain any such consent or approval
would not reasonably be expected to have a Parent Material
Adverse Effect.
(c) None of the execution, delivery or performance of this
Agreement by Parent or, subject to the receipt of the Parent
Shareholder Approval and the Parent Preferred Consents,
consummation by Parent of the transactions contemplated hereby
or compliance by Parent with any provisions hereof, will
(i) violate any provision of the Organizational Documents
of Parent or any Parent Subsidiary; (ii) except as set
forth on Schedule 6.5(c) of the Parent Disclosure
Schedule, result in a violation or breach of any provision of,
or constitute (with or without due notice or lapse of time or
both) a default under, or give rise to any right of termination,
cancellation, payment, acceleration or revocation under, any
Contract to which Parent or any Parent Subsidiary is a party or
by which Parent or any Parent Subsidiary or any of their
respective assets may be bound; (iii) result in the
creation or imposition of any Encumbrance upon any property or
asset of Parent or any Parent Subsidiary or (iv) violate or
conflict with any law to which Parent or any Parent Subsidiary,
is subject, except, in the case of clauses (ii),
(iii) and (iv), for violations, breaches, defaults,
terminations, cancellations, payments, accelerations,
revocations, creations, impositions or conflicts which would
not, individually or in the aggregate, have or be reasonably
expected to have, a Parent Material Adverse Effect.
Section 6.6 Parent
Financial Statements; SEC Reports.
(a) The Parent Financial Statements comply as to form in
all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with U.S. GAAP
(except, in the case of unaudited financial statements, as
permitted by
Form 10-Q
of the SEC) as in effect on the respective dates thereof,
applied on a consistent basis throughout the periods presented,
subject, in the case of interim unaudited Parent Financial
Statements, only to normal, recurring year-end adjustments, none
of which are expected to be material in nature. The consolidated
balance sheets included in the Parent Financial Statements
present fairly in all material respects the financial position
of Parent and the Parent Subsidiaries as at the respective dates
thereof, and the consolidated statements of income, consolidated
statements of shareholders equity, and consolidated
statements of cash flows included in such Parent Financial
Statements
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present fairly in all material respects the results of
operations, shareholders equity and cash flows of Parent
and the Parent Subsidiaries for the respective periods indicated.
(b) The term Parent Financial Statements
means the consolidated financial statements of Parent and the
Parent Subsidiaries included in the Parent Reports together, in
the case of year-end statements, with reports thereon by KPMG
LLP, the independent auditors of Parent, including in each case
a consolidated balance sheet, a consolidated statement of
income, a consolidated statement of shareholders equity
and a consolidated statement of cash flows, and accompanying
notes.
(c) Parent and each Parent Subsidiary has filed or
furnished, as applicable, all reports, schedules, forms,
statements and other documents required to be filed by it or
furnished by it to the SEC since January 1, 2004 (the
Parent Reports). As of its respective date,
each Parent Report except for the Registration Statement
complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as the case may be, and the
rules and regulations of the SEC promulgated thereunder
applicable to such Parent Report, and did not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
(d) With respect to each Parent Report on
Form 10-K
or 10-Q or
an amendment thereto, each of the principal executive officer
and the principal financial officer of Parent has made all
certifications required by
Rule 13a-14
or 15(d) under the Exchange Act or Sections 302 and 906 of
the Sarbanes-Oxley Act and the rules and regulations of the SEC
promulgated thereunder with respect to the Parent Reports.
Section 6.7 Statutory
Statements.
(a) Parent has previously furnished to the Company true and
complete copies of the following statutory statements, in each
case together with all exhibits, schedules and notes thereto and
any affirmations and certifications filed therewith:
(i) the audited annual statement of each Parent Insurance
Subsidiary as at December 31 in each of the years ended
2003, 2004 and 2005 and (ii) the unaudited annual statement
of each Parent Insurance Subsidiary for the year ended
December 31, 2006 (collectively, the Parent
Statutory Statements).
(b) The Parent Statutory Statements (i) were prepared
in conformity with SAP, except as expressly set forth within the
subject financial statements and (ii) present fairly to the
extent required by and in conformity with SAP, except as set
forth in the notes, exhibits or schedules thereto, in all
material respects the statutory financial condition and
statutory results of operation of each Parent Insurance
Subsidiary as of the dates and for the periods therein specified.
Section 6.8 Absence
of Certain Changes or Events. Except as
contemplated by this Agreement, from December 31, 2005 to
the date hereof: (a) Parent and its Subsidiaries have
conducted their businesses only in the Ordinary Course of
Business; (b) there has not been any event, condition,
change, effect or development that individually or in the
aggregate, has had or would reasonably be expected to have a
Parent Material Adverse Effect; and (c) Parent and its
Subsidiaries have not taken any action (or failed to take any
action) that, if taken (or failed to be taken) during the period
from the date of this Agreement through the Effective Time,
would constitute a breach of Section 7.2.
Section 6.9 Litigation.
(a) Set forth on Schedule 6.9(a) of the Parent
Disclosure Schedule is a true and complete list as of the date
hereof of all Proceedings pending or, to the Knowledge of
Parent, threatened against Parent or any Parent Subsidiary as of
the date hereof, except for those Proceedings that (i) do
not and would not reasonably be expected to impair in any
material respect the ability of Parent to perform its
obligations under this Agreement, or prevent or materially
impede the consummation by Parent of the Merger or the other
transactions contemplated by this Agreement and (ii) have
not had and would not reasonably be expected to have a Parent
Material Adverse Effect. There is no Proceeding pending or, to
the Knowledge of Parent, threatened against Parent or any Parent
Subsidiary except those that, individually or in the aggregate,
(x) do not and would not reasonably be expected to impair
in any material respect the ability of Parent to perform its
obligations under this Agreement, or prevent or materially
impede the consummation by Parent of the Merger or the other
transactions contemplated by this Agreement or (y) have not
had
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and would not reasonably be expected to have a Parent Material
Adverse Effect, other than those Proceedings set forth on
Schedule 6.9(a) of the Parent Disclosure Schedule.
(b) With respect to any Proceedings pending or threatened
against Parent or any Parent Subsidiary that are set forth on
Schedule 6.9(a) of the Parent Disclosure Schedule,
there has not been any change in circumstance since
September 30, 2006 except as individually or in the
aggregate, (i) do not and would not reasonably be expected
to impair in any material respect the ability of Parent to
perform its obligations under this Agreement, or prevent or
materially impede the consummation by Parent of the Merger or
the other transactions contemplated by this Agreement, or
(ii) have not had and would not reasonably be expected to
have a Parent Material Adverse Effect.
(c) Neither Parent nor any Parent Subsidiary nor any of
their respective properties is or are a party or subject to or
in default under any Judgment except as individually or in the
aggregate, (i) do not and would not reasonably be expected
to impair in any material respect the ability of Parent to
perform its obligations under this Agreement, or prevent or
materially impede the consummation by Parent of the Merger or
the other transactions contemplated by this Agreement, or
(ii) have not had and would not reasonably be expected to
have a Parent Material Adverse Effect.
(d) To the Knowledge of Parent, since December 31,
2005, there have been no formal or informal SEC inquiries or
investigations, other governmental inquiries or investigations
or internal investigations or material whistle-blower complaints
pending or threatened or otherwise involving Parent or any
Parent Subsidiary, including, regarding any accounting practices
of Parent, any broker compensation issues or any conduct by any
executive officer of Parent.
Section 6.10 Absence
of Undisclosed Liabilities. Parent and the Parent
Subsidiaries do not have any liabilities of any nature (whether
accrued, absolute, asserted or unasserted, contingent or
otherwise), except for liabilities (a) reflected on or
reserved against in Parents consolidated balance sheet as
of December 31, 2005 included in the Parent Financial
Statements, (b) liabilities incurred in the Ordinary Course
of Business since December 31, 2005 and
(c) liabilities which, individually or in the aggregate,
have not had or would not reasonably be expected to have a
Parent Material Adverse Effect.
Section 6.11 Title
to Property.
(a) Schedule 6.11(a) of the Parent Disclosure
Schedule sets forth the location and description of all real
property owned by Parent or any of the Parent Subsidiaries as of
the date hereof.
(b) Each of Parent and the Parent Subsidiaries (a) has
good and valid title to all of its properties, assets and other
rights that would not constitute real property (other than
Intellectual Property), free and clear of all Encumbrances and
(b) owns, has valid leasehold interests in or valid
contractual rights to use, all of the assets, tangible and
intangible (other than Intellectual Property), necessary to
permit Parent and the Parent Subsidiaries to carry on their
business, in each case, except for Permitted Encumbrances where
the failure to have such good and valid title, own such assets,
have such valid leasehold interests or have such valid
contractual rights have not had or would not, individually or in
the aggregate, reasonably be expected to have a Parent Material
Adverse Effect.
Section 6.12 Insurance. Copies
of all insurance policies maintained by Parent and the Parent
Subsidiaries have been provided or made available to the
Company. Except as would not, individually or in the aggregate,
reasonably be expected to have a Parent Material Adverse Effect,
(a) all such policies are in full force and effect and were
in full force and effect during the periods of time such
insurance policies are purported to be in effect and
(b) neither Parent nor any Parent Subsidiary (i) is in
material breach or default or (ii) has taken any action or
failed to take any action, and, to the Knowledge of Parent, no
event has occurred which, with notice or the lapse of time,
would constitute such a breach or default, or permit termination
or modification under any policy.
Section 6.13 Disclosure
Documents. None of the information supplied or to
be supplied by Parent or Merger Sub for inclusion or
incorporation by reference in the Registration Statement,
contains or will contain, as applicable, at the time the
Registration Statement is filed with the SEC, at any time it is
amended or supplemented or at the time it becomes effective
under the Securities Act, any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading. None of the information supplied or to be supplied
by Parent or Merger Sub for inclusion or incorporation by
reference in the Joint Proxy Statement/Prospectus, on the date
it is first mailed to the Companys stockholders or
Parents
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shareholders or at the time of the Company Stockholders Meeting,
the Parent Shareholders Meeting or at the Effective Time,
contains or will contain, any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not
misleading. Notwithstanding the foregoing, no representation or
warranty is made by Parent or Merger Sub with respect to
statements made or incorporated by reference in the Registration
Statement or the Joint Proxy Statement/Prospectus based on
information supplied by the Company for inclusion or
incorporation by reference in the Registration Statement or the
Joint Proxy Statement/Prospectus.
Section 6.14 Brokers. Other
than Keefe, Bruyette & Woods, Inc., no Person is
entitled to any brokerage, financial advisory, finders or
similar fee or commission payable by Parent or any Parent
Subsidiary in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of
Parent or any Parent Subsidiary. Parent has furnished to the
Company a true and complete copy of all agreements between
Parent and Keefe, Bruyette & Woods, Inc. relating to
the Merger or other transactions contemplated by this Agreement.
Section 6.15 Contracts.
(a) Schedule 6.15(a) of the Parent Disclosure
Schedule sets forth a list of each Contract to which Parent or
any of the Parent Subsidiaries is a party or by which it is
bound which:
(i) contains outstanding obligations in excess of
$1.0 million in any twelve (12)-month period or is
otherwise material to the business, as of the date hereof, of
Parent and the Parent Subsidiaries taken as a whole, other than
Parent Reinsurance Agreements;
(ii) contains outstanding obligations in excess of
$1.0 million in any twelve (12)-month period and cannot be
terminated without penalty upon sixty (60) days prior
notice, other than Parent Reinsurance Agreements;
(iii) is a standard form of agency, brokerage and
reinsurance intermediary Contract; and which is an agency,
brokerage or other similar insurance sales or marketing Contract
which accounted for five percent (5%) or more of the aggregate
gross written premiums of the Parent Subsidiaries for the year
ended December 31, 2005 or nine months ended
September 30, 2006;
(iv) is a material underwriting management, third-party
administration, managing general agency or similar Contract
(pursuant to which any underwriting, claims settlement or
distribution authority is delegated);
(v) is a reinsurance pool pursuant to which Parent
and/or the
Parent Subsidiaries has assumed reinsurance risks currently in
force or is an assigned pool in which Parent
and/or the
Parent Subsidiaries are participating, other than state FAIR
plans, assigned risk plans, joint underwriting associations and
similar associations arising from the requirements of state
insurance rules and regulations;
(vi) contains covenants materially limiting the freedom of
Parent or any of the Parent Subsidiaries to engage in any line
of business in any geographic area or to compete with any Person
or restricting the ability of Parent or any of the Parent
Subsidiaries to acquire equity securities of any Person;
(vii) is an employment, severance, retention or
indemnification Contract applicable to (A) any named
executive officer (as such term is defined in
Item 402 of
Regulation S-K
of the Securities Act) or director of Parent or (B) any
employee of Parent or any Parent Subsidiary entitled to at least
one (1) years severance pay, in each case, that
cannot be canceled by Parent (or the applicable Parent
Subsidiary) upon sixty (60) days prior written notice
without liability, penalty or premium;
(viii) is a Contract that is required to be disclosed
pursuant to Items 404 or 601(b)(10) of
Regulation S-K
under the Securities Act (other than the employment agreements
covered by clause (vii) above);
(ix) is a partnership or joint venture agreement;
(x) is a loan agreement, note, mortgage, indenture,
security agreement, letter of credit, or other Contract for the
borrowing or lending of money by Parent (other than extensions
of trade credit in the Ordinary Course
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of Business involving an aggregate amount of less than $100,000
and other advances of operating expenses in the Ordinary Course
of Business involving an aggregate amount of less than $100,000);
(xi) is a Contract under which Parent agrees to indemnify
any Person, other than in the Ordinary Course of Business;
(xii) is a lease, sublease or similar Contract with any
person (other than Parent or a Parent Subsidiary directly or
indirectly wholly owned by the Parent) under which Parent or a
Parent Subsidiary is a lessor or sublessor of, or makes
available for use to any person (other than Parent or a Parent
Subsidiary directly or indirectly wholly owned by Parent),
(A) any Parent Property that is material to the conduct of
the business of Parent and the Parent Subsidiaries as presently
conducted; (B) any portion of any premises otherwise
occupied by Parent or a Parent Subsidiary; or (C) is a
lease, sublease or similar Contract with any person (other than
Parent or a Parent Subsidiary directly or indirectly wholly
owned by Parent) under which Parent or a Parent Subsidiary is a
lessor or sublessor of, or makes available for use by any
person, any tangible personal property owned or leased by Parent
or a Parent Subsidiary, in any such case which provides for a
future liability or receivable, as the case may be, in excess of
$10,000 annually or $30,000 over the term of the Contract, and
is not terminable by Parent or a Parent Subsidiary by notice of
not more than 90 days for a cost of less than $10,000;
(xiii) is a Contract creating or granting any Encumbrance
(including Encumbrances upon properties acquired under
conditional sales and capital leases but excluding Permitted
Encumbrances), other than Encumbrances granted in the Ordinary
Course of Business which are not material to Parent and the
Parent Subsidiaries;
(xiv) is a Contract for the acquisition of assets or any
business (whether by merger, consolidation, acquisition of stock
or assets or otherwise) for an amount in excess of $10,000;
(xv) is a Contract between Parent and any of its
Affiliates; or
(xvi) is a Contract containing any
change-of-control
provisions.
(each Contract of the type described in clauses (i) through
(xvi), the Parent Contracts).
(b) (i) Each Parent Contract is (assuming due power
and authority of, and due execution and delivery by, the other
party or parties thereto) valid and binding upon Parent or the
Parent Subsidiary party thereto and, to the Knowledge of Parent,
each other party thereto (except as may be limited by
bankruptcy, insolvency, moratorium, or other similar laws
affecting or relating to enforcement of creditors rights
generally, or by general principles of equity, none of which
conditions, to the Knowledge of Parent, exist as of the date
hereof) and is in full force and effect, none of which
conditions to the Knowledge of Parent, exist as of the date
hereof; and (ii) there is no material default or claim of
material default under any Parent Contract by Parent or the
Parent Subsidiary party thereto, or to the Knowledge of Parent,
by any other party thereto, and, to the Knowledge of Parent, no
event has occurred which, with the passage of time or the giving
of notice (or both), would constitute a material default
thereunder by Parent or the Parent Subsidiary party thereto or
by any other party thereto, or would permit material
modification, acceleration or termination thereof.
(c) Parent has filed each Contract required to be filed by
Parent as a material contract pursuant to
Item 601(b)(10) of
Regulation S-K
under the Securities Act or disclosed by Parent on a Current
Report on
Form 8-K.
Section 6.16 Compliance
with Law.
(a) Applicable Law. The businesses
of Parent and its Subsidiaries are being, and have at all times
been, conducted in compliance, in all material respects, with
Applicable Law. No notice has been given of any violation of any
Applicable Law, except for any violation or possible violation
that, individually or in the aggregate, has not had, and would
not reasonably be expected to have, a Parent Material Adverse
Effect. No investigation or review by any Governmental Entity
with respect to Parent or any of its Subsidiaries is pending or,
to the Knowledge of Parent, threatened, nor has any Governmental
Entity indicated an intention to conduct any such investigation
or review.
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(b) Sarbanes-Oxley Act.
(i) Parent is in compliance, in all material respects, with
(i) the provisions of the Sarbanes-Oxley Act and
(ii) the listing and corporate governance rules and
regulations of the NYSE applicable to Parent as of the date of
this Agreement. Except as permitted by the Exchange Act,
including, without limitation, Sections 13(k)(2) and (3),
since the effectiveness of the Sarbanes-Oxley Act, neither
Parent nor any of its Subsidiaries has arranged any
extensions of credit to any executive officer or
director of Parent within the meaning of Section 402 of the
Sarbanes-Oxley Act. Parent has previously made available to the
Company a true and complete copy of any reports by Parents
management to the Parent Board or any committee thereof relating
to compliance with the Sarbanes-Oxley Act, as well as the
reports of any outside consultant or auditor with respect
thereto, for periods after December 31, 2004.
(ii) The management of Parent has (i) designed and
implemented disclosure controls and procedures (as defined in
Rule 13a-15(e)
of the Exchange Act) or caused such disclosure control and
procedures to be designed and implemented under their
supervision to ensure that material information relating to the
Parent, including its consolidated Parent Subsidiaries, is made
known to management of Parent by others within those entities.
Since December 31, 2005, Parent has disclosed to
Parents outside auditors and the audit committee of the
Parent Board (A) any significant deficiencies or material
weaknesses in the design or operation of internal controls over
financial reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) which are reasonably likely to adversely
affect Parents ability to record, process, summarize and
report financial information and (B) any fraud or
allegation of fraud, whether or not material, that involves
management or other employees who have a significant role in
Parents internal controls over financial reporting. Since
January 1, 2005, any material change in internal control
over financial reporting required to be disclosed in any Parent
Report has been so disclosed.
(iii) Since December 31, 2005, (i) neither Parent
nor any Parent Subsidiary nor, to the Knowledge of Parent, any
director, officer, employee, auditor, accountant or
Representative of Parent or any Parent Subsidiary has received
or otherwise has Knowledge of any complaint, allegation,
assertion or claim, whether written or oral, regarding the
accounting or auditing practices, procedures, methodologies or
methods of Parent or any Parent Subsidiary or their respective
internal accounting controls relating to periods after
December 31, 2005, including any material complaint,
allegation, assertion or claim that Parent or any Parent
Subsidiary has engaged in questionable accounting or auditing
practices (except for any of the foregoing after the date hereof
which have no reasonable basis), and (ii) no attorney
representing Parent or Parent Subsidiary, whether or not
employed by Parent or any Parent Subsidiary, has reported
evidence of a material violation of securities Laws, breach of
fiduciary duty or similar violation, relating to periods after
December 31, 2005, by Parent or any of its officers,
directors, employees or agents to the Parent Board or any
committee thereof or, to the Knowledge of Parent, to any
director or officer of Parent.
(iv) As of the date hereof, to the Knowledge of Parent,
Parent has not identified any material weaknesses in its system
of internal controls over financial reporting. To the Knowledge
of Parent, there is no reason to believe that its auditors and
its chief executive officer and chief financial officer will not
be able to give the certifications and attestations required
pursuant to the rules and regulations adopted pursuant to
Section 404 of the Sarbanes-Oxley Act, without
qualification, when next due.
(c) Foreign Corrupt Practices
Act. None of Parent, any Parent Subsidiary
or, to the Knowledge of Parent, any of their Affiliates or any
other Persons acting on their behalf has, in connection with the
operation of their respective businesses, (i) used any
corporate or other funds for unlawful contributions, payments,
gifts or entertainment, or made any unlawful expenditures
relating to political activity to government officials,
candidates or members of political parties or organizations, or
established or maintained any unlawful or unrecorded funds in
violation of Section 104 of the Foreign Corrupt Practices
Act of 1977, as amended, or any other similar applicable
Federal, state or foreign law, (ii) paid, accepted or
received any unlawful contributions, payments, expenditures or
gifts, or (iii) violated or operated in noncompliance with
any export restrictions, anti-boycott regulations, embargo
regulations or other applicable domestic or foreign laws and
regulations.
(d) Exchange Act. None of the
Parent Subsidiaries is, or has at any time since January 1,
2002 been, subject to the reporting requirements of
Sections 13(a) or 15(d) under the Exchange Act.
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Section 6.17 Permits.
(a) Parent and each of the Parent Subsidiaries has, and is
in good standing with respect to, all governmental consents,
approvals, licenses (including insurance licenses),
authorizations, permits, certificates, inspections and
franchises (collectively, the Parent Permits)
necessary to continue to conduct the business of Parent or such
Parent Subsidiary as now conducted and to own or lease and
operate the assets and properties necessary for the conduct by
Parent or such Parent Subsidiary of their business as now
conducted, all of which are valid and in full force and effect,
except for such failures that, individually or in the aggregate,
do not have, and would not reasonably be expected to have, a
Parent Material Adverse Effect.
(b) The Parent Insurance Subsidiaries are duly licensed,
authorized, approved or accredited (as required by the
respective jurisdiction) to conduct an insurance or reinsurance
business in the jurisdictions listed on
Schedule 6.17(b) of the Parent Disclosure Schedule,
and are not transacting any insurance or reinsurance business in
any jurisdiction in which they are not so licensed, authorized,
approved, accredited (as the case may be) or otherwise permitted
to transact such business.
(c) Except as set forth on Schedule 6.17(c) of
the Parent Disclosure Schedule:
(i) neither Parent nor any Parent Subsidiary has received
any notice, oral or written, (A) that it is required to
obtain, or that it is engaging in any activity that would
require it to obtain, any Parent Permits that it does not now
possess or (B) that it is engaging in any activity that
would cause modification, limitation, non-renewal, revocation or
suspension of any Parent Permits and no action, inquiry,
investigation or proceeding looking to or contemplating any of
the actions specified in clauses (A) and
(B) above is pending or, to the Knowledge of Parent,
threatened;
(ii) all reports, statements, documents, registrations,
filings and submissions to state insurance regulatory
authorities submitted or made by Parent or the Parent
Subsidiaries complied in all material respects with Applicable
Law in effect when filed, and in each instance were filed in all
material respects on a timely basis;
(iii) no material deficiencies have been asserted by any
such Governmental Entities with respect to any such reports,
statements, documents, registrations, filings or submissions
that have not been satisfied in all material respects;
(iv) Parent has delivered or made available for inspection
by the Company true and complete copies of all quarterly and
annual statutory statements, reports of examinations and market
conduct studies made by the Parent Subsidiaries with any
Governmental Entities since January 1, 2003, including each
Parent Statutory Statement, and any reports of examination or
market conduct studies relating to any Parent Subsidiary issued
by any Governmental Entities since December 31, 2003, and
all such quarterly and annual statutory statements, reports of
examinations and market conduct studies were in all material
respects true, complete and accurate when filed.
(d) Parent has delivered or made available for inspection
by the Company true and complete copies of all financial
examination, market conduct or other reports of U.S. state
insurance departments with respect to any U.S. Parent
Insurance Subsidiary and any equivalent reports of Insurance
Regulators with respect to any
non-U.S. Parent
Insurance Subsidiaries which have been completed since
January 1, 2003. Since January 1, 2003, no violations
material to the financial condition of any Parent Insurance
Subsidiary have been asserted in writing by any Insurance
Regulator, other than any violation which has been cured or
otherwise resolved to the satisfaction of such Insurance
Regulator or which is no longer being pursued by such Insurance
Regulator following a response by the relevant Parent Insurance
Subsidiary. Neither Parent nor any of its Subsidiaries is in
default under or in violation of any Order, stipulation, decree,
award or judgment entered into with or issued by any Insurance
Regulator; nor has any of Parent or any of its Subsidiaries
received any notice of any such default or violation that
remains uncorrected.
Section 6.18 Reserves. The
reserves for future payment of benefits, losses, claims,
expenses and similar purposes (including claims litigation)
under all insurance policies, reinsurance agreements or
retrocessional agreements to which any Parent Insurance
Subsidiary is a party reflected in, or included with, the
financial statements set forth in the Parent Statutory
Statements and Parent Financial Statements (i) have been
computed in
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all material respects in accordance with presently accepted
actuarial standards consistently applied and prepared in
accordance with applicable SAP or U.S. GAAP, as applicable,
consistently applied; (ii) have been computed based on
actuarial assumptions that are consistent in all material
respects with applicable Contract provisions and with those used
to compute the corresponding items in the Parent Statutory
Statements and the Parent Financial Statements; (iii) have
been computed on the basis of assumptions consistent with those
used to compute the corresponding items in such financial
statements; and (iv) have been computed in accordance with
the requirements for reserves established by the insurance
departments of the state of domicile of each Parent Insurance
Subsidiary. Parent has made available to the Company a true and
complete copy of all actuarial reports prepared by actuaries,
independent or otherwise, with respect to any Parent Insurance
Subsidiary as of any date on or after December 31, 2004,
together with all attachments, addenda, supplements and
modifications thereto.
Section 6.19 Reinsurance.
(a) Copies of all retrocession and reinsurance agreement
pursuant to which a Parent Subsidiary has ceded, transferred,
reinsured or assumed any obligations or liabilities under any
reinsurance or insurance agreement with respect to which such
Parent Subsidiary has booked any liability or recoverable or
under which such Parent Subsidiary has any contingent
liabilities or rights (collectively, the Parent
Reinsurance Agreements) have been made available to
the Company and each Parent Reinsurance Agreement is in full
force and effect, except as have not had, and would not
reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect. Each such Parent
Reinsurance Agreement is a valid and binding agreement of the
applicable Parent Subsidiary, enforceable against such Parent
Subsidiary in accordance with its terms (except as may be
limited by bankruptcy, insolvency, moratorium, or other similar
laws affecting or relating to enforcement of creditors
rights generally, or by principles of equity, none of which
conditions, to the Knowledge of the Company, exist as of the
date hereof). To the Knowledge of Parent, each Parent
Reinsurance Agreement is a valid and binding obligation of each
other party thereto, enforceable against such party in
accordance with the terms of such Parent Reinsurance Agreement
(except as may be limited by bankruptcy, insolvency, moratorium,
or other similar laws affecting or relating to enforcement of
creditors rights generally, or by principles of equity,
none of which conditions, to the Knowledge of Parent, exist as
of the date hereof).
(b) Each Parent Subsidiary party to a Parent Reinsurance
Agreement pursuant to which a Parent Subsidiary has ceded,
transferred or reinsured any obligations or liabilities
(Parent Retrocession Agreements) is entitled
to take full credit (except (i) in the case of PXRE
Reinsurance Company, as set forth on Schedule F of such
Parent Subsidiarys Parent Statutory Statement, or
(ii) in the case of PXRE Reinsurance Ltd., to the extent
that an allowance has been included in the applicable Parent
Statutory Statement) in its respective Parent Statutory
Statements pursuant to Applicable Law for all reinsurance and
coinsurance ceded pursuant to any Parent Retrocession Agreement
to which such Parent Subsidiary is a party. No notice of
intended cancellation or termination has been received by Parent
or any of the Parent Subsidiaries from any of the other parties
to such Parent Retrocession Agreements.
Section 6.20 Taxes.
(a) Parent and each of the Parent Subsidiaries has timely
filed, or has caused to be timely filed, in the manner required
by law (taking into account all applicable extensions) with the
appropriate Taxing Authority all material Tax Returns in all
jurisdictions in which Tax Returns are required to be filed, and
such Tax Returns are true, correct and complete in all material
respects. Neither Parent nor any of the Parent Subsidiaries is
the beneficiary of any extension of time within which to file
any material Tax Return. All material Taxes of Parent and each
of the Parent Subsidiaries (whether or not shown on any Tax
Return) that have become due or payable have been fully and
timely paid in the manner required by law (taking into account
all applicable extensions), or such Taxes are being contested in
good faith and proper accruals pursuant to U.S. GAAP have
been established on Parents consolidated financial
statements with respect thereto. There are no liens for any
material amount of Taxes (other than a lien for current real
property or ad valorem Taxes not yet due and payable) on any of
the assets of Parent or any of the Parent Subsidiaries.
(b) Neither Parent nor any of the Parent Subsidiaries has
received any notice of any disputes, claims, audits,
examinations, assessments or proposed assessments regarding any
material amount of Taxes, and there are no disputes, claims,
audits, examinations, assessments or proposed assessments
regarding any material amount of
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Taxes of Parent or any of the Parent Subsidiaries or the assets
of Parent or any of the Parent Subsidiaries that (i) are
pending or (ii) have been threatened in writing, unless
such Taxes are being contested in good faith and proper accruals
pursuant to U.S. GAAP have been established on
Parents consolidated financial statements with respect
thereto. Neither Parent nor any of the Parent Subsidiaries has
waived any statute of limitations in respect of any material
amount of Taxes or agreed to a material Tax assessment or
deficiency.
(c) Parent and each of the Parent Subsidiaries has duly and
timely withheld, collected, paid and reported to the proper
governmental authority all Taxes required to have been withheld,
collected, paid or reported (including, without limitation,
pursuant to Sections 1441 through 1464, 3101 through 3510,
and 6041 through 6053 of the Code and Treasury regulations
thereunder, and comparable provisions under any other Applicable
Laws).
(d) Proper accruals in the manner required by
U.S. GAAP have been established (and until the Closing Date
will be maintained) on Parents consolidated financial
statements adequate to pay all Taxes of Parent and each of the
Parent Subsidiaries not yet due and payable.
(e) Neither Parent nor any of the Parent Subsidiaries is a
party to any Tax allocation or sharing agreement. Neither Parent
nor any of the Parent Subsidiaries has been a member of an
affiliated group filing a consolidated federal income Tax Return
(other than a group the common parent of which was Parent) or
has any Tax liability to any Person under Treasury regulations
Section 1.1502-6
or any similar provision of Applicable Law (other than the other
members of the consolidated group of which Parent is parent), or
as a transferee or successor, or by contract, agreement or other
arrangement.
(f) Neither Parent nor any of the Parent Subsidiaries has
been a distributing corporation or a controlled corporation in a
transaction intended to be governed by Section 355 of the
Code.
(g) Neither Parent nor any of the Parent Subsidiaries is
now or has ever been a United States real property holding
corporation within the meaning of Section 897(c)(1)(A)(ii)
of the Code.
(h) Neither Parent nor any of the Parent Subsidiaries has
engaged in any intercompany transaction within the meaning of
Treasury regulations Section 1.1502-13 for which any income
or gain remains unrecognized or deferred and no excess loss
account within the meaning of Treasury regulations
Section 1.1502-19 exists with respect to the stock of any
of the Parent Subsidiaries.
(i) Neither Parent nor any of the Parent Subsidiaries has
agreed to or requested or is required to include in income any
adjustment under either Section 481(a) or Section 482
of the Code (or an analogous provision of state, local, or
foreign law) by reason of a change in accounting method or
otherwise.
(j) No claim has ever been made by any Taxing Authority
with respect to Parent or any of the Parent Subsidiaries in a
jurisdiction where Parent or such Parent Subsidiary does not
file Tax Returns that Parent or such Parent Subsidiary is or may
be subject to taxation by that jurisdiction.
(k) Neither Parent nor any of the Parent Subsidiaries has
engaged in any reportable transaction within the
meaning of Treasury regulations Section 1.6011-4.
(l) No power of attorney that is currently in force has
been granted by Parent or any of the Parent Subsidiaries with
respect to any matters relating to Taxes.
(m) Schedule 6.20(m) of the Parent Disclosure
Schedule accurately sets forth as to Parent and each of the
Parent Subsidiaries (i) the amount, as of the date of this
Agreement, of the net operating loss deduction (within the
meaning of Section 172(a) of the Code and the applicable
Treasury regulations thereunder), detailing separately any
amounts defined as specified liability loss amounts under
Section 172(f) of the Code, that may be carried forward or
backward (the NOL) of Parent or such Parent
Subsidiary, (ii) the dates of expiration of the NOL or any
portion thereof and the amounts expiring on each such date,
(iii) a full description of each limitation on the amount
or usage of the NOL under (A) Section 381, 382, 383 or
384 of the Code or any Treasury regulations promulgated under
any of such Sections (including, but not limited to, each
limitation as a result of an ownership change within the meaning
of Section 382 of the Code and Treasury regulations
thereunder and, for each ownership change, the date and amount
of the limitation and the methodology used to calculate the
limitation), (B) any Treasury regulations promulgated under
Section 1502 of the Code, or (C) any election made by
or on behalf of Parent or such Parent
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Subsidiary, and (iv) information comparable to the
foregoing as determined for state, local or foreign income tax
purposes in each jurisdiction where Parent or a Parent
Subsidiary is required to file a franchise or income tax return.
(n) Neither Parent nor any of the Parent Subsidiaries have
submitted a request for a ruling from a Taxing Authority
relating to Taxes that has not been granted or have proposed to
enter into an agreement with a Taxing Authority relating to
Taxes that is currently pending, in each case, that could
adversely affect the Parent, any of the Parent Subsidiaries, the
Company or any of the Company Subsidiaries after the Closing
Date.
(o) Except as required by Applicable Law, since
December 31, 2005, none of Parent or any of the Parent
Subsidiaries have, in each case, (i) made or changed any
election concerning any Taxes, (ii) filed any amended Tax
Return, (iii) settled any Tax claim or assessment,
(iv) received or filed a request for a ruling relating to
Taxes issued by a Governmental Authority or entered into any
agreement with a Governmental Authority relating to Taxes or
(v) surrendered any right to claim a refund of any Taxes.
(p) The Parent and each of the Parent Subsidiaries have
delivered or made available to the Company correct and complete
copies of all (i) Tax Returns filed by or including Parent
or any of the Parent Subsidiaries and (ii) all examination
reports by a Taxing Authority and other relevant written
materials with respect to audits (whether proposed, threatened,
pending or concluded) related to the three taxable years ending
prior to the Closing Date of Parent or any of the Parent
Subsidiaries.
Section 6.21 Benefit
Plans; Employees and Employment Practices.
(a) Parent has delivered or made available to the Company
true, complete and correct copies of (i) each Parent
Benefit Plan (or, in the case of any unwritten Parent Benefit
Plans, descriptions of the material terms thereof),
(ii) the most recent annual report.
(b) Each Parent Benefit Plan has been established, funded,
maintained and administered in all material respects in
accordance with its terms and is in compliance with the
applicable provisions of ERISA, the Code and all other
Applicable Laws.
(c) To the Knowledge of Parent, all Parent Pension Plans
have been the subject of favorable and
up-to-date
(through any applicable remedial amendment period) determination
letters from the IRS, or a timely application therefor has been
filed, to the effect that such Parent Pension Plans are
qualified and exempt from federal income taxes under
Section 401(a) and 501(a), respectively, of the Code; and,
to the Knowledge of Parent, no circumstances exist and no events
have occurred that could adversely affect the qualification of
any Parent Pension Plan or the related trust.
(d) With respect to each Parent Pension Plan that is
subject to Title IV or Section 302 of ERISA or
Section 412 or 4971 of the Code, except as would not
reasonably be expected to have a Parent Material Adverse Effect:
(i) there does not exist any accumulated funding deficiency
within the meaning of Section 412 of the Code or
Section 302 of ERISA, whether or not waived; (ii) on
the date of the last actuarial valuation, the fair market value
of the assets of such Parent Pension Plan equals or exceeds the
actuarial present value of all accrued benefits under such
Parent Pension Plan (whether or not vested) based upon the
actuarial assumptions set forth in the most recent actuarial
report for such Parent Pension Plan; (iii) no reportable
event within the meaning of Section 4043(c) of ERISA for
which the
30-day
notice requirement has not been waived has occurred, and the
consummation of the transactions contemplated by this Agreement
will not result in the occurrence of any such reportable event;
(iv) all premiums to the PBGC have been timely paid in
full; (v) no liability (other than for premiums to the
PBGC) under Title IV of ERISA has been or is expected to be
incurred by Parent or any of its Subsidiaries; and (vi) the
PBGC has not instituted proceedings to terminate any such Parent
Pension Plan.
(e) Neither Parent nor any of its Subsidiaries has been
required at any time or is required currently to contribute to
any multiemployer plan (as defined in
Section 4001(a)(3) of ERISA).
(f) There does not now exist, nor do any circumstances
exist that could reasonably be expected to result in, any
Controlled Group Liability that would be a material liability of
the Surviving Corporation following the Closing. Without
limiting the generality of the foregoing, neither the Company
nor any of its subsidiaries, nor any of their respective ERISA
Affiliates, has engaged in any transaction described in
Section 4069 or Section 4204 or 4212 of ERISA.
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(g) Neither Parent nor its Subsidiaries has any liability
for life, health, medical or other welfare benefits for former
employees or beneficiaries or dependents thereof under Parent
Benefit Plans, other than the Parent Pension Plans and other
than as required by Section 4980B of the Code or
Part 6 of Title I of ERISA or other Applicable Law.
(h) All contributions or premiums owed by Parent or any of
its Subsidiaries with respect to Parent Benefit Plans under
Applicable Law, contract or otherwise have been made in full and
on a timely basis and Parent or its Subsidiaries are not
obligated to contribute with respect to any Parent Benefit Plan
that involves a retroactive contribution, assessment or funding
waiver arrangement.
(i) To Parents Knowledge, no Parent Pension Plan or
Parent Welfare Plan or any fiduciary or
party-in-interest (as such terms are respectively
defined by Sections 3(21) and 3(14) of ERISA) thereto has
engaged in a transaction prohibited by Section 406 of ERISA
or 4975 of the Code for which a valid exception is not available.
(j) There are no pending or, to Parents Knowledge,
threatened, claims, lawsuits, arbitrations or audits asserted or
instituted against any Parent Benefit Plan, any fiduciary (as
defined by Section 3(21) of ERISA) thereto, Parent, any of
its Subsidiaries or any employee or administrator thereof in
connection with the existence, operation or administration of a
Parent Benefit Plan, other than routine claims for benefits.
(k) Neither Parent nor its Subsidiaries is a party to any
labor or collective bargaining agreement. There are no
controversies, strikes, work stoppages, slowdowns, lockouts,
arbitrations or other material labor disputes pending or, to the
Knowledge of Parent, threatened between Parent or its
Subsidiaries and any representatives of any of their employees.
(l) Parent and its Subsidiaries are in compliance in all
material respects with all Applicable Laws and Orders applicable
to such entity or the employees or other persons providing
services to or on behalf of such entity, as the case may be,
relating to the employment of labor, including all such laws,
regulations and orders relating to wages, hours, employment
standards, the WARN Act, Title VII of the Civil Rights Act
of 1964, Age Discrimination in Employment Act, Americans
with Disabilities Act, Equal Pay Act, HIPAA, ERISA, Family and
Medical Leave Act, discrimination, civil rights, safety and
health, workers compensation and the collection and
payment of withholding
and/or
social security taxes and any similar tax.
Section 6.22 Intellectual
Property.
(a) Except as would not be reasonably expected to have a
Parent Material Adverse Effect: (i) Parent or one of the
Parent Subsidiaries is the owner of, free and clear of any
Encumbrance (other than Permitted Encumbrances), or has a valid
right or license to, all Intellectual Property necessary for the
conduct of its business as now conducted (all such Intellectual
Property, the Parent IP Rights);
(ii) Parent and Parent Subsidiaries have taken commercially
reasonable actions to protect the Parent IP Rights;
(iii) to the Parents Knowledge, the rights of Parent
and/or the
Parent Subsidiaries in the Parent IP Rights are valid and
enforceable; (iv) to Parents Knowledge, neither
Parent nor any Parent Subsidiary is infringing or
misappropriating, and has not infringed or misappropriated, any
Intellectual Property of any other Person; (v) the Parent
IP Rights that have been licensed by Parent or Parent
Subsidiaries are being used substantially in accordance with the
applicable licenses pursuant to which Parent or Parent
Subsidiaries acquired the right to use such Parent IP Rights;
and (vi) to Parents Knowledge, no Person is
infringing or misappropriating any Parent IP Rights owned by
Parent or any Parent Subsidiary. Neither Parent nor any Parent
Subsidiary has received any written demand, claim or notice from
any Person in respect of the Parent IP Rights which challenges
the validity of, or the rights of Parent or such Parent
Subsidiary in, any such Parent IP Rights.
Section 6.23 Information
Technology.
(a) Except as would not be reasonably expected to have a
Parent Material Adverse Effect, the material Parent IT Systems
(i) have been reasonably maintained and (ii) are in
good working condition to perform all information technology
operations necessary for the conduct of the business of Parent
or any of the Parent Subsidiaries. Parent and Parent
Subsidiaries have taken commercially reasonable steps to provide
for the backup and recovery of the data and information critical
to the conduct of the business of Parent or any of the Parent
Subsidiaries.
(b) To the Knowledge of Parent, Parent and each of the
Parent Subsidiaries are in material compliance with all
Applicable Laws regarding the collection, use and protection of
personal information and with Parents and the Parent
Subsidiaries published and internal privacy and data
security policies and procedures.
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(c) Parent and the Parent Subsidiaries have established and
are in compliance with commercially reasonable security programs
that are designed to protect (A) the security,
confidentiality and integrity of transactions executed through
their computer systems, including encryption
and/or other
security protocols and techniques when appropriate and
(B) the security, confidentiality and integrity of all
confidential or proprietary data except, in each case, which
individually or in the aggregate would not reasonably be
expected to have a Parent Material Adverse Effect. Neither
Parent nor any of the Parent Subsidiaries has suffered a
material security breach with respect to their data or systems,
and neither Parent nor any of the Parent Subsidiaries has
notified consumers or employees of any information security
breach involving in connection with such consumers
confidential information or such employees confidential
information.
Section 6.24 Company
Common Shares Ownership. Neither Parent nor
any of its Subsidiaries beneficially owns any Company Common
Shares or other securities convertible into or exercisable for
Company Common Shares.
Section 6.25 Investment
Company. Neither Parent nor any of its
Subsidiaries is an investment company as defined
under the Investment Company Act and neither the Company nor any
of its Subsidiaries sponsors any person that is such an
investment company.
Section 6.26 Opinion
of Financial Advisor. The Parent Special
Committee has received an opinion from Keefe,
Bruyette & Woods, Inc., dated as of the date hereof,
to the effect that as of the date of such opinion, the Merger
Consideration is fair, from a financial point of view, to the
holders of Parent Common Shares. A copy of this opinion has been
provided to the Company as of the date hereof.
Section 6.27 Bids
and Quotes. The Company has never provided or
submitted a false, sham, phony or otherwise artificial bid or
quote with respect to prospective insurance business.
ARTICLE VII
Conduct of
Business by Company and Parent
Section 7.1 Conduct
of Business by the Company Pending the Merger.
(a) From the date hereof until the Effective Time, unless
Parent shall otherwise consent in writing, which consent shall
not be unreasonably withheld, or except as listed on
Schedule 7.1(a) of the Company Disclosure Schedule
or as otherwise expressly permitted by or provided for in this
Agreement, the Company shall, and shall cause each of the
Company Subsidiaries to, conduct its business in the Ordinary
Course of Business and shall use its commercially reasonable
efforts to preserve intact its business organization and
goodwill and relationships with Third Parties, to maintain each
rating classification, published or indicative, assigned as of
the date hereof by A. M. Best Company, Inc. (A. M.
Best) and Standard & Poors, a division
of the McGraw-Hill Companies (Standard &
Poors) and, except as would not cause a Company
Material Adverse Effect, to keep available the services of its
current key employees, subject to the terms of this Agreement.
In addition to and without limiting the generality of the
foregoing, except as listed on Schedule 7.1(a) of
the Company Disclosure Schedule or as otherwise expressly
permitted by or provided for in this Agreement, from the date
hereof until the Effective Time, without the prior written
consent of Parent, which consent shall not be unreasonably
withheld:
(i) the Company shall not adopt or propose any material
change in its Organizational Documents except for such
amendments (A) required by Applicable Law or the rules and
regulations of the SEC or the NASDAQ or (B) that do not
have a material adverse effect on the Merger and would not
materially restrict the operation of the Company or any Company
Subsidiary business; provided, however, that
notwithstanding the foregoing, any such amendments permitted by
this Section 7.1(a)(i) shall not cause any changes
to the capital structure of the Company, including any changes
to the rights, preferences or other terms of any class of
securities of the Company or the authorized number of shares of
any such class; and the Company shall not permit its
Subsidiaries to adopt or propose any material change in their
Organizational Documents except for such amendments that do not
have a material adverse effect on the Merger and would not
materially restrict the operation of any Company Subsidiary
Business;
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(ii) without the prior written consent of Parent, which may
be withheld in Parents sole discretion, the Company shall
not, and shall not permit its Subsidiaries to, enter into any
Company Alternative Transaction or agree to do so;
(iii) the Company shall not, and shall not permit its
Subsidiaries to, change any method of accounting or accounting
principles or practices by the Company or any Company
Subsidiary, except for any such change required by Applicable
Law or by a change in Applicable Law, U.S. GAAP or SAP;
(iv) the Company shall not, and shall not permit its
Subsidiaries to, fail to (A) timely file or furnish to or
with the SEC or any Insurance Regulator all reports, schedules,
forms, statements and other documents required to be filed or
furnished or (B) comply in all material respects with the
requirements of the Sarbanes-Oxley Act applicable to it; and
(v) the Company shall not, and shall not permit any Company
Subsidiary to, agree or commit to do any of the foregoing.
(b) Advice of Changes. The Company
shall promptly advise Parent in writing of any matter or event
that results in any breach of any representation, warranty or
consent that would reasonably be expected to result in a failure
of a condition to the Merger set forth in Article IX.
Section 7.2 Conduct
of Business by Parent Pending the Merger.
(a) From the date hereof until the Effective Time, unless
the Company shall otherwise consent in writing, which consent
shall not be unreasonably withheld, or except as listed on
Schedule 7.2(a) of the Parent Disclosure Schedule or
as otherwise expressly permitted by or provided for in this
Agreement, Parent shall, and shall cause each of the Parent
Subsidiaries to, conduct its business in the Ordinary Course of
Business and shall use its commercially reasonable efforts to
preserve intact its business organization and goodwill and
relationships with Third Parties, to maintain each rating
classification, published or indicative, assigned as of the date
hereof by A. M. Best and Standard & Poors and to
keep available the services of its current key employees,
subject to the terms of this Agreement. In addition to and
without limiting the generality of the foregoing, except as
listed on Schedule 7.2(a) of the Parent Disclosure
Schedule or as otherwise expressly permitted by or provided for
in this Agreement, from the date hereof until the Effective
Time, without the prior written consent of the Company, which
consent shall not be unreasonably withheld:
(i) Parent shall not, and shall not permit its Subsidiaries
to, adopt or propose, any material change in its Organizational
Documents except for such amendments required by Applicable Law
or the rules and regulations of the SEC or the NYSE;
(ii) Parent shall not, and shall not permit its
Subsidiaries to, declare, set aside or pay any shareholder
dividend or other distribution except for (A) any dividend
or distribution by a Parent Subsidiary to Parent or another
Parent Subsidiary and (B) dividends required to be paid
pursuant to the terms of the Parent Preferred Shares or trust
preferred securities of Parent or any of its Subsidiaries
outstanding on the date hereof;
(iii) Parent shall not, and shall not permit its
Subsidiaries to, enter into any Business Combination Transaction
with any Third Party, acquire capital stock or assets of any
Third Party, or agree to do any of the preceding;
provided, however, that a Parent Subsidiary may
merge with another Parent Subsidiary;
(iv) Parent shall not, and shall not permit its
Subsidiaries to, sell, lease, license, subject to an
Encumbrance, or otherwise surrender, relinquish or dispose of
any assets or property of Parent or any Parent Subsidiary, other
than (A) pursuant to existing written Contracts or
commitments, including the posting of collateral to secure
letters of credit required to be issued pursuant thereto (the
terms of which have been disclosed to the Company prior to the
date hereof) or (B) in an amount not in excess of
$1.0 million in the aggregate;
(v) other than issuances of Parent Common Shares in respect
of Parent Employee Options outstanding on the date hereof,
Parent shall not, and shall not permit its Subsidiaries to:
(A) issue, sell, grant, pledge or otherwise encumber any
shares of its capital stock or other securities (including any
Parent Employee Options, warrants or any similar security
exercisable for, or convertible into, such capital stock or
similar security);
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(B) split, combine or reclassify any of its capital stock
or authorize the issuance of or issue securities (including
Parent Employee Options, warrants or any similar security
exercisable for, or convertible into, such capital stock or
similar security) in respect of, in lieu of, or in substitution
for, its capital stock; (C) take any action that, if such
action had been taken prior to the date hereof, would have
caused the representation and warranty made in
Section 6.3 to be untrue in any material respect;
(D) enter into any amendment of any material term of any of
its outstanding securities; or (E) accelerate the vesting
of any Parent Employee Options (other than as required pursuant
to preexisting contractual commitments);
(vi) Parent shall not, and shall not permit its
Subsidiaries to incur, guarantee or assume any indebtedness
other than short-term borrowings (including letters of credit)
and trade payables, in each case, in the Ordinary Course of
Business.
(vii) Parent shall not, and shall not permit its
Subsidiaries to, enter into any transaction with any of its
Affiliates other than pursuant to arrangements in effect on the
date of this Agreement, including the reimbursement of
reasonable expenses of Parents officers and directors in
the Ordinary Course of Business;
(viii) Parent shall not, and shall not permit any Parent
Subsidiary to, grant any increase in the base salary of
directors, officers, employees, consultants or agents of Parent
or any Parent Subsidiary (other than increases in the Ordinary
Course of Business for employees at will) or increases pursuant
to previously existing contractual arrangements;
(ix) except as permitted pursuant to
Section 7.2(a)(x) below, Parent shall not, and shall
not permit its Subsidiaries to, enter into or materially amend
or modify any of the Parent Benefit Plans or any severance,
consulting, retention or employment agreement (other than with
respect to agreements for new hires of employees in the Ordinary
Course of Business or which are terminable by Parent or a Parent
Subsidiary before and after the Effective Time without any
penalty or cost to Parent, such Parent Subsidiary or any
Affiliate thereof; provided, however, that any
such agreements may contain customary notice and severance
provisions required by Applicable Law);
(x) Parent shall not, and shall not permit its Subsidiaries
to, other than in the Ordinary Course of Business and in the
exercise of Parents business judgment, hire or terminate
the employment or contractual relationship of any officer,
employee, consultant or agent of Parent or any Parent Subsidiary
who is not terminable at will without any penalty or cost to
Parent, such Parent Subsidiary or any Affiliate thereof, as the
case may be;
(xi) Parent shall not change any method of accounting or
accounting principles or practices by Parent or any Parent
Subsidiary, except for any such change required by Applicable
Law or a change in Applicable Law, U.S. GAAP or SAP;
(xii) Parent shall not, and shall not permit its
Subsidiaries to, pay, discharge, settle or satisfy any actual or
threatened Proceedings, liabilities or obligations (whether
absolute, accrued, asserted or unasserted, contingent or
otherwise) other than any settlement, payment, discharge or
satisfaction (A) in the Ordinary Course of Business or
(B) with respect to those Proceedings set forth on
Schedule 6.9(a) of the Parent Disclosure Schedule,
within insurance limits;
(xiii) Parent shall not, and shall not permit its
Subsidiaries to, terminate or cancel any insurance coverage
maintained by it or any Parent Subsidiary with respect to any
material assets which is not replaced by a comparable amount of
insurance coverage;
(xiv) Parent shall not, and shall not permit its
Subsidiaries to, make or agree to make any new capital
expenditure or expenditures other than (A) capital
expenditures in accordance with the specified items of, and
pursuant to the time frame specified in, the capital expenditure
budget delivered to the Company prior to the date hereof and
(B) other capital expenditures in an aggregate amount not
in excess of $300,000;
(xv) Parent shall not, and shall not permit its
Subsidiaries to, enter into any hedging or swap arrangements or
Contracts or other similar financing instruments or redeem,
repurchase, prepay, defease or otherwise acquire any of the
Parents indebtedness;
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(xvi) Parent shall not, and shall not permit its
Subsidiaries to, fail to maintain the Parent Retrocession
Agreements in full force and effect;
(xvii) Parent shall not, and shall not permit its
Subsidiaries to, fail to (A) timely file or furnish to or
with the SEC or any Insurance Regulator all reports, schedules,
forms, statements and other documents required to be filed or
furnished or (B) comply in all material respects with the
requirements of the Sarbanes-Oxley Act applicable to it;
(xviii) Parent shall not, and shall not permit its
Subsidiaries to, purchase or redeem any shares of the capital
stock of Parent or any Parent Subsidiary, or any other equity
interests or any rights, warrants or Parent Employee Options to
acquire any such shares or interests, other than as otherwise
contractually required;
(xix) Parent shall not, and shall not permit its
Subsidiaries to, enter into, make any proposal for, renew,
extend or amend or modify in any material respect, terminate,
cancel, or waive, release or assign any right or claim under,
any Contract or agreement which is or, if applicable, would be
material to Parent or Parent Subsidiaries;
(xx) Parent shall not, and shall not permit its
Subsidiaries to: (i) sell, assign, license, mortgage,
pledge, sublicense, encumber, impair, abandon or fail to
maintain in any material respect any material Parent IP Rights;
or (ii) grant, extend, amend, waive or modify any rights in
or to a material portion of the Parent IP Rights;
(xxi) Parent shall not, and shall not permit its
Subsidiaries to, make any material change in its underwriting,
reinsurance, marketing, claim processing and payment, except as
required by concurrent changes in Applicable Law; or reduce the
amount of any reserves and other liability accruals held in
respect of losses or loss adjustment expenses arising under or
relating to Parent Insurance Contracts, other than as required
by concurrent changes in Applicable Law and other than as a
result of the payment of claims in the Ordinary Course of
Business;
(xxii) Parent shall not, and shall not permit its
Subsidiaries to, undertake any abandonment, modification,
waiver, termination or otherwise change to any Parent Permit,
except (i) as is required in order to comply with
concurrent changes in Applicable Law, (ii) such
modification, changes or waivers of Parent Permits as would not,
individually or in the aggregate, restrict the business or
operations of Parent or any of its Subsidiaries in any material
respect or (iii) such modifications or changes that would
expand the Parent Permits in a way favorable to Parent;
(xxiii) Parent shall not, and shall not permit any Parent
Subsidiary to, (A) surrender any right to claim a material
Tax refund or credit, offset or other material reduction in Tax
liability or (B) settle any Tax audit, file any Tax Return
(other than in manner consistent with past practice), file an
amended Tax Return, file a claim for a Tax refund, make or amend
any Tax election, consent to any extension of the limitations
period applicable to any Tax claim or assessment, file a request
for any Tax ruling with any Governmental Authority or
(C) enter into any agreement with respect to Taxes with any
Person (including any agreement providing for any Tax
indemnification or Tax sharing or allocation) or grant any power
of attorney with respect to Taxes; and
(xxiv) Parent shall not, and shall not permit any Parent
Subsidiary to, agree or commit to do any of the foregoing.
(b) Advice of Changes. Parent
shall promptly advise the Company in writing of any matter or
event that results in any breach of any representation, warranty
or consent that would reasonably be expected to result in a
failure of a condition to the Merger set forth in Article
IX.
ARTICLE VIII
Additional
Agreements
Section 8.1 Access
and Information. Upon reasonable prior notice and
subject to Applicable Law, each of the Company and Parent shall,
and shall respectively cause their respective Subsidiaries to,
afford to the other party and its financial advisors, legal
counsel, financing sources, accountant or other advisor, agent
or authorized
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representative (collectively,
Representatives) reasonable access during
normal business hours and without undue disruption of normal
business activity throughout the period prior to the Effective
Time to all of its books, records, properties, premises and
personnel and, during such period, shall furnish, and shall
cause to be furnished, as promptly as reasonably practicable to
the other party, (a) a copy of each report, schedule and
other document filed or received by it or any of its
Subsidiaries pursuant to the requirements of the federal
securities laws or a Governmental Entity, except, with respect
to examination reports, as may be restricted by Applicable Law
and (b) all other information as the other party reasonably
may request; provided, that (i) the Company and
Parent (and their respective Subsidiaries) shall not be
obligated to disclose more than ten (10) Business Days
prior to the estimated Closing Date (A) any competitively
sensitive information, (B) any information that in the
reasonable Judgment of the Company or Parent, as the case may
be, would result in the loss of attorney-client privilege with
respect to such information or (C) any information that
would result in a breach of an agreement to which the Company or
Parent (or any of their respective Subsidiaries) is a party and
(ii) no investigation pursuant to this
Section 8.1 shall affect any representations or
warranties made herein or the conditions to the obligations of
the respective parties to consummate the Merger. If either party
intends to rely on Section 8.1(b)(i) to withhold
information from the other party, such party shall advise the
other party as to such intention and shall provide the other
party with a sufficient summary of the withheld information in
order for the other party to evaluate the basis of the
non-disclosure. Each party shall continue to abide by the terms
of the Confidentiality Agreement between Parent and the Company,
dated February 17, 2006, as amended (the
Confidentiality Agreement).
Section 8.2 Preparation
of Proxy Statement and Other Filings; Shareholder
Meetings.
(a) As promptly as practicable following the date of this
Agreement, (i) Company and Parent shall prepare the
registration statement on
Form S-4
to be filed with the SEC in connection with the issuance of
Parent Common Shares in the Merger (the Registration
Statement) and the joint proxy statement/prospectus
included in the Registration Statement (the Joint Proxy
Statement/Prospectus) and (ii) each of the
Company and Parent shall, and shall cause their respective
Affiliates to, prepare and file with the SEC, to the extent
required under Applicable Law, all other documents required to
be filed by them with the SEC in connection with the Merger (the
Other Filings). Parent and the Company will,
and will cause their respective Affiliates to, cooperate with
each other in the preparation of the Joint Proxy
Statement/Prospectus, the Registration Statement and the Other
Filings. Without limiting the generality of the foregoing,
(i) the Company and Parent shall, and shall cause their
respective Affiliates to, provide each other with a reasonable
opportunity to review and comment on the Joint Proxy
Statement/Prospectus, the Registration Statement and the Other
Filings and (ii) Parent and the Company will provide each
other the information relating to it and its Affiliates required
by the Securities Act and the Exchange Act to be set forth in
the Joint Proxy Statement/Prospectus, the Registration Statement
and the Other Filings. The Company and Parent shall cause the
Joint Proxy Statement/Prospectus, the Registration Statement and
the Other Filings to be made by it or its Affiliates to comply
as to form and substance in all material respects with the
requirements of (i) the Securities Act and the Exchange
Act, (ii) the rules and regulations of the NYSE and
(iii) the rules and regulations of the NASD, as applicable.
(b) Each of the Company and Parent shall use its reasonable
best efforts, after consultation with the other party, to
resolve all SEC comments with respect to the Joint Proxy
Statement/Prospectus, the Registration Statement and the Other
Filings as promptly as practicable after receipt thereof. Each
of the Company and Parent shall use its reasonable best efforts
to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after the filing
thereof. Each of the Company and Parent shall as promptly as
practicable notify the other party of the receipt of any
comments from or other correspondence with the SEC or its staff
with respect to the Joint Proxy Statement/Prospectus, the
Registration Statement or the Other Filings and any request by
the SEC or its staff for amendments or supplements to the Joint
Proxy Statement/Prospectus, the Registration Statement or the
Other Filings or for additional information and shall supply the
other party with copies of all correspondence between it and any
of its Representatives or Affiliates, on the one hand, and the
SEC or its staff, on the other hand, with respect to the Joint
Proxy Statement/Prospectus, the Registration Statement and the
Other Filings. If at any time prior to receipt of the Company
Stockholder Approval or the Parent Shareholder Approval there
shall occur any event that is required to be set forth in an
amendment or supplement to the Joint Proxy Statement/Prospectus,
the Company or Parent, as the case may be, shall promptly
prepare and mail to its shareholders such an amendment or
supplement.
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The Company and Parent shall use their reasonable best efforts
to cause the Joint Proxy Statement/Prospectus to be mailed to
their respective shareholders as promptly as practicable after
being declared effective by the SEC.
(c) The Joint Proxy Statement/Prospectus shall provide for
all actions required to amend the existing Parent Employee
Benefit Plans or to amend, adopt and approve the Company
Employee Benefit Plans by Parent as set forth in (i)
Schedule 8.2(c) of the Parent Disclosure Schedule,
with respect to actions of Parent, and
(ii) Schedule 8.2(c) of the Company Disclosure
Schedule, with respect to actions of the Company.
(d) The Company shall, in accordance with its
Organizational Documents, as promptly as practicable following
the date of this Agreement, duly call, give notice of, convene
and hold a meeting of its stockholders (the Company
Stockholders Meeting) for the sole purpose of seeking
the Company Stockholder Approval. The Company shall,
(i) through the Company Board, recommend to its
stockholders that they give the Company Stockholder Approval and
include in the Joint Proxy Statement/Prospectus such
recommendation and (ii) use its reasonable best efforts to
solicit such adoption.
(e) Parent shall, in accordance with its Organizational
Documents, as promptly as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting
of its shareholders (the Parent Shareholders
Meeting) for the purpose of seeking the Parent
Shareholder Approval. Parent shall, (i) through the Parent
Board, at the recommendation of the Parent Special Committee,
recommend to its shareholders that they give the Parent
Shareholder Approval and include in the Joint Proxy
Statement/Prospectus such recommendation and (ii) use its
reasonable best efforts to solicit such adoption, in each case
except to the extent that the Parent Board shall have withdrawn
or modified its approval or recommendation of the Parent Voting
Proposal as permitted by
Section 8.3(b). Without limiting the
generality of the foregoing, Parent agrees that its obligations
pursuant to the first sentence of this
Section 8.2(e) shall not be affected by the
commencement, public proposal, public disclosure or
communication to Parent of any Parent Alternative Transaction
Proposal or a Parent Adverse Recommendation Change, unless this
Agreement shall have terminated in accordance with its terms
prior to the Parent Shareholder Meeting. The Company agrees that
Parents Annual General Meeting for 2007 may be combined
with the Parent Shareholders Meeting.
(f) Unless otherwise mutually agreed upon by the parties,
the respective record dates and meeting dates for the Company
Stockholders Meeting and for the Parent Shareholders Meeting
shall be the same.
(g) The Company shall use commercially reasonable efforts
to cause to be delivered to the Company and Parent a comfort
letter of Ernst & Young LLP, independent auditors of
the Company, dated a date within two business days before the
date on which the Registration Statement shall be initially
filed, which shall be brought down to a date within two business
days before the date on which the Registration Statement shall
become effective and to a date within two business days before
the Closing Date, addressed to the Company and Parent, in form
and substance reasonably satisfactory to Parent and customary in
scope and substance for letters delivered by independent public
accountants in connection with registration statements similar
to the Registration Statement.
(h) Parent shall use commercially reasonable efforts to
cause to be delivered to the Company and Parent a comfort letter
of KPMG LLP, independent auditors of Parent, dated a date within
two business days before the date on which the Registration
Statement shall be initially filed, which shall be brought down
to a date within two business days before the date on which the
Registration Statement shall become effective and to a date
within two business days before the Closing Date, addressed to
the Company and Parent, in form and substance reasonably
satisfactory to the Company and customary in scope and substance
for letters delivered by independent public accountants in
connection with registration statements similar to the
Registration Statement.
Section 8.3 Parent
Alternative Transaction Proposals.
(a) Parent shall not, nor shall it authorize or permit any
Parent Subsidiary, or any of their respective directors,
officers or employees or any Representatives retained by it or
any Parent Subsidiary to, directly or indirectly,
(i) solicit, initiate, facilitate or knowingly encourage
any inquiries or the making of any proposal that constitutes or
could reasonably be expected to lead to a Parent Alternative
Transaction Proposal or (ii) enter into, continue or
otherwise participate in any discussions (other than with
Parent, Merger Sub or their respective directors, officers or
employees or Representatives) or negotiations regarding, or
furnish to any Person any information with respect to, or
otherwise cooperate in any way with, any Parent Alternative
Transaction Proposal. Notwithstanding the
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foregoing, at any time prior to obtaining the Parent Shareholder
Approval, in response to a bona fide written Parent Alternative
Transaction Proposal that the Parent Board (or committee
thereof) determines in good faith, after consultation with its
financial and legal advisors, constitutes or is reasonably
likely to constitute a Parent Superior Proposal, Parent may,
subject to compliance with Section 8.3(d), and after
giving the Company written notice of such action,
(x) furnish information with respect to Parent and the
Parent Subsidiaries to the Person making such Parent Alternative
Transaction Proposal (and its Representatives) pursuant to an
executed confidentiality agreement containing substantially
similar terms to those contained in the Confidentiality
Agreement; provided, that a copy of all such information
not previously provided to Parent (or its Representatives) is
promptly provided to Parent, and (y) participate in
discussions or negotiations with the Person making such Parent
Alternative Transaction Proposal (and its Representatives)
regarding such Parent Alternative Transaction Proposal.
(b) The Parent Board (or committee thereof) shall not,
directly or indirectly, (i) (A) withdraw (or amend or
modify in a manner adverse to the Company) or publicly propose
to withdraw (or amend or modify in a manner adverse to the
Company), the approval, recommendation or declaration of
advisability by such board of directors (or any such committee)
of this Agreement, or the Merger or the other transactions
contemplated by this Agreement or (B) recommend, adopt or
approve, or propose publicly to recommend, adopt or approve, any
Parent Alternative Transaction Proposal (any action described in
this clause (i) being referred to as a Parent
Adverse Recommendation Change) or (ii) approve or
recommend, or publicly propose to approve or recommend, or allow
Parent or any Parent Subsidiary to execute or enter into, any
letter of intent, memorandum of understanding, agreement in
principle, merger agreement, acquisition agreement, option
agreement, joint venture agreement, partnership agreement or
other similar agreement, arrangement or understanding
(A) constituting or that could reasonably be expected to
lead to, any Parent Alternative Transaction Proposal (other than
a Confidentiality Agreement referred to in
Section 8.3(a)) or (B) requiring it to abandon,
terminate or fail to consummate the Merger or any other
transaction contemplated by this Agreement; provided,
that in the case of clauses (A) and (B), that Parent
shall not be prohibited from entering into an agreement referred
to in and in accordance with
Section 10.1(k). Notwithstanding the
foregoing, at any time after a Parent Alternative Transaction
Proposal shall have been made to Parent or directly to its
shareholders and not withdrawn but prior to obtaining the Parent
Shareholder Approval, and subject to Parents compliance
with the other provisions of this Section 8.3, as
applicable, the Parent Board (or committee thereof) may make a
Parent Adverse Recommendation Change if it determines, after
consultation with its legal advisors, that such action is
consistent with its fiduciary duties to the shareholders of
Parent under Applicable Law.
(c) Notwithstanding anything to the contrary contained
herein, Parent or the Parent Board (or committee thereof) shall
be permitted to comply with
Rule 14d-9
and 14e-2
promulgated under the Exchange Act, including by taking and
disclosing to Parents shareholders a position with respect
to a tender offer by a Third Party.
(d) In addition to the obligations of Parent listed in
Section 8.3(a) and Section 8.3(b),
Parent shall promptly (but in any event within 24 hours of
receipt of a Parent Alternative Transaction Proposal or the
entering of any discussions or negotiations) advise the Company
orally and in writing of any Parent Alternative Transaction
Proposal, the terms and conditions of any such Parent
Alternative Transaction Proposal (including any changes thereto)
and the identity of the Person making any such Parent
Alternative Transaction Proposal and of any discussions or
negotiations sought to be entered into or continued by such
Person with Parent, any Parent Subsidiary or any of their
respective directors, officers, employees or Representatives.
Parent shall keep the Company reasonably informed of the status
(including any change to the terms and conditions thereof) of
any such Parent Alternative Transaction Proposal.
Section 8.4 Filings;
Other Action.
(a) Subject to the terms and conditions set forth in this
Agreement, each of the parties hereto agrees to use (and to
cause its Affiliates to use) its reasonable best efforts
(subject to, and in accordance with, Applicable Law) to take
promptly, or cause to be taken promptly, all actions, and to do
promptly, or cause to be done promptly, and to assist and
cooperate with the other parties in doing, all things necessary,
proper or advisable under Applicable Laws and regulations to
consummate and make effective the Merger and the other
transactions contemplated by this Agreement, including:
(i) obtaining all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and making all
necessary registrations and filings and taking all steps as may
be necessary to obtain an approval or waiver from, or to avoid
an action or Proceeding by, any Governmental Entity;
(ii) obtaining
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all necessary consents, approvals or waivers from Third Parties;
(iii) defending any lawsuits or other legal Proceedings,
whether judicial or administrative, challenging this Agreement
or the consummation of the Merger and the other transactions
contemplated by this Agreement; and (iv) executing and
delivering any additional instruments necessary to consummate
the Merger and the other transactions contemplated by this
Agreement. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the
purposes of this Agreement, Parent, Merger Sub and the Surviving
Corporation shall take all such necessary action.
(b) Subject to the terms and conditions herein provided and
without limiting the foregoing, the Company and Parent shall:
(i) promptly, but in no event later than fifteen
(15) Business Days after the date of this Agreement, make
their respective filings and thereafter make any other required
submissions under the HSR Act; (ii) use reasonable efforts
to cooperate with each other in (A) determining whether any
filings are required to be made with, or consents, permits,
authorizations, waivers or approvals are required to be obtained
from, any third parties or other Governmental Entities in
connection with the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby and
(B) timely making all such filings and timely seeking all
such consents, permits, authorizations or approvals;
(iii) use reasonable best efforts to take, or cause to be
taken, all other actions and do, or cause to be done, all other
things necessary, proper or advisable to consummate and make
effective the transactions contemplated hereby, including taking
all such further action as reasonably may be necessary to
resolve such objections, if any, as the United States Federal
Trade Commission, the Antitrust Division of the United States
Department of Justice, state antitrust enforcement authorities
or competition authorities of any other nation or other
jurisdiction or any other Person may assert under Regulatory Law
with respect to the transactions contemplated hereby, and to
avoid or eliminate each and every impediment under any
Applicable Law that may be asserted by any Governmental Entity
with respect to the Merger so as to enable the Closing to occur
as soon as reasonably possible (and in any event no later than
the Outside Date); and (iv) subject to applicable legal
limitations and the instructions of any Governmental Entity,
keep each other apprised of the status of matters relating to
the completion of the transactions contemplated thereby,
including promptly furnishing the other with copies of notices
or other communications received by the Company or Parent, as
the case may be, or any of their respective Subsidiaries, from
any Third Party
and/or any
Governmental Entity with respect to such transactions. The
Company and Parent shall permit counsel for the other party
reasonable opportunity to review in advance, and consider in
good faith the views of the other party in connection with, any
proposed written communication to any Governmental Entity. Each
of the Company and Parent agrees not to participate in any
substantive meeting or discussion, either in person or by
telephone, with any Governmental Entity in connection with the
proposed transactions unless it consults with the other party in
advance and, to the extent not prohibited by such Governmental
Entity, gives the other party the opportunity to attend and
participate.
(c) Parent and the Company shall promptly make the
Form A filings required by Insurance Regulators (the
Form A Filings) upon the execution of
this Agreement and to supply promptly any additional information
and documentary material that may be requested by such Insurance
Regulators in connection therewith. Each party agrees to provide
a draft of the Form A Filings to the other party for its
review and to consult with the other party relating to any
issues arising as a result of the other partys review,
prior to the submission of the Form A Filings;
provided, that such consultation does not delay the
timely filing of the Form A Filing or any amendments or
supplements thereto and it being agreed that the final
determination as to the content of the Form A Filing or any
amendments or supplements thereto shall remain with each party.
Each party agrees to provide the other party with a copy of the
Form A Filing and each amendment or supplement thereto in
final form upon submission thereof.
(d) In furtherance and not in limitation of the agreements
of the parties contained in this Section 8.4, if any
administrative or judicial action or proceeding, including any
proceeding by a private party, is instituted (or threatened to
be instituted) challenging any transaction contemplated by this
Agreement as violative of any Regulatory Law, each of the
Company and Parent shall cooperate in all respects with each
other and shall use their respective reasonable efforts to
contest and resist any such action or proceeding and to have
vacated, lifted, reversed or overturned any decree, judgment,
injunction or other order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents or
restricts consummation of the transactions contemplated by this
Agreement. Notwithstanding the foregoing or any other provision
of this Agreement, nothing in this Section 8.4 shall
limit a partys right to terminate this Agreement pursuant
to Section 10.1(f) so long as such party has, prior
to such termination, complied with its obligations under this
Section 8.4.
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(e) Notwithstanding anything to the contrary contained
herein, neither Parent nor any of its Affiliates shall be under
any obligation to make proposals, execute or carry out
agreements or submit to Orders providing for the sale or other
disposition or holding separate (through the establishment of a
trust or otherwise) of any assets or categories of assets of
Parent, any of its Affiliates or the Company (or any of its
Affiliates), or the holding separate of shares of capital stock
of the Company (or any of its Affiliates) or imposing or seeking
to impose any limitation on the ability of Parent or any of its
subsidiaries or Affiliates to own, retain, use or operate any of
its products, services, properties or assets (including equity,
properties or assets of the Company
and/or its
Affiliates) or any limitation on the ability of the Company (or
its Affiliates) to own, retain, use or operate any of their
products, services, properties or assets or seeking a
disposition or divestiture of any such properties or assets.
Section 8.5 Public
Announcements; Public Disclosures; Privacy
Laws. Parent and the Company will consult with
each other before issuing any press release or making any public
statement with respect to this Agreement or the transactions
contemplated hereby and, except for any press release or public
statement as may be required by Applicable Law or by obligations
pursuant to any listing agreement with or rules of any
securities exchange, will not issue any such press release or
make any such public statement without the consent of the other
party (not to be unreasonably delayed, conditioned or withheld).
Section 8.6 Indemnification
Provisions.
(a) Parent shall, or shall cause the Surviving Corporation
to, maintain the Companys existing indemnification
provisions that have been provided or made available to Parent
as of the date hereof with respect to present and former
directors, officers, employees and agents of the Company and the
Company Subsidiaries and all other Persons who may presently
serve or have served at the Companys request as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise
(collectively, the Company Indemnified
Parties) for all expenses, Judgments, fines and
amounts paid in settlement by reason of actions or omissions or
alleged actions or omissions occurring at or prior to the
Effective Time to the fullest extent permitted or required
under, (i) Applicable Law, (ii) the Companys
Organizational Documents in effect on the date hereof (to the
extent consistent with Applicable Law) and
(iii) indemnification agreements of the Company or any
Company Subsidiary in effect on the date hereof (to the extent
consistent with Applicable Law), and shall cause the Surviving
Corporation to perform its obligations under such
indemnification provisions in accordance with their respective
terms. In addition, from and after the Effective Time, Company
Indemnified Parties who become directors, officers or
fiduciaries under benefit plans of Parent will be entitled to
the indemnity rights and protections then afforded to directors,
officers and fiduciaries under benefit plans of Parent.
(b) Parent shall maintain Parents existing
indemnification provisions that have been provided or made
available to the Company as of the date hereof with respect to
present and former directors, officers, employees and agents of
Parent, the Parent Subsidiaries and all other Persons who may
presently serve or have served at Parents request as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise for all
expenses, Judgments, fines and amounts paid in settlement by
reason of actions or omissions or alleged actions or omissions
occurring at or prior to the Effective Time to the fullest
extent permitted or required under, (i) Applicable Law,
(ii) Parents Organizational Documents in effect on
the date hereof (to the extent consistent with Applicable Law)
and (iii) indemnification agreements of Parent or any
Parent Subsidiary in effect on the date hereof (to the extent
consistent with Applicable Law), and shall perform its
obligations under such indemnification provisions in accordance
with their respective terms.
(c) Parent shall, for six years after the Effective Time,
cause the Surviving Corporation to maintain in effect
directors and officers liability insurance covering
each person currently covered by the Companys current
directors and officers liability insurance policy
for acts or omissions occurring prior to the Effective Time on
terms with respect to such coverage and amounts no less
favorable than those of such policy in effect on the date of
this Agreement; provided, that the Surviving Corporation
may substitute therefor policies of a reputable insurance
company the material terms of which, including coverage and
amount, are no less favorable to such directors and officers
than the insurance coverage otherwise required under this
Section 8.6(c); provided, however,
that the Surviving Corporation shall not be obligated to make
annual premium payments for such insurance to the extent such
premiums exceed 200% of the annual premiums paid as of the date
hereof by the Company for such insurance (such 200% amount, the
Company Maximum Premium). If such insurance
coverage cannot be obtained at all, or
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can only be obtained at an annual premium in excess of the
Company Maximum Premium, the Surviving Corporation shall
maintain the most advantageous policies of directors and
officers insurance obtainable for an annual premium equal
to the Company Maximum Premium. The Company represents to Parent
that the Company Maximum Premium is the amount set forth in
Schedule 8.6(c) of the Company Disclosure Schedule.
The Surviving Company may satisfy in full its obligation under
this Section 8.6(c) by acquiring a tail
directors and officers liability insurance policy
(i) that covers each person currently covered by the
Companys current directors and officers
liability insurance policy for acts or omissions occurring prior
to the Effective Time on terms with respect to such coverage and
amounts no less favorable than those of such policy in effect on
the date of this Agreement, and (ii) in respect of which
the premium for a period until the sixth anniversary of the
Effective Time is prepaid at the commencement of such period. At
the request of Parent, the Company shall cooperate with Parent
to obtain such a tail policy effective as of the Effective Time.
(d) Parent shall, for six years after the Effective Time,
maintain in effect directors and officers liability
insurance covering each person currently covered by
Parents current directors and officers
liability insurance policy for acts or omissions occurring prior
to the Effective Time on terms with respect to such coverage and
amounts no less favorable than those of such policy in effect on
the date of this Agreement; provided, that Parent may
substitute therefor policies of a reputable insurance company
the material terms of which, including coverage and amount, are
no less favorable to such directors and officers than the
insurance coverage otherwise required under this
Section 8.6(d); provided, however,
that Parent shall not be obligated to make annual premium
payments for such insurance to the extent such premiums exceed
200% of the annual premiums paid as of the date hereof by Parent
for such insurance (such 200% amount, the Parent
Maximum Premium). If such insurance coverage cannot be
obtained at all, or can only be obtained at an annual premium in
excess of the Parent Maximum Premium, Parent shall maintain the
most advantageous policies of directors and officers
insurance obtainable for an annual premium equal to the Parent
Maximum Premium. The Parent represents to the Company that the
Parent Maximum Premium is the amount set forth in
Schedule 8.6(d) of the Parent Disclosure Schedule.
Parent may satisfy in full its obligation under this
Section 8.6(d) by acquiring a tail directors
and officers liability insurance policy (i) that
covers each person currently covered by Parents current
directors and officers liability insurance policy
for acts or omissions occurring prior to the Effective Time on
terms with respect to such coverage and amounts no less
favorable than those of such policy in effect on the date of
this Agreement, and (ii) in respect of which the premium
for a period until the sixth anniversary of the Effective Time
is prepaid at the commencement of such period.
(e) In the event that Parent or the Surviving Corporation
or any of its successors or assigns (i) consolidates with
or merges into any other Person and is not the continuing or
surviving corporation or entity of such consolidation or merger
or (ii) transfers or conveys all or substantially all its
properties and assets to any Person (including by dissolution),
then, and in each such case, Parent shall cause proper provision
to be made so that the successors and assigns of Parent or the
Surviving Corporation assume and honor the obligations set forth
in this Section 8.6.
Section 8.7 State
Takeover Laws. If any fair price,
business combination or control share
acquisition statute or other similar statute or regulation
is or may become applicable to the Merger, the parties shall use
commercially reasonable efforts to (a) take such actions as
are necessary so that the transactions contemplated hereunder
may be consummated as promptly as practicable on the terms
contemplated hereby and (b) otherwise take all such actions
as are necessary to eliminate or minimize the effects of any
such statute or regulation on the Merger.
Section 8.8 Stock
Exchange Listing. Parent and the Company shall
use their reasonable best efforts to cause the Parent Common
Shares to be approved for listing on the NASDAQ, subject to
official notice of issuance, effective upon completion of the
Merger.
Section 8.9 Parent
Board. Parent shall use its commercially
reasonable efforts (including submitting to its shareholders at
the Parent Shareholders Meeting a proposal to amend
Parents Bye-Laws) to increase the number of members of the
Parent Board to thirteen (13) effective immediately after
the Effective Time; provided that the failure of Parent
to increase the number of members of the Parent Board to
thirteen (13) shall not result in a failure of a condition
to Closing. Parent shall take all actions necessary so that
immediately after the Effective Time the Parent Board shall be
comprised of (x) four (4) members of the Parent Board
as constituted on the date of this Agreement
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designated by Parent and reasonably acceptable to the Company
and (y) nine (9) members of the Company Board as
constituted on the date of this Agreement designated by the
Company and reasonably acceptable to Parent, in each case to
serve from and after the Effective Time until a successor is
duly elected and qualified; provided, that in the event
of the failure of Parent to increase the number of members of
the Parent Board to thirteen (13), the number of designees of
Parent pursuant to clause (x) shall be three (3).
Parent and the Company agree that they shall take all actions
necessary so that any current member of the Parent Board who is
not a designee of Parent pursuant to this
Section 8.9 will become fully vested in all
outstanding stock options and restricted shares held by such
member upon termination from the Parent Board. In addition, the
Company and Parent agree that the Parent Board shall give its
consent that the resignation of any current member of the Parent
Board who is not a designee of Parent pursuant to this
Section 8.9 be treated as a retirement
for purposes of those options granted under the Parent Director
Stock Plan held by such member that have an exercise price above
the fair market value of the Parent Common Shares on the date of
such Parent Board consent, provided that such member has
either attained age 65 or has served for ten years on
Parent Board at the time of resignation.
Section 8.10 Name
of Parent. Parent shall take all actions
necessary to cause the name of Parent to be changed to
Argo Group International Holdings, Ltd. immediately
after the Effective Time.
Section 8.11 Employee
Matters.
(a) Parent and the Company agree to honor, and to cause the
Surviving Corporation and its Subsidiaries to honor, from and
after the Effective Time, all Parent Benefit Plans in accordance
with their terms as in effect immediately before the Effective
Time, subject to any amendment or termination thereof that may
be permitted by such terms. For a period of not less than one
year following the Effective Time, Parent and the Company shall
provide, or cause the Surviving Corporation and its Subsidiaries
to provide, to current employees of Parent and its Subsidiaries
(the Parent Employees) the same base salary
and bonus opportunity and employee benefits that are comparable
in the aggregate to those provided to Parent Employees
immediately before the Effective Time. Without limiting the
generality of the foregoing, Parent and the Company shall
provide, or cause the Surviving Corporation and its Subsidiaries
to provide, severance and any similar benefits to Parent
Employees which are no less favorable to the severance and
similar benefits currently provided under the Parent Benefit
Plans for a period of not less than one year following the
Effective Time, including by recognizing all service recognized
for such purposes under the applicable Parent Benefit Plan.
(b) For all purposes (other than for benefit accrual under
a defined benefit plan) under the employee benefit plans of
Parent, the Company and their Subsidiaries or the Surviving
Corporation and its Subsidiaries providing benefits to any
Parent Employees after the Effective Time (the New
Plans), each Parent Employee shall be credited with
his or her years of service with Parent and its Affiliates
before the Effective Time, to the same extent as such Parent
Employee was entitled, before the Effective Time, to credit for
such service under any similar Parent Benefit Plans, provided
that such service will not be credited to the extent it would
result in duplication of benefits. In addition, and without
limiting the generality of the foregoing: (i) each Parent
Employee shall be immediately eligible to participate, without
any waiting time, in any and all New Plans to the extent
coverage under such New Plan replaces coverage under a
comparable Parent Benefit Plan in which such Parent Employee
participated immediately before the Effective Time (such plans,
the Old Plans); and (ii) for purposes of
each New Plan providing medical, dental, pharmaceutical
and/or
vision benefits to any Parent Employee, Parent and the Company
shall cause, or cause the Surviving Corporation and its
Subsidiaries to cause, all pre-existing condition exclusions and
actively-at-work
requirements of such New Plan to be waived for such employee and
his or her covered dependents to the extent such requirements
would not have applied under the comparable Parent Benefit Plan
that employee and his or her covered dependents participated in
prior to the Effective Time, and Parent and the Company shall
cause, or cause the Surviving Corporation and its Subsidiaries
to cause, any eligible expenses incurred by such employee and
his or her covered dependents during the portion of the plan
year of the Old Plan ending on the date such employees
participation in the corresponding New Plan begins to be taken
into account under such New Plan for purposes of satisfying all
deductible, co-insurance and maximum
out-of-pocket
requirements applicable to such employee and his or her covered
dependents for the applicable plan year as if such amounts had
been paid in accordance with such New Plan.
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Section 8.12 Tax
Matters. Except as otherwise required by
Section 367 of the Code, (i) Parent and the Company
intend that the Merger will qualify as a
reorganization within the meaning of
Section 368(a) of the Code and (ii) each of Parent,
Merger Sub and the Company agrees that it will not take (and
will cause each Parent Subsidiary and Company Subsidiary
respectively not to take) any action, or fail to take (or allow
any Parent Subsidiary or Company Subsidiary respectively to fail
to take) any action not specifically permitted by this
Agreement, which action or failure to take action would
reasonably be expected to cause the Merger not to so qualify.
The parties hereto agree that the directors and employees of
each of the Company, the Company Subsidiaries, Parent and the
Parent Subsidiaries shall be held harmless by Parent from any
increase resulting from the transactions contemplated by this
Agreement (other than any increase due to the transactions
described on Schedule 1.1(a)) in the total state or
federal income or excise tax liability of such individual over
and above that which would have been incurred in the ordinary
course in future periods had such transactions not been
consummated.
Section 8.13 Affiliates. Not
less than ten Business Days prior to the date of the Company
Stockholders Meeting, the Company shall deliver to Parent a
letter identifying all Persons who, in the judgment of the
Company, may be deemed at the time this Agreement is submitted
for adoption by the stockholders of the Company,
affiliates of the Company for purposes of
Rule 145 under the Securities Act and applicable SEC rules
and regulations, and such list shall be updated as necessary to
reflect changes from the date thereof. The Company shall use its
reasonable best efforts to cause each Person identified on such
list to deliver to Parent, not later than five Business Days
prior to the Effective Time, a written agreement substantially
in the form attached as Exhibit C hereto.
Section 8.14 Increase
in Authorized Share Capital. Parent shall submit
to its shareholders at the Parent Shareholders Meeting a
proposal to increase the authorized share capital of Parent from
$350 million to $500 million, to be effective
immediately after the Effective Time.
Section 8.15 Bye-Law
Amendment and Memorandum of Association
Amendment. Parent shall submit to its
shareholders at the Parent Shareholders Meeting (a) a
proposal to amend the Bye-Laws of Parent substantially as set
forth in Schedule 8.15(a) of the Parent Disclosure
Schedule and (b) a proposal to amend the Memorandum of
Association of Parent substantially as set forth in
Schedule 8.15(b) of the Parent Disclosure Schedule,
in each case to be effective immediately after the Effective
Time.
ARTICLE IX
Conditions
to Consummation of the Merger
Section 9.1 Conditions
to Each Partys Obligation To Effect The
Merger. The respective obligation of each party
to effect the Merger is subject to the satisfaction or waiver on
or prior to the Closing Date of the following conditions:
(a) Company Stockholder Approval. The
Company shall have obtained the Company Stockholder Approval.
(b) Parent Shareholder Approval. Parent
shall have obtained the Parent Shareholder Approval and the
Parent Preferred Consents.
(c) Antitrust. Any waiting period (and
any extension thereof) applicable to the Merger under the HSR
Act shall have been terminated or shall have expired.
(d) Required Regulatory Approvals. Parent
shall have received the Parent Required Regulatory Approvals and
the Company shall have received the Company Required Regulatory
Approvals.
(e) No Injunctions or Restraints. No
temporary restraining order, preliminary or permanent injunction
or other judgment or Order issued by any court or agency of
competent jurisdiction or other Applicable Law preventing the
consummation of the Merger shall be in effect (provided,
however, that prior to asserting this condition, each of
the parties shall have used its reasonable best efforts (in the
manner contemplated by
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Section 8.4) to prevent the entry of any such
injunction or other Order and to appeal as promptly as possible
any such judgment that may be entered).
Section 9.2 Conditions
to Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger are
further subject to the satisfaction or waiver on or prior to the
Closing Date of the following conditions:
(a) Representations and Warranties. The
representations and warranties of the Company set forth in
Sections 5.1, 5.2(b), 5.3, 5.4,
5.5, 5.6, and 5.10 of this Agreement shall
be true and correct in all respects (other than de
minimis exceptions) as of the Closing Date, as though made
on the Closing Date, except to the extent such representations
and warranties expressly relate to an earlier date (in which
case such representations and warranties shall be true and
correct in all respects (other than de minimis
exceptions) on and as of such earlier date). The other
representations and warranties of the Company set forth in this
Agreement (disregarding all qualifications, limitations and
exceptions therein regarding materiality or a Company Material
Adverse Effect or any similar standard as qualification) shall
be true and correct in all respects as of the Closing Date, as
though made on the Closing Date, except to the extent such
representations and warranties expressly relate to an earlier
date (in which case such representations and warranties shall be
true and correct in all respects as of such earlier date),
except to the extent that the failure of such representations
and warranties to be so true and correct as of the Closing Date
or such earlier date, as the case may be, individually or in the
aggregate, has not had and would not reasonably be expected to
have a Company Material Adverse Effect. Parent shall have
received a certificate signed on behalf of the Company by the
chief executive officer and the chief financial officer of the
Company to such effect.
(b) Performance of Obligations of the
Company. The Company shall have complied in all
material respects with its obligations required to be complied
with by it under this Agreement at or prior to the Closing Date,
and Parent shall have received a certificate signed on behalf of
the Company by the chief executive officer and the chief
financial officer of the Company to such effect.
(c) Company Material Adverse Effect. No
event, development, circumstance or occurrence shall have
occurred, since the date hereof that, individually or in the
aggregate, has had or would reasonably be expected to have a
Company Material Adverse Effect. Parent and Merger Sub shall
have received a certificate signed on behalf of the Company by
the chief executive officer and the chief financial officer of
the Company to such effect.
(d) Tax Opinion. Parent shall have
received an opinion of Dewey Ballantine LLP or its successor, in
form and substance reasonably satisfactory to Parent, based on
facts, representations and assumptions set forth in such opinion
that are consistent with the state of facts existing at the
Effective Time, dated as of the Effective Time, to the effect
that (i) Parent should not recognize gain or loss for
United States federal income tax purposes solely as a result of
the Merger and (ii) the Merger should not cause Parent or
any Affiliate of Parent to be treated as a domestic corporation
under Section 7874(b) of the Code. The issuance of such
opinion shall be conditioned upon the receipt by such counsel of
appropriate representation letters from each of Parent, Merger
Sub and the Company, at such time or times as counsel may
reasonably request, and, in each case, in form and substance
reasonably satisfactory to such counsel. Each such
representation letter shall be dated on or before the date of
such opinion and shall not have been withdrawn or modified in
any material respect.
(e) Bermuda Counsel Opinion. Parent shall
have received an opinion of Conyers Dill & Pearman or
its successor, substantially in the form set forth in
Schedule 6.4(d) of the Parent Disclosure Schedule.
Section 9.3 Conditions
to Obligation of the Company. The obligation of
the Company to effect the Merger is further subject to the
satisfaction or waiver on or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties. The
representations and warranties of Parent and Merger Sub set
forth in Sections 6.1, 6.2(b), 6.3,
6.4, 6.5, 6.6 and 6.10 of this
Agreement shall be true and correct in all respects (other than
de minimis exceptions) as of the Closing Date, as though
made on the Closing Date, except to the extent such
representations and warranties expressly relate to an earlier
date (in which case such representations and warranties shall be
true and correct in all respects (other than de minimis
exceptions) on
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and as of such earlier date). The other representations and
warranties of Parent and Merger Sub set forth in this Agreement
(disregarding all qualifications, limitations and exceptions
therein regarding materiality or a Parent Material Adverse
Effect or any similar standard as qualification) shall be true
and correct in all respects as of the Closing Date, as though
made on the Closing Date, except to the extent such
representations and warranties expressly relate to an earlier
date (in which case such representations and warranties shall be
true and correct in all respects as of such earlier date),
except to the extent that the failure of such representations
and warranties to be so true and correct as of the Closing Date
or such earlier date, as the case may be, individually or in the
aggregate, has not had and would not reasonably be expected to
have a Parent Material Adverse Effect. The Company shall have
received a certificate signed on behalf of Parent by the chief
executive officer and the chief financial officer of Parent to
such effect.
(b) Performance of Obligations of Parent and Merger
Sub. Each of Parent and Merger Sub shall have
performed in all material respects all obligations required to
be performed by it under this Agreement at or prior to the
Closing Date, and the Company shall have received a certificate
signed on behalf of Parent by an executive officer of Parent to
such effect.
(c) Parent Material Adverse Effect. No
event, development, circumstance or occurrence shall have
occurred, since the date hereof that, individually or in the
aggregate, has had or would reasonably be expected to have a
Parent Material Adverse Effect. The Company shall have received
a certificate signed on behalf of Parent by the chief executive
officer and the chief financial officer of Parent to such effect.
(d) Voting Agreement. The Voting
Agreement shall include the Parent Preferred Consents and shall
provide that (i) the Parent Preferred Shares issued and
outstanding immediately prior to the Effective Time shall be
converted into 9,316,026 Parent Convertible Common Shares in the
aggregate, (ii) each Parent Convertible Common Share
(including all of the Parent Convertible Common Shares resulting
from the conversion in Section 9.3(d)(i) above)
issued and outstanding immediately prior to the Effective Time
shall be converted into one (1) Parent Common Share and
(iii) at the Effective Time, each Parent Preferred Share
and each Parent Convertible Common Share converted into Parent
Common Shares pursuant to the Voting Agreement shall no longer
be outstanding and shall automatically be canceled and retired
and shall cease to exist (collectively, the Parent
Share Conversion). The Voting Agreement shall not have
been amended, modified or supplemented without the consent of
all parties thereto and shall be in full force and effect on the
Closing Date.
(e) Ratings. Neither Parent nor Company
shall have received notice (i) from A. M. Best that any
published or indicative rating assigned to Parent, Parent
Subsidiaries, Company or Company Subsidiaries as of date of this
Agreement is subject to being downgraded, placed under review or
watch with negative implications or outlook, or otherwise
adversely affected as a result of the announcement or
consummation of any of the transactions contemplated by this
Agreement or (ii) from Standard & Poors
that any published or indicative rating assigned to Parent,
Parent Subsidiaries, or Company Subsidiaries by
Standard & Poors has been downgraded.
(f) Reverse Split and Name Change. All
conditions precedent to the reverse split of Parent Common
Shares and the change of name of Parent to Argo Group
International Holdings, Ltd. shall have been satisfied.
(g) Tax Opinion. The Company shall have
received an opinion of LeBoeuf, Lamb, Greene & MacRae
LLP, in form and substance reasonably satisfactory to the
Company, based on facts, representations and assumptions set
forth in such opinion that are consistent with the state of
facts existing at the Effective Time, dated as of the Effective
Time, to the effect that (i) the Company should not
recognize gain or loss for United States federal income tax
purposes solely as a result of the Merger and (ii) the
Merger should not cause Parent or any Affiliate of Parent to be
treated as a domestic corporation under Section 7874(b) of
the Code. The issuance of such opinion shall be conditioned upon
the receipt by such counsel of appropriate representation
letters from each of Parent, Merger Sub and the Company, at such
time or times as such counsel may reasonably request, and, in
each case, in form and substance reasonably satisfactory to such
counsel. Each such representation letter shall be dated on or
before the date of such opinion and shall not have been
withdrawn or modified in any material respect.
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(h) Conversion of Parent Convertible Common Shares and
Parent Preferred Shares. The Parent Share
Conversion shall be effective as of the Effective Time.
(i) Bermuda Counsel Opinion. The Company
shall have received an opinion of Conyers Dill &
Pearman or its successor, substantially in the form set forth in
Schedule 6.4(d) of the Parent Disclosure Schedule.
Section 9.4 Frustration
of Closing Conditions. Neither the Company,
Parent nor Merger Sub may rely on the failure of any condition
set forth in Section 9.1, 9.2 or 9.3,
as the case may be, to be satisfied if such failure was caused
by such partys failure to use reasonable best efforts to
consummate the Merger and the other transactions contemplated by
this Agreement, as required by and subject to
Section 8.4.
ARTICLE X
Termination
Section 10.1 Termination. This
Agreement may be terminated and the Merger contemplated hereby
may be abandoned at any time prior to the Effective Time,
whether before or after approval of matters presented in
connection with the Merger at the Company Stockholders Meeting
or the Parent Shareholders Meeting, or any adjournment or
postponement thereof:
(a) By mutual written consent of Parent and the Company;
(b) By either Parent or the Company, if the Merger shall
not have been consummated on or before August 31, 2007 (the
Outside Date) after the date hereof (other
than due principally to the failure of the party seeking to
terminate this Agreement to perform any obligations under this
Agreement required to be performed by it at or prior to the
Effective Time); provided, that the passage of such
period shall be tolled for any part thereof during which any
party shall be subject to a non-final Order, decree, ruling or
action restraining, enjoining or otherwise prohibiting
consummation of the Merger;
(c) By Parent, if a Company Adverse Recommendation Change
shall have occurred;
(d) By Parent, if the Company enters into or agrees to
enter into a Company Alternative Transaction without
Parents prior written consent;
(e) By the Company, if a Parent Adverse Recommendation
Change shall have occurred;
(f) By Parent or the Company, if the Company Stockholder
Approval shall not have been obtained at the Company
Stockholders Meeting or at any adjournment or postponement
thereof;
(g) By Parent or the Company, if the Parent Shareholder
Approval shall not have been obtained at the Parent Shareholders
Meeting or at any adjournment or postponement thereof;
(h) By Parent or the Company, if any Governmental Entity
shall have issued an Order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other
action is or shall have become final and non-appealable;
provided, that the party seeking to terminate this
Agreement pursuant to this Section 10.1 shall not
have taken any action that would cause it to be in material
violation of any of its representations, warranties or covenants
set forth in this Agreement;
(i) By the Company, if (i) on or prior to the Closing
Date there shall have been a breach or inaccuracy of any
representation, warranty, covenant or agreement on the part of
Parent or Merger Sub contained in this Agreement, which breach
or inaccuracy would (A) give rise to the failure of a
condition set forth in Section 9.3(a), 9.3(b)
or 9.3(c) and (B) is incapable of being cured prior
to the Closing Date by Parent or Merger Sub, as the case may be,
or is not cured within thirty (30) days of written notice
of such breach or inaccuracy, or (ii) any of the conditions
set forth in Section 9.1 or 9.3 shall have
become incapable of fulfillment prior to the Outside Date
(subject to the further proviso in Section 10.1(b);
provided, that the Company is not then in material breach
of any representation, warranty or covenant contained in this
Agreement;
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(j) By Parent, if (i) on or prior to the Closing Date
there shall have been a breach or inaccuracy of any
representation, warranty, covenant or agreement on the part of
the Company contained in this Agreement, which breach or
inaccuracy would (A) give rise to the failure of a
condition set forth in Section 9.2(a), 9.2(b)
or 9.2(c) and (B) is incapable of being cured prior
to the Closing Date by the Company or is not cured within thirty
(30) days of written notice of such breach or inaccuracy,
or (ii) any of the conditions set forth in
Section 9.1 or 9.2 shall have become
incapable of fulfillment prior to the Outside Date (subject to
the further proviso in Section 10.1(b));
provided, that Parent or Merger Sub is not then in
material breach of any representation, warranty or covenant
contained in this Agreement;
(k) By Parent if, at any time prior to receipt of the
Parent Shareholder Approval, (i) the Parent Board (or a
committee thereof) has received a Parent Superior Proposal,
(ii) in light of such Parent Superior Proposal, the Parent
Board (or a committee thereof) shall have determined in good
faith after consultation with outside counsel, that such action
is consistent with the fiduciary duties of the Parent Board (or
a committee thereof), (iii) Parent has notified the Company
in writing of the determination described in clause (ii),
indicating in such notice the material terms and conditions of
such Parent Alternative Transaction Proposal and during the
seventy-two hour period immediately following the delivery of
such notice, Parent negotiates with the Company to make such
adjustments to the terms and conditions of this Agreement as
would enable the parties to proceed with the transactions
contemplated herein on such adjusted terms, (iv) following
such seventy-two hour period, the Parent Board (or a committee
thereof) shall have again made the determination referred to in
clause (ii) and (v) Parent pays the Company the
applicable Parent Termination Fee set forth in and pursuant to
the terms of Section 10.3(b); or
(l) By the Company, if Parent does not provide its written
consent to a Company Alternative Transaction within five
(5) Business Days after the Companys written notice
to Parent of the Companys or its Subsidiarys
intention to enter into such a Company Alternative Transaction.
Section 10.2 Effect
of Termination. In the event of the termination
of this Agreement pursuant to Section 10.1, this
Agreement shall forthwith become null and void and have no
effect and the obligations of the parties under this Agreement
shall terminate, except for the obligations in
Article I, the last sentence of
Section 8.1, this Section 10.2,
Section 10.3 and Article XI and there
shall be no liability on the part of any party hereto;
provided, however, that no Person shall be
relieved or released from any liabilities or damages arising out
of its willful or intentional breach of any provision of this
Agreement, including any making of a representation of warranty
with Knowledge that such representation or warranty is not true
and correct.
Section 10.3 Fees
and Expenses.
(a) In the event that this Agreement is terminated pursuant
to Section 10.1(c), 10.1(d) or
10.1(l), then the Company shall pay Parent a fee equal to
$40,000,000 (the Company Termination Fee),
and such amount shall constitute liquidated damages in respect
of such termination regardless of the circumstances giving rise
to such termination. Any fee due under this
Section 10.3(a) shall be paid by wire transfer of
same-day
funds to an account provided in writing by Parent to the Company
within two (2) Business Days of termination of this
Agreement.
(b) In the event that:
(i) this Agreement is terminated by the Company pursuant to
Section 10.1(e);
(ii) this Agreement is terminated by Parent pursuant to
Section 10.1(k); or
(iii) (A) prior to the date of the Parent Shareholders
Meeting, a Parent Alternative Transaction Proposal shall have
been made to Parent or directly to its shareholders generally
and not withdrawn, (B) this Agreement is terminated by
Parent pursuant to Section 10.1(b) or 10.1(g)
and (C) within six (6) months of such termination,
Parent enters into a definitive agreement to consummate and
consummates the transactions contemplated by such Parent
Alternative Transaction Proposal (for purposes of this
Section 10.3(b)(iii) only, all references to
25% in the definition of Parent Alternative
Transaction shall be deemed to be 50%);
then Parent shall pay the Company a fee equal to $20,000,000
(the Parent Termination Fee), and such amount
shall constitute liquidated damages in respect of such
termination regardless of the circumstances giving rise to such
termination. Any fee due under this Section 10.3(b)
shall be paid by wire transfer of
same-day
funds to an account provided in writing by Parent to the Company
(A) in the event referred to in
A-64
clause (i) above, within two (2) Business Days of
termination of this Agreement, (B) in the case of
termination pursuant to clause (ii) above, on the date of
termination or (C) in the case of termination pursuant to
clause (iii) above, within two (2) Business Days of
the consummation of the transactions referred to in
clause (iii)(C) above.
(c) Each of the Company and Parent acknowledges that the
agreements contained in this Section 10.3 are an
integral part of the transactions contemplated by this Agreement
and that, without these agreements, neither Parent nor the
Company would have entered into this Agreement. Each of the
Company and Parent acknowledges that in the event it is entitled
to receive the Parent Termination Fee or the Company Termination
Fee, as the case may be, the right of Parent or the Company to
receive such amount shall constitute such partys sole and
exclusive remedy for, and such amount shall constitute
liquidated damages in respect of, the breach or termination of
this Agreement regardless of the circumstances giving rise to
such breach or termination and the Company or Parent, as the
case may be, shall have no further rights, directly or
indirectly, against any other party hereto or any of their
respective Affiliates, shareholders, partners, members,
directors, officers and agents, whether at law or equity, in
contract, in tort or otherwise.
ARTICLE XI
Miscellaneous
Section 11.1 Survival
of Representations, Warranties and
Agreements. No representations or warranties
in this Agreement or in any instrument delivered pursuant to
this Agreement shall survive beyond the Effective Time. This
Section 11.1 shall not limit any covenant or
agreement set forth in this Agreement that by its terms
contemplates performance after the Effective Time, which
covenants and agreements shall survive the Effective Time.
Nothing in this Section 11.1 shall be construed to
prevent any action against any Person based on fraud.
Section 11.2 Notices. All
notices, claims, demands and other communications hereunder
shall be in writing and shall be deemed given (a) upon
confirmation of receipt of a facsimile transmission or
(b) when sent by an internationally recognized overnight
carrier (providing proof of delivery) or when delivered by hand,
addressed to the respective parties at the following addresses
(or such other address for a party as shall be specified by like
notice):
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(a)
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If to Parent or Merger Sub, to:
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PXRE Group Ltd.
PXRE House
110 Pitts Bay Road
Pembroke HM 08 Bermuda
Facsimile:
441-296-6162
Attention: Chief Financial Officer
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Facsimile:
212-259-6333
Attention: Linda E. Ransom, Esq.
Sidley Austin LLP
787 Seventh Avenue
New York, New York 10019
Facsimile:
212-839-5599
Attention: Nancy H. Corbett, Esq.
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(b)
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If to the Company, to:
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Argonaut Group, Inc.
10101 Reunion Place, Suite 500
San Antonio, Texas 78216
Facsimile:
(210) 321-8409
Attention: General Counsel
LeBoeuf, Lamb, Greene & MacRae LLP
125 West 55th Street
New York, New York 10019
Facsimile:
212-424-8500
Attention: Michael Groll, Esq.
Section 11.3 Expenses. Except
as otherwise specifically provided herein, whether or not the
Merger is consummated, each party shall bear its own expenses in
connection with this Agreement and the transactions contemplated
hereby, except that Parent and the Company shall each bear and
pay one-half of the costs and expenses incurred in connection
with the filing and printing of the Registration Statement and
the HSR filing.
Section 11.4 Descriptive
Headings. The headings contained in this
Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
Section 11.5 Entire
Agreement; Assignment. This Agreement (including
the Exhibits, Schedules and other documents and instruments
referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings (other
than those contained in the Confidentiality Agreement, which is
hereby incorporated by reference herein), both written and oral,
among the parties or any of them, with respect to the subject
matter hereof, including any transaction between or among the
parties. This Agreement shall not be assigned by operation of
law or otherwise, except that Merger Sub may, with the prior
written consent of the Company (not to be unreasonably
withheld), assign all of its rights and obligations hereunder to
any wholly-owned Subsidiary of Parent, which Subsidiary shall
thereupon be substituted for Merger Sub for all purposes hereof.
Section 11.6 Governing
Law and Venue; Waiver of Jury Trial.
(a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, regardless
of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof. The parties hereby
irrevocably submit to the jurisdiction of the courts of the
State of Delaware and the Federal courts of the United States of
America located in the State of Delaware and hereby waive, and
agree not to assert, as a defense in any action, suit or
Proceeding for the interpretation or enforcement hereof or of
any such document, that it is not subject thereto or that such
action, suit or Proceeding may not be brought or is not
maintainable in said courts or that the venue thereof may not be
appropriate or that this Agreement or any such document may not
be enforced in or by such courts, and the parties irrevocably
agree that all claims with respect to such action or Proceeding
shall be heard and determined in such a Delaware State court.
The parties hereby consent to and grant any such court
jurisdiction over the person of such parties solely for such
purpose and over the subject matter of such dispute and agree
that mailing of process or other papers in connection with any
such action or Proceeding in the manner provided in
Section 11.2 or in such other manner as may be
permitted by law shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH
PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS
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CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY AND (iv) EACH PARTY HAS
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 11.6.
Section 11.7 Amendment. This
Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties.
Section 11.8 Waiver. At
any time prior to the Effective Time, Parent, on the one hand,
and the Company, on the other, may (a) extend the time for
the performance of any of the obligations or other acts of the
Company, in the case of Parent, or Parent or Merger Sub, in the
case of the Company, (b) waive any inaccuracies in the
representations and warranties contained herein or in any
document delivered pursuant hereto of the Company, in the case
of Parent, or Parent or Merger Sub, in the case of the Company,
and (c) waive compliance with any of the agreements or
conditions contained herein of the Company, in the case of
Parent, or Parent or Merger Sub, in the case of the Company. Any
agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. No failure or delay by
any party in exercising any right, power or privilege hereunder
shall act as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof
or the exercise of any other right, power or privilege hereunder.
Section 11.9 Counterparts;
Effectiveness. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an
original but all of which shall constitute one and the same
instrument. This Agreement shall become effective when each
party shall have received counterparts thereof signed and
delivered (by facsimile or otherwise) by all of the other
parties.
Section 11.10 Severability;
Validity; Parties in Interest. If any provision
of this Agreement, or the application thereof to any Person or
circumstance is held invalid or unenforceable, the remainder of
this Agreement, and the application of such provision to other
Persons or circumstances, shall not be affected thereby, and to
such end, the provisions of this Agreement are agreed to be
severable. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced,
the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent
possible. Except as provided in Section 8.6, nothing
in this Agreement, express or implied, is intended to confer
upon any Person not a party to this Agreement any rights or
remedies of any nature whatsoever under or by reason of this
Agreement.
Section 11.11 Enforcement
of Agreement. The parties agree that irreparable
damage would occur in the event that any provision of this
Agreement was not performed in accordance with its specific
terms or was otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent
jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
[Signature
Page Follows]
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IN WITNESS WHEREOF, each of Parent, Merger Sub and the Company
has caused this Agreement to be executed as of the date first
above written.
PXRE GROUP LTD.
Name: Jeffrey L. Radke
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Title:
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President & Chief Executive Officer
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PXMS INC.
Name: Robert P. Myron
ARGONAUT GROUP, INC.
Name: Byron L. LeFlore
Title Senior Vice President
A-68
Annex B
FORM NO. 2
BERMUDA
THE COMPANIES ACT 1981
MEMORANDUM
OF ASSOCIATION OF
COMPANY LIMITED BY SHARES
(Section 7(1)
and (2))
MEMORANDUM OF ASSOCIATION
OF
PXRE
Group Ltd.
(hereinafter
referred to as the Company)
1. The liability of the members of the Company is limited
to the amount (if any) for the time being unpaid on the shares
respectively held by them.
2. We, the undersigned, namely,
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Bermudian
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Number of
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Status
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Shares
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Name
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Address
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(Yes/No)
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Nationality
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Subscribed
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A.D. Whaley
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2 Church Street
Hamilton HM 11
Bermuda
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Yes
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British
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One
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J.M. Macdonald
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Yes
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British
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One
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N.P. Johnson
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Yes
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British
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One
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do hereby respectively agree to take such number of shares of
the Company as may be allotted to us respectively by the
provisional directors of the Company, not exceeding the number
of shares for which we have respectively subscribed, and to
satisfy such calls as may be made by the directors, provisional
directors or promoters of the Company in respect of the shares
allotted to us respectively.
3. The Company is to be an exempted Company as
defined by the Companies Act 1981.
4. The Company, with the consent of the Minister of
Finance, has power to hold land situate in Bermuda not exceeding
in all, including the following parcels:-
N/A
5. The authorised share capital of the Company is
US$12,000 divided into shares of US$1.00
each. The minimum subscribed share capital of the
Company is US$12,000.00.
6. The objects for which the Company is formed and
incorporated are
unrestricted
.
1. to act and or to perform all the functions of
a holding company in all its branches and to co-ordinate the
policy and administration of any subsidiary company or companies
wherever incorporated or carrying on business or of any group of
companies of which the Company or any subsidiary company is a
member or which are in any manner controlled directly or
indirectly by the Company or which are in any manner controlled
directly or indirectly by the same entity in any manner
controlling directly or indirectly the Company;
2. to raise or secure the payment of money in
such manner as the Company may think fit and for that purpose to
authorise, issue, offer, sell and deliver, common shares,
preferred shares and other securities of the Company, notes, or
other evidences and to transfer, redeem, and purchase any such
securities, notes or evidences of indebtedness as
aforesaid;
B-1
3. to provide and or procure financing and
financial investment, management and advisory services and
administrative services to any entity in which the Company owns,
directly or indirectly an equity interest (regardless of whether
the same carries any voting rights or preferred rights or
restrictions) of not less than twenty percent of the total
equity issued and outstanding in that entity (as determined in
good faith by the board of directors of the Company); and, in
connection with any of the foregoing, to provide and or procure
credit, financial accommodation, loans and or advances with or
without interest or benefit to the Company to any such entity
and to lend to and or deposit with any financial institution,
fund and or trust, all or any property of the Company and or any
interest therein to provide collateral for loans or other forms
of financing provided to any such entity;
4. to act as an investment company and for that
purpose to acquire and hold upon any terms and, either in the
name of the Company or that of any nominee, shares, stock,
debentures, debenture stock, ownership interests, annuities,
notes, mortgages, bonds, obligations and securities, foreign
exchange, foreign currency deposits and commodities, issued or
guarantees by any company or partnership wherever incorporated,
established or carrying on business, or by any government,
sovereign, ruler, commissioners, public body or authority,
supreme, municipal, local or otherwise, by original
subscription, tender, purchase, exchange, underwriting,
participation in syndicates or in any other manner and whether
or not fully paid up, and to make payments thereon as called up
or in advance of calls or otherwise and to subscribe for the
same, whether conditionally or absolutely, and to hold the same
with a view to investment, but with the power to vary any
investments, and to exercise and enforce all rights and powers
conferred by or incident to the ownership thereof, and to invest
and deal with the moneys of the Company not immediately required
upon such securities and in such manner as may be from time to
time determined;
5. buying, selling and dealing in goods of all
kinds;
6. acquiring by purchase or otherwise and
holding as an investment inventions, patents, trade marks, trade
names, trade secrets, designs and the like;
7. buying, selling, hiring, letting and dealing
in conveyances of any sort;
8. to acquire by purchase or otherwise hold,
sell, dispose of and deal in real property situated outside
Bermuda and in personal property of all kinds wheresoever
situated; and
9. to enter into any guarantee, contract of
indemnity or suretyship and to assure, support or secure with or
without consideration or benefit the performance of any
obligations of any person or persons and to guarantee the
fidelity of individuals filling or about to fill situations of
trust or confidence.
1. The Company shall, pursuant to the
Section 42 of the Companies Act 1981, have the power to
issue preference shares which are, at the option of the holder,
liable to be redeemed.
2. The Company shall, pursuant to
Section 42A of the Companies Act 1981, have the power to
purchase its own shares.
Subject
to paragraph 4, the Company shall have the capacity,
rights, powers and privileges of a natural person,
and
(i) pursuant
to Section 42 of the Act, the Company shall have the power
to issue preference shares which are, at the option of the
holder, liable to be redeemed;
(ii) pursuant
to Section 42A of the Act , the Company shall have the
power to purchase its own shares for
cancellation; and
(iii) pursuant
to Section 42B of the Act, the Company shall have the power
to acquire its own shares to be held as treasury
shares.
B-2
Signed by each subscriber in the presence of at least one
witness attesting the signature thereof
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/s/ R.
Vieira
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/s/ J.M.
Macdonald
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/s/ R.
Vieira
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/s/ A.D. Whaley (Subscribers)
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SUBSCRIBED this 28th day of May, 1999
B-3
B Y E - L A W S
of
PXRE Group Ltd.
C-1
INTERPRETATION
1. (1) In these Bye-Laws, unless the context otherwise
requires, the words standing in the first column of the
following table shall bear the meaning set opposite them
respectively in the second column.
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WORD |
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MEANING |
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Act |
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The Companies Act 1981 of Bermuda, as amended from time to time. |
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Attribution Percentage |
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with respect to a Member, the percentage of the
Members shares that are treated as Controlled Shares of a
Tentative 9.5% U.S. Member. |
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Auditor |
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the Auditor of the Company for the time being and may include
any individual or partnership. |
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Bye-Laws |
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these Bye-Laws in their present form or as supplemented or
amended from time to time. |
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Board or the Directorsor the Board
of Directors |
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the Board of Directors of the Company or the Directors
(including alternate Directors). |
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capital |
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the share capital from time to time of the Company. |
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clear daysClear
Days |
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in relation to the period of a Notice, that period excluding the
day when the Notice is given or served or
deemed to be given or served and
the day for which it is given or on which it is to take effect. |
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Code |
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the Internal Revenue Code of 1986, as amended, of the United
States. |
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Company |
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PXRE Group Ltd. |
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Common Shares |
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has the meaning assigned to it in Bye-Law 2. |
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Company |
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the company incorporated in Bermuda under the name of
PXRE Group Ltd. on 1 June 1999. |
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competent regulatory Authority |
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a competent regulatory authority in the jurisdiction or place
where the shares of the Company are listed or quoted on a stock
exchange. |
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Controlled Shares |
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in reference to any Person means (i) all
shares of the Company that such Person owns within the meaning
of Section 958(a) of the Code, or is considered as owning
by applying the rules of Section 958(b) of the Code,
(ii) all shares of the Company that such Person owns by
applying the rules of Sections 544 or 554 of the Code or
(iii)all shares of the Company directly, indirectly
or beneficially owned by a Person within the meaning
of Section 13(d) of the Exchange Act (including any shares
owned by a group of Persons as so defined and including
any shares
that would otherwise be excluded by Section 13(d) of the
Exchange
Act)constructively
owned by a person as determined pursuant to sections 957
and 958 of the Code and the Treasury Regulations promulgated
thereunder. |
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Designated Stock Exchange |
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a stock exchange which is an appointed stock exchange for the
purposes of the Act in respect of which the shares of the
Company are listed or quoted. |
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dollars and $ |
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dollars, the legal currency of the United States. |
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Exchange Act |
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the Securities Exchange Act of 1934, as amended, of the United
States. |
C-2
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General Meeting |
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any meeting of the Members of the Company. The General Meeting
convened once in every calendar year in compliance with the Act,
shall be known as the Annual General Meeting. Any
General Meeting other than an Annual General Meeting, shall be
known as a Special General Meeting. |
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Maximum
Percentageindirect |
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nine and nine-tenths percent
(9.9%)when referring to a holder or owner of shares,
ownership of shares within the meaning of section 958(a)(2)
of the Code. |
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Member |
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a duly registered holder from time to time of the shares in the
capital of the Company. |
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month |
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a calendar month. |
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9.9% Limitation 9.5% U.S.
Member |
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the requirement and restriction that no Person
shall be permitted to Own or Control more than nine and
nine-tenthsa U.S. Person whose Controlled
Shares constitute nine and one half percent
(9.99.5%) or more of the
total combinedvoting power of all
classes of issued shares
entitled to vote at a General Meeting of the
Companys Members or of the total number of outstanding
shares of any class of stock, except as provided for in these
Bye-Laws or as permitted by the Board and provided that the 9.9%
Limitation shall not apply to PXRE Purpose Trust of
the Company and who generally would be required to recognize
income with respect to the Company under section 951(a)(1)
of the Code, if the Company were a controlled foreign
corporation as defined in section 957 of the Code and if
the ownership threshold under section 951(b) of the Code
were 9.5%. |
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Notice |
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written notice unless otherwise specifically stated and as
further defined in these Bye-Laws. |
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Office |
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the registered office of the Company for the time being. |
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Officer |
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any individual appointed by the Board pursuant to these
Bye-Laws or by another officer to hold an office of
the Company. |
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Own or Control or Owning or
Controling |
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with respect to the Companys shares, means
(i) shares that a Person owns within the meaning of
Section 958(a) of the Code or is considered as owning by
applying the rules of Section 958(b) of the Code,
(ii) shares that a Person owns by applying the rules of
Sections 544 or 554 of the Code or (ii) shares
directly, indirectly or beneficially owned by a Person within
the meaning of Section 13(d) of the Exchange Act (including
any shares owned by a group of Persons as so defined and
including any shares that would otherwise be excluded by
Section 13 (d) of the Exchange Act). |
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paid up |
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paid up or credited as paid up. |
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Person |
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any individual, general or limited partnership, corporation,
association, trust, estate, company (including a limited
liability company) or any other entity or organization,
including a government, a political subdivision or agency or
instrumentality thereof. |
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Preferred Shares |
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has the meaning assigned to it in Bye-Law 2. |
C-3
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Register |
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the principal register of Members and,
where applicable, any branch register of Members of the Company
to be kept pursuant to the provisions of the Act. |
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Registration Office |
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in respect of any class or series of share capital, such place
as the Board may from time to time determine to keep a branch
register of Members in respect of that class or series of share
capital and where (except in cases where the Board otherwise
directs) the transfers or other documents of title for such
class or series of share capital are to be delivered for
registration. |
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Seal |
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common seal or any one or more duplicate seals of the Company
(including a securities seal) for use in Bermuda or in any place
outside Bermuda. |
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Secretary |
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any Person appointed by the Board to perform any of the duties
of secretary of the Company and includes any assistant, deputy,
temporary or acting secretary. |
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Securities Act |
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the Securities Act of 1933, as amended, of the United States. |
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shares |
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the Common Shares or Preferred Shares of the Company, as the
case may be. |
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Subsidiary |
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any entity in which the Company owns, directly or indirectly,
shares representing at least fifty percent (50%) of the voting
power or fifty percent (50%) of the value of such entity. |
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Ten Percent ShareholderTentative
9.5% U.S. Member |
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a Person (other than the PXRE Purpose Trust) who
the Board determines Owns or Controls more than 9.9% of the
total combinedU.S. Person that, but for
adjustments or restrictions on exercise of the
voting power of all classes of shares
entitled to vote or of the total number of outstanding shares of
any class of stock shares pursuant to
Bye-Law 20, would be a 9.5% U.S.
Member. |
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treasury share |
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as defined in the Act. |
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year |
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a calendar year. |
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U.S. Person |
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(i) an individual who is a citizen or resident of
the United States, (ii) a corporation or partnership that
is, as to the United States, a domestic corporation or
partnership, (iii) an estate that is subject to United
States federal income tax on its income, regardless of its
source, (iv) a U.S. Trust; a
U.S. Trust is any trust (A) if and only if (i) a
court within the United States is able to exercise primary
supervision over the administration of the trust, and
(ii) one or more U.S. trustees have the authority to
control all substantial decisions of the trust or (B) that
has otherwise validly elected to be treated as a domestic trust
under applicable U.S. Treasury regulations; or (v) any
person that is treated as one of the foregoing for
U.S. federal income tax purposes. |
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(2)
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In these Bye-Laws, where not inconsistent with the context:
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(a)
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words denoting the singular include the plural and vice versa;
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(b)
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words denoting a gender include every gender;
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C-4
(c) words describing Persons include companies,
associations and bodies of Persons whether corporate or not;
(d) the word:
(i) may shall be construed as
permissive; and
(ii) shall or will shall be
construed as imperative;
(e) expressions referring to writing shall, unless the
contrary intention appears, be construed as including printing,
lithography, photography, facsimile, computer generated and
other modes of representing words or figures in a
visible form electronic records;
(f) references to any act, ordinance, statute or statutory
provision (whether in Bermuda or elsewhere)
shall be interpreted as relating to any statutory modification
or re-enactment thereof for the time being in force;
(g) unless otherwise provided herein words and expressions
defined in the Act shall bear the same meanings in these
Bye-Laws if not inconsistent with the context;
(h) a resolution shall be a special
resolutionSpecial Resolution
when it has been passed by the affirmative vote of Members
holding not less than sixty-six and two-thirds percent
(662/3%)
of the voting power of the then outstanding shares entitled to
vote, cast by such Members in person or, in the case of such
Members as are corporations, by their respective duly authorized
representative or, where proxies are allowed, by proxy, at a
General Meeting of which not less than twenty-one
(21) clear
daysClear Days
Notice, specifying (without prejudice to the power
contained in these Bye-Laws to amend the same) the intention to
propose the resolution as a special resolution, has been duly
given;
(i) a resolution shall be an ordinary
resolutionOrdinary Resolution when
it has been passed by a simple majority of votes cast
by the Members, in person, by a
representative or by proxy, at a General Meeting of which not
less than twenty-one (21) clear
daysClear Days Notice has
been duly given;
(j) a special resolutionSpecial
Resolution shall be effective for any purpose
for which an ordinary
resolutionOrdinary Resolution is
expressed to be required under any provision of these Bye-Laws
or the Act; and
(k) headings used in these Bye-Laws are for convenience
only and are not to be used or relied upon in the construction
of these
Bye-Laws
;
(l) A a reference to anything
being done by electronic means includes it being done by means
of any electronic or other communications equipment or
facilities and reference to any communication being delivered or
received, or being delivered or received at a particular place,
includes the transmission of an electronic record to a recipient
identified in such manner or by such means as the Board may from
time to time approve or prescribe, either generally or for a
particular purpose; and
(m) A a reference to a signature
or to anything being signed or executed include such forms of
electronic signature or other means of verifying the
authenticity of an electronic record as the Board may from time
to time approve or prescribe, either generally or for a
particular purpose.
(3) In these Bye-Laws, in calculating whether a resolution
has been passed by a particular majority or whether a particular
number of shares is represented at a General Meeting and,
generally, for all purposes, in calculating the total number of
votes cast or votes represented, as the case may be, the
provisions of paragraph (4) of
Bye-Law 20 hereof shall be taken into account in all
cases in computing the number of votes cast or votes
represented, as the case may be.
(4) Any right or power of the Company under
the Act or the Companys Memorandum of Association or these
Bye-Laws which is not expressly subject to approval by the
Members in a General Meeting shall be exercisable by the
Board.
C-5
SHARES AND
SHARE CAPITAL
2. (1) The authorized share capital of the Company is
$380,000,000 divided into the following classes of shares:
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(a)
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350,000,000 common shares, par value $1.00 per share
(Common Shares); and
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(b)
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30,000,000 preferred shares, par value $1.00 per share
(Preferred Shares).
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(2) Subject to the provisions of these Bye-Laws, any
shares of the Company held as treasury shares shall be at the
disposal of the Board, which may hold all or any of the shares,
dispose of or transfer all or any of the shares for cash or
other consideration, or cancel all or any of the
shares.
(2) Subject to paragraph (1) of
Bye-Law 13, no Person shall be permitted to Own or Control
shares in the Company to the extent that such Person or any
other Person will be considered to Own or Control Controlled
Shares, as the Board may determine, in excess of 9.9% of the
total combined voting power of all classes of voting shares or
of the total number of outstanding shares of any class of stock
of the Company, nor shall any Person be permitted to Own or
Control Controlled Shares if the result thereof would be to
render such Person or any other Person a Ten Percent
Shareholder, provided, however, that the foregoing
limitation shall not apply to the PXRE Purpose Trust. Nor may
any shares be issued, redeemed, repurchased or transferred if
the effect of such issuance, redemption, repurchase or transfer
would be to cause a violation of the prohibitions of this
Bye-Law. To the extent that, for any reason whatsoever and by
any method howsoever, a Person, whether an existing Member or
not of the Company, shall Own or Control Controlled Shares in
excess of the 9.9% Limitation, then the voting rights applicable
to such Controlled Shares shall be reduced in accordance with
paragraph (4) of Bye-Law 20.
COMMON
SHARES
3. (1) Subject to these Bye-Laws, at a General Meeting
of the Company every holder of Common Shares shall be entitled
to one vote for each share held by him on all matters submitted
to a vote of the Companys
Members.Members, but in all cases after giving
effect to any adjustments to or restrictions on exercise of
voting rights under Bye-Law 20.
(2) The Board may in its discretion, at any time, and from
time to time, issue or cause to be issued all or any part of the
authorized but unissued Common Shares of the Company for
consideration of such character and value as the Board shall in
its absolute discretion from time to time fix or determine.
(3) Notwithstanding the foregoing or any other
provision of these Bye-Laws, the Company may not issue any
shares or grant options or warrants in a manner that the Board
determines in its sole discretion may result in a non de minimis
adverse tax, legal or regulatory consequence to the Company, any
of its subsidiaries or any direct or indirect holder of shares
or its affiliates.
AUTHORITY
OF BOARD TO ISSUE AND DIVIDE
PREFERRED SHARES INTO DIFFERENT SERIES
4. (1) The Board may in its discretion at any time,
and from time to time, issue or cause to be issued all or any
part of the authorized but unissued Preferred Shares of the
Company for consideration of such character and value as the
Board shall in its absolute discretion from time to time fix or
determine.
(2) Notwithstanding the foregoing or any other
provision of these Bye-Laws, the Company may not issue any
shares or grant options or warrants in a manner that the Board
determines in its sole discretion may result in a non de minimis
adverse tax, legal or regulatory consequence to the Company, any
of its subsidiaries or any direct or indirect holder of shares
or its affiliates.
(23) Without
prejudice to the generality of paragraph (1) of this
Bye-Law, the Board is hereby further expressly authorized at any
time, and from time to time, to consolidate, divide or subdivide
any or all of the authorized but unissued Preferred Shares of
the Company into several series, and to set the par value of any
of the
C-6
unissued Preferred Shares, and in the resolution or resolutions
establishing a particular series, before issuance of any of the
shares thereof, to fix and determine the number of shares and
the designation of such series, so as to distinguish it from the
shares of all other series and classes, and to fix and determine
the voting rights, preferences, qualifications, privileges,
limitations, options, conversion rights, redemption features,
restrictions, and other special or relative rights of such
series. Each of such series may differ from every other series
previously authorized, as may be determined by the Board in any
or all respects, to the fullest extent now, or hereafter,
permitted by the laws of Bermuda including, but not limited to,
the variations between different series in the following
respects:
(a) the distinctive designation of such series and the
number of shares which shall constitute such series, which
number may be increased or decreased (but not below the number
of shares thereof then outstanding) from time to time by the
Board;
(b) the annual dividend or dividend rate for such series,
and the date or dates from which dividends shall commence to
accrue;
(c) the par value of the shares prior to issue,
provided, however, that the par value shall in no case be
set at less than $1.00 per share;
(d) the price or prices at which, and the terms and
conditions on which, if any, the shares of such series may be
redeemed or made redeemable;
(e) the purchase or sinking fund provisions, if any, for
the purchase or redemption of shares of such series;
(f) the preferential amount or amounts, if any, payable
upon shares of such series in the event of the liquidation,
dissolution, or winding up of the Company;
(g) the terms and conditions, if any, upon which shares of
such series may be converted and the class or series of shares
of the Company or other securities into which such shares may be
converted;
(h) the relative seniority, priority or junior rank of such
series as to dividends or assets in relation to any other
classes or series of shares of the Company then or thereafter to
be issued;
(i) such other terms, preferences, qualifications,
privileges, limitations, options, restrictions, and other
special rights, if any, of shares of such series as the Board
may, at the time of such resolution or resolutions, lawfully fix
or determine;
(j) cancel shares which, at the date of the passing of the
resolution in that behalf, have not been taken or agreed to be
taken by any Person; and
(k) where any difficulty arises in regard to any
consolidation, division or
sub-division
under this Bye-Law, the Board may settle the same as it thinks
expedient and, in particular, may issue certificates in respect
of fractions of shares or arrange for the sale of the shares
representing fractions and the distribution of the net proceeds
of sale (after deduction of the expenses of such sale) in due
proportion among the Members who would have been entitled to the
fractions, and for this purpose the Board may authorize a Person
to transfer the shares representing fractions to the purchaser
thereof, or resolve that such net proceeds be paid to the
Company for the Companys benefit; and such purchases shall
not be bound to see to the application of the purchase money nor
shall such Persons title to the shares be affected by any
irregularity or invalidity in the proceedings relating to the
sale.
(4) Notwithstanding the foregoing or any other
provision of these Bye-Laws, the Company may not consolidate,
divide or subdivide Preferred Shares in a manner that the Board
determines in its sole discretion may result in a non- de
minimis adverse tax, legal or regulatory consequence to the
Company, any of its subsidiaries or any direct or indirect
holder of shares or its affiliates.
C-7
EMPLOYEE
SHARE PURCHASE
5. (1) The Board may from time to time:
(a) establish a plan or plans (including individual
agreements) for employees, directors, officers, consultants
and/or
advisors of the Company, its subsidiaries or affiliates whereby
the Company provides securities (whether restricted or
otherwise), or options to purchase securities, or money for the
purchase of, or subscription for, such securities
and/or
options, whether directly or indirectly through a trust
established for the benefit of such employees, directors,
officers, consultants
and/or
advisors;
(b) provide for the making by the Company of loans to
Persons, other than Directors, bona fide in the employment of
the Company or any of its Subsidiaries, with a view to enabling
those Persons to purchase or subscribe for fully-paid shares in
the Company, to be held by themselves by way of beneficial
ownership; and
(c) provide for the giving by the Company, directly or
indirectly, of financial assistance, whether by means of a loan,
guarantee, the provision of security or otherwise, to its bona
fide employees, or the bona fide employees of any of its
Subsidiaries, whether or not they shall also be Directors, in
order that they may buy shares in the Company and the Board may,
in its discretion, from time to time require, as one of the
terms of issue of any such shares or by contract, that any such
employee shall be required or allowed to sell such shares to the
Company, upon such terms and at such price as the Board may by
such terms of issue or contract establish, when such employee
ceases to be employed by the Company or any of its Subsidiaries.
COMPANY
SHARE REPURCHASEPURCHASE
6. (1) Subject to the Act, the Companys
Memorandum of Association and these Bye-Laws and, where
applicable, the rules of any Designated Stock Exchange
and/or any
competent regulatory authority, the Company may purchase or
otherwise acquire its own shares upon such terms and conditions
as the Board shall determine, provided, however, that such
purchase or acquisition may not be made if the Board determines
in its sole discretion that it may result in a non-de minimis
adverse tax, legal or regulatory consequence to the Company, any
of its subsidiaries or any direct or indirect holder of shares
or its affiliates.
(2) The Board may, at its discretion and without the
sanction of a resolution of the Members, authorise the
acquisition by the Company of its own shares, of any class, at
any price (whether at par or above or below par), and any shares
to be so purchased may be selected in any manner whatsoever, to
be held as treasury shares, upon such terms as the Board may in
its discretion determine, provided always that such acquisition
is effected in accordance with the provisions of the Act. The
whole or any part of the amount payable on any such acquisition
may be paid or satisfied otherwise than in cash, to the extent
permitted by the Act.
ALTERATION
OF CAPITAL
7. (1) The Company may from time to time by
ordinary resolutionOrdinary Resolution
in accordance with the Act:
(a) increase its capital by such sum, to be divided
into shares of such amounts, as the resolution shall
prescribe;
(b) consolidate and divide all or any of its
capital into shares of larger amount than its existing
shares;
(c) divide its shares into several classes, and
without prejudice to any special rights previously conferred on
the holders of existing shares, attach thereto respectively any
preferential, deferred, qualified or special rights, privileges,
conditions or such restrictions, which, in the absence of any
such determination by the Company in a General Meeting, as the
Directors may determine, provided always that where the Company
issues shares which do not carry voting rights, the words
non-voting shall appear in the designation of such
shares and where the equity capital includes shares with
different voting rights, the designation of each class of
shares, other than those with the most favorable voting rights,
must include the words restricted voting or
limited voting;
C-8
(d) sub-divide
its shares, or any of them, into shares of smaller amount than
is fixed by the Memorandum of Association (subject,
nevertheless, to the Act), and may by such resolution determine
that, as between the holders of the shares resulting from such
sub-division,
one or more of the shares may have any such preferred rights or
be subject to any such restrictions as compared with the other
or others as the Company has power to attach to unissued or new
shares;
(e) change the currency denomination of its share
capital; and
(f) cancel any shares which, at the date of the
passing of the resolution, have not been taken, or agreed to be
taken, by any Person, and diminish the amount of its capital by
the amount of the shares so canceled;
PROVIDED THAT, none of the foregoing actions shall be
taken if it were to result in any Person (other than the PXRE
Purpose Trust) violating the 9.9% Limitation unless the Board
otherwise determines.
Notwithstanding the foregoing or any other provision of
these Bye-Laws, the Company shall not alter the rights attaching
to any class of shares if the Board, after taking into account
any adjustments to or restrictions on exercise of voting rights
under Bye-Law 20, determines in its sole discretion that
any non de minimis adverse tax, regulatory or legal consequences
to the Company, any subsidiary of the Company, or any direct or
indirect holders of shares or its affiliates may result from
such variation.
(2) The Board may settle as it considers expedient any
difficulty which arises in relation to any consolidation,
division or subdivision under this Bye-Law and in particular but
without prejudice to the generality of the foregoing may issue
certificates in respect of fractions of shares or arrange for
the sale of the shares representing fractions and the
distribution of the net proceeds of sale (after deduction of the
expenses of such sale) in due proportion among the Members who
would have been entitled to the fractions, and for this purpose
the Board may authorize a Person to transfer the shares
representing fractions to the purchaser thereof or resolve that
such net proceeds be paid to the Company for the Companys
benefit. Such purchaser will not be bound to see to the
application of the purchase money nor shall such Persons
title to the shares be affected by any irregularity or
invalidity in the proceedings relating to the sale.
(3) The Company may from time to time by
ordinary resolutionOrdinary
Resolution in accordance with the Act reduce its
authorized or issued share capital or any share premium account
or other undistributable reserve in any manner permitted by
applicable law.
(4) Except so far as otherwise provided by the conditions
of issue, or by these Bye-Laws, any capital raised by the
creation of new shares shall be treated as if it formed part of
the original capital of the Company, and such shares shall be
subject to the provisions contained in these Bye-Laws with
reference to the payment of calls and installments, transfer and
transmission, forfeiture, lien, cancellation, surrender, voting
and otherwise.
(5) Subject to the Act and the 9.9%
LimitationBye-Laws 20 and 7(2), all
or any of the special rights attached to the shares or any class
of shares may, unless otherwise provided by the terms of issue
of the shares of that class, from time to time (whether or not
the Company is being wound up) be varied, modified or abrogated
either with the consent in writing of the holders of not less
than sixty-six and two-thirds percent
(662/3%)
of the issued shares of that class or with the sanction of a
special resolution passed at a separate General Meeting of the
holders of the shares of that class. To every such separate
General Meeting all the provisions of these Bye-Laws relating to
General Meetings of the Company shall, as the case may be,
apply, but so that:
(a) the necessary quorum shall be two or more Persons
holding or representing by proxy not less than a majority of the
issued shares of that class;
(b) subject to the 9.9% Limitation and the
provisions of
paragraph (4) of Bye-Law 20, every
holder of shares of the class shall be entitled on a vote to one
vote for every such share held by him; and
(c) any holder of shares of the class present in person or
by proxy may demand a vote.
(6) The special rights conferred upon the holders of any
shares or class of shares shall not, unless otherwise expressly
provided in the rights attaching to or the terms of issue of
such shares, be deemed to be varied, modified or abrogated by
the creation or issue of further shares ranking pari passu
therewith.
C-9
WARRANTS
8. (1) Subject to the 9.9% Limitation,
theThe Board may issue warrants conferring
the right upon the holders thereof to subscribe for any class of
shares or securities in the capital of the Company on such terms
as the Board may from time to time determine.
Notwithstanding the foregoing or any other provision of
these Bye-Laws, the Company may not issue any warrants in a
manner that the Board determines in its sole discretion may
result in a non de minimis adverse tax, legal or regulatory
consequence to the Company, any of its subsidiaries or any
direct or indirect holder of shares or its affiliates.
(2) The Company may in connection with the issue of any
shares exercise all powers of paying commission and brokerage
conferred or permitted by the Act. Subject to the Act, the
commission may be satisfied by the payment of cash or by the
allotment of fully or partly paid shares or partly in one and
partly in the other.
(3) Except as provided in these Bye-Laws,
neither the Company nor any of its Subsidiaries shall directly
or indirectly give financial assistance to a Person who is
acquiring or proposing to acquire shares in the Company for the
purpose of that acquisition whether before or at the same time
as the acquisition takes place or afterwards, provided,
however, that nothing in this Bye-Law shall prohibit
transactions permitted by the Act.
(3) INTENTIONALLY LEFT BLANK
(4) Except as required by applicable law, no Person shall
be recognized by the Company as holding any share in the capital
of the Company upon any trust and the Company shall not be bound
by or required in any way to recognize (even when having Notice
thereof) any equitable, contingent, future or partial interest
in any share or any fractional part of a share or (except only
as otherwise provided by these Bye-Laws or by applicable law)
any other rights in respect of any share except an absolute
right to the entirety thereof in the registered holder.
(5) Subject to the Act and these Bye-Laws, the Board may at
any time after the allotment of shares in the capital of the
Company but before any Person has been entered in the Register
as the holder, recognize a renunciation thereof by such
recipient in favor of some other Person and may accord to any
such recipient of a share a right to effect such renunciation
upon and subject to such terms and conditions as the Board
determines to impose.
SHARE
CERTIFICATES
9. (1) Every share certificate shall be
issued under the Seal or a facsimile thereof and shall
specify the number and class and distinguishing
numbers of the shares to which it relates, and the amount paid
up thereon and may otherwise be in such form as the Directors
may from time to time determine. be
issued under the Seal or signed by a Director, the Secretary or
any person authorised by the Board for that purpose. No
certificate shall be issued representing shares of more than one
class. The Board may by resolution determine, either generally
or in any particular case or cases, that any signatures on any
such certificates (or certificates in respect of other
securities) need not be autographic but may be affixed to such
certificates by some mechanical means or may be printed thereon
or that such certificates need not be signed by any Person.
If any person holding office in the Company who has
signed, or whose facsimile signature has been used on, any
certificate ceases for any reason to hold office, such
certificate may nevertheless be issued as though that person had
not ceased to hold such office. Every share certificate
shall recite that the voting rights relating to such shares are
subject to the limitations contained in these Bye-Laws.
(2) In the case of a share held jointly by several Persons,
the Company shall not be bound to issue more than one
certificate therefor and delivery of a certificate to one of
several joint holders shall be sufficient delivery to all such
holders.
(3) Where a share stands in the names of two or more
Persons, the Person first named in the Register shall as regards
service of Notices and, subject to the provisions of these
Bye-Laws, all or any other matters connected with the Company,
except the transfer of the shares, be deemed the sole holder
thereof.
(4) Every Person whose name is entered, upon an allotment
of shares, as a Member in the Register shall be entitled,
without payment, to receive one certificate for all such shares
of any one class, or several certificates each
C-10
for one or more of such shares of such class upon payment, for
every certificate after the first, of such reasonable
out-of-pocket
expenses as the Board from time to time determines.
(5) Subject to paragraph (2) hereof, share
certificates shall be issued, in the case of an issue of shares
within twenty-one (21) days (or such longer period as the
terms of the issue provide) after allotment, or in the case of a
transfer of fully or partly paid shares within twenty-one
(21) days after delivery of a transfer to the Company, not
being a transfer which the Company is for the time being
entitled to refuse to register and does not register.
(6) Notwithstanding any provision in these Bye-Laws to the
contrary, a Person may by Notice to the Company elect that no
certificate be issued in respect of shares registered or to be
registered in his name and on receipt of such election the
Company shall not be required to issue a certificate for such
shares or may cancel an existing certificate without issuing
another certificate in lieu thereof.
(7) Upon every transfer of shares, the certificate held by
the transferor shall be given up to be canceled, and shall
forthwith be canceled accordingly, and a new certificate shall
be issued to the transferee in respect of the shares transferred
to him. If any of the shares included in the certificate so
given up shall be retained by the transferor a new certificate
for the balance shall be issued to him.
(8) If a share certificate shall be damaged or defaced or
alleged to have been lost, stolen or destroyed, a new
certificate representing the same shares may be issued to the
relevant Member upon request and on payment of such fee as the
Designated Stock Exchange or the Board may determine to be
payable, and, subject to compliance with such terms (if any) as
to evidence and indemnity and to payment of the costs and
reasonable
out-of-pocket
expenses of the Company in investigating such evidence and
preparing such indemnity as the Board shall determine and, in
case of damage or defacement, on delivery of the old certificate
to the Company, provided always that where share warrants have
been issued, no new share warrant shall be issued to replace one
that has been lost, stolen or destroyed unless the Directors are
satisfied beyond reasonable doubt that the original has been
lost, stolen or destroyed.
REGISTER
OF MEMBERS
10. (1) The Company shall keep in one or more books a
Register of its Members and shall enter therein
the following particulars:
(a) the name and address of each Member, the number and,
where appropriate, the class or series of shares held by such
Member and the amount paid or agreed to be considered as paid on
such shares; and
(b) the date on which each Person was entered in the
Register; and
(c) the date on which any Person ceased to be a
Member for one year after such Person so ceased.
(2) Subject to the Act, the Company may keep an overseas or
local or other branch register of Members resident in any place,
and the Board may make and vary such regulations as it
determines in respect of the keeping of any such register and
maintaining a Registration Office in connection therewith.
INSPECTION
OF REGISTER OF MEMBERS
11. The Register and branch register of Members, as the
case may be, shall be open to inspection on every business day
by Membersany Person without
charge or by any other Person, upon the maximum payment
permitted under the Act, subject to such reasonable restrictions
as the Board may impose, so that not less then two
(2) hours in each business day be allowed for inspections,
at the Office or such other place in Bermuda at which the
Register is kept in accordance with the Act or, if appropriate,
upon the maximum payment permitted under the Act at the
Registration Office. The Register, including any overseas or
local or other branch register of Members, may, after Notice has
been given by advertisement in an appointed newspaper and, where
applicable, any other newspapers in accordance with the
requirements of any Designated Stock Exchange to that effect, be
closed at such times or for such periods not exceeding in the
aggregate thirty (30) days in each year as the Board may
determine and either generally or in respect of any class or
series of shares.
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RECORD
DATES
12. Notwithstanding any provision of these Bye-Laws to the
contrary, the Company or the Directors may fix any date as the
record date for:
(a) determining the Members entitled to receive any
dividend, distribution, allotment or issue; and
(b) determining the Members entitled to receive Notice of
and to vote at any General Meeting of the Company.
TRANSFER
OF SHARES
13. (1) No transfer may be made if the
effect of such transfer would result in the transferee or any
other Person Owning or Controlling in excess of nine and nine
tenths percent (9.9%) of all of the issued and outstanding
shares of the Company or Owning or Controlling shares in excess
of the 9.9% Limitation and the Board may, in its absolute
discretion, refuse to register such transfer, provided, however,
that the foregoing limitation shall not apply to the PXRE
Purpose Trust. Notwithstanding the foregoing, the Board may
waive the restrictions set forth in this Bye-Law, in its
discretion and on a case by case basis. One of the purposes of
the 9.9% Limitation is to prevent the Company from being
characterized as a controlled foreign corporation, a foreign
personal holding company or a personal holding company within
the meaning of the Code. Nevertheless, the Board will not be
liable to the Company, its Members or any other Person
whatsoever for any errors in judgment made by it in granting any
waiver or waivers to the foregoing restrictions in any case so
long as it has acted in good faith. (2) Subject to these
Bye-Laws (1) Subject to the Act and to such of the
restrictions contained in these Bye-Laws, as may be
applicable, any Member may transfer all or
any of his shares by an instrument of transfer in the usual or
common form or in any other form approved by the Board.
(32) The instrument of
transfer shall be executed by or on behalf of the transferor.
The Board may also resolve, either generally or in any
particular case, upon request by the transferor, to accept
mechanically executed transfers. The transferor shall be deemed
to remain the holder of the share until the name of the
transferee is entered in the Register in respect thereof.
Nothing in these Bye-Laws shall preclude the Board from
recognizing a renunciation of the allotment or provisional
allotment of any share by the allottee in favor of some other
Person.
(43) The Board may, in its absolute
discretion, and without giving any reason therefor, refuse to
register a transfer of any share issued under any share plan for
employees upon which a restriction on transfer imposed thereby
still subsists, and it may also refuse to register a transfer of
any share to more than four (4) joint holders. The
Board may decline to approve or register or permit the
registration of any transfer of shares if it appears to the
Board that any non-de minimis adverse tax, regulatory or legal
consequences to the Company, any subsidiary of the Company, or
any direct or indirect holder of shares or its Affiliates would
result from such transfer. Nothing in these Bye-Laws
shall impair the settlement of transactions entered into through
the facilities of a Designated Stock Exchange except as provided
by such exchange.
(54) No transfer shall be
made to an infant or to a Person of unsound mind or under other
legal disability, known as such by the Company.
(6) The Board, in so far as permitted by
applicable law may, in its absolute discretion, at any time and
from time to time transfer any share upon the Register to any
branch register or any share on any branch register to the
Register or any other branch register. In the event of any such
transfer, the shareholder requesting such transfer shall bear
the cost of effecting the transfer unless the Board otherwise
determines.
(5) INTENTIONALLY LEFT BLANK
(6) INTENTIONALLY LEFT BLANK
(7) Unless the Board otherwise agrees (which
agreement may be on such terms and subject to such conditions as
the Board in its absolute discretion may from time to time
determine, and which agreement it shall, without giving any
reason therefor, be entitled in its absolute discretion to give
or withhold), no shares upon the Register shall be transferred
to any branch register nor shall shares on any branch register
be transferred to the Register or any other branch register and
all transfers and other documents of title shall be delivered
for
C-12
registration, and registered, in the case of any
shares on a branch register, at the relevant Registration
Office, and, in the case of any shares on the Register, at the
Office or such other place in Bermuda at which the Register is
kept in accordance with the Act.
(87) Without limiting the
generality of the preceding paragraph, the Board may decline to
recognize any instrument of transfer unless:
(a) the instrument of transfer is in respect of only one
class of share;
(b) the instrument of transfer is delivered to the Office
or such other place in Bermuda at which the Register is kept in
accordance with the Act or the Registration Office (as the case
may be) accompanied by the relevant share certificate(s) and
such other evidence as the Board may reasonably require to show
the right of the transferor to make the transfer (and, if the
instrument of transfer is executed by some other Person on his
behalf, the authority of that Person so to do); and
(c) if applicable, it shall be satisfied to the Board that
the proposed transfer complies with the federal and state
securities laws of the United States.
(98) If the Board refuses
to register a transfer of any share in accordance with these
Bye-Laws, it shall, within one hundred twenty (120) days
after the date on which the transfer was delivered to the
Company, send to each of the transferor and transferee Notice of
the refusal.
(109) The registration of
transfers of shares or of any class of shares may, after Notice
has been given by advertisement in an appointed newspaper and,
where applicable, any other newspapers in accordance with the
requirements of any Designated Stock Exchange to that effect, be
suspended at such times and for such periods (not exceeding
thirty (30) days in any year) as the Board may determine.
TRANSMISSION
OF SHARES
14. (1) If a Member dies, the survivor or survivors
where the deceased was a joint holder, and his legal
representatives where he was a sole or only surviving holder,
will be the only Persons recognized by the Company as having any
title to his interest in the shares; but nothing in this Bye-Law
will release the estate of a deceased Member (whether sole or
joint) from any liability in respect of any share which had been
solely or jointly held by him.
(2) Subject to the Act, any Person becoming entitled to a
share in consequence of the death or bankruptcy or
winding-up
of a Member may, upon such evidence as to his title being
produced as may be required by the Board, elect either to become
the holder of the share or to have some Person nominated by him
registered as the transferee thereof. If he elects to become the
holder he shall notify the Company in writing either at the
Registration Office or Office, as the case may be, to that
effect. If he elects to have another Person registered he shall
execute a transfer of the share in favor of that Person. The
provisions of these Bye-Laws relating to the transfer and
registration of transfers of shares shall apply to such Notice
or transfer as aforesaid as if the death or bankruptcy of the
Member had not occurred and the Notice or transfer were a
transfer signed by such Member.
Accordingly, no Person shall be registered as the
holder of a share if the result would be that such Person or any
other Person would Own or Control shares in excess of the 9.9%
Limitation.
The Board may decline to approve or register or permit the
registration of shares if it appears to the Board that any
non-de minimis adverse tax, regulatory or legal consequences to
the Company, any subsidiary of the Company, or any direct or
Indirect holder of shares or its Affiliates would result from
such transfer.
(3) A Person becoming entitled to a share by reason of the
death or bankruptcy or
winding-up
of a Member shall be entitled to the same dividends and other
advantages to which he would be entitled if he were the
registered holder of the share. However, the Board may determine
to withhold the payment of any dividend payable or other
advantages in respect of such share until such Person shall
become the registered holder of the share or shall have
effectually transferred such share, but, subject to the
requirements of these Bye-Laws being met, such a Person may vote
at meetings.
C-13
UNTRACEABLE
MEMBERS
15. (1) Without prejudice to the rights of the Company
under paragraph (2) of this Bye-Law, the Company may
cease sending a check for dividend entitlements or dividend
warrants by mail if such check or warrants have been left
uncashed on two consecutive occasions. However, the Company may
exercise the power to cease sending a check for dividend
entitlements or dividend warrant after the first occasion on
which such a check or warrant is returned undelivered.
(2) The Company shall have the power to sell, in such
manner as the Board shall determine, any shares of a Member who
is untraceable, but no such sale shall be made unless:
(a) all checks or warrants in respect of dividends of the
shares in question, being not less than three in total number,
for any sum payable in cash to the holder of such shares in
respect of them sent during the relevant period in the manner
authorized by these Bye-Laws have remained uncashed;
(b) so far as it is aware at the end of the relevant
period, the Company has not at any time during the relevant
period received any indication of the existence of the Member
who is the holder of such shares or of a Person entitled to such
shares by death, bankruptcy or operation of law; and
(c) the Company, if so required by the rules governing the
listing of shares on the Designated Stock Exchange, has given
Notice to, and caused advertisement in newspapers in accordance
with the requirements of, the Designated Stock Exchange to be
made of its intention to sell such shares in the manner required
by the Designated Stock Exchange, and a period of ninety
(90) days or such shorter period as may be allowed by the
Designated Stock Exchange has elapsed since the date of such
advertisement.
For the purpose of the foregoing, the relevant
period means the period commencing twelve years before the
date of publication of the advertisement referred to in
sub-paragraph (2)(c)
of this Bye-Law and ending at the expiration of the period
referred to in that paragraph.
(3) To give effect to any such sale the Board may authorize
a Person to transfer the said shares and an instrument of
transfer signed or otherwise executed by or on behalf of such
Person shall be as effective as if it had been executed by the
registered holder or the Person entitled by transmission to such
shares, and the purchaser shall not be bound to see to the
application of the purchase money nor shall his title to the
shares be affected by any irregularity or invalidity in the
proceedings relating to the sale. The net proceeds of the sale
will belong to the Company and upon receipt by the Company of
such net proceeds it shall become indebted to the former Member
for an amount equal to such net proceeds. No trust shall be
created in respect of such debt and no interest shall be payable
in respect of it and the Company shall not be required to
account for any money earned from the net proceeds which may be
employed in the business of the Company or as the Board shall
determine. Any sale under this Bye-Law shall be valid and
effective notwithstanding that the Member holding the shares
sold is dead, bankrupt or otherwise under any legal disability
or incapacity.
GENERAL
MEETINGS OF THE MEMBERS
16. (1) The Board shall convene and the Company shall
hold Annual General Meetings of the Members in accordance with
the requirements of the Act and these Bye-Laws. The Board may,
whenever it shall determine, and shall, when required by the Act
or these Bye-Laws, convene a General Meeting, other than an
Annual General Meeting, which shall be called a Special General
Meeting. Except with the unanimous approval of the Board, all
Annual or Special General Meetings of the Company shall be held
in Bermuda, but under no circumstance shall any General Meeting
be held in the United States.
(2) The Board may determine to call Special General
Meetings, and Members holding at the date of delivery of the
written Notice not less than one-tenth (1/10) of the paid up
capital of the Company carrying the right of voting at General
Meetings of the Company shall at all times have the right, by
written Notice to the Board or the Secretary of the Company, to
require a Special General Meeting to be called by the Board for
the transaction of any business specified in such Notice; and
such meeting shall be held within sixty (60) days after the
deposit of such Notice. If within twenty-one (21) days of
such delivery, the Board fails to proceed to convene such
meeting such Members may do so in accordance with the provisions
of the Act.
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NOTICE OF GENERAL MEETINGS
17. (1) An Annual General Meeting and any Special
General Meeting of the Members shall be called by not less than
twenty-one (21) clear
daysClear Days Notice.
(2) Notice of every General Meeting shall be given in any
manner permitted by these Bye-Laws to all Members other than
those who, under the provisions of these Bye-Laws or the terms
of issue of the shares they hold, are not entitled to receive
such Notice from the Company.
(3) Notwithstanding that a General Meeting of the Company
is called by shorter Notice than that specified in this Bye-Law,
it shall be deemed to have been duly called if it is so agreed:
(a) in the case of a meeting called as an Annual General
Meeting, by all the Members entitled to attend and vote thereat;
(b) in the case of any other General Meeting, by a majority
in number of the Members having the right to attend and vote at
the meeting, being a majority together holding not less than
ninety-five percent (95%) in nominal value of the shares giving
that right.
(4) At any Annual or Special General Meeting of the
Members, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought
before an Annual or Special General Meeting, business must be
specified in the Notice of meeting (or any supplement thereto)
given by or at the direction of the Board, otherwise properly
brought before the meeting by or at the direction of the Board,
or otherwise properly brought before the meeting by a Member. In
addition to any other applicable requirements, for business to
be properly brought before an Annual or Special General Meeting
by a Member, the Member must have given timely Notice thereof in
writing to the Secretary of the Company. To be timely, a
Members Notice must be delivered to or mailed and received
at the Registration Office of the Company, not less than sixty
(60) days prior to such meeting. A Members Notice to
the Secretary shall set forth as to each matter the Member
proposes to bring before the meeting and any material interest
of the Member in such business (i) a brief description of
the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting,
(ii) the name and record address of the Member proposing
such business, (iii) a representation that the Member is a
holder of record of shares of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the
meeting to present such proposal or nomination, (iv) the
class and number of shares of the Company which are beneficially
owned by the Member, and (v) any material interest of the
Member in such business; provided, however, that Members
may only give Notice to the Secretary of matters to be brought
before an Annual or Special General Meeting for the purposes of
this Bye-Law that are matters that are suitable and appropriate
for submission to General Meetings of the Members of a
publicly-quoted company as determined by the Board.
(5) Notwithstanding anything in the Bye-Laws to the
contrary, no business shall be conducted at an Annual or Special
General Meeting except in accordance with the procedures set
forth in this Bye-Law; provided, however, that nothing in
this Bye-Law shall be deemed to preclude discussion by any
Member of any business properly brought before the Annual or
Special General Meeting in accordance with the procedures herein
detailed.
(6) The Chairman of an Annual or Special General Meeting
shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the
meeting in accordance with the provisions of this Bye-Law, and
if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting
shall not be transacted.
(7) Any nomination or nominations of Persons for election
to the Board of the Company made in accordance with the
provisions of these Bye-Laws shall be deemed for the purposes of
this Bye-Law to constitute business properly brought before an
Annual or Special General Meeting, as the case may be.
(8) The accidental omission to give Notice of a meeting or
(in cases where instruments of proxy are sent out with the
Notice) to send such instrument of proxy to, or the non-receipt
of such Notice or such instrument of proxy by, any Person
entitled to receive such Notice shall not invalidate any
resolution passed or the proceedings at that meeting.
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PROCEEDINGS
AT GENERAL MEETINGS
18. (1) No business shall be transacted at any General
Meeting unless it shall have been properly brought before the
Annual or Special General Meeting in accordance with these
Bye-Laws and a quorum is present when the meeting proceeds to
business, but the absence of a quorum shall not preclude the
appointment, choice or election of a Chairman which shall not be
treated as part of the business of the meeting. Except as
provided to the contrary in these Bye-Laws, Members representing
a majority of the outstanding shares carrying the right to vote
in the Company, represented in person or by proxy, shall
constitute a quorum for all purposes. In calculating the amount
of voting shares represented in person or by proxy to determine
whether or not a quorum is present for purposes of this Bye-Law,
the inspectors appointed in accordance with Bye-Law 19
hereof, shall calculate the number of votes represented in
person or by proxy in accordance with the provisions of
paragraph (4) of
Bye-Law 20 hereof.
(2) If within five (5) minutes (or such longer time as
the Chairman of the meeting may determine to wait) after the
time appointed for the meeting, a quorum is not present, the
meeting, if convened on the requisition of Members, shall be
dissolved. In any other case, it shall stand adjourned to such
other day and such other time and place as the Chairman of the
meeting may determine and at such adjourned meeting two Members
present in person (whatever the number of shares held by them)
shall be a quorum. The Company shall give not less than seven
(7) days Notice of any meeting adjourned through want
of a quorum and such Notice shall state that two Members present
in person (whatever the number of shares held by them) shall be
a quorum.
(3) Each Director shall be entitled to attend and speak at
any General Meeting of the Company.
(4) The Chairman of the Board shall preside as Chairman at
every General Meeting. In his absence, the following shall
preside in the order stated: the Deputy Chairman, any other
Director appointed by the Board, the President, any Executive
Vice President or any other Officer of the Company. If none of
the foregoing is present within five (5) minutes after the
time appointed for holding the meeting, or if none of them is
willing to act as Chairman, the Directors present shall choose
one of their number to act or if one Director only is present he
shall preside as Chairman if willing to act. If no Director is
present or if each of the Directors present declines to take the
chair, the Persons present and entitled to vote shall elect one
of their number to be Chairman.
(5) The Chairman may, with the consent of any meeting at
which a quorum is present (and shall if so directed by the
meeting), adjourn the meeting from time to time and from place
to place but no business shall be transacted at any adjourned
meeting except business which might lawfully have been
transacted at the meeting from which the adjournment took place.
When a meeting is adjourned for three (3) months or more,
Notice of the adjourned meeting shall be given as in the case of
an original meeting.
(6) Except as provided to the contrary in these Bye-Laws,
it shall not be necessary to give any Notice of an adjournment
or of the business to be transacted at an adjourned meeting.
INSPECTORS
19. The Board may, in advance of any meeting of Members,
appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed
or if any of them shall fail to appear or act, the Chairman of
the meeting may and on the request of any Member entitled to
vote thereat shall, appoint inspectors. Each inspector, before
entering upon the discharge of his duties, shall take and sign
an oath faithfully to exercise the duties of inspector at such
meeting with strict impartiality and according to the best of
his ability. The inspectors shall determine the number of shares
outstanding and the voting power of each, the number of shares
represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate
all votes, ballots or consents, determine the result, and do
such acts as are proper to conduct the election or vote with
fairness to all Members. On the request of the Chairman of the
meeting or any Member entitled to vote thereat, the inspectors
shall make a report in writing of any challenge, request or
matter determined by them and shall execute a certificate of any
fact found by them. No Director or candidate for the office of
Director shall act as inspector. Inspectors need not be Members.
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VOTING AT
GENERAL MEETINGS
20. (1) Subject to
thesethe provisions of
Bye-LawsLaw 20
below, and
subject to any special
rights or other
and restrictions as to voting
for the time being attached to any
shares by or in accordance with these Bye-Laws or
the Act, at any General Meeting on a show of hands every Member
present in person or, in the case of a Member being a
corporation, by a duly authorized representative, or by proxy,
shall have one vote and on a vote every Member present in person
or by proxyclass or classes or series of shares,
every Member shall have one vote
forevery fully paid shareeach share
carrying the right to vote on the matter in question
of which he is the holder. Notwithstanding
any other provisions of these Bye-Laws, all determinations in
these Bye-Laws that are made by or subject to a vote or approval
of Members shall be based upon the voting power of such
Members shares as determined pursuant to Bye-Law
20.
(2) Adjustment of Voting Power
(a) The voting power of all shares is hereby
adjusted (and shall be automatically adjusted in the future) to
the extent necessary so that there is no 9.5% U.S. Member.
The Board shall implement the foregoing in the manner provided
herein, provided however, that the foregoing provision and the
remainder of this Bye-Law 20 (2) shall not apply in the
event that one Member owns greater than 75% of the voting power
of the issued shares of the Company determined without applying
the voting power adjustments or eliminations under Bye-Law
20.
(b) The Board shall from time to time, including
prior to any time at which a vote of Members is taken, take all
reasonable steps necessary to ascertain, including those
specified in Bye-Law 20 (6), through communications with Members
or otherwise, whether there exists, or will exist at the time
any vote of Members is taken, a Tentative 9.5%
U.S. Member.
(c) In the event that a Tentative 9.5%
U.S. Member exists, the aggregate votes conferred by shares
held by a Member and treated as Controlled Shares of that
Tentative 9.5% U.S. Member shall be reduced to the extent
necessary such that the Controlled Shares of the Tentative 9.5%
U.S. Member will constitute less than 9.5% of the voting
power of all issued and outstanding shares. In applying the
previous sentence where shares held by more than one Member are
treated as Controlled Shares of such Tentative 9.5%
U.S. Member, the reduction in votes shall apply to such
Members in descending order according to their respective
Attribution Percentages, provided that, in the event of a tie,
the reduction shall apply pro rata to such Members. The votes of
Members owning no shares treated as Controlled Shares of any
Tentative 9.5% U.S. Member shall, in the aggregate, be
increased by the same number of votes subject to reduction as
described above provided however that no shares shall be
conferred votes to the extent that doing so will cause any
person to be treated as a 9.5% U.S. Member. Such increase
shall be apportioned to all such Members in proportion to their
voting power at that time, provided that such increase shall be
limited to the extent necessary to avoid causing any person to
be a 9.5% U.S. Member. The adjustments of voting power
described in this Bye-Law shall apply repeatedly until there is
no 9.5% U.S. Member. The Board of Directors may deviate
from any of the principles described in this Bye-Law and
determine that shares held by a Member shall carry different
voting rights as it determines appropriate (1) to avoid the
existence of any 9.5% U.S. Member or (2) to avoid
adverse tax, legal or regulatory consequences to the Company,
any subsidiary of the Company, or any direct or indirect holder
of shares or its affiliates. For the avoidance of doubt, in
applying the provisions of Bye-Law 20, a share may carry a
fraction of a vote.
(3) Other Adjustments of Voting Power
In addition to the provisions of Bye-Law 20 (2), any
shares shall not carry any right to vote to the extent that the
Board of Directors determines that it is necessary that such
shares should not carry the right to vote in order to avoid
adverse tax, legal or regulatory consequences to the Company,
any subsidiary of the Company, or any other direct or indirect
holder of shares or its affiliates, provided that no adjustment
pursuant to this sentence shall cause any person to become a
9.5% U.S. Member.
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(4) Notice
Prior to the meeting on which Members shall vote on any
matter (or prior to any vote in the case of notification to
Members specified in item (3) of this Bye-Law), the Board
may, in its sole discretion, (i) retain the services of an
internationally recognized accounting firm or organization with
comparable professional capabilities in order to assist the
Company in applying the principles of Bye-Laws 20 (2) and
20 (3) and (ii) obtain from such firm or organization
a statement describing the information obtained and procedures
followed and setting forth the determinations made with respect
to Bye-Laws 20 (2) and 20 (3), and (iii) notify in
writing or orally each Member of the voting power conferred by
its shares determined in accordance with Bye-Laws 20
(2) and 20 (3). For the avoidance of doubt, any failure by
the Board to take any of the actions described in this Bye-Law
20 (4) shall not invalidate any votes cast or the
proceedings at the meeting.
(5) Board Determination Binding
Any determination by the Board as to any adjustments or
eliminations of voting power of any shares made pursuant to
Bye-Law 20 shall be final and binding and any vote taken based
on such determination shall not be capable of being challenged
solely on the basis of such determination.
(6) Requirement to Provide Information and
Notice
(a) The Board shall have the authority to request
from any direct or indirect holder of shares, and such holder of
shares shall provide, such information as the Board may
reasonably request for the purpose of determining whether any
holders voting rights are to be adjusted. If such holder
fails to respond to such a request, or submits incomplete or
inaccurate information in response to such a request, the Board
may determine in its sole discretion that such holders
shares shall carry no voting rights in which case such holder
shall not exercise any voting rights in respect of such shares
until otherwise determined by the Board.
(b) Any direct or indirect holder of shares shall
give notice to the Company within ten days following the date
that such holder acquires actual knowledge that it is the direct
or indirect holder of Controlled Shares of 9.5% or more of the
voting power of all issued shares of the Company (without giving
effect to voting power adjustments or eliminations under
Bye-Law 20).
(c) Notwithstanding the foregoing, no Member shall
be liable to any other Member or the Company for any losses or
damages resulting from such Members failure to respond to,
or submission of incomplete or inaccurate information in
response to, a request under Bye-Law
20 (6) (a) or from such Members failure to
give notice under Bye-Law 20 (6) (b).
(d) Any information provided by any Member to the
Company pursuant to this Bye-Law 20 (6) or for
purposes of making the analysis required by Bye-Laws
20 (2) and 20 (3), shall be deemed
confidential information (the Confidential
Information) and shall be used by the Company solely for
the purposes contemplated by such Bye-Law (except as may be
required otherwise by applicable law or regulation). The Company
shall hold such Confidential Information in strict confidence
and shall not disclose any Confidential Information that it
receives, except (i) to the U.S. Internal Revenue
Service (the Service) if and to the extent the
Confidential Information is required by the Service,
(ii) to any outside legal counsel or accounting firm
engaged by the Company to make determinations regarding the
relevant Bye-Law or (iii) as otherwise required by
applicable law or regulation.
For the avoidance of doubt, the Company shall be
permitted to disclose to the Members and others the relative
voting percentages of all Members after application of Bye-Law
20. At the written request of a Member, the Confidential
Information of such Member shall be destroyed or returned to
such Member after the later to occur of (i) such Member no
longer being a Member or (ii) the expiration of the
applicable statute of limitations with respect to any
Confidential Information obtained for purposes of engaging in
any tax-related analysis.
(27) Subject to these
Bye-Laws and to the Act, any matter submitted to the Members at
a General Meeting for approval shall be approved by an
ordinary resolutionOrdinary Resolution
of the Members provided, however, that any
matter submitted to the Members at a General Meeting for
approval which relates to the amalgamation, merger or
consolidation of the Company with another company or the sale,
lease or exchange of all or substantially all of the
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assets of the Company shall be approved by at least a majority
of the voting power of the then outstanding shares entitled to
vote on such matter.
(38) A resolution put to the
vote of a meeting shall be decided on a show of hands
(and every Member present in person and every person
holding a valid proxy at such meeting shall be entitled to, for
each voting share of which such person is the holder or for
which such person holds a proxy, the number of votes determined
pursuant to Bye-Law 20 and shall cast such vote by raising
his or her hand) unless (before or on the
declaration of the result of the show of hands or on the
withdrawal of any other demand for a vote) a vote is demanded by:
(a) the Chairman of such meeting; or
(b) at least three (3) Members present in person or,
in the case of a Member being a corporation, by its duly
authorized representative, or by proxy, for the time being
entitled to vote at the meeting; or
(c) a Member or Members present in person or, in the case
of a Member being a corporation by its duly authorized
representative or, by proxy, and representing not less than
one-tenth (1/10) of the total voting rights of all Members
having the right to vote at the meeting; or
(d) a Member or Members present in person or, in the case
of a Member being a corporation by its duly authorized
representative, or by proxy, and holding shares in the Company
conferring a right to vote at the meeting being shares on which
an aggregate sum has been paid up equal to not less than
one-tenth (1/10) of the total sum paid up on all shares
conferring that right.
A demand by a Person as proxy for a Member, or in the case of a
Member being a corporation by its duly authorized
representative, shall be deemed to be the same as a demand by a
Member.
(4) Subject to this Bye-Law, at any General
Meeting each Member holding shares of the Company present, in
person or by proxy, shall be entitled to such number of votes as
otherwise indicated in this Bye-Law with respect to such shares,
on a non-cumulative basis, for each such share registered in
such Members name in the Register of Members, provided
that, if and for so long as the votes conferred by the
Controlled Shares of any Person shall exceed the Maximum
Percentage applicable to such Person of the votes conferred by
all of the issued and outstanding shares of the Company (reduced
for any votes represented by Controlled Shares that are not
entitled to vote due to the terms of this Bye-Law), each share
comprised in such Controlled Shares shall confer only such
fraction of a vote, such that the total combined voting rights
of such Controlled Shares shall be equal to the Maximum
Percentage, provided, however, that the foregoing limitation
shall not apply to the PXRE Purpose Trust. The calculation of
such fraction shall take into account the reduction of combined
voting power of the Companys Members by a number of votes
equal to any votes represented by the Controlled Shares of such
Person and any other Persons that are not entitled to vote due
to the terms of these Bye-Laws and shall be made as of any date
and, with respect to any record date for determining the Members
entitled to vote, as of such record date, including, without
limitation, for any election of directors. If, as a result of
giving effect to the provisions of this Bye-Law or otherwise,
the votes conferred by the Controlled Shares of a Person would
otherwise represent an amount greater than the Maximum
Percentage applicable to such Person, the votes conferred by the
Controlled Shares of such Person shall be reduced in accordance
with the foregoing provisions of this Bye-Law. Such process
shall be repeated until the votes conferred by the Controlled
Shares of each Person are less than or equal to the Maximum
Percentage applicable to such Person. The Board shall have sole
discretion as to the applicability of this Bye-Law to any Member
or Person and over the manner in which any reduction in voting
power of any shares is calculated. The Board shall have the
authority to request any or all Members to provide information
relating to their ownership of Controlled Shares and if any
Member fails to fully comply with the Boards request to
provide such information, the Board may make any assumptions it
deems necessary in order to determine such Members
ownership of Controlled Shares and to calculate reductions in
voting powers of shares under this Bye-Law.
(59) Unless a vote is duly
demanded and the demand is not withdrawn, a declaration by the
Chairman that a resolution has been carried, or carried
unanimously, or
by a particular majority, or not carried by a particular
majority, or lost, and an entry to that effect made in the
minute book of the Company, shall be conclusive evidence of the
fact without proof of the number or proportion of the votes
recorded for or against the resolution.
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(610) If a vote is duly
demanded, the result of the vote shall be deemed to be the
resolution of the meeting at which the vote was demanded. There
shall be no requirement for the Chairman to disclose the voting
figures on a vote.
(711) A vote demanded on
the election of a Chairman, or on a question of adjournment,
shall be taken forthwith. A vote demanded on any other question
shall be taken in such manner (including the use of ballot or
voting papers) and either forthwith or at such time (being not
later than thirty (30) days after the date of the demand)
and place as the Chairman directs. It shall not be necessary
(unless the Chairman otherwise directs) for Notice to be given
of a vote not taken immediately.
(812) The demand for a
vote shall not prevent the continuance of a meeting or the
transaction of any business other than the question on which the
vote has been demanded, and, with the consent of the Chairman,
it may be withdrawn at any time before the close of the meeting
or the taking of the vote, whichever is the earlier.
(913) Where a vote is
taken, votes may be given either personally or by
proxy. and every person present at
such meeting shall have for each voting share of which such
person is the holder or for which such person holds a proxy, the
number of votes determined pursuant to Bye-Law
20.
(1014) A Person entitled
to more than one vote on a vote need not use all his votes or
cast all the votes he uses in the same way. Notwithstanding the
preceding sentence, nothing herein is intended to allow for
cumulative voting in the election of Directors and cumulative
voting in the election of Directors is expressly prohibited.
(1115) In the case of an
equality of votes, whether on a show of hands or on a vote, the
Chairman of such meeting shall be entitled to a second or
casting vote in addition to any other vote he may have.
(1216) Where there are
joint holders of any share any one of such joint holders may
vote, either in person or by proxy, in respect of such share as
if he were solely entitled thereto, but if more than one of such
joint holders be present at any meeting the vote of the senior
who tenders a vote, whether in person or by proxy, shall be
accepted to the exclusion of the votes of the other joint
holders, and for this purpose seniority shall be determined by
the order in which the names stand in the Register in respect of
the joint holding. Several executors or administrators of a
deceased Member in whose name any share stands shall for the
purposes of this Bye-Law be deemed joint holders thereof.
(1317) A Member who is a
patient for any purpose relating to mental health or in respect
of whom an order has been made by any court having jurisdiction
for the protection or management of the affairs of Persons
incapable of managing their own affairs may vote, whether on a
show of hands or on a vote, by his receiver, committee, curator
bonis or other Person in the nature of a receiver, committee or
curator bonis appointed by such court, and such receiver,
committee, curator bonis or other Person may vote by proxy, and
may otherwise act and be treated as if he were the registered
holder of such shares for the purposes of General Meetings,
provided that such evidence as the Board may require of the
authority of the Person claiming to vote shall have been
deposited at the Office, Registration Office or such other place
as the Board may designate, as appropriate, not less than
forty-eight (48) hours before the time appointed for
holding the meeting, or adjourned meeting or vote, as the case
may be.
(1418) Any Person entitled
under these Bye-Laws to be registered as the holder of any
shares may vote at any General Meeting in respect thereof in the
same manner as if he were the registered holder of such shares,
provided that at least forty-eight (48) hours before the
time of the holding of the meeting or adjourned meeting, as the
case may be, at which he proposes to vote, he shall satisfy the
Board of his entitlement to such shares, or the Board shall have
previously admitted his right to vote at such meeting in respect
thereof.
(1519) No Member shall,
unless the Board otherwise determines, be entitled to attend and
vote and to be counted in a quorum at any General Meeting unless
he is duly registered and all calls or other sums presently
payable by him in respect of shares in the Company have been
paid.
(1620) If: (a) any
objection shall be raised to the qualification of any voter; or
(b) any votes have been counted which ought not to have
been counted or which might have been rejected; or (c) any
votes are not counted which ought to have been counted; the
objection or error shall not vitiate the decision of the meeting
or adjourned meeting on any resolution unless the same is raised
or pointed out at the meeting or, as the case may be, the
adjourned meeting at which the vote objected to is given or
tendered or at which the error occurs. Any objection or error
shall
C-20
be referred to the Chairman of the meeting and shall only
vitiate the decision of the meeting on any resolution if the
Chairman decides that the same may have affected the decision of
the meeting. The decision of the Chairman on such matters shall
be final and conclusive.
(21) Notwithstanding section 77A of the Act
anything which may be done by resolution of the Members in a
general meeting shall not be done by resolution in
writing.
CERTAIN
SUBSIDIARIES
20A. (1) Voting of Subsidiary Shares.
Notwithstanding any other provision of these Bye-Laws to the
contrary, if the Company is required or entitled to vote at a
general meeting of any direct
non-U.S. subsidiary
of the Company, the Board shall refer the subject matter of the
vote to the Members of the Company on a poll (subject to Bye-Law
20) and seek authority from the Members for the
Companys corporate representative or proxy to vote in
favour of the resolution proposed by the subsidiary.
The Board shall cause the Companys corporate
representative or proxy to vote the Companys shares in the
subsidiary pro rata to the votes received at the general meeting
of the Company, with votes for or against the directing
resolution being taken, respectively, as an instruction for the
Companys corporate representative or proxy to vote the
appropriate proportion of its shares for and the appropriate
proportion of its shares against the resolution proposed by the
subsidiary. The Board shall have authority to resolve any
ambiguity.
(2) Bye-Law or Articles of Association of Certain
Subsidiaries. The Board in its discretion shall require that the
Bye-Law or Articles of Association or similar organizational
documents of each subsidiary of the Company, organized under the
laws of a jurisdiction outside the United States of America,
other than any
non-U.S. subsidiary
that is a direct or indirect subsidiary of a U.S. Person,
shall contain provisions substantially similar to Bye-Law 23 and
24. The Company shall enter into agreements, as and when
determined by the Board, with each such subsidiary, only if and
to the extent reasonably necessary and permitted under
applicable law, to effectuate or implement this
Bye-Law.
PROXIES
AND CORPORATE REPRESENTATION
21. (1) Any Member entitled to attend and vote at a
meeting of the Company shall be entitled to appoint another
Person as his proxy to attend and vote instead of him. A Member
may appoint a proxy in respect of part only of his holding of
shares in the Company. A proxy need not be a Member of the
Company.
(2) The instrument appointing a proxy shall be in writing
under the hand of the appointor or of his attorney duly
authorized in writing or, if the appointor is a corporation,
either under its seal or under the hand of an officer, attorney
or other Person authorized to sign the same. In the case of an
instrument of proxy purporting to be signed on behalf of a
corporation by an officer thereof it shall be assumed, unless
the contrary appears, that such officer was duly authorized to
sign such instrument of proxy on behalf of the corporation
without further evidence of the fact.
(3) The instrument appointing a proxy and (if required by
the Board) the power of attorney or other authority (if any)
under which it is signed, or a certified copy of such power or
authority, shall be delivered to such place or one of such
places (if any) as may be specified for that purpose in or by
way of Notice to or in any document accompanying the Notice
convening the meeting (or, if no place is so specified at the
Registration Office or the Office, as may be appropriate) not
less than forty-eight (48) hours before the time appointed
for holding the meeting or adjourned meeting at which the Person
named in the instrument proposes to vote or, in the case of a
vote taken subsequently to the date of a meeting or adjourned
meeting, not less than twenty-four (24) hours before the
time appointed for the taking of the vote, and in default the
instrument of proxy shall not be treated as valid. No instrument
appointing a proxy shall be valid after the expiration of one
(1) year from the date named in it as the date of its
execution, except at an adjourned meeting or on a vote demanded
at a meeting or an adjourned meeting in cases where the meeting
was originally held within one (1) year from such date.
Delivery of an instrument appointing a proxy shall not preclude
a Member from attending and voting in person at the meeting
convened and in such event, the instrument appointing a proxy
shall be deemed to be revoked.
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(4) Instruments of proxy shall be in any common form or in
such other form as the Board may approve (provided that this
shall not preclude the use of the two-way form) and the Board
may send out with the Notice of any meeting, forms of instrument
of proxy for use at the meeting. The instrument of proxy shall
be deemed to confer authority to demand or join in demanding a
vote and to vote on any amendment of a resolution put to the
meeting for which it is given as the proxy may determine. The
instrument of proxy shall, unless the contrary is stated
therein, be valid as well for any adjournment of the meeting as
for the meeting to which it relates.
(5) A vote given in accordance with the terms of an
instrument of proxy shall be valid notwithstanding the previous
death or insanity of the principal, or revocation of the
instrument of proxy or of the authority under which it was
executed, provided that no intimation in writing of such death,
insanity or revocation shall have been received by the Company
at the Office or the Registration Office (or such other place as
may be specified for the delivery of instruments of proxy in the
Notice convening the meeting or other document sent therewith)
at least two (2) hours before the commencement of the
meeting or adjourned meeting, or the taking of the vote, at
which the instrument of proxy is used.
(6) Anything which under these Bye-Laws a Member may do by
proxy he may likewise do by his duly appointed attorney and the
provisions of these Bye-Laws relating to proxies and instruments
appointing proxies shall apply, as the case may be, in relation
to any such attorney and the instrument under which such
attorney is appointed.
(7) Any corporation which is a Member of the
Company may by any authorized officer authorize
such Person as it may determine to act as its representative at
any meeting of the Company or any class of Members of
the Company. The Person so authorized shall be
entitled to exercise the same powers on behalf of such
corporation as the corporation could exercise if it were an
individual Member of the Company and
such corporation shall for the purposes of these Bye-Laws be
deemed to be present in person at any such meeting if a Person
so authorized is present thereat. Any reference in these
Bye-Laws to a duly authorized representative of a Member being a
corporation shall mean a representative authorized under the
provisions of this Bye-Law.
(8) If a clearing house is a Member, it may authorize such
Person or Persons as it determines to act as its representative
or representatives at any meeting of the Company or at any
meeting of any class of Members provided that, if more than one
Person is so authorized, the authorization shall specify the
number and class of shares in respect of which each such Person
is so authorized. A Person so authorized under the provisions of
this Bye-Law shall be entitled to exercise the same powers on
behalf of the clearing house (or its nominee) which he
represents as that clearing house (or its nominee) could
exercise if it were an individual Member. For the purposes of
this Bye-Law, clearing house means any clearing
house or other similar body recognized by the laws of the
jurisdiction in which the shares of the Company are listed or
quoted on a Designated Stock Exchange.
NOMINATION
AND REMOVAL OF DIRECTORS
22. (1) This Bye-law 22 shall be read
subject to the terms of any special resolution of the Members
relating thereto and be it further theThe
number of Directors which shall constitute the whole
Board of Directors of the Company shall be such number (not less
than three (3) or more than
twelvethirteen
(13)) as the Company may by
ordinary resolution in general
meetingOrdinary Resolution determine.
The Board shall be divided into three classes, Class I,
Class II and Class III. The number of Directors in
each class shall be the whole number contained in the quotient
arrived at by dividing the authorized number of Directors by
three and if a fraction is also contained in such quotient, then
if such fraction is one-third (1/3) the extra Director shall be
a member of Class III and if the fraction is two-thirds
(2/3) one of the Directors shall be member of Class III and
the other shall be a member of Class II. Each Director
shall serve for a term ending on the third Annual General
Meeting following the annual meeting at which such Director was
elected; provided however, that the initial term of each Class
and the classes to which the first slate of Directors elected
hereunder belong, shall be determined by the ordinary
resolution of MembersOrdinary Resolution at
the time of such initial election. The foregoing
notwithstanding, each Director shall serve until his successor
shall have been duly elected and qualified, unless he shall
resign, become disqualified, disabled or shall otherwise be
removed.
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(2) For the purpose of the preceding paragraph, reference
to the first election of Directors is to the election at the
1999 Annual General Meeting of the Company. At each annual
election held thereafter, the Directors chosen to succeed those
whose terms then expire shall be identified as being of the same
class as the Directors they succeed. If for any reason the
number of Directors in the various classes shall not conform
with the formula set forth in the preceding paragraph, the Board
may redesignate any Director to a different class in order that
the balance of Directors in such classes shall conform thereto.
(3) A Director need not be a Member.
(4) Only Persons who are nominated in accordance with the
following procedures shall be eligible for election as
Directors. Nominations of Persons for election to the Board of
the Company may be made at a meeting of Members called for the
election of directors, or at the discretion of the Board, by any
nominating committee or Person appointed by the Board, by any
Member of the Company entitled to vote for the election of
Director at the meeting who complies with the Notice procedures
set forth in this Bye-Law. Such nominations, other than those
made by or at the direction of the Board, shall be made pursuant
to timely Notice to the Secretary of the Company. To be timely,
a Members Notice shall be delivered to or mailed and
received at the Office of the Company not less than sixty
(60) days prior to such meeting. Such Members Notice
to the Secretary shall set forth (a) as to each Person whom
the Member proposes to nominate for election or re-election as a
Director, (i) the name, age, business address and residence
address of the Person, (ii) the principal occupation or
employment of the Person, (iii) the class and number of
shares of Common Shares of the Company which are beneficially
owned by the Person, (iv) any other information relating to
the Person that is required to be disclosed in solicitations for
proxies for election of Directors pursuant to Schedule 14A
of the Exchange Act, and (v) the consent of each nominee to
serve as a Director, if so elected; and (b) as to the
Member giving the Notice (i) the name and record address of
the Member and (ii) the class and number of shares of
capital stock of the Company which are beneficially owned by the
Member. The Company may require any proposed nominee to furnish
such other information as may reasonably be required by the
Company to determine the eligibility of such proposed nominee to
serve as a Director of the Company. No Persons shall be eligible
for election as a Director of the Company unless nominated in
accordance with the procedures set forth herein.
(5) The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination
was not made in accordance with the foregoing procedure, and if
he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
(6) The Directors shall (subject to any resolution of the
Members to the contrary) have the power from time to time and at
any time to appoint any Person as a Director to fill a casual
vacancy on the Board, provided, however, that the number of
Directors so appointed shall not exceed any maximum number
determined from time to time by the Members in a General
Meeting. Any Director so appointed by the Board shall hold
office until the next election of the class for which such
director shall have been chosen and shall then be eligible for
re-election at that meeting.
(7) Neither a Director nor an Alternate Director, as the
case may be, shall be required to hold any shares of the Company
by way of qualification and a Director or an Alternate Director
(as the case may be) who is not a Member shall be entitled to
receive Notice of and to attend and speak at any General Meeting
of the Company and of all classes of shares of the Company.
(8) Notwithstanding anything to the contrary in these
Bye-Laws, the Members may only
remove a Director for,
with or without cause, at any
time prior to the expiration of such Directors
period of office or in any agreement between the Company and
such Director (but without prejudice to any claim for damages
under any such agreement) at a General Meeting convened and held
in accordance with these Bye-Laws at which a majority of the
holders of shares entitled to vote thereon vote in favor of such
action provided that the Notice of any such meeting convened for
the purpose of removing a Director shall contain a statement of
the intention so to do and be served on such Director fourteen
(14) days before the meeting and at such meeting such
Director shall be entitled to be heard on the motion for his
removal.
(9) A vacancy on the Board created by the removal of a
Director under paragraph (8) of this Bye-Law may be
filled by the election or appointment by the Members at the
meeting at which such Director is removed to hold office
C-23
until the next election of the class for which such director
shall have been chosen, but subject to any resolution of the
Members to the contrary, the Board may fill any vacancy in the
number left unfilled.
(10) A retiring Director shall be eligible for re-election.
(11) The office of a Director shall be vacated if the
Director:
(a) resigns his office by Notice delivered to the Company
at the Office or tendered at a meeting of the Board whereupon
the Board resolves to accept such resignation; or
(b) becomes of unsound mind (as determined by the Board in
its sole discretion) or dies; or
(c) without special leave of absence from the Board, is
absent from meetings of the Board for
foursix consecutive meetings, and
the Board resolves that his office be vacated; or
(d) becomes bankrupt or has a receiving order made against
him or suspends payment or comprises with his creditors; or
(e) is prohibited by law from being a Director; or
(f) ceases to be a Director by virtue of any provision of
the Act or is removed from office pursuant to this Bye-Law.
ALTERNATE
DIRECTORS
23. (1) Any Director may at any time by Notice
delivered to the Office or at a meeting of the Directors appoint
any Person to be his alternate Director (an Alternate
Director). Any Person so appointed shall have all the
rights and powers of the Director or Directors for whom such
Person is appointed in the alternative provided that such Person
shall not be counted more than once in determining whether or
not a quorum is present. An Alternate Director may be removed at
any time by the Director who appointed him and, subject thereto,
the office of Alternate Director shall continue until the next
annual election of Directors or, if earlier, the date on which
the relevant Director ceases to be a Director. Any appointment
or removal of an Alternate Director shall be effected by Notice
signed by the appointor and delivered to the Office or tendered
at a meeting of the Board. An Alternate Director may also be a
Director in his own right and may act as alternate to more than
one other Director. An Alternate Director shall, if his
appointor so requests, be entitled to receive Notices of
meetings of the Board or of committees of the Board to the same
extent as, but in lieu of, the Director appointing him and shall
be entitled to such extent to attend and vote as a Director at
any such meeting at which the Director appointing him is not
personally present and generally at such meeting to exercise and
discharge all the functions, powers and duties of his appointor
as a Director and for the purposes of the proceedings at such
meeting the provisions of these Bye-Laws shall apply as if he
were a Director save that as an alternate for more than one
Director his voting rights shall be cumulative.
(2) An Alternate Director shall only be a Director for the
purposes of the Act and shall only be subject to the provisions
of the Act insofar as they relate to the duties and obligations
of a Director when performing the functions of the Director for
whom he is appointed in the alternative and shall alone be
responsible to the Company for his acts and defaults and shall
not be deemed to be the agent of or for the Director appointing
him. An Alternate Director shall be entitled to contract and be
interested in and benefit from contracts or arrangements or
transactions and to be repaid expenses and to be indemnified by
the Company to the same extent, as the case may be, as if he
were a Director but he shall not be entitled to receive from the
Company any fee in his capacity as an Alternate Director except
only such part, if any, of the remuneration otherwise payable to
his appointor as such appointor may by Notice to the Company
from time to time direct.
(3) Every Person acting as an Alternate Director shall have
one vote for each Director for whom he acts as alternate (in
addition to his own vote if he is also a Director). If his
appointor is for the time being unavailable or unable to act,
the signature of an Alternate Director to any resolution in
writing of the Board or a committee of the Board of which his
appointor is a member shall, unless the Notice of his
appointment provides to the contrary, be as effective as the
signature of his appointor.
C-24
(4) An Alternate Director shall ipso facto cease to be an
Alternate Director if his appointor ceases for any reason to be
a Director, however, such Alternate Director or any other Person
may be re-appointed by the Directors to serve as an Alternate
Director provided always that, if at any meeting any Director
retires but is re-elected at the same meeting, any appointment
of such Alternate Director pursuant to these Bye-Laws which was
in force immediately before his retirement shall remain in force
as though he had not retired.
DIRECTORS
COMPENSATION
24. The amount, if any, of Directors fees, retainers,
awards of shares and options, or other remuneration shall from
time to time be determined by the Board. In addition, each
Director shall be paid his reasonable traveling, hotel and
incidental expenses in attending and returning from meetings of
the Board or committees appointed by the Board, or any Annual
General Meeting or Special General Meeting of the Members, and
shall be paid all expenses properly and reasonably incurred by
him in the conduct of the Companys business or in the
discharge of his duties as a Director. Any question as to the
reasonableness of expenses as provided herein shall be a matter
to be determined by the Board. Any Director who by request, goes
or resides abroad for any purposes of the Company or who
performs services which in the opinion of the Board go beyond
the ordinary duties of a Director may be paid such extra
remuneration (whether by way of salary or otherwise) as the
Board may determine, and such extra remuneration shall be in
addition to any remuneration provided for by or pursuant to any
other Bye-Law.
DIRECTORS
AND OFFICERS INTERESTS
25. (1) A Director may:
(a) hold any other office or place of profit with the
Company (except that of Auditor) in conjunction with his office
of Director for such period and, subject to the relevant
provisions of the Act, upon such terms as the Board may
determine. Any remuneration (whether by way of salary or
otherwise) paid to any Director in respect of any such other
office or place of profit shall be in addition to any
remuneration provided for by or pursuant to any other Bye-Law;
(b) act by himself or his firm in a professional capacity
for the Company (otherwise than as Auditor) and he or his firm
may be remunerated for professional services as if he were not a
Director;
(c) continue to be or become a director, manager or other
officer or member of any other Person whether or not promoted by
the Company or in which the Company may be interested as a
vendor, shareholder or otherwise and (unless otherwise agreed)
no such Director shall be accountable for any remuneration or
other benefits received by him as a director, manager or other
officer or member of or from his interests in any such other
Person.
Notwithstanding anything contained in these Bye-Laws to the
contrary, any Director may exercise or cause to be exercised the
voting powers conferred by the shares in any other company held
or owned by the Company, or exercisable by him as director of
such other company in such manner in all respects as he may
determine (including the exercise thereof in favor of any
resolution appointing himself as a director, manager or other
officer of such company, or voting or providing for the payment
of remuneration to the director, managing director, joint
managing director, deputy managing director, executive director,
manager or other officers of such other company) and any
Director may vote in favor of the exercise of such voting rights
in the manner aforesaid notwithstanding that he may be, or about
to be, appointed a director, manager or other officer of such a
company, and that as such he is or may become interested in the
exercise of such voting rights in the manner aforesaid.
(2) Subject to the Act and to these Bye-Laws, no Director
or Officer or proposed Director or Officer shall be disqualified
by his office from contracting with the Company or any
Subsidiary, either with regard to his tenure of any office or
place of profit or as vendor, purchaser or in any other manner
whatever, nor shall any such contract or any other contract or
arrangement in which any Director or Officer is in any way
interested be liable to be avoided, nor shall any Director or
Officer so contracting or being so interested be liable to
account to the Company or the Members for any remuneration,
profit or other benefits realized by any such contract or
arrangement by reason of such Director or Officer holding that
office or of the fiduciary relationship thereby established,
provided that such
C-25
Director or Officer shall disclose the nature of his interest in
any contract or arrangement in which he is interested in
accordance with these Bye-Laws.
(3) A Director or Officer who to his knowledge is in any
way, whether directly or indirectly, interested in a contract or
arrangement or proposed contract or arrangement with the Company
shall declare the nature of his interest at the first
opportunity at the meeting of the Board at which the
question of entering into the contract or arrangement is first
considered, if he knows his interest then exists, or in any
other case at the first meeting of the Board after he knows that
he is or has become so interested.
(4) For the purposes of the preceding paragraph, a Director
shall furnish Notice to the Board to the effect that:
(a) he is a member or officer of a specified company or
firm and is to be regarded as interested in any contract or
arrangement which may after the date of the Notice be made with
that company or firm; or (b) he is to be regarded as
interested in any contract or arrangement which may after the
date of the Notice be made with a specified Person who is
connected with him; and such Notice shall be deemed to be a
sufficient declaration of interest under these Bye-Laws in
relation to any such contract or arrangement, provided that no
such Notice shall be effective unless either it is given at a
meeting of the Board or the Director or Officer takes reasonable
steps to secure that it is brought up and read at the next Board
meeting after it is given.
GENERAL
POWERS OF THE BOARD OF DIRECTORS
26. (1) The business of the Company shall be managed
and conducted by the Board, which may exercise all powers of the
Company (whether relating to the management of the business of
the Company or otherwise) which are not by the Act or by these
Bye-Laws required to be exercised by the Company in a
General Meeting, subject nevertheless to the provisions of the
Act and of these Bye-Laws and to such regulations being not
inconsistent with such provisions as may be prescribed by the
Company in a General MeetingMembers. No
regulations made by the Company in a General Meeting shall
invalidate any prior act of the Board which would have been
valid if such regulations had not been made. The general powers
given by this Bye-Law shall not be limited or restricted by any
special authority or power given to the Board by any other
Bye-Law.
(2) Any Person contracting or dealing with the Company in
the ordinary course of business shall be entitled to rely on any
written or oral contract or agreement or deed, document or
instrument entered into or executed as the case may be by any
Officer acting on behalf of the Company and the same shall be
deemed to be validly entered into or executed by the Company as
the case may be and shall, subject to applicable law, be binding
on the Company; provided, however, that no such contract
or agreement or deed, document or instrument may be executed on
the Companys behalf within the United States unless
specifically authorized by resolution of the Board.
(3) Without prejudice to the general powers conferred by
these Bye-Laws it is hereby expressly declared that the Board
shall have the following powers, namely:
(a) to give to any Person (including, without limitation,
any Director, Officer, or employee) the right or option of
requiring at a future date that an allotment shall be made to
him of any share at par or at such premium as may be
agreed; and
(b) to give to any Director, Officer or employee of the
Company an interest in any particular business or transaction or
participation in the profits thereof or in the general profits
of the Company either in addition to or in substitution for a
salary or other remuneration.
(4) The Board may by power of attorney appoint
under the Sealin writing any
company, firm or Person or body of Persons, whether nominated
directly or indirectly by the Board, to be the attorney or
attorneys of the Company for such purposes and with such powers,
authorities and discretions (not exceeding those vested in or
exercisable by the Board under these Bye-Laws) and for such
period and subject to such conditions as it may determine, and
any such power of attorney may contain such provisions for the
protection and convenience of Persons dealing with any such
attorney as the Board may determine, and may also authorize any
such attorney to
sub-delegate
all or any of the powers, authorities and discretions vested in
him. Such attorney or attorneys may, if so authorized
under the Seal of the Companyin
writing, execute any deed
or,
instrument
under their personal sealor
other documents with the same effect as the
affixation of the Companys
Seal.execution of the Company.
C-26
(5) The Board may entrust to and confer upon any
Director any of the powers exercisable by it upon such terms and
conditions and with such restrictions as it may determine, and
either collaterally with, or to the exclusion of, its own
powers, and may from time to time revoke or vary all or any of
such powers but no Person dealing in good faith and without
Notice of such revocation or variation shall be affected
thereby.
(6) All checks, promissory notes, drafts, bills
of exchange and other instruments, whether negotiable or
transferable or not, and all receipts for monies paid to the
Company shall be signed, drawn, accepted, endorsed or otherwise
executed, as the case may be, in such manner as the Board shall
from time to time by resolution determine. The Companys
banking accounts shall be kept with such banks or other
financial institutions as the Board shall from time to time
determine.
(7) The Board may establish or join with other
companies (including any of its Subsidiaries or other affiliated
companies) in establishing and making contributions out of the
Companys monies to any plans or funds for providing
pensions, life insurance or other benefits for employees (which
expression as used in this and the following paragraph shall
include any Director or
ex-Director
who may hold or have held any executive office or any office of
profit under the Company or any of its Subsidiaries) and
ex-employees of the Company or any of its Subsidiaries and their
dependents or any class or classes of such Persons.
(8) The Board may pay, enter into agreements to
pay or make grants of revocable or irrevocable, and either
subject or not subject to any terms or conditions, pensions or
other benefits to employees and ex-employees of the Company or
any of its Subsidiaries and their dependents, or to any of such
Persons, including pensions or benefits additional to those, if
any, to which such employees or ex-employees or their dependents
are or may become entitled under any such plan or fund as
mentioned in the preceding paragraph. Any such pension or
benefit may, as the Board considers desirable, be granted to an
employee either before and in anticipation of or upon or at any
time after his actual retirement.
(9) The Board may exercise all the powers of the
Company to raise or borrow money and to mortgage or charge all
or any part of the undertaking, property and assets (present and
future) and uncalled capital of the Company and, subject to the
Act, to issue debentures, bonds and other securities, whether
outright or as collateral security for any debt, liability or
obligation of the Company or of any third party.
(10) Debentures, bonds and other securities may
be made assignable free from any equities between the Company
and the Person to whom the same may be issued.
(11) Any debentures, bonds or other securities
may be issued at a discount (other than shares), premium or
otherwise and with any special privileges as to redemption,
surrender, drawings, allotment of shares, attending and voting
at General Meetings of the Company, appointment of Directors and
otherwise as the Board may determine by resolution.
PROCEEDINGS
OF THE BOARD OF DIRECTORS
27. (1) The Board may meet for the conduct of
business, adjourn and otherwise regulate its meetings as it
considers appropriate. Actions to be taken at any meeting shall
be determined by a majority of votes cast, provided a quorum is
present.
(2) A meeting of the Board may be convened by the Secretary
on request of the President or by any two (2) Directors,
provided that no business shall be transacted at a Board meeting
unless not less than seven (7) clear
daysClear Days Notice of the meeting
shall be given to each Director with reasonable details of the
business to be transacted and provided further that any Director
may by Notice to the Company agree that no Notice needs, or any
shorter Notice specified in a Notice may, be given to him. The
Secretary shall convene a meeting of the Board, of which Notice
may be given in writing or by telephone or in such other manner
as the Board may from time to time determine, whenever he shall
be required so hereunder. Any Director may waive Notice of any
meeting either prospectively or retrospectively.
(3) The quorum necessary for the transaction of the
business of the Board may be fixed by the Board and, unless so
fixed at any other number, shall be a majority of the Directors.
An Alternate Director shall be counted in a
C-27
quorum in the case of the absence of a Director for whom he is
the alternate provided that he shall not be counted more than
once for the purpose of determining whether or not a quorum is
present.
(4) Directors may participate in any meeting of the Board
by means of a conference telephone or other communications
equipment through which all Persons participating in the meeting
can communicate with each other simultaneously and
instantaneously and, for the purpose of counting a quorum, such
participation shall constitute presence at a Meeting as if those
participating were present in person.
(5) Any Director who ceases to be a Director at a Board
meeting may continue to be present and to act as a Director and
be counted in the quorum until the termination of such Board
meeting if no other Director objects and if otherwise a quorum
of Directors would not be present.
(6) The continuing Directors or a sole continuing Director
may act notwithstanding any vacancy in the Board but, if and so
long as the number of Directors is reduced below the minimum
number fixed by or in accordance with these Bye-Laws, the
continuing Directors or Director, notwithstanding that the
number of Directors is below the number fixed by or in
accordance with these Bye-Laws as the quorum or that there is
only one continuing Director, may act for the purpose of filling
vacancies in the Board or of summoning General Meetings of the
Company but not for any other purpose.
(7) The Board may elect a Chairman and a Deputy Chairman of
its meetings and determine the period for which they are
respectively to hold such office. If no Chairman or Deputy
Chairman is elected, or if at any meeting neither the Chairman
nor any Deputy Chairman is present within five (5) minutes
after the time appointed for holding the same, the Directors
present may choose one of their number to be Acting Chairman of
the meeting.
(8) A meeting of the Board at which a quorum is present
shall be competent to exercise all the powers, authorities and
discretions for the time being vested in or exercisable by the
Board.
(9) The Board may delegate any of its powers, authorities
and discretions to committees (including, but not limited to, an
Executive Committee, an Audit Committee, a Nominating
Committee, a Human Resources Committee, and an
Investment Committee), consisting of Directors or Officers or
other persons as it may determine, and they may, from time to
time, revoke such delegation or revoke the appointment of and
discharge any such committees either wholly or in part, and
either as to Persons or purposes. Any committee so formed shall,
in the exercise of the powers, authorities and discretions so
delegated, conform to any regulations which may be imposed on it
by the Board.
(10) All acts done by any such committee in conformity with
such regulations, and in fulfillment of the purposes for which
it was appointed, but not otherwise, shall have like force and
effect as if done by the Board, and the Board shall have power
to remunerate the members of any such committee, and charge such
remuneration to the current expenses of the Company.
(11) The meetings and proceedings of any committee
consisting of two (2) or more members shall be governed by
the provisions contained in these Bye-Laws for regulating the
meetings and proceedings of the Board so far as the same are
applicable and are not superseded by any regulations imposed by
the Board under the preceding paragraph.
(12) A resolution in writing signed outside the
United States by all the
Directors(except such as are temporarily unable to
act through ill-health or
disability), (provided that such
number is sufficient to constitute a quorum and further provided
that a copy of such resolution has been given or the contents
thereof communicated to all the Directors for the time being
entitled to receive Notices of Board meetings in the same manner
as Notices of meetings are required to be given by these
Bye-Laws) shall be as valid and effectual as if a resolution had
been passed at a meeting of the Board duly convened and held
provided that (i) any such resolution shall be valid
only if the Board determines necessary the signature of the last
Director to sign is affixed outside the United States, and
(ii) the Board may declare such resolution to be invalid if
the Board determines that the use of a resolution in writing
would result in a non-de minimis adverse tax, regulatory or
legal consequence to the Company, any subsidiary of the Company,
or any direct or indirect holder of shares or its
affiliates. Such resolution may be contained in
one document or in several documents in like form each signed by
one or more of the Directors and for this purpose a facsimile
signature of a Director shall be treated as valid.
C-28
(13) All acts bona fide done by the Board or by any
committee or by any Person acting as a Director or member of a
committee, shall, notwithstanding that it is afterwards
discovered that there was some defect in the appointment of any
member or the Board or such committee or Person acting as
aforesaid or that they or any of them were disqualified or had
vacated office, be as valid as if every such Person had been
duly appointed and was qualified and had continued to be a
Director or member of such committee.
OFFICERS
28. (1) The Officers of the Company shall
consist of the Chairman, President, Chief Executive Officer,
Executive Vice-President(s), Senior Vice President(s), Vice
President(s), Chief Financial Officer and Secretary and such
additional Officers (, who may or may not be
Directors) as, may be appointed
by the Board may from time to
time determine, all of whom shall
be deemed to be Officers for the purposes of the Act and these
Bye-Laws.
(2) The Officers shall have such powers and perform such
duties in the management, business and affairs of the Company as
may be delegated to them by the Board or another Officer from
time to time.
(3) The authority of any Officer of the Company so long as
such Officer shall be physically present in the United States,
shall be limited to maintaining an oversight and review of and
providing recommendations and information to the Board, but not
to any third party, regarding the affairs of the Company
pertaining to any of its Subsidiaries incorporated in the United
States and otherwise to enable the Company to fulfill its role
as the holder of shares of such Subsidiaries. Such Officer while
physically present in the United States shall have no authority
(i) to negotiate or conclude contracts in the name of the
Company (or any of its Subsidiaries not incorporated in the
United States) or otherwise bind the Company (or any of its
Subsidiaries not incorporated in the United States), or
(ii) to conduct or manage any activities of the Company (or
any of its Subsidiaries not incorporated in the United States),
or (iii) to act in any way which might result in the
Company (or any of its Subsidiaries not incorporated in the
United States) being considered to be engaged in a trade or
business in the United States within the meaning of the Code.
Any purported action or contract done or made by such Officer or
any other duly appointed Officer of the Company in violation of
the provisions hereof shall be null and void ab initio and the
Company or any of its Subsidiaries shall in no way be bound or
affected by any such action or contract done or made in
violation hereof.
(4) The Directors shall, as soon as may be after each
appointment or election of Directors, elect the Officers of the
Company, and a Chairman and a Deputy Chairman of the Board of
Directors.
(5) The Officers shall receive such remuneration as the
Directors may from time to time determine.
(6) The Company may in accordance with the Act appoint a
resident representative ordinarily resident in Bermuda and the
resident representative shall maintain an office in Bermuda and
comply with the provisions of the Act. The Company shall provide
the resident representative with such documents and information
as the resident representative may require in order to be able
to comply with the provisions of the Act. The resident
representative shall be entitled to have Notice of, attend and
be heard at all meetings of the Board or meetings of the Members.
(7) The Secretary, or an Assistant Secretary, shall attend
all meetings of the Members and of the Board (and its
committees) and shall keep correct minutes of such meetings and
enter the same in the proper books provided for the purpose. The
Secretary shall perform such other duties as are prescribed by
the Act or these Bye-Laws or as may be prescribed by the Board.
(8) The Chairman or the Deputy Chairman of the Board of
Directors, as the case may be, shall act as chairman at all
meetings of the Members and of the Directors at which he is
present. In the absence of both the Chairman and the Deputy
Chairman, a chairman shall be appointed or elected by those
present at the meeting.
(9) The Officers of the Company shall have such powers and
perform such duties in the management, business and affairs of
the Company as may be delegated to them by the Directors or
another Officer from time to time.
(10) Any provision of the Act or of these Bye-Laws
requiring or authorizing a thing to be done by or to a Director
and the Secretary shall not be satisfied by its being done by or
to the same Person acting both as Director and as or in place of
the Secretary.
C-29
REGISTER
OF DIRECTORS AND OFFICERS
29. (1) The Board shall cause to be kept in one or
more books at its Office a Register of Directors and Officers
and shall enter therein the particulars required by the Act.
(2) The Register of Directors and Officers shall be open to
inspection at the Office of the Company on every business day,
subject to such reasonable restrictions as the Board may impose,
so that not less than two (2) hours in each business day be
allowed for inspection.
MINUTES
30. The Board shall cause Minutes to be duly entered in
books provided for the purpose: (i) of all elections and
appointments of Officers; (ii) of the names of the
Directors present at each meeting of the Directors and of any
committee appointed by the Board; and (iii) of all
resolutions and proceedings of each General Meeting of the
Members, meetings of the Board and meetings of committees of the
Board.
SEAL
31. (1) The Company shall have one or more
Seals, as the Board may determine. For the purpose of sealing
documents creating or evidencing securities issued by the
Company, the Company may have a securities seal which is a
facsimile of the Seal of the Company with the addition of the
words Corporate Seal on its face or in such other
form as the Board may approve. The Board shall provide for the
custody of each Seal and no Seal shall be used without the
authority of the Board or of a committee of the Board authorized
by the Board in that regard. Except as otherwise provided in
these Bye-Laws, any instrument to which a Seal is affixed shall
be signed autographically by one Officer and the Secretary or by
two Officers or by such other Person or Persons as the Board may
appoint, either generally or in any particular case, save that
as regards any certificates for shares or debentures or other
securities of the Company the Board may by resolution determine
that such signatures or either of them shall be dispensed with
or affixed by some method or system of mechanical signature.
Every instrument executed in manner provided by this Bye-Law
shall be deemed to be sealed and executed with the authority of
the Board previously given.
(2) Where the Company has a Seal for use abroad,
the Board may by writing under the Seal appoint any agent or
committee abroad to be the duly authorized agent of the Company
for the purpose of affixing and using such Seal and the Board
may impose restrictions on the use thereof as it may determine.
Wherever in these Bye-Laws reference is made to the Seal, the
reference shall, when and so far as may be applicable, be deemed
to include any such other Seal as aforesaid.
(3) Any Officer or any Person appointed by the
Board for the purpose may authenticate (by affixing the seal or
otherwise) any documents affecting the constitution of the
Company and any resolution passed by the Company or the Board or
any committee, and any books, records, documents and accounts
relating to the business of the Company, and to certify copies
thereof or extracts therefrom as true copies or extracts. A
document purporting to be a copy of a resolution, or an extract
from the minutes of a meeting, of the Company or of the Board or
any committee which is so certified shall be conclusive evidence
in favor of all Persons dealing with the Company upon the faith
thereof that such resolution has been duly passed or, as the
case may be, that such minutes or extract is a true and accurate
record of proceedings at a duly constituted meeting.
31. (1) The Board may authorise the
production of a Seal and one or more duplicate seals, which
shall consist of a circular device with the name of the Company
around the outer margin thereof and the country and year of
registration in Bermuda across the centre thereof.
(2) Any document required to be under seal or
executed as a deed on behalf of the Company may
be:
(a) executed under Seal; or
(b) signed or executed by any person authorised by
the Board for that purpose, without the use of the
Seal.
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(3) The Board shall provide for the custody
of every Seal. A Seal shall only be used by authority of the
Board or of a committee constituted by the Board. Subject to
these Bye-Laws, any instrument to which a Seal is affixed shall
be attested by the signature of:
(a) a Director;
(b) the Secretary; or
(c) any one person authorised by the Board
for that purpose.
DESTRUCTION
OF DOCUMENTS
32. The Company shall be entitled to destroy the
following documents at the following times:
(a) any share certificate which has been canceled
at any time after the expiration of one (1) year from the
date of such cancellation;
(b) any dividend mandate or any variation or
cancellation thereof or any notification of change of name or
address at any time after the expiration of two (2) years
from the date such mandate, variation, cancellation or
notification was recorded by the Company;
(c) any instrument of transfer of shares which has
been registered at any time after the expiration of seven
(7) years from the date of registration;
(d) any allotment letters after the expiration of
seven (7) years from the date of issue
thereof; and
(e) copies of powers of attorney, grants of probate
and letters of administration at any time after the expiration
of seven (7) years after the account to which the relevant
power of attorney, grant of probate or letters of administration
related has been closed;
and it shall conclusively be presumed in favor of the
Company that every entry in the Register purporting to be made
on the basis of any such documents so destroyed was duly and
properly made and every share certificate so destroyed was a
valid certificate duly and properly canceled and that every
instrument of transfer so destroyed was a valid and effective
instrument duly and properly registered and that every other
document destroyed hereunder was a valid and effective document
in accordance with the recorded particulars thereof in the books
or records of the Company; provided, however, that: (1) the
foregoing provisions of this Bye-Law shall apply only to the
destruction of a document in good faith and without Notice to
the Company that the preservation of such document was relevant
to a claim; (2) nothing contained in this Bye-Law shall be
construed as imposing upon the Company any liability in respect
of the destruction of any such document earlier than as
aforesaid or in any case where the conditions of proviso
(1) above are not fulfilled; and (3) references in
this Bye-Law to the destruction of any document include
references to its disposal in any manner.
DIVIDENDS
AND OTHER DISTRIBUTIONS
33. (1) Subject to the Act, the Board may from
time to time declare dividends in any currency or property to be
paid to the Members. The Board may also make a distribution to
the Members out of any contributed surplus (as ascertained in
accordance with the Act).
(2) No dividend shall be paid or other distribution
made out of contributed surplus if to do so would render the
Company unable to pay its liabilities as they become due or the
realizable value of its assets would thereby become less than
the aggregate of its liabilities and its issued share capital
and share premium accounts.
(3) Except in so far as the rights attaching to, or
the terms of issue of, any share otherwise provide:
(a) all dividends shall be declared and paid
according to the amounts paid; and
(b) all dividends shall be apportioned and paid pro
rata according to the amounts paid up on the shares during any
portion or portions of the period in respect of which the
dividend is paid.
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(4) The Board may from time to time pay to the
Members such interim dividends as appear to the Board to be
justified by the profits of the Company and in particular (but
without prejudice to the generality of the foregoing) if at any
time the share capital of the Company is divided into different
classes, the Board may pay such interim dividends in respect of
those shares in the capital of the Company which confer on the
holders thereof deferred or non-preferential rights as well as
in respect of those shares which confer on the holders thereof
preferential rights with regard to dividends and provided that
the Board acts bona fide the Board shall not incur any
responsibility to the holders of shares conferring any
preference for any damage that they may suffer by reason of the
payment of an interim dividend on any shares having deferred or
non-preferential rights and may also pay any fixed dividend
which is payable on any shares of the Company quarterly or on
any other dates, whenever such profits, in the opinion of the
Board, justifies such payment.
(5) The Board may deduct from any dividend or other
monies payable to a Member by the Company on or in respect of
any shares all sums of money (if any) presently payable by him
to the Company on account of calls or otherwise.
(6) No dividend or other monies payable by the
Company on or in respect of any share shall bear interest
against the Company.
(7) Any dividend, interest or other sum payable in
cash to the holder of shares may be paid by check or warrant
sent through the mail addressed to the holder at his registered
address or, in the case of joint holders, addressed to the
holder whose name stands first in the Register in respect of the
shares at his address as appearing in the Register or addressed
to such Person and at such address as the holder or joint
holders may in writing direct. Every such check or warrant
shall, unless the holder or joint holders otherwise direct, be
made payable to the order of the holder or, in the case of joint
holders, to the order of the holder whose name stands first on
the Register in respect of such shares, and shall be sent at his
or their risk and payment of the check or warrant by the bank on
which it is drawn shall constitute a good discharge to the
Company notwithstanding that it may subsequently appear that the
same has been stolen or that any endorsement thereon has been
forged. Any one of two or more joint holders may give effectual
receipts for any dividends or other monies payable or property
distributable in respect of the shares held by such joint
holders.
(8) All dividends or bonuses unclaimed for one
(1) year after having been declared may be invested or
otherwise made use of by the Board for the benefit of the
Company until claimed. Any dividend or bonuses unclaimed after a
period of six (6) years from the date of declaration shall
be forfeited and shall revert to the Company. The payment by the
Board of any unclaimed dividend or other sums payable on or in
respect of a share into a separate account shall not constitute
the Company a trustee in respect thereof.
(9) Whenever the Board has resolved that a dividend
be declared or paid, the Board may further resolve that such
dividend be satisfied wholly or in part by the distribution of
specific assets of any kind and in particular of paid up shares,
debentures or warrants to subscribe securities of the Company or
any other company, or in any one or more of such ways, and where
any difficulty arises in regard to the distribution the Board
may settle the same as it thinks expedient, and in particular
may issue certificates in respect of fractions of shares,
disregard fractional entitlements or round the same up or down,
and may fix the value for distribution of such specific assets,
or any part thereof, and may determine that cash payments shall
be made to any Members upon the basis of the value so fixed in
order to adjust the rights of all parties, and may vest any such
specific assets in trustees as may seem expedient to the Board
and may appoint any Person to sign any requisite instruments of
transfer and other documents on behalf of the Persons entitled
to the dividend, and such appointment shall be effective and
binding on the Members. The Board may resolve that no such
assets shall be made available to Members with registered
addresses in any particular territory or territories where, in
the absence of a registration statement or other special
formalities, such distribution of assets would or might, in the
opinion of the Board, be unlawful or impracticable and in such
event the only entitlement of the Members aforesaid shall be to
receive cash payments as aforesaid. Members affected as a result
of the foregoing sentence shall not be or be deemed to be a
separate class of Members for any purpose whatsoever.
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(10) Whenever the Board has resolved that a
dividend be declared or paid on any class of the share capital
of the Company, the Board may further resolve either:
(a) that such dividend be satisfied wholly or in
part in the form of an allotment of shares credited as fully
paid up, provided that the shareholders entitled thereto will be
entitled to elect to receive such dividend (or part thereof if
the Board so determines) in cash in lieu of such allotment. In
such case, the following provisions shall apply:
(i) the basis of any such allotment shall be
determined by the Board;
(ii) the Board, after determining the basis of
allotment, shall give not less than two (2) weeks
Notice to the holders of the relevant shares of the right of
election accorded to them, and shall send with such Notice,
forms of election and specify the procedure to be followed and
the place at which and the latest date and time by which duly
completed forms of election must be delivered in order to be
effective;
(iii) the right of election may be exercised in
respect of the whole or part of that portion of the dividend in
respect of which the right of election has been
accorded; and
(iv) the dividend (or that part of the dividend to
be satisfied by the allotment of shares as aforesaid) shall not
be payable in cash on shares in respect whereof the cash
election has not been duly exercised (the non-elected
shares) and in satisfaction thereof shares of the relevant
class shall be allotted credited as fully paid up to the holders
of the non-elected shares on the basis of allotment determined
as aforesaid and for such purpose the Board shall capitalize and
apply out of any part of the undivided profits of the Company
(including profits carried and standing to the credit of any
reserves or other special account other than the Subscription
Rights Reserve) as the Board may determine, such sum as may be
required to pay up in full the appropriate number of shares of
the relevant class for allotment and distribution to and amongst
the holders of the non-elected shares on such basis; or
(b) that the
shareholdersMembers
entitled to such dividend shall be entitled to elect to
receive an allotment of shares credited as fully paid up in lieu
of the whole or such part of the dividend as the Board may
determine. In such case, the following provisions shall apply:
(i) the basis of any such allotment shall be determined by
the Board;
(ii) the Board, after determining the basis of allotment,
shall give not less than fourteen (14) days Notice to
the holders of the relevant shares of the right of election
accorded to them and shall send with such Notice forms of
election and specify the procedure to be followed and the place
at which and the latest date and time by which duly completed
forms of election must be delivered in order to be effective;
(iii) the right of election may be exercised in respect of
the whole or part of that portion of the dividend in respect of
which the right of election has been accorded; and
(iv) the dividend (or that part of the dividend in respect
of which a right of election has been accorded) shall not be
payable in cash on shares in respect whereof the share election
has been duly exercised (the elected shares) and in
lieu thereof shares of the relevant class shall be allotted
credited as fully paid up to the holders of the elected shares
on the basis of allotment determined as aforesaid and for such
purpose the Board shall capitalize and apply out of any part of
the undivided profits of the Company (including profits carried
and standing to the credit of any reserves or other special
account other than the Subscription Rights Reserve) as the Board
may determine, such sum as may be required to pay up in full the
appropriate number of shares of the relevant class for allotment
and distribution to and amongst the holders of the elected
shares on such basis.
(11) (a) The shares allotted under
paragraph (10) of this Bye-Law shall rank pari passu
in all respects with shares of the same class (if any) then in
issue save only as regards participation in the relevant
dividend or in any other distributions, bonuses or rights paid,
made, declared or announced prior to or contemporaneously with
the payment or declaration of the relevant dividend unless,
contemporaneously with the announcement by the Board of their
proposal under paragraph (10) of this Bye-Law in
relation to the relevant dividend or contemporaneously with
their announcement of the distribution, bonus or rights in
question, the Board shall specify that the shares to be allotted
under paragraph (10) of this Bye-Law shall rank for
participation in such distribution, bonus or rights.
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(b) The Board may do all acts and things considered
necessary or expedient to give effect to any capitalization
under paragraph (10) of this Bye-Law, with full power
to the Board to make such provisions as it determines in the
case of shares becoming distributable in fractions (including
provisions whereby, in whole or in part, fractional entitlements
are aggregated and sold and the net proceeds distributed to
those entitled, or are disregarded or rounded up or down or
whereby the benefit of fractional entitlements accrues to the
Company rather than to the Members concerned). The Board may
authorize any Person to enter into on behalf of all Members
interested, an agreement with the Company providing for such
capitalization and matters incidental thereto and any agreement
made pursuant to such authority shall be effective and binding
on all concerned.
(12) The Board may resolve in respect of any particular
dividend of the Company that notwithstanding the provisions of
paragraph (10) of this Bye-Law such dividend may be
satisfied wholly in the form of an allotment of shares credited
as fully paid up without offering any right to shareholders to
elect to receive such dividend in cash in lieu of such allotment.
(13) The Board may on any occasion determine that rights of
election and the allotment of shares under
paragraph (10) of this Bye-Law shall not be made
available or made to any
shareholdersMembers with
registered addresses in any territory where, in the absence of a
registration statement or other special formalities, the
circulation of an offer of such rights of election or the
allotment of shares would or might, in the opinion of the Board,
be unlawful or impracticable, and in such event the provisions
aforesaid shall be read and construed subject to such
determination. Members affected as a result of the foregoing
sentence shall not be or be deemed to be a separate class of
Members for any purpose whatsoever.
(14) Any resolution declaring a dividend on shares of any
class may specify that the same shall be payable or
distributable to the Persons registered as the holders of such
shares at the close of business on a particular date,
notwithstanding that it may be a date prior to that on which the
resolution is passed, and thereupon the dividend shall be
payable or distributable to them in accordance with their
respective holdings so registered, but without prejudice to the
rights inter se in respect of such dividend of transferors and
transferees of any such shares. The provisions of this Bye-Law
shall, as the case may be, apply to bonuses, capitalization
issues, distributions of realized capital profits or offers or
grants made by the Company to the Members.
(15) Before declaring any dividend, the Board may set aside
out of the profits of the Company such sums as it determines as
reserves which shall, at the discretion of the Board, be
applicable for any purpose to which the profits of the Company
may be properly applied and pending such application may, also
at such discretion, either be employed in the business of the
Company or be invested in such investments as the Board may from
time to time determine and so that it shall not be necessary to
keep any investments constituting the reserve or reserves
separate or distinct from any other investments of the Company.
The Board may also, without placing the same to reserves, carry
forward any profits which it may think prudent not to distribute.
CAPITALIZATION
34. (1) The Board may resolve to capitalize any part
of the amount for the time being standing to the credit of any
reserve account or to the credit of the profit and loss account
or otherwise available for distribution by applying such sum in
paying up (i) unissued shares, debentures or other
obligations to be allotted or distributed fully paid pro rata to
the Members or any class of Members or (ii) in full or
partly paid shares of those Members who would have been entitled
to such sums if they were distributed by way of dividend or
other distribution. In addition, the Board may, subject to the
Act, resolve to capitalize any part of the amount for the time
being standing to the credit of the Companys share premium
account by applying such sum in paying up unissued shares to be
issued to the Members, or class of Members, as fully paid bonus
shares.
(2) The Board may settle, as it considers appropriate, any
difficulty arising in regard to any distribution under the
preceding paragraph and in particular may issue certificates in
respect of fractions of shares or authorize any Person to sell
and transfer any fractions or may resolve that the distribution
should be as nearly as may be practicable in the correct
proportion but not exactly so or may ignore fractions
altogether, and may determine that cash payments shall be made
to any Members in order to adjust the rights of all parties, as
may seem expedient to the Board. The Board may appoint any
Person to sign on behalf of the Persons entitled to participate
in the distribution
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any contract necessary or desirable for giving effect thereto
and such appointment shall be effective and binding upon the
Members.
ACCOUNTING
RECORDS
35. (1) The Board shall cause true accounts to be kept
of the sums of money received and expended by the Company, and
the matters in respect of which such receipts and expenditures
take place, and of the property, assets, credits and liabilities
of the Company and of all other matters required by the Act or
necessary to give a true and fair view of the Companys
affairs and to explain its transactions.
(2) The accounting records shall be kept at the Office or,
subject to the Act, at such other place or places as the Board
decides outside of the United States and shall always be open to
inspection by the Directors of the Company. No Member (other
than a Director of the Company) shall have any right of
inspecting any accounting record or book or document of the
Company except as conferred by law or authorized by the Board or
the Company in a General Meeting.
(3) Subject to the Act, a printed copy of the balance sheet
and profit and loss account, including every document required
by law to be annexed thereto, made up to the end of the
applicable financial year and containing a summary of the assets
and liabilities of the Company under convenient headings and a
statement of income and expenditures, together with a copy of
the Auditors report, shall be sent to each Person entitled
thereto at least twenty-one (21) days before the date of
the Annual General Meeting and laid before the Company at such
meeting in accordance with the requirements of the Act provided
that this Bye-Law shall not require a copy of those documents to
be sent to any Person of whose address the Company is not aware
or to more than one of the joint holders of any shares or
debentures.
AUDIT
36. (1) Subject to the Act, at the Annual General
Meeting or at a subsequent Special General Meeting in each year,
the Members shall appoint an Auditor to audit the accounts of
the Company and such Auditor shall hold office until the Members
appoint another Auditor. Such Auditor may be a Member but no
Director or Officer or employee of the Company shall, during his
continuance in office, be eligible to act as an Auditor of the
Company.
(2) Subject to the Act, a Person, other than a retiring
Auditor, shall not be capable of being appointed Auditor at an
Annual General Meeting unless Notice of an intention to nominate
that Person to the office of Auditor has been given not less
than fourteen (14) days before the Annual General Meeting
and furthermore, the Company shall send a copy of any such
Notice to the retiring Auditor.
(3) The Members, by a resolution passed by at least
two-thirds of the votes cast at a General Meeting of which
notice specifying the intention to pass such resolution was
given, may remove the Auditor at any time before the expiration
of his term of office and shall by ordinary
resolutionOrdinary Resolution at that
meeting appoint another Auditor in his stead for the remainder
of his term, provided that, not less than twenty-one
(21) days before the date of the meeting, notice in writing
of the proposed resolution is given to the incumbent auditor and
to the auditor proposed to be appointed.
(4) Subject to the Act, the accounts of the Company shall
be audited at least once in every year.
(5) The remuneration of the Auditor shall be fixed by the
Company in a General Meeting or in such manner as the Members
may determine.
(6) If the office of Auditor becomes vacant by the
resignation or death of the Auditor, or by his becoming
incapable of acting by reason of illness or other disability at
a time when his services are required, the Directors shall as
soon as practicable convene a Special General Meeting to fill
the vacancy.
(7) The statement of income and expenditures and the
balance sheet provided for by these Bye-Laws shall be examined
by the Auditor and compared by him with the books, accounts and
vouchers relating thereto; and he shall make a written report
thereon stating whether such statement and balance sheet are
drawn up so as to present fairly the financial position of the
Company and the results of its operations for the period under
review and, in case
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information shall have been called for from Directors or
Officers of the Company, whether the same has been furnished and
has been satisfactory. The financial statements of the Company
shall be audited by the Auditor in accordance with generally
accepted auditing standards. The Auditor shall make a written
report thereon in accordance with generally accepted auditing
standards and the report of the Auditor shall be submitted to
the Members in a General Meeting. The generally accepted
auditing standards referred to herein may be those of a country
or jurisdiction other than Bermuda. If so, the financial
statements and the report of the Auditor should disclose this
fact and name such country or jurisdiction.
(8) The Auditor shall at all reasonable times have access
to all books kept by the Company and to all accounts and
vouchers relating thereto; and he may call on the Directors or
Officers of the Company for any information in their possession
relating to the books or affairs of the Company.
NOTICES
37. (1) Any Notice from the Company to a Member shall
be given in writing or by cable, telex or facsimile transmission
message and any such Notice and (where appropriate) any other
document may be served or delivered by the Company on or to any
Member either personally or by sending it through the mail or
other courier service in a prepaid envelope addressed to such
Member at his registered address as appearing in the Register or
at any other address supplied by him to the Company for the
purpose or, as the case may be, by transmitting it to any such
address or transmitting it to any telex or facsimile
transmission number supplied by him to the Company for the
giving of Notice to him or which the Person transmitting the
Notice reasonably and bona fide believes at the relevant time
will result in the Notice being duly received by the Member or
may also be served by advertisement in appointed newspapers (as
defined in the Act) or in accordance with the requirements of
any Designated Stock Exchange. In the case of joint holders of a
share all Notices shall be given to that one of the joint
holders whose name stands first in the Register and Notice so
given shall be deemed a sufficient service on or delivery to all
the joint holders.
(2) Any Notice or other document:
(a) if served or delivered by mail, shall be sent airmail
where appropriate and shall be deemed to have been served or
delivered on the day following that on which the envelope
containing the same, properly prepaid and addressed, is put into
the mail; in proving such service or delivery it shall be
sufficient to prove that the envelope or wrapper containing the
Notice or document was properly addressed and put into the mail
and a certificate in writing signed by the Secretary or other
Officer of the Company or other Person appointed by the Board
that the envelope or wrapper containing the Notice or other
document was so addressed and put into the mail shall be
conclusive evidence thereof; and
(b) if served or delivered in any other manner contemplated
by these Bye-Laws, shall be deemed to have been served or
delivered at the time of personal service or delivery or, as the
case may be, at the time of the relevant dispatch or
transmission; and in proving such service or delivery a
certificate in writing signed by the Secretary or other Officer
of the Company or other Person appointed by the Board as to the
fact and time of such service, delivery, dispatch or
transmission shall be conclusive evidence thereof.
(3) Any Notice or other document delivered or sent by mail
to or left at the registered address of any Member in pursuance
of these Bye-Laws shall, notwithstanding that such Member is
then dead or bankrupt or that any other event has occurred, and
whether or not the Company has Notice of the death or bankruptcy
or other event, be deemed to have been duly served or delivered
in respect of any share registered in the name of such Member as
sole or joint holder unless his name shall, at the time of the
service or delivery of the Notice or document, have been removed
from the Register as the holder of the share, and such service
or delivery shall for all purposes be deemed a sufficient
service or delivery of such Notice or document on all Persons
interested (whether jointly with or as claiming through or under
him) in the share.
(4) A Notice may be given by the Company to the Person
entitled to a share in consequence of the death, mental disorder
or bankruptcy of a Member by sending it through the mail in a
prepaid letter, envelope or wrapper addressed to him by name, or
by the title of the representative of the deceased, or trustee
of the bankrupt, or by any like description, at the address, if
any, supplied for the purpose by the Person claiming to be so
entitled, or (until
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such an address has been so supplied) by giving the Notice in
any manner in which the same might have been given if the death,
mental disorder or bankruptcy had not occurred.
(5) Any Person who by operation of law, transfer or other
means whatsoever shall become entitled to any share shall be
bound by every Notice in respect of such share which prior to
his name and address being entered on the Register shall have
been duly given to the Person from whom he derives his title to
such share.
(6) For the purposes of these Bye-Laws, a cable or telex or
facsimile transmission message purporting to come from a holder
of shares or, as the case may be, a Director or Alternate
Director, or, in the case of a corporation which is a holder of
shares from a director or the secretary thereof or a duly
appointed attorney or duly authorized representative thereof for
it and on its behalf, shall in the absence of express evidence
to the contrary available to the Person relying thereon at the
relevant time be deemed to be a document or instrument in
writing signed by such holder or Director or Alternate Director
or in the terms in which it is received.
WINDING
UP
38. (1) The Board shall have power in the name and on
behalf of the Company to present a petition to the court for the
Company to be wound up.
(2) A resolution that the Company be wound up by the court
or be wound up voluntarily shall be a special resolution.
(3) If the Company shall be wound up (whether the
liquidation is voluntary or by the court) the liquidator may,
with the authority of a special resolution and any other
sanction required by the Act, divide among the Members in specie
or kind the whole or any part of the assets of the Company and
whether or not the assets shall consist of properties of one
kind or shall consist of properties to be divided as aforesaid
of different kinds, and may for such purpose set such value as
he deems fair upon any one or more class or classes of property
and may determine how such division shall be carried out as
between the Members or different classes of Members. The
liquidator may, with the like authority, vest any part of the
assets in trustees upon such trusts for the benefit of the
Members as the liquidator with the like authority shall
determine, and the liquidation of the Company may be closed and
the Company dissolved, but so that no contributory shall be
compelled to accept any shares or other property in respect of
which there is a liability.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS OF THE COMPANY
39. (1) The Directors and Officers (such term to
include, for the purposes of this Bye-Law, any individual
appointed to any committee by the Board) for the time being
acting in relation to any of the affairs of the Company and the
liquidator or trustees (if any) for the time being acting in
relation to any of the affairs of the Company and every one of
them, and their heirs, executors and administrators, shall be
indemnified and held harmless out of the assets of the Company
from and against all actions, costs, charges, losses, damages
and expenses which they or any of them, their heirs, executors
or administrators, shall or may incur or sustain by or by reason
of any act done, concurred in or omitted in or about the
execution of their duty, or supposed duty, or in their
respective offices or trusts, and none of them shall be
answerable for the acts, receipts, neglects or defaults of the
others of them or for joining in any receipts for the sake of
conformity, or for any bankers or other Persons with whom any
monies or effects belonging to the Company shall or may be
delivered or deposited for safe custody, or for insufficiency or
deficiency of any security upon which any monies of or belonging
to the Company shall be deposited or invested, or for any other
loss, misfortune or damage which may happen in the execution of
their respective offices or trusts, or in relation thereto,
provided that this indemnity shall not extend to any matter in
respect of any fraud or dishonesty which may attach to any of
said individuals.
(2) Each Member and the Company agree to waive any claim or
right of action he or it might have, whether individually or by
or in the right of the Company, against any Director or Officer
on account of any action taken by such Director or Officer, or
the failure of such Director or Officer to take any action, in
the performance of his duties, or supposed duties, with or for
the Company; provided that such waiver shall not extend to any
matter in respect of any fraud or dishonesty which may attach to
such Director or Officer. Any repeal or modification of this
C-37
Bye-Law shall not adversely affect any right or protection of a
Director or Officer of the Company existing immediately prior to
such repeal or modification.
(3) Expenses incurred in defending a civil or criminal
action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or
proceeding as authorized by the Board in the specific case upon
receipt of an undertaking by or on behalf of the Director,
Officer, liquidator or trustee to repay such amount unless it
shall ultimately be determined that the individual is entitled
to be indemnified by the Company as authorized in these Bye-Laws
or otherwise pursuant to the laws of Bermuda.
NONAPPLICABILITY
OF VOTING AND TRANSFER RESTRICTIONS TO
CERTAIN SHAREHOLDERS OF PXRE CORPORATION
40. Notwithstanding anything to the contrary
in these Bye-Laws, the Maximum Percentage limitations on voting
rights set forth in paragraph 4 of Bye-Law No. 20 and
the 9.9% Limitation on the transfer of shares set forth in
paragraph 1 of Bye-Law No. 13 and paragraph 2 of
Bye-Law No. 14 shall not apply to any Person Owning or
Controlling more than 9.9% of the outstanding shares of common
stock of PXRE Corporation on the date of the adoption of these
Bye-Laws, but only with respect to Common Shares into which
shares of common stock of PXRE Corporation owned as of the date
of the adoption of these Bye-Laws are converted pursuant to the
Agreement and Plan of Merger, dated as of July 7, 1999,
between the Company, PXRE Corporation and PXRE Merger
Corp.
AMENDMENT
OF BYE-LAWS
41. 40 Any amendment
to these Bye-Laws or to the Companys Memorandum of
Association shall be approved by the Board and decided on by an
ordinary resolutionOrdinary Resolution
of the Members.; provided however,
that any proposed amendment to Bye-Laws 1, 3, 4,
5, 13, 17, 18, 20, 22, 39 or 40 or 41 shall be
approved by the Board and by a special resolution of the
Members.
* * * * *
C-38
Annex D
VOTING
AND CONVERSION AGREEMENT
VOTING AND CONVERSION AGREEMENT, dated as of March 14, 2007
(this Agreement), by and among PXRE Group
Ltd., a Bermuda company (Parent), Argonaut
Group, Inc., a Delaware corporation (the
Company), Capital Z Financial Services
Fund II, L.P. (Capital Z Fund), Capital
Z Financial Services Private Fund II, L.P.
(Capital Z Private Fund), CapZ PXRE Holdings,
LLC (CapZ Holdings), CapZ PXRE Holdings
Private, LLC (CapZ Holdings Private), Capital
Z Management, LLC (Capital Management and
collectively with Capital Z Fund, Capital Z Private Fund, CapZ
Holdings and CapZ Holdings Private,
Cap Z), Reservoir Capital Master Fund,
L.P. (Reservoir Capital Master Fund),
Reservoir Capital Master Fund II, L.P. (Reservoir
Capital Master Fund II), Reservoir Capital
Partners, L.P. (Reservoir Partners),
Reservoir Capital Investment Partners, L.P. (Reservoir
Investment), Reservoir Capital Group, L.L.C.
(Reservoir Group and, collectively with
Reservoir Capital Master Fund, Reservoir Capital Master
Fund II, Reservoir Partners and Reservoir Investment,
Reservoir), RER Reinsurance Holdings, L.P.
(RER) and Robert Stavis (Robert
Stavis and, collectively with Cap Z, Reservoir, and
RER, Stockholders). Capitalized terms not
defined herein shall have the meaning ascribed to such terms in
the Merger Agreement (defined below).
W I T N E S S E T H:
WHEREAS, Parent, Merger Sub, a Delaware corporation and wholly
owned subsidiary of Parent (Merger Sub), and
the Company have entered into an Agreement and Plan of Merger,
dated as of the date hereof (as the same may be amended or
supplemented, the Merger Agreement),
providing for, among other things, the merger of Merger Sub with
and into the Company (the Merger), upon the
terms and subject to the conditions set forth in the Merger
Agreement;
WHEREAS, pursuant to Section 8.14 of the Merger Agreement,
Parent shall cause the number of authorized common shares of
Parent, par value $1.00 per share (the Common
Shares) to be increased (the Share
Increase);
WHEREAS, pursuant to Section 4.1(c) of the Merger
Agreement, the number of Common Shares outstanding shall be
reduced pursuant to a
one-for-ten
reverse stock split (the Reverse Stock Split);
WHEREAS, pursuant to Section 8.10 of the Merger Agreement,
Parent shall cause the name of Parent to be changed to
Argo Group International Holdings, Ltd. (the
Name Change);
WHEREAS, pursuant to Section 8.9 of the Merger Agreement,
Parent shall increase the number of members of the board of
directors of Parent to twelve (12) and shall use
commercially reasonable efforts to increase the number of
members of the board of directors of Parent to thirteen (13)
(collectively, the Board Increase);
WHEREAS, as of the date hereof, each Stockholder beneficially
owns (as such term is defined in
Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder)
the number of shares of (i) Series A Convertible
Voting Preferred Shares of Parent, par value $1.00 per
share (Series A Preferred Shares),
(ii) Series B Convertible Voting Preferred Shares of
Parent, par value $1.00 per share (Series B
Preferred Shares), (iii) Series C
Convertible Voting Preferred Shares of Parent, par value
$1.00 per share (Series C Preferred
Shares and, collectively with Series A Preferred
Shares and Series B Preferred Shares, Preferred
Shares), (iv) Class A Convertible Voting
Common Shares of Parent, par value $1.00 per share
(Class A Common Shares),
(v) Class B Convertible Voting Common Shares of
Parent, par value $1.00 per share (Class B
Common Shares), (vi) Class C Convertible
Voting Common Shares of Parent, par value $1.00 per share
(Class C Common Shares and, collectively
with Class A Common Shares and Class B Common Shares,
Convertible Common Shares), and
(vii) Common Shares, set forth opposite such
Stockholders name on Schedule I (and with
respect to each Stockholder, such Preferred Shares, Convertible
Common Shares and Common Shares, together with any other Common
Shares, the beneficial ownership of which is acquired by such
Stockholder from and including the date hereof through and
including the date on which this Agreement is terminated in
accordance with its terms (including through the exercise of any
stock options, warrants or similar instruments), its
Subject Shares);
D-1
WHEREAS, pursuant to that certain Description of Stock of
Parent, dated as of February 12, 2002 (the
Description of Stock), attached to the
bye-laws of Parent, as amended (the
Bye-Laws), Stockholders as holders of
Preferred Shares and Convertible Common Shares have been granted
certain approval rights with respect to actions proposed to be
taken by Parent in connection with the Merger, including the
right to approve (i) the expansion by Parent into lines of
business other than continuing lines of business in which Parent
is currently involved and (ii) any alteration or change to
the terms, designations, powers, preferences or relative
participating, optional or other special rights, or the
qualifications, limitations or restrictions of the Preferred
Shares or Convertible Common Shares;
WHEREAS, pursuant to the Description of Stock, Stockholders may
opt at any time to convert (i) Preferred Shares to
Convertible Common Shares and (ii) Convertible Common
Shares to Common Shares;
WHEREAS, as a condition to their willingness to enter into this
Agreement, Stockholders have required that Parent reduce the
conversion price applicable to the conversion of Preferred
Shares to Convertible Common Shares on the terms set forth
herein only if the Merger is consummated; and
WHEREAS, as a condition to its willingness to enter into the
Merger Agreement, Parent and the Company have requested that
Stockholders enter into this Agreement pursuant to which each
Stockholder shall, among other things, (i) vote all of
their Subject Shares in favor of the proposal to approve and
adopt the Merger Agreement and the Merger, the Share Increase,
the Reverse Stock Split, the amendment and restatements of the
memorandum of association of Parent (the Memorandum of
Association) and the Bye-Laws (such amendment and
restatements together, the Amendment and
Restatements), the Name Change and the Board Increase,
(ii) deliver the consent described in Section 5
hereof and (iii) convert all of their Preferred Shares and
Convertible Common Shares into Common Shares, immediately prior
to consummation of the Merger.
NOW, THEREFORE, to induce the Company and Parent to enter into,
and in consideration of their entering into, the Merger
Agreement, and in consideration of the representations,
warranties, covenants and agreements set forth in this
Agreement, and intending to be legally bound hereby, the parties
hereto agree as follows:
Section 1. Limited
Irrevocable Proxies.
(a) Each Stockholder hereby irrevocably grants to, and
appoints, Parent and any individual who shall be designated by
Parent, Stockholders proxy and
attorney-in-fact
(with full power of substitution and resubstitution), for and in
the name, place and stead of Stockholder, to vote its Subject
Shares, or grant a consent or approval in respect of such
Subject Shares, at any meeting of stockholders of Parent or at
any adjournment or postponement thereof or in any other
circumstances upon which their vote, consent or other approval
is sought, in the manner contemplated by
Sections 6(a)(i)-(vii)
hereof; provided, however, that each Stockholder
shall be entitled to revoke such proxy in the event the Closing
does not occur for any reason on or before August 31, 2007
or the Merger Agreement is terminated in accordance with its
terms.
(b) Each Stockholder represents and warrants that any
proxies heretofore given in respect of its Subject Shares are
not irrevocable and that any such proxies have been or are
hereby revoked.
(c) Each Stockholder understands and acknowledges that
Parent is entering into the Merger Agreement in reliance upon
such Stockholders execution and delivery of this
Agreement. Each Stockholder hereby affirms that the proxy set
forth in this Section 1 is coupled with an interest
and is irrevocable until such time as this Agreement terminates
in accordance with its terms and that no subsequent proxies with
respect to its Subject Shares shall be given (and if given shall
not be effective). Each Stockholder hereby further affirms
that the irrevocable proxy is given in connection with the
execution of the Merger Agreement and that such irrevocable
proxy is given to secure the performance of the duties of such
Stockholder under this Agreement. Each Stockholder hereby
ratifies and confirms all that such irrevocable proxy may
lawfully do or cause to be done by virtue hereof. Such
irrevocable proxy is executed and intended to be irrevocable in
accordance with the provisions of the Bye-Laws and Bermuda law.
The power of attorney granted by each Stockholder is a durable
power of attorney and shall survive the dissolution, bankruptcy,
death or incapacity of such Stockholder.
D-2
Section 2. Representations
and Warranties of Stockholders. Each Stockholder
hereby represents and warrants as follows:
(a) Ownership of Subject
Shares. Stockholder is the record and beneficial
owner of, and has good, valid and marketable title to, the
Subject Shares set forth opposite its name on
Schedule I, free and clear of any liens, warrants,
options or other rights to purchase or acquire such Subject
Shares other than those imposed by securities laws and by this
Agreement. Stockholder has the exclusive right to vote the
Subject Shares set forth opposite its name on
Schedule I, and none of such Subject Shares is
subject to any voting trust or other agreement, arrangement or
restriction with respect to the voting of such Subject Shares,
except as contemplated by this Agreement.
(b) Authority; No Conflict. Stockholder
has all requisite power and authority to enter into this
Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by
Stockholder and constitutes a valid and binding obligation of
Stockholder enforceable against Stockholder in accordance with
its terms. The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated
hereby and compliance with the terms hereof will not, conflict
with, result in any violation of, or constitute (with or without
notice or lapse of time or both) default under, any provision of
any trust agreement, loan or credit agreement, bond, note,
mortgage, indenture, lease, partnership agreement or other
contract, agreement, obligation, commitment, arrangement,
understanding, instrument, permit, concession, franchise or
license or any statute, law, ordinance, rule, regulation,
judgment, order, notice or decree applicable to Stockholder or
to any of Stockholders property or assets.
(c) No Filings; Consents. No consents or
approvals of, or filings or registrations with, any Governmental
Entity or any other Person are necessary to be made by
Stockholder in connection with (i) the execution and
delivery by Stockholder of this Agreement and (ii) the
performance by Stockholder of its obligations under this
Agreement, including the grant of the limited irrevocable proxy
pursuant to Section 1(a) hereof.
(d) Reliance. Each Stockholder
understands and acknowledges that Parent is entering into the
Merger Agreement in reliance upon such Stockholders
execution and delivery of this Agreement.
(e) Brokers. No broker, finder or
investment banker is entitled to any brokerage, finders or
other fee or commission from Parent or the Company in connection
with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Stockholders.
Section 3. Representations
and Warranties of the Company. The Company hereby
represents and warrants that the Company has all requisite
corporate power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding obligation of
the Company enforceable against the Company in accordance with
its terms. The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated
hereby and compliance with the terms hereof will not, conflict
with, result in any violation of, or constitute (with or without
notice or lapse of time or both) default under, any provisions
of the certificate of incorporation or by-laws of the Company or
any trust agreement, loan or credit agreement, bond, note,
mortgage, indenture, lease or other contract, agreement,
obligation, commitment, arrangement, understanding, instrument,
permit, concession, franchise or license or any statute, law,
ordinance, rule, regulation, judgment, order, notice or decree
applicable to the Company or any of the Companys property
or assets. No broker, finder or investment banker is entitled to
any brokerage, finders or other fee or commission from
Stockholder or Parent in connection with the transactions
contemplated by this Agreement based upon arrangements made by
or on behalf of the Company.
Section 4. Representations
and Warranties of Parent. Parent hereby
represents and warrants that Parent has all requisite corporate
power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by Parent and
constitutes a valid and binding obligation of Parent enforceable
against Parent in accordance with its terms. The execution and
delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby and compliance with the terms
hereof will not, conflict with, result in any violation of, or
constitute (with or without notice or lapse of time or both)
default under, any provisions of the Memorandum of Association
or Bye-Laws or any trust agreement, loan or credit agreement,
bond, note, mortgage, indenture, lease or other contract,
agreement,
D-3
obligation, commitment, arrangement, understanding, instrument,
permit, concession, franchise or license or any statute, law,
ordinance, rule, regulation, judgment, order, notice or decree
applicable to Parent or any of Parents property or assets.
No broker, finder or investment banker is entitled to any
brokerage, finders or other fee or commission from
Stockholder or the Company in connection with the transactions
contemplated by this Agreement based upon arrangements made by
or on behalf of Parent.
Section 5. Consents
of Preferred Shares and Convertible Common Shares.
(a) Each Stockholder hereby agrees that, concurrently with
the execution and delivery of this Agreement and the Merger
Agreement, it shall execute and deliver to Parent a consent,
substantially in the form attached as Exhibit A (the
Consent), to:
(i) the substitution of $6.24 (the Substituted
Conversion Price) for the Current Conversion
Price calculated in accordance with the terms of the
Description of Stock for the purpose of calculating the
conversion ratio applicable to the conversion of Preferred
Shares to Convertible Common Shares pursuant to
Section 7(a) hereof;
(ii) the waiver of any dividends that would have otherwise
accrued on the Preferred Shares in accordance with the terms of
the Description of Stock from and after December 31, 2006
(the Waived Dividends) and the acknowledgment
that such Waived Dividends shall not constitute past
due dividends under Section 4(c) of the Description
of Stock;
(iii) the exclusion of the Waived Dividends that otherwise
would have been included in each of the Series A Preferred
Liquidation Preference, the Series B Preferred Liquidation
Preference and the Series C Preferred Liquidation
Preference for the purpose of calculating the Series A
Conversion Ratio, the Series B Conversion Ratio and the
Series C Conversion Ratio, respectively;
(iv) the waiver of any adjustments to the Current
Conversion Price that would have otherwise occurred as a result
of the Merger and the related transactions in accordance with
Sections 7(a), 7(b) and 7(d) of the Description of Stock;
(v) the expansion by Parent into lines of business other
than continuing lines of business in which Parent is currently
involved resulting from the Merger;
(vi) the entry by such Stockholder and Parent into this
Agreement and the conversions provided by Section 7
hereof; and
(vii) the Board Increase;
provided, that such consents are conditioned upon the
Closing occurring on or before August 31, 2007, and in the
event the Closing does not occur on or before August 31,
2007 or the Merger Agreement is terminated in accordance with
its terms, the foregoing consents shall hereby be automatically
rescinded, shall have no effect and shall be void ab
initio; provided, further, that any Waived
Dividends that become payable as a result thereof shall not be
deemed past due dividends under Section 4(c) of
the Description of Stock if paid on the next applicable Dividend
Due Date; provided, further, that if the Closing
does occur and any dividends or distributions are declared or
paid in respect of the Common Shares at or prior to the Closing,
then Stockholders shall be entitled to share in such dividend or
distribution in respect of the Preferred Shares and Convertible
Common Shares on an as-converted basis (assuming the Substituted
Conversion Price).
(b) Subject to Section 5(a), the Consent shall
remain in full force and effect until the termination of this
Agreement. Such Stockholder shall not enter into any agreement
or understanding with any Person prior to the termination of
this Agreement that is inconsistent with the terms hereof.
Section 6. Voting
Covenants of Stockholders. Each Stockholder
agrees as follows:
(a) Without in any way limiting Stockholders right to
vote its Subject Shares in such Stockholders sole
discretion with respect to any other matters that may be
submitted to a stockholder vote, consent or other approval
(including by written consent), at any meeting of the
stockholders of Parent called upon to approve and adopt the
Merger Agreement and the Merger, the Share Increase, the Reverse
Stock Split, the Amendment
D-4
and Restatements, the Name Change or the Board Increase or at
any adjournment thereof or in any other circumstances upon which
a vote, consent or other approval (including written consent)
with respect to the Merger Agreement and the Merger, the Share
Increase, the Reverse Stock Split, the Amendment and
Restatements, the Name Change or the Board Increase is sought,
Stockholder shall vote (or cause to be voted) its Subject Shares:
(i) in favor of the Merger, the approval and adoption of
the Merger Agreement and approval of any other transactions
contemplated by the Merger Agreement;
(ii) in favor of the Share Increase;
(iii) in favor of the Reverse Stock Split;
(iv) in favor of the Amendment and Restatements;
(v) in favor of the Name Change;
(vi) in favor of the Board Increase; and
(vii) against (x) any Parent Alternative Transaction
Proposal or any merger agreement or merger (other than the
Merger Agreement and the Merger), amalgamation, consolidation,
combination, sale of substantially all of Parents assets,
sale or issuance of securities of Parent or any of its
Subsidiaries, reorganization, joint venture, recapitalization,
dissolution, liquidation or winding up of or by Parent or any of
its Subsidiaries and (y) any amendment of the Memorandum of
Association or Bye-Laws or equivalent organizational documents
or other proposal or transaction involving Parent or any of its
Subsidiaries which amendment or other proposal or transaction
would or could reasonably be expected to impede, frustrate,
prevent, nullify or result in a breach of any representation,
warranty or covenant or any other obligation or agreement of
Parent under or with respect to, the Merger, the Merger
Agreement or any of the transactions contemplated by the Merger
Agreement or by this Agreement, including, without limitation,
the Share Increase, the Reverse Stock Split, the Amendment and
Restatements, the Name Change and the Board Increase.
(b) Stockholder shall not enter into any agreement or
understanding with any Person prior to the termination of this
Agreement to vote or give instructions in a manner inconsistent
with this Section 6.
(c) Stockholder agrees not to transfer, sell, assign,
exchange, pledge or otherwise dispose of (including by gift) or
encumber any of its Subject Shares, or to make any offer or
agreement relating thereto, at any time prior to the termination
of this Agreement unless the acquirer of such Subject Shares
executes a counterpart signature page to this Agreement and
agrees to be bound by all of the restrictions, obligations and
commitments of Stockholders hereunder. Furthermore, Stockholder
shall not, except as contemplated by this Agreement, directly or
indirectly, grant any proxies or powers of attorney with respect
to its Subject Shares, deposit such Subject Shares into a voting
trust or enter into a voting agreement or any other arrangement
with respect to such Subject Shares and shall not commit or
agree to take any of the foregoing actions.
(d) Stockholder shall be deemed to be a Representative at
all times for purposes of Section 8.3(a) of the Merger
Agreement (regardless of whether Stockholder is in fact a
Representative at the relevant time) and shall comply with the
terms of Section 8.3(a) of the Merger Agreement.
Section 7. Conversion
Covenants of Stockholders. Upon certification by
Parent and the Company to the Stockholders of the satisfaction
or waiver of all the conditions set forth in Article IX of
the Merger Agreement (other than those conditions that by their
nature are to be satisfied at the Closing, but subject to the
satisfaction or waiver of those conditions), each Stockholder
agrees that at least one (1) Business Day prior to the
Closing Date such Stockholder shall:
(a) surrender all Preferred Shares with written evidence to
Parent at its office designated pursuant to the Bye-Laws
(substantially in the form attached as Exhibit B) of
such Stockholders election to convert all Series A
Preferred Shares, Series B Preferred Shares or
Series C Preferred Shares of such Stockholder into fully
paid and nonassessable Class A Common Shares, Class B
Common Shares or Class C Common Shares,
D-5
respectively, using the Substituted Conversion Price and
excluding the Waived Dividends from the calculation of the
applicable conversion ratio, but otherwise in accordance with
the terms of the Description of Stock; and
(b) surrender all Convertible Common Shares with written
evidence to Parent at its office designated pursuant to the
Bye-Laws (substantially in the form attached as
Exhibit B) of such Stockholders election to
convert all Class A Common Shares, Class B Common
Shares and Class C Common Shares of such Stockholder
(including all of the Convertible Common Shares resulting from
the conversion in subparagraph 7(a) above) into fully paid
and nonassessable Common Shares on a
one-for-one
ratio in accordance with the terms of the Description of Stock;
provided, that such conversion shall be conditioned upon
the Closing occurring on or prior to August 31, 2007 and if
the Closing does not occur on or before August 31, 2007 for
any reason or the Merger Agreement is terminated pursuant to its
terms, the foregoing covenants to convert and any elections made
in accordance therewith shall hereby be rescinded, shall have no
effect and shall be void ab initio and Stockholders shall
continue to hold such Preferred Shares and Convertible Common
Shares Stockholders held of record immediately prior to
such elections to convert and the current conversion terms as
set forth in the Description of Stock shall apply to any future
conversions thereof.
Section 8. Further
Assurances. Each Stockholder will, from time to
time, execute and deliver, or cause to be executed and
delivered, such additional or further consents, documents and
other instruments as Parent may reasonably request for the
purpose of effectively carrying out the transactions
contemplated by this Agreement.
Section 9. Certain
Events. Each Stockholder agrees that this
Agreement and the obligations hereunder shall attach to its
Subject Shares and shall be binding upon any person or entity to
which legal or beneficial ownership of such Subject Shares shall
pass, whether by operation of law or otherwise, including the
respective successors of such Stockholder. In the event of any
stock split, stock dividend, merger, amalgamation,
reorganization, recapitalization or other change in the capital
structure of Parent affecting the Subject Shares or the
acquisition of additional shares of Subject Shares, the number
of Subject Shares shall be adjusted appropriately and this
Agreement and the obligations hereunder shall attach to any
additional or decreased shares of Subject Shares issued to or
acquired or disposed of by such Stockholder.
Section 10. Stockholder
Capacity. Each Stockholder enters into this
Agreement solely in such Stockholders capacity as the
record and beneficial owner of its Subject Shares. If any
Stockholder is or becomes during the term hereof a director or
officer of Parent, such Stockholder makes no agreement or
understanding in this Agreement in Stockholders capacity
as such director or officer. Nothing in this Agreement shall
limit or affect any actions taken by Stockholder in
Stockholders capacity as an officer or director of Parent.
Section 11. No
Ownership Interest. Except as expressly set
forth in this Agreement, nothing contained in this Agreement
shall be deemed to vest in Parent or the Company any direct or
indirect ownership or incidence of ownership of or with respect
to any Subject Shares. All rights, ownership and economic
benefits of and relating to any Subject Shares shall remain and
belong to Stockholders, and the Company shall not have any
authority to exercise any power or authority to manage, direct,
superintend, restrict, regulate, govern or administer any of the
policies or operations of Parent or exercise any power or
authority to direct Stockholders in the voting of any of the
Subject Shares, except as otherwise expressly provided in this
Agreement.
Section 12. Assignment. Neither
this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned, in whole or in part (whether by
operation of law or otherwise), by any party hereto without the
prior written consent of each of the other parties hereto, and
any attempt to make any such assignment without such consent
shall be null and void; provided that Parent may assign,
in its sole discretion, any or all of its rights, interests and
obligations hereunder to any direct or indirect wholly owned
subsidiary of Parent; provided, further, that any
Stockholder may assign its rights and obligations in connection
with any transfer of Subject Shares made in accordance with
Section 6(c). Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and
be enforceable by the parties and their respective successors
and assigns.
Section 13. Termination. This
Agreement shall terminate, and the provisions hereof shall be of
no further force or effect, upon the earliest of (i) the
Effective Time, (ii) the termination of the Merger
Agreement, and (iii) August 31, 2007; provided,
however, that notwithstanding anything to the contrary
contained in this
D-6
Agreement, no party hereto shall be relieved of or released from
any liabilities or damages arising out of a willful breach of
its covenants or a willful breach of its representations or
warranties contained in this Agreement prior to the termination
of this Agreement.
Section 14. General
Provisions.
(a) Modification. No supplement,
modification or amendment of this Agreement will be binding
unless made in a written instrument that is signed by all of the
parties hereto and that specifically refers to this Agreement.
(b) Notice. All notices and other
communications hereunder shall be in writing and shall be deemed
given upon receipt by the parties. All notices hereunder shall
be delivered to the Company and Parent in accordance with
Section 11.2 of the Merger Agreement and to each
Stockholder at its address set forth on Parents stock
ledger (or at such other address for a party as shall be
specified by like notice).
(c) Costs and Expenses. Whether or not
the Merger is consummated, each party shall bear its own
expenses in connection with this Agreement and the transactions
contemplated hereby.
(d) Interpretation. When a reference is
made in this Agreement to a Section, such reference shall be to
a Section of this Agreement unless otherwise indicated. The
headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement is the result
of the collective efforts of the Company, Parent and
Stockholder, and each provision hereof has been subject to the
mutual consultation, negotiation and agreement of the parties
and there shall be no construction against any party based on
any presumption of that partys involvement in the drafting
thereof. The words include, includes or
including shall be deemed to be followed by the
words without limitation. The term ordinary
course of business (or similar terms) shall be deemed to
be followed by the words consistent with past
practice.
(e) Entire Agreement; No Third Party
Beneficiaries. This Agreement (including the
documents and the instruments referred to herein)
(i) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof and
(ii) is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
(f) Governing Law and Venue; Waiver of Jury Trial.
(i) This Agreement shall be governed by, and construed in
accordance with, the laws of Bermuda, regardless of the laws
that might otherwise govern under applicable principles of
conflicts of laws thereof. The parties hereby irrevocably submit
to the jurisdiction of the courts of the State of New York and
the Federal courts of the United States of America located in
the State of New York and hereby waive, and agree not to assert,
as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document,
that it is not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in said
courts or that the venue thereof may not be appropriate or that
this Agreement or any such document may not be enforced in or by
such courts, and the parties irrevocably agree that all claims
with respect to such action or proceeding shall be heard and
determined in such a New York State court. The parties hereby
consent to and grant any such court jurisdiction over the person
of such parties solely for such purpose and over the subject
matter of such dispute and agree that mailing of process or
other papers in connection with any such action or proceeding in
the manner provided in Section 14(b) or in such other
manner as may be permitted by law shall be valid and sufficient
service thereof.
(ii) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO
INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH
SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT
(i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS
CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER
D-7
VOLUNTARILY AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION 14(f)(ii).
(g) Counterparts. This Agreement may be
executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the
parties and delivered to the other parties, it being understood
that all parties need not sign the same counterpart.
(h) Severability. If any provision of
this Agreement, or the application thereof to any Person or
circumstance is held invalid or unenforceable, the remainder of
this Agreement, and the application of such provision to other
Persons or circumstances, shall not be affected thereby, and to
such end, the provisions of this Agreement are agreed to be
severable. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced,
the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent
possible.
(i) Enforcement. The parties agree that
irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this
Agreement, in addition to any other remedy to which they are
entitled at law or in equity. Without limiting the generality of
the foregoing, the parties hereto expressly agree that the
obligations of Stockholders set forth in Sections 5,
6 and 7 hereof shall be subject to the foregoing
provisions of this Section 14(i).
[SIGNATURE PAGE FOLLOWS]
D-8
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed as of the date first written above.
PXRE GROUP LTD.
Name: Jeffrey L. Radke
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Title:
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President & Chief Executive Officer
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ARGONAUT GROUP, INC.
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By:
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/s/ Byron
L. LeFlore, Jr.
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Name: Byron L. LeFlore, Jr.
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Title:
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Senior Vice President
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CAPITAL Z FINANCIAL SERVICES FUND II, L.P.
Name: Bradley Cooper
CAPITAL Z FINANCIAL SERVICES PRIVATE
FUND II, L.P.
Name: Bradley Cooper
D-9
CAPZ PXRE HOLDINGS, LLC
Name: Bradley Cooper
CAPZ PXRE HOLDINGS PRIVATE, LLC
Name: Bradley Cooper
CAPITAL Z MANAGEMENT, LLC
Name: Bradley Cooper
RESERVOIR CAPITAL MASTER FUND, L.P.
Name: Craig Huff
RESERVOIR CAPITAL MASTER FUND II, L.P.
Name: Craig Huff
D-10
RESERVOIR CAPITAL PARTNERS, L.P.
Name: Craig Huff
RESERVOIR CAPITAL INVESTMENT PARTNERS, L.P.
Name: Craig Huff
RESERVOIR CAPITAL GROUP, L.L.C.
Name: Craig Huff
RER REINSURANCE HOLDINGS, L.P.
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By:
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/s/ Richard
E. Rainwater
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by Melissa T. Parrish,
Attorney-in-fact
Name: Richard E. Rainwater
ROBERT STAVIS
D-11
Annex E
PERSONAL AND CONFIDENTIAL
March 12, 2007
Special Committee of the Board of Directors
PXRE Group Ltd.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
Members of the Special Committee of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to certain of the
shareholders of PXRE Group Ltd., a company organized under the
laws of Bermuda (Acquiror) of the proposed
acquisition (the Merger) of Argonaut Group, Inc., a
Delaware corporation (Target), by Acquiror by means
of a merger of PXMS Inc., a direct, wholly owned subsidiary of
Acquiror (MergerSub), with and into Target, pursuant
to the Agreement and Plan of Merger, dated as of March 14,
2007, by and among Acquiror, Merger Sub and Target (the
Agreement). Pursuant to the terms of the Agreement,
each outstanding share of common stock, par value $0.10 per
share, of Target will be converted into 6.4672 common shares,
par value $1.00 per share, of Acquiror (the Common
Shares).
Keefe, Bruyette & Woods, Inc., as part of its
investment banking business, is continually engaged in the
valuation of insurance and insurance holding company securities
in connection with acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities,
private placements and valuations for various other purposes. As
specialists in the securities of insurance companies, we have
experience in, and knowledge of, the valuation of insurance
enterprises. In the ordinary course of our business as a
broker-dealer, we may, from time to time purchase securities
from, and sell securities to, Target and Acquiror, and as a
market maker in securities, we may from time to time have a long
or short position in, and buy or sell, debt or equity securities
of Target and Acquiror for our own account and for the accounts
of our customers. To the extent we have any such position as of
the date of this opinion it has been disclosed to Acquiror. We
have acted exclusively for the Special Committee of the Board of
Directors of Acquiror in rendering this fairness opinion and
will receive a fee from Acquiror for our services.
In connection with this opinion, we have reviewed and analyzed
the Merger and the financial and operating condition of Target
and Acquiror, including among other things, the following:
(i) the Agreement; (ii) the Annual Reports to
Stockholders and Annual Reports on
Form 10-K
for the three years ended December 31, 2005 of Target and
Acquiror; (iii) certain interim reports to stockholders and
Quarterly Reports on
Form 10-Q
of Target and Acquiror and certain other communications from
Target and Acquiror to their respective shareholders;
(iv) other financial information concerning the businesses
and operations of Target and Acquiror furnished to us by Target
and Acquiror for purposes of our analysis; (v) market
prices and valuation multiples for Target and compared them with
those of certain publicly traded companies that we deemed
relevant; (vi) the results and operations of Target and
compared them with those of certain publicly traded companies
that we deemed relevant; (vii) the terms and conditions of
the Voting and Conversion Agreement with the Preferred and
Convertible Common Shareholders (the Preferred Share
Exchange Agreement) whereby the Stockholders, as defined
therein, agree to, among other things, (1) the substitution
of $6.24 for the Current Conversion Price in the Description of
Stock, (2) the waiver of
Keefe,
Bruyette, & Woods 787 Seventh Avenue New York, NY
10019
212 887 7777 Toll Free 800 966 1559
E-1
Special Committee of the Board of Directors
PXRE Group Ltd.
March 12, 2007
dividends that would otherwise have accrued on the Preferred
Shares from and after December 31, 2006, (3) the
expansion by Acquiror into lines of business other than
continuing lines of business in which it is currently involved,
and (4) certain other actions as described in the Preferred
Share Exchange Agreement (the Preferred Share
Exchange); and (viii) other financial information
concerning the businesses and operations of Target and Acquiror
furnished to us by Target and Acquiror for purposes of our
analysis.
We have also held discussions with senior management of Target
and Acquiror regarding the past and current business operations,
regulatory relations, financial condition and future prospects
of their respective companies and such other matters as we have
deemed relevant to our inquiry. In addition, we have compared
certain financial and stock market information for Target and
Acquiror with similar information for certain other companies
the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the
financial institution industry and performed such other studies
and analyses as we considered appropriate. Our opinion is
necessarily based upon market, economic and other conditions as
they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
In conducting our review and arriving at our opinion, we have
relied upon the accuracy and completeness of all of the
financial, accounting, legal, tax and other information provided
to us or publicly available and we have not assumed any
responsibility for independently verifying the accuracy or
completeness of any such information. We have relied upon the
management of Target and Acquiror as to the reasonableness and
achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to
us, and we have assumed that such forecasts and projections
reflect the best currently available estimates and judgments of
such managements and that such forecasts and projections will be
realized in the amounts and in the time periods currently
estimated by such managements. We are not experts in the
independent verification of the adequacy of reserves for loss
and loss adjustment expenses and we have assumed, with your
consent, that the aggregate reserves for loss and loss
adjustment expenses for Target and Acquiror are adequate to
cover such losses. In rendering our opinion, we have not made or
obtained any evaluations or appraisals of the property of Target
or Acquiror, nor have we examined any individual production or
underwriting files of Target or Acquiror. In addition, we have
not assumed any obligation to conduct any physical inspection of
the properties or facilities of Target or Acquiror.
We have considered such financial and other factors as we have
deemed appropriate under the circumstances, including, among
others, the following: (i) the historical and current
financial position and results of operations of Target and
Acquiror, (ii) the assets and liabilities of Target and
Acquiror; and (iii) the nature and terms of certain other
merger transactions involving insurance, insurance brokerage and
insurance holding companies. We have also taken into account our
assessment of general economic, market and financial conditions
and our experience in other transactions, as well as our
experience in securities valuation and knowledge of the
insurance and insurance brokerage industries generally. Our
opinion is necessarily based upon conditions as they exist and
can be evaluated on the date hereof and the information made
available to us through the date hereof.
Finally, we have assumed, with your consent, that: (i) the
Merger will be consummated in accordance with the terms of the
Agreement, without waiver, modification or amendment of any
material term, condition or agreement; (ii) in the course
of obtaining the necessary governmental, regulatory or third
party approvals, consents and releases for the Merger, no delay,
limitation, restriction or condition will be imposed that would
have a material adverse effect on Acquiror, Target or the
holders of the Common Shares; (iii) the Preferred Share
Exchange will be consummated in accordance with the terms of the
Preferred Share Exchange Agreement, without waiver, modification
or amendment of any material term, condition or agreement; and
(iv) in the course of obtaining the necessary governmental,
regulatory or third party approvals, consents and releases for
the Preferred Share Exchange, no delay, limitation, restriction
or condition will be imposed that would have a material adverse
effect on Acquiror, Target or the holders of the Common Shares.
We further have assumed that the final terms of the Agreement
and the Preferred Share Exchange Agreement will not vary
materially from those set forth in the drafts reviewed by us.
E-2
Special Committee of the Board of Directors
PXRE Group Ltd.
March 12, 2007
This opinion is for the use and benefit of the Special Committee
of the Board of Directors and the Board of Directors of
Acquiror. Our opinion does not address the relative merits of
the Merger as compared to any alternative transactions that
might exist for Acquiror or the effect of any other transaction
in which it might engage and does not constitute a
recommendation to any shareholder as to how such shareholder
should vote on the proposed Merger or any matter related thereto.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof and after giving effect to the
transactions contemplated by the Preferred Share Exchange, the
consideration paid in the Merger is fair, from a financial point
of view, to the holders of the Common Shares (other than such
holders that participate in the Preferred Share Exchange).
Very truly yours,
/s/ Keefe,
Bruyette & Woods, Inc.
Keefe, Bruyette & Woods, Inc.
E-3
Annex F
Bear,
Stearns & Co. Inc.
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383 Madison Avenue
New York, New York 10179
Tel 212.272.2000
www.bearstearns.com
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March 14, 2007
The Board of Directors
Argonaut Group, Inc.
10101 Reunion Place
Suite 500
San Antonio, TX 78216
Gentlemen:
We understand that Argonaut Group, Inc. (Argonaut),
PXRE Group Ltd. (PXRE) and PXMS Inc., a newly formed
wholly owned subsidiary of PXRE (Merger Sub), intend
to enter into an Agreement and Plan of Merger to be dated as of
March 14, 2007 (the Agreement), pursuant to
which Merger Sub shall be merged (the Merger) with
and into Argonaut, with Argonaut being the surviving
corporation. In the Merger, each share of common stock, par
value $0.10 per share, of Argonaut (Argonaut Common
Stock) shall be converted into the right to receive
6.4672 shares of common stock, par value $1.00 per
share, of PXRE (PXRE Common Stock), subject to
certain potential adjustments as more fully described in the
Agreement (the Exchange Ratio). From time to time
herein, Argonaut and PXRE on a combined basis after the Merger
are referred to as New Argonaut. We also understand
that, prior to the effective time of the Merger, Argonaut
intends to pay to the holders of Argonaut Common Stock a
one-time special cash dividend of up to $60 million (the
Special Cash Dividend). We further understand that
certain of PXREs shareholders intend to enter into a
Voting and Conversion Agreement, to be dated as of even date
with the Agreement (the Voting and Conversion
Agreement and, together with the Agreement, the
Transaction Documentation), pursuant to which such
shareholders will, among other things, agree to (i) convert
all of their holdings of PXRE Convertible Common Shares and PXRE
Preferred Shares (each, as defined in the Agreement) into shares
of PXRE Common Stock, (ii) vote all of their shareholdings
in favor of the proposal to approve and adopt the Merger
Agreement, the Merger and certain related actions and
(iii) take such other actions as specified in the Voting
and Conversion Agreement. You have provided us with a copy of
the Transaction Documentation in substantially final form.
You have asked us to render our opinion as to whether the
Exchange Ratio is fair, from a financial point of view, to the
shareholders of Argonaut.
In the course of performing our review and analyses for
rendering this opinion, we have:
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reviewed drafts of the Transaction Documentation, dated
March 14, 2007;
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reviewed Argonauts Annual Reports to Shareholders and
Annual Reports on
Form 10-K
for the years ended December 31, 2004, 2005 and 2006 and
its Current Reports on
Form 8-K
filed since December 31, 2006;
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ATLANTA BEIJING BOSTON BUENOS
AIRES CHICAGO DALLAS DUBLIN HONG
KONG LONDON
LOS
ANGELES LUGANO NEW
YORK PUERTO
RICO SAN FRANCISCO
SÃO
PAULO SHANGHAI SINGAPORE TOKYO
F-1
The Board of Directors
Argonaut Group, Inc.
March 14, 2007
Page 2
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reviewed PXREs Annual Reports to Shareholders and Annual
Reports on
Form 10-K
for the years ended December 31, 2003, 2004 and 2005, a
draft of its
Form 10-K
for the year ended December 31, 2006, its Quarterly Reports
on
Form 10-Q
for the periods ended March 31, 2006, June 30, 2006
and September 30, 2006, a draft of its financial statements
for the year ended December 31, 2006 and its Current
Reports on
Form 8-K
filed since December 31, 2005;
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reviewed certain operating, financial and actuarial information
relating to Argonauts business and prospects, including
projections for the four years ended December 31, 2010 (the
Argonaut Stand-Alone Projections), all as prepared
and provided to us by Argonauts management;
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reviewed certain operating, financial and actuarial information
relating to PXREs business and prospects, including
projections for the four years ended December 31, 2010 and
certain actuarial projections for the 24 years ended
December 31, 2030 (together, the PXRE Stand-Alone
Projections), all as prepared and provided to us by
PXREs management;
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reviewed certain operating, financial and actuarial information
relating to New Argonauts business and prospects,
including projections, synergy estimates and other combination
benefits for the four years ended December 31, 2010 and
certain actuarial projections for the 24 years ended
December 31, 2030 (the New Argonaut Combined
Projections and, together with the Argonaut Stand-Alone
Projections and the PXRE Stand-Alone Projections, the
Projections), all as prepared and provided to us by
Argonauts management;
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met with certain members of Argonauts senior management to
discuss Argonauts and PXREs respective businesses,
operations, historical and projected financial results and
future prospects;
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met with certain members of PXREs senior management to
discuss PXREs business, operations, historical and
projected financial results and future prospects;
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reviewed the historical prices, trading multiples and trading
volumes of the shares of Argonaut Common Stock and PXRE Common
Stock;
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reviewed publicly available financial data, stock market
performance data and trading multiples of companies which we
deemed generally comparable to Argonaut and PXRE;
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performed various discounted cash flow analyses based on the
Projections furnished to us;
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reviewed the terms of recent mergers and acquisitions involving
companies which we deemed generally comparable to PXRE;
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reviewed the pro forma financial results, financial condition
and capitalization of New Argonaut, giving effect to the Merger;
and
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conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
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We have relied upon and assumed, without independent
verification, the accuracy and completeness of the financial,
actuarial and other information provided to or discussed with us
by Argonaut and PXRE or obtained by us from public sources,
including, without limitation, the Projections referred to
above. With respect to the New Argonaut Combined Projections,
the Argonaut Stand-Alone Projections and the PXRE Stand-Alone
Projections, we have relied on representations that they have
been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the senior management of
Argonaut
and/or PXRE,
as the case may be, as to the expected future performance of New
Argonaut, Argonaut and PXRE. We have not assumed any
responsibility for the independent verification of any such
information, including, without limitation, the Projections, and
we have further relied upon the assurances of the senior
management of Argonaut
and/or PXRE,
as the case may be, that they are unaware of any facts that
would make the information and Projections incomplete or
misleading.
F-2
The Board of Directors
Argonaut Group, Inc.
March 14, 2007
Page 3
In arriving at our opinion, we have not performed or obtained
any independent appraisal of the assets or liabilities
(contingent or otherwise) of Argonaut and PXRE, nor have we been
furnished with any such appraisals. We are not actuaries, our
services did not include any actuarial determination or
evaluation by us or any attempt to evaluate actuarial
assumptions and we have relied on Argonauts and
PXREs actuaries with respect to the adequacy of reserves
for Argonauts and PXREs respective insurance and
investment contract liabilities. We have assumed that
(i) except as otherwise required by Section 367 of the
Internal Revenue Code (the Code), the Merger will
qualify as a reorganization within the meaning of
Section 368(a) of the Code, (ii) Argonaut, PXRE and
Merger Sub should not recognize any gain or loss for United
States federal income tax purposes solely as a result of the
Merger pursuant to Sections 367 and 368 of the Code,
(iii) the Merger should not cause PXRE or any of its
affiliates to be treated as a domestic corporation under
Section 7874(b) of the Code, (iv) the accounting
treatment of the Merger pursuant to United States generally
accepted accounting principles will not require the accrual of
any liability for income taxes pursuant to FASB Interpretation
No. 48 and (v) certain class action investor lawsuits
and other litigation in which PXRE
and/or its
affiliates are currently defendants will not have a material
adverse effect on PXREs business, financial condition and
future prospects. We have further assumed that the Merger will
be consummated in a timely manner and in accordance with the
terms of the Agreement without any limitations, restrictions,
conditions, amendments or modifications, regulatory or
otherwise, that collectively would have a material effect on New
Argonaut, Argonaut or PXRE.
We do not express any opinion as to the price or range of prices
at which the shares of Argonaut Common Stock and PXRE Common
Stock may trade subsequent to the announcement of the Merger or
the price or range of prices at which the shares of common stock
of New Argonaut may trade subsequent to consummation of the
Merger.
We have acted as a financial advisor to Argonaut in connection
with the Merger and will receive a customary fee for such
services, a substantial portion of which is contingent on
successful consummation of the Merger. In addition, Argonaut has
agreed to reimburse us for certain expenses and to indemnify us
against certain liabilities arising out of our engagement. Bear
Stearns has previously been engaged by Argonaut to provide
certain investment banking and other services on matters
unrelated to the Merger, and Bear Stearns may seek to provide
New Argonaut, Argonaut, PXRE and their respective affiliates
with certain investment banking and other services unrelated to
the Merger in the future.
Consistent with applicable legal and regulatory requirements,
Bear Stearns has adopted policies and procedures to establish
and maintain the independence of Bear Stearns research
departments and personnel. As a result, Bear Stearns
research analysts may hold views, make statements or investment
recommendations
and/or
publish research reports with respect to New Argonaut, Argonaut,
PXRE, the Merger and other participants in the transaction that
differ from the views of Bear Stearns investment banking
personnel.
In the ordinary course of business, Bear Stearns and its
affiliates may actively trade, for its own account and for the
accounts of its customers, equity and debt securities, bank debt
and/or other
financial instruments issued by Argonaut
and/or PXRE
and their respective affiliates, as well as derivatives thereof,
and, accordingly, may at any time hold long or short positions
in such securities, bank debt, financial instruments and
derivatives.
It is understood that this letter is intended for the benefit
and use of the Board of Directors of Argonaut and does not
constitute a recommendation to the Board of Directors of
Argonaut or any holders of Argonaut Common Stock as to how to
vote in connection with the Merger or otherwise. This opinion
does not address Argonauts underlying business decision to
pursue the Merger, the relative merits of the Merger as compared
to any alternative business strategies that might exist for
Argonaut, the Special Cash Dividend or the effects of any other
transaction in which Argonaut might engage. This letter is not
to be used for any other purpose, or be reproduced,
disseminated, quoted from or referred to at any time, in whole
or in part, without our prior written consent; provided,
however, that this letter may be included in its entirety in any
joint proxy statement/prospectus to be distributed to the
holders of
F-3
The Board of Directors
Argonaut Group, Inc.
March 14, 2007
Page 4
Argonaut Common Stock in connection with the Merger. Our opinion
is subject to the assumptions, limitations, qualifications and
other conditions contained herein and is necessarily based on
economic, market and other conditions, and the information made
available to us, as of the date hereof. We assume no
responsibility for updating or revising our opinion based on
circumstances or events occurring after the date hereof.
Based on and subject to the foregoing, it is our opinion that,
as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the shareholders of Argonaut.
Very truly yours,
BEAR, STEARNS & CO. INC.
Jay Bullock
Senior Managing Director
F-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20.
Indemnification of Directors and Officers.
(a) Indemnification. PXRE Group Ltd. is a Bermuda company.
Section 98 of the Companies Act 1981 of Bermuda, which we
refer to as the Companies Act, provides generally that a Bermuda
company may indemnify its directors, officers and auditors
against any liability which by virtue of Bermuda law otherwise
would be imposed on them, except in cases where such liability
arises from fraud or dishonesty of which such director, officer
or auditor may be guilty in relation to the company.
Section 98 further provides that a Bermudian company may
indemnify its directors, officers and auditors against any
liability incurred by them in defending any proceedings, whether
civil or criminal, in which judgment is awarded in their favor
or they are acquitted or in which they are acquitted or granted
relief by the Supreme Court of Bermuda in certain proceedings
arising under Section 281 of the Companies Act.
PXRE has adopted provisions in its bye-laws that provide that it
shall indemnify its officers and directors to the maximum extent
permitted under the Companies Act.
In addition, PXRE has entered into an indemnification agreement
with the members of the board of directors appointed to the
special committee of the board of directors pursuant to
resolutions dated as of November 28, 2006 requiring the
registrant to indemnify and hold harmless such directors against
certain liabilities that may arise by reason of their status as
a member of the board of directors or any committee thereof,
including the special committee.
The merger agreement provides for director and officer
indemnification and insurance. PXRE has agreed to maintain its
existing indemnification provisions with respect to present and
former directors and officers for all expenses, judgments, fines
and amounts paid in settlement by reason of actions or omissions
or alleged actions or omissions occurring at or prior to the
effective time of the merger to the fullest extent permitted or
required under applicable law, PXREs organizational
documents and indemnification agreements of PXRE or any of its
subsidiary in effect on the date of the merger agreement.
In addition, PXRE has agreed to maintain in effect, for a period
of six years after the effective time of the merger, its current
directors and officers liability insurance policies
covering acts or omissions occurring at or prior to the
effective time of the merger with respect to those persons who
are currently covered by PXREs directors and
officers liability insurance policies (or substitute
policies with a substantially comparable insurer including at
least the same coverage and amounts and containing terms and
conditions which are no less advantageous than the current PXRE
policies).
(b) Insurance. There is in effect a Claim-Made Management
Liability and Company Reimbursement Insurance Policy (the
Policy) with XL Specialty Insurance Company
(XL Specialty), which insures losses incurred as a
result of claims alleging wrongful acts committed by the
directors and officers of PXRE Group Ltd. and its subsidiaries
(with subsidiary defined as any entity in which PXRE
Group Ltd. owns, at any time, directly or through one or more
subsidiaries, more than 50% of the outstanding securities
representing the right to vote for election of such
entitys directors), hereinafter collectively referred to
as the Company. Defense expenses are included in the
limit of liability under the Policy.
The Policy coverages fall into the following three categories of
insuring agreements, each of which is described further below:
(A) Directors and Officers Liability;
(B) Company Reimbursement; and (C) Company Securities
Claim Liability.
The term loss is defined as damages, judgments,
settlements or other amounts (including punitive or exemplary
damages, where insurable by law) and defense expenses in excess
of the retention that the Company is legally obligated to pay,
excluding (1) the multiple portion of any damage award;
(2) fines, penalties or taxes imposed by law;
(3) wages; or (4) matters which are uninsurable under
the law pursuant to which the Policy is construed. The Policy
does contain an endorsement making clear that, with respect to
judgments in which punitive damages are awarded, the coverage
provided by the Policy applies to the broadest extent permitted
by law and, if,
II-1
based on the written opinion of counsel for the Company,
punitive damages are insurable under applicable law, then PXRE
will not dispute the written opinion of the counsel of the
Company.
The inception date of the Policy is November 20, 2006 and
the expiration date of the Policy is November 20, 2007 (the
Policy Period). PXRE Group Ltd. has the right, upon
payment of an additional premium, to a one-year extension of the
coverage provided by the Policy, subject to the terms and
conditions set forth in the Policy (the Optional Extension
Period).
(A) Directors
and Officers Liability:
Except for loss which the Company is permitted or required to
pay on behalf of the directors or officers as indemnification,
the Policy insures the directors and officers of the Company
against loss arising from any claim made against such directors
or officers for a wrongful act (such as any actual or alleged
act, error, omission, misstatement, misleading statement,
neglect or breach of duty) by any such director or officer while
acting in his or her capacity as such or while serving in a
functionally equivalent role for the Company, while serving, at
the specific written request of the Company, as a director,
officer, trustee, regent or governor of a non-profit entity or
while serving in an elected or appointed position having
fiduciary, supervisory or managerial duties and responsibilities
comparable to those of a director or officer of the Company,
regardless of the name or title by which such position is
designated, of a joint venture, at the specific written request
of the Company.
The Policy also insures the directors and officers of the
Company against loss arising from any claim made against such
directors or officers for an employment practices wrongful act.
Employment Practices Wrongful Act is defined as any
actual or alleged (1) wrongful termination of employment
whether actual or constructive; (2) employment
discrimination of any kind, including violation of any federal,
state or local law involving employment or discrimination in
employment which would deprive or potentially deprive any person
of employment opportunities or otherwise adversely affect his or
her status as an employee, because of such persons race,
color, religion, age, sex, national origin, disability,
pregnancy, or other protected status; (3) sexual or other
harassment in the workplace; or (4) wrongful deprivation of
career opportunity, employment related misrepresentations,
retaliatory treatment against an employee of the Company,
failure to promote, demotion, wrongful discipline or evaluation,
or refusal to hire.
(B) Company
Reimbursement:
The Policy insures the Company against loss resulting from a
claim made against the directors or officers during the Policy
Period or, if applicable, the Optional Extension Period, for
which the Company has, to the extent permitted or required by
law, indemnified the directors and officers.
(C) Company
Securities Claim Liability:
The Policy provides coverage to the Company against losses
resulting from a securities claim. Securities claim
is defined as a claim: (1) for a violation of any federal,
state, local regulation, statute or rule regulating securities,
including but not limited to the purchase or sale of, or offer
to purchase or sell, securities which is brought by any person
or entity based upon, arising out of, directly or indirectly
resulting from, in consequence of, or in any way involving the
purchase or sale of, or offer to purchase or sell, securities of
the Company or brought by a security holder of the Company with
respect to such security holders interest in securities of
the Company; or (2) brought derivatively on behalf of the
Company by a security holder of the Company.
Among other exclusions, the Policy does not provide coverage for
loss in connection with claims (1) brought about or
contributed to in fact by any intentionally dishonest,
fraudulent or criminal act or omission or any willful violation
of any statute, rule or law; or (2) a director or
officers gaining in fact any profit or remuneration to
which they were not legally entitled.
II-2
Claims brought by, on behalf of, or at the direction of the
Company are excluded from coverage, except and to the extent
such claim is brought derivatively by a security holder of the
Company who, when such claim is made and maintained, is acting
independently of, and without the solicitation, assistance,
participation or intervention of an officer or director or the
Company or is brought by the Bankruptcy Trustee or Examiner of
the Company or any assignee of such Trustee or Examiner, or any
Receiver, Conservator, Rehabilitator, or Liquidator or
comparable authority of the Company.
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III.
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POLICY
LIMITS AND COVERAGE LAYERS
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The aggregate limit of liability is $10,000,000 per policy
year (subject to a $5,000,000 self insured retention), including
claims and expenses. Excess coverage over this primary layer is
provided as follows: Hartford Financial Services Group, Inc.,
which we refer to as Hartford ($10,000,000 excess of
$10,000,000), Travelers Companies, Inc., which we refer to as
Travelers ($10,000,000 excess of $20,000,000), XL Specialty
Insurance Company, which we refer to as XL ($5,000,000, part of
$10,000,000, excess of $30,000,000), Hartford ($5,000,000, part
of $10,000,000, excess of $30,000,000), XL ($5,000,000, part of
$10,000,000, excess of $40,000,000), Travelers ($5,000,000, part
of $10,000,000, excess of $40,000,000).
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Item 21.
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Exhibits
and Financial Statement Schedules.
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The exhibits to this registration statement set forth on the
Exhibit Index, beginning on page II-7, filed as part of
this registration statement are incorporated herein by reference.
a. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
i. To include any prospectus required in
Section 10(a)(3) of the Securities Act, as amended;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) under
the Securities Act if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the Calculation of
Registration Fee table in the effective registration
statement; and
iii. To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
2. That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof;
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
b. The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act,
each filing of the registrants annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act
(and, where applicable, each filing of an employee benefit
plans annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
c. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
d. The undersigned registrant hereby undertakes as follows:
That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) under
the Securities Act of 1933, the issuer undertakes that such
reoffering prospectus will contain the information called for by
the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
e. The registrant undertakes that every prospectus
(i) that is filed pursuant to the immediately preceding
paragraph or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to
Rule 415 under the Securities Act, will be filed as a part
of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
f. The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or
13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the
request.
g. The undersigned registrant hereby undertakes to supply
by means of a post-effective amendment all information
concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this Amendment No. 1 to the
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Hamilton, Bermuda.
PXRE GROUP LTD.
Name: Robert P. Myron
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Title:
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Executive Vice President, Chief Financial Officer and Treasurer
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Date: June 8, 2007
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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Signature
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Title
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Date
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Jeffrey
L. Radke*
Jeffrey
L. Radke
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President, Chief Executive Officer
and Director (Principal Executive Officer)
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June 8, 2007
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/s/ Robert
P. Myron
Robert
P. Myron
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Executive Vice President, Chief
Financial Officer and Treasurer (Principal Financial Officer and
Principal Accounting Officer)
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June 8, 2007
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Gerald
L. Radke*
Gerald
L. Radke
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Director
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June 8, 2007
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Bradley
E. Cooper*
Bradley
E. Cooper
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Director
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June 8, 2007
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Mural
R. Josephson*
Mural
R. Josephson
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Director
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June 8, 2007
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F.
Sedgwick Browne*
F.
Sedgwick Browne
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Director
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June 8, 2007
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Craig
A. Huff*
Craig
A. Huff
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Director
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June 8, 2007
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Jonathan
Kelly*
Jonathan
Kelly
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Director
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June 8, 2007
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Wendy
Luscombe*
Wendy
Luscombe
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Director
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June 8, 2007
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Philip
R. McLoughlin*
Philip
R. McLoughlin
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Director
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June 8, 2007
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II-5
Name: Donald Puglisi
Title: Authorized U.S. Representative
Date: June 8, 2007
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*By:
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/s/ Robert P.
Myron
Robert
P. Myron
Attorney-in-Fact
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II-6
EXHIBIT INDEX
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Exhibit
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Number
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|
Description
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2
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.1
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Agreement and Plan of Merger,
dated as of March 14, 2007 and amended and restated as of
June 8, 2007, by and among PXRE Group Ltd., PXMS Inc. and
Argonaut Group, Inc. (included as Annex A to the joint
proxy statement/prospectus and incorporated herein by reference)
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3
|
.1
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Memorandum of Association of PXRE
Group Ltd. (Exhibit 3.1 to PXRE Group Ltd.s
Form S-4
Registration Statement dated August 18, 1999)**
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4
|
.1
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Amended Bye-laws of PXRE Group
Ltd., dated as of November 18, 2005. (Exhibit 3.2 to
PXRE Group Ltd.s annual report on
Form 10-K
for the fiscal year ended December 31, 2005)**
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4
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.2
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Voting and Conversion Agreement,
dated as of March 14, 2007, by and among PXRE Group Ltd.,
Argonaut Group, Inc. and the Stockholders named therein
(Exhibit 4.1 to PXRE Group Ltd.s current report on
Form 8-K/A
filed on March 19, 2007)**
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5
|
.1
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Opinion of Conyers
Dill & Pearman*
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8
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.1
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Form of Opinion of Dewey
Ballantine LLP as to tax matters***
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8
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.2
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Form of Opinion of LeBoeuf, Lamb,
Greene & MacRae LLP as to tax matters***
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10
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.1
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Separation Agreement dated
March 14, 2007 between PXRE Group Ltd. and Jeffrey L. Radke
(Exhibit 10.1 to PXRE Group Ltd.s current report on
Form 8-K/A
filed on March 19, 2007)**
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23
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.1
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Consent of KPMG LLP, independent
registered public accounting firm for PXRE Group Ltd.*
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23
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.2
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Consent of Ernst & Young
LLP, independent registered public accounting firm for Argonaut
Group, Inc.*
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23
|
.3
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Consent of Dewey Ballantine LLP*
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23
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.4
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Consent of LeBoeuf, Lamb,
Greene & MacRae LLP*
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23
|
.5
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Consent of Conyers
Dill & Pearman (included in Exhibit 5.1)
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24
|
.1
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Powers of Attorney for PXRE Group
Ltd. ***
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99
|
.1
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Form of Proxy for PXRE Group Ltd. *
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99
|
.2
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Form of Proxy for Argonaut Group,
Inc. *
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99
|
.3
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Form of Letter of Transmittal*
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99
|
.4
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Consent of Keefe,
Bruyette & Woods, Inc. *
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99
|
.5
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Consent of Bear,
Stearns & Co. Inc.*
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99
|
.6
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Consent of Gary V. Woods to be
named as a director***
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99
|
.7
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Consent of H. Berry Cash to be
named as a director***
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99
|
.8
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Consent of Hector De Leon to be
named as a director***
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99
|
.9
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Consent of Allan W. Fulkerson to
be named as a director***
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99
|
.10
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Consent of David Hartoch to be
named as a director***
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99
|
.11
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Consent of Frank Maresh to be
named as a director***
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99
|
.12
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Consent of John R. Power, Jr.
to be named as a director***
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99
|
.13
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Consent of Fayez F. Sarofim to be
named as a director***
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99
|
.14
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Consent of Mark E. Watson III
to be named as a director***
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* |
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Filed herewith |
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** |
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Incorporated by reference herein |
II-7