Formation And Separation Agreement

FORMATION AND SEPARATION AGREEMENT


BETWEEN


AMERICAN PREMIER UNDERWRITERS, INC.


AND


INFINITY PROPERTY AND CASUALTY CORPORATION


DATED AS OF DECEMBER 31, 2002


FORMATION AND SEPARATION AGREEMENT


THIS FORMATION AND SEPARATION AGREEMENT (this "AGREEMENT") is made and entered into as of December 31, 2002, between AMERICAN PREMIER UNDERWRITERS, INC., an Ohio corporation ("APU"), and INFINITY PROPERTY AND CASUALTY CORPORATION, an Ohio corporation (the "Company").


RECITALS


APU has sponsored the formation of the Company and in connection therewith:


A. APU will transfer to the Company, all of the issued and
outstanding capital stock of each of the NSA Insurance
Subsidiaries (as defined below) in exchange for all issued and
outstanding common shares, no par value per share (the "Common
Shares"), of the Company and a note payable to APU in the amount
of $55 million and in the form attached hereto as Exhibit A (the
"APU Note").


B. Great American Insurance Company, including certain of its
subsidiaries, shall transfer to the Company its personal insurance
business written through independent agents.


C. The Company will file a registration statement under the
Securities Act (as defined below) for the purpose of selling a
portion of the Common Shares owned by APU (the "Public Offering").


D. The Company will file a registration statement under the
Securities Act for the purpose of offering for sale to the public
$180 million in principal amount of senior notes (the "Senior Note
Offering").


E. APU and the Company wish to provide for certain transactions
to be entered into in connection with the formation of the Company
and the Public Offering and to set forth herein certain
arrangements that will govern the relationship between APU, the
Company and their respective Affiliates (as defined below).


NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements set forth herein, the sufficiency of which is acknowledged, the parties hereby agree as follows:


ARTICLE I
DEFINITIONS


Section 1.1. Definitions. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):


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"ACTION" means any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal.


"AFFILIATE" of any Person or entity means any Person which, directly or indirectly, controls, is under common control with, or is controlled by, such Person.


"AFG" means American Financial Group, Inc., an Ohio corporation.


"ANCILLARY AGREEMENTS" means the Reinsurance Agreement, Registration Rights Agreement, Investment Advisory Agreement, Services Agreement, Noncompetition Agreement, Tax Allocation Indemnification Agreement, License Agreement and Sublease Agreement in each case as defined and described in more detail in Section 3.1 hereof.


"ASSUMED AGENCY BUSINESS" means the personal insurance business written by Great American Insurance Company and its wholly-owned subsidiaries through independent agents and which will be transferred to the Company under the Reinsurance Agreement as described in Section 3.1 hereof.


"BUSINESS" means collectively the insurance business conducted through the NSA Insurance Subsidiaries and the Assumed Agency Business.


"BUSINESS DAY" means any day excluding Saturday, Sunday and any day on which banks in Cincinnati, Ohio have the option by law or other governmental action to close.


"CLOSING" has the meaning specified in Section 3.2.


"CLOSING DATE" has the meaning specified in Section 3.2.


"COMMISSION" means the Securities and Exchange Commission.


"COMMON SHARES" has the meaning specified in the Recitals.


"COMPANY" has the meaning specified in the preamble of this Agreement.


"CONTINUING EMPLOYEES" means active employees of AFG who, as of the Closing Date, will render or have rendered their services to the NSA Insurance Subsidiaries or the Assumed Agency Business. For purposes of this Agreement, active employees shall include employees who are on approved absences from work (e.g., disability leave, statutory leave, approved leave of absence, etc.) as of the Closing Date.


"CORPORATE OBLIGATIONS" mean all liabilities related to the Business other than (a) Extracontractual Obligations, (b) claims payments, including loss adjustment expenses, and (c) other obligations for which a reserve has been established. The date on which a Corporate Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the action taken or not taken giving rise to the Obligation.


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"EXTRACONTRACTUAL OBLIGATIONS" means those liabilities not covered under any other provision of this Agreement and which arise from or in connection with the operation, administration, underwriting or claim handling of the Business, such liabilities arising because of, but not limited to, the following: failure to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement, or denying coverage, or in the preparation or prosecution of an appeal consequent upon such action.


The date on which an Extracontractual Obligation is incurred shall be deemed, in all circumstances, to be the date of the action taken or not taken giving rise to the Extracontractual Obligation.


"EXTRACONTRACTUAL OBLIGATIONS" shall also include losses in excess of policy limits of an original policy, such loss in excess of limit having been incurred because of failure to settle within the policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting coverage or an offer of settlement or in the preparation of the defense or in the trial of any action against an insured or reinsured or in the preparation of prosecution of an appeal consequent upon such action. For purposes of this definition, the word "loss" shall mean any amounts for which a party would have been contractually liable to pay had it not been for the limit of the original policy.


"FIRM PUBLIC OFFERING SHARES" means the Company's Common Shares issued in the Public Offering, other than Common Shares issued as a result of exercise of the Over-Allotment by the underwriters of the Public Offering.


"GAI SUBSIDIARIES" mean Great American Contemporary Insurance Company and Great Texas County Mutual Insurance Company.


"FOREIGN SUBSIDIARIES" mean El Aguila Compania de Seguros, S.A. de C.V., Penn Central U.K. Limited, and their respective wholly-owned subsidiaries.


"LOSSES" means any and all losses, liabilities, claims, damages, obligations, payment, costs and expenses, matured or unmatured, absolute or contingent, disclosed or undisclosed, determined or determinable, accrued or unaccrued, liquidated or unliquidated, known or unknown (including, without limitation, the costs and expenses of any Action, threatened Action, demand, assessment, judgment, settlement and compromise relating thereto and attorneys' fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against, or settling any such Action or threatened Action but reduced by, in all cases, the amount of reinsurance, whether or not collectible).


"NSA INSURANCE SUBSIDIARIES" means Atlanta Casualty Company, Leader Insurance Company, Infinity Insurance Company, Windsor Insurance Company and each of their respective U.S. domestic subsidiaries except, however, Leader National Agency of Texas, Inc. ("Leader National").


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"OVER-ALLOTMENT" means an over-allotment option that may be exercised by the underwriters of the Public Offering pursuant to the Underwriting Agreement relating to the Public Offering.


"PERSON" includes an individual, a partnership, a joint venture, a limited liability company, a corporation, a trust, an unincorporated organization, a group and a government or other department or agency thereof.


"POST-CLOSING SUBSIDIARIES," with respect to either APU or the Company, means collectively all of the Subsidiaries of such entity following the Closing Date.


"REGISTRATION STATEMENTS" means the registration statements on Form S-1, as amended and supplemented from time to time, to be filed with the Commission under the Securities Act, relating to the Public Offering.


"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.


"SUBSIDIARY" means, as to any Person, (i) any corporation, partnership or other entity of which at the time of determination more than 50% of the outstanding Voting Stock is owned directly or indirectly, by such Person and/or one or more Subsidiaries of such Person.


"UNDERWRITING AGREEMENT" means the underwriting agreement among APU, the Company and CS First Boston and the other underwriters named therein relating to the Public Offering.


"VOTING STOCK" means stock of any class or classes or other ownership interest having general voting power under ordinary circumstances to elect a majority of the board of directors, managers, trustees or persons with similar functions of the entity in question, provided that, for the purposes of this definition, stock which carries only the right to vote conditionally on the happening of an event will not considered Voting Stock whether or not that event has happened.


Section 1.2. Other Definitional Provisions. The words "hereof," "hereto," "herein" and "hereunder" and words of similar import when used in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement; and references to any Article, Section, Exhibit or Schedule are references to Articles, Sections, Exhibits or Schedules in or to this Agreement unless otherwise specified.


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ARTICLE II
TRANSFER OF INSURANCE SUBSIDIARIES


Section 2.1. Transfer of NSA Subsidiaries. On or prior to the Closing Date, subject to the receipt of any required third party approvals, consents and the satisfaction of any conditions precedent set forth herein, and in exchange for 900 shares of the Company's common stock and the APU Note, APU shall, and (as necessary) shall cause its Subsidiaries, to transfer and deliver to the Company, all of the outstanding shares of capital stock of the NSA Subsidiaries (the "NSA Shares"), free of any lien, claim or encumbrance of any kind (except as required by the insurance regulations of certain states) and shall deliver to the Company at the Closing certificates representing the NSA Shares, registered and in such denominations as the Company shall notify APU prior to the Closing.


Section 2.2. Transfer of Foreign Subsidiaries and Leader National. Prior to the Closing Date, APU and the Company shall take all necessary steps to cause a transfer to APU of all of the outstanding shares of capital stock, limited partnership interests or other indicia of ownership, of the Foreign Subsidiaries and Leader National. Such steps shall include the pursuit of a novation whereby Windsor Insurance Company ("Windsor") shall be released, and Great American Insurance Company shall assume, all obligations of Windsor under a reinsurance agreement relating to Insurance (GB) Limited. If the approvals or authorizations for the transfer of the Foreign Subsidiaries and Leader National have not been obtained on or prior to the Closing Date, then APU and the Company shall reasonably cooperate subsequent to the Closing Date in attempting to obtain such approvals or authorizations as promptly thereafter as practicable.


Section 2.3. Transfer of GAI Subsidiaries. As soon as reasonably practicable after the Closing Date (a) all of the outstanding shares of capital stock of Great American Contemporary Insurance Company and (b) that certain management agreement in the case of Great Texas County Mutual Insurance Company (collectively the "GAI Ownership Interests") shall be transferred or assigned, as the case may be, to the Company at a price equal to the statutory book value at the time of the transfer of each of the GAI Ownership Interests. Notwithstanding the foregoing, the transfer of the GAI Ownership Interests shall not bestow upon the Company any rights to, or license to use, any marks, designs, logos, names, words or letters that include the words "Great American" or those that are suggestive or derivative thereof, and Company shall take all actions reasonably necessary to change the corporate names of the GAI Subsidiaries to other names that will not reasonably suggest or imply any affiliation with Great American Insurance Company.


Article III
INTERCOMPANY TRANSACTIONS AS OF THE CLOSING DATE; CLOSING


Section 3.1. Ancillary Agreements. As a condition precedent to the transfer of the capital stock of the NSA Subsidiaries under Section 2.1, the parties, or, in certain cases, their
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Affiliates, shall enter into such transfer documents as are customary to effect the transfers set forth in Section 6.1 and shal ...