-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ATHJNJIJshFjBwZtizM5iDcl9r/XtYwbc6bWISgAQB5tctEdhLofdVsJXswPEWAl nMdx0KLDL1YLQBM0pGzxjg== 0000898080-05-000165.txt : 20050318 0000898080-05-000165.hdr.sgml : 20050318 20050318172235 ACCESSION NUMBER: 0000898080-05-000165 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050318 DATE AS OF CHANGE: 20050318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTTISH RE GROUP LTD CENTRAL INDEX KEY: 0001064122 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 000000000 STATE OF INCORPORATION: E9 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16855 FILM NUMBER: 05692516 BUSINESS ADDRESS: STREET 1: GRAND PAVILION COMMERCIAL CENTRE STREET 2: 802 WEST BAY RD GEORGE TOWN GRAND CAYMAN CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459492800 MAIL ADDRESS: STREET 1: P O BOX HM 2939 CITY: HAMILTON STATE: D0 ZIP: HM MX FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 10-K 1 form10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934 /x/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004 / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from to Commission File Number 0-29788 ---------- SCOTTISH RE GROUP LIMITED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Cayman Islands 98-0362785 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) Crown House, Third Floor 4 Par-la-Ville Road Hamilton HM12, Bermuda Not Applicable (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (441) 295-4451 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Ordinary Shares, par value Registered $0.01 per share New York Stock Exchange Hybrid Capital Units New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes /x/ No / / The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2004 was $556,063,065. As of February 28, 2005, Registrant had 39,991,745 ordinary shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated by reference into Part III hereof from the registrant's proxy statement for its 2005 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission (the "SEC") within 120 days of the close of the registrant's fiscal year ended December 31, 2004. ================================================================================ TABLE OF CONTENTS Page PART I........................................................................1 Item 1: BUSINESS.............................................................1 Item 2: PROPERTIES..........................................................31 Item 3: LEGAL PROCEEDINGS...................................................31 Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................31 PART II. ....................................................................32 Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...................32 Item 6: SELECTED FINANCIAL DATA.............................................34 Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................35 Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................70 Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................70 Item 9A: CONTROLS AND PROCEDURES.............................................70 Item 9B: OTHER INFORMATION...................................................73 PART III ....................................................................73 Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.....................73 Item 11: EXECUTIVE COMPENSATION.............................................74 Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS....................................74 Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................74 Item 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................74 PART IV......................................................................74 Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....74 i PART I Item 1: BUSINESS Overview Scottish Re Group Limited, which we call Scottish Re, is a holding company organized under the laws of the Cayman Islands with its principal executive office in Bermuda. Through our operating subsidiaries, we are engaged in the reinsurance of life insurance, annuities and annuity-type products. These products are written by life insurance companies and other financial institutions located in the United States, as well as in many other countries around the world. We refer to this business as life reinsurance. We have operating companies in Bermuda, the Cayman Islands, Guernsey, Ireland, the United Kingdom and the United States. Our flagship subsidiaries are Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (U.S.), Inc. and Scottish Re Limited. Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (U.S.), Inc. and Scottish Re Limited are each rated "A- (excellent)" for financial strength by A.M. Best Company, which is fourth highest of sixteen rating levels, "A (strong)" for financial strength by Fitch Ratings, which is sixth highest of twenty-two rating levels, and "A- (strong)" for financial strength by Standard & Poor's, which is seventh highest of twenty-two rating levels. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re (U.S.), Inc. are also rated "A3 (good)" for financial strength by Moody's, which is seventh highest of twenty-one rating levels. These ratings are based upon factors of concern to policyholders, treaty holders, retrocessionaires, agents and intermediaries and are not directed toward the protection of investors. Since our formation in 1998, we have grown to be one of the 3 largest life reinsurers serving the U.S. market (based on the amount of new ordinary life reinsurance business assumed in 2004, together with the acquisition of the individual in-force life reinsurance business of ING America Insurance Holdings, Inc., which we call ING, as described in more detail below). On December 31, 2001, we expanded our business outside of North America by acquiring Scottish Re Holdings Limited and its subsidiary, Scottish Re Limited. Scottish Re Limited, formed in 1964, is a U.K.-based reinsurer of group life insurance, individual life insurance and aircrew loss of license insurance in Asia, Europe, Latin America, the Middle East and North Africa. On December 22, 2003, we completed the acquisition of 95% of the outstanding capital stock of ERC Life Reinsurance Corporation. On February 19, 2004 ERC Life Reinsurance Corporation's name was changed to Scottish Re Life Corporation. Scottish Re Life Corporation's business consists primarily of a closed block of traditional life reinsurance business. On December 31, 2004, we acquired, through two of our subsidiaries, the in-force individual life reinsurance business of ING. See "ING Individual Life Reinsurance Acquisition". As of December 31, 2004, the number of lives reinsured in North America was approximately 14.2 million and our gross face amount of in-force business was approximately $1.0 trillion. As of December 31, 2004, we had consolidated assets of $9.0 billion and consolidated shareholders' equity of $862.7 million. ING Individual Life Reinsurance Acquisition On October 17, 2004, Scottish Re, Scottish Re (U.S.), Inc. and Scottish Re Life (Bermuda) Limited signed an asset purchase agreement with Security Life of Denver Insurance Company and Security Life of Denver International Limited, subsidiaries of ING. The transaction closed on December 31, 2004. Unless otherwise indicated, financial information as of December 31, 2004 contained in this report gives effect to this transaction. Pursuant to the agreement and the related transaction documents, Security Life of Denver Insurance Company and Security Life of Denver International Limited reinsured their individual life reinsurance business to Scottish Re (U.S.), Inc. and Scottish Re Life (Bermuda) Limited on a 100% indemnity reinsurance basis. In addition, Security Life of Denver Insurance Company and Security Life of Denver International Limited transferred to Scottish Re or its affiliates certain systems and operating assets used in their individual life reinsurance business. We employed a significant number of the existing staff of Security Life of Denver Insurance Company to help manage the transition and the servicing of the acquired business. Security Life of Denver Insurance Company and Security Life of Denver International Limited transferred assets of approximately $1.4 billion on the individual life reinsurance business of Security Life of Denver Insurance Company and Security Life of Denver International Limited to Scottish Re (U.S.), Inc. and Scottish Re Life (Bermuda) Limited. Certain of these assets are held in trust for the benefit of Security Life of Denver Insurance Company and Security Life of Denver International Limited to secure Scottish Re (U.S.), Inc.'s and Scottish Re Life (Bermuda) Limited's liabilities on the acquired business. The ceding commission will be released from the trusts based on an agreed upon schedule, novation of the underlying treaties, or upon release of certain ING collateral obligations described below. The acquired business represents the reinsurance division of ING's U.S. life insurance operations, and was written through Security Life of Denver Insurance Company and Security Life of Denver International Limited. The acquired business mainly consists of traditional mortality risk reinsurance written on an automatic basis with more than 100 different ceding insurers. Less than 10% of the acquired business was written on a facultative basis. Most of the business involves guaranteed level premium term life insurance that is subject to the statutory reserve requirements of NAIC Actuarial Regulation XXX ("Regulation XXX"). ING is obligated to maintain collateral for the Regulation XXX and AXXX reserve requirements of the acquired business for the duration of such requirements (which relate to state insurance law reserve requirements applying to reserves for level premium term life insurance policies and universal life policies). We will pay ING a fee based on the face amount of the collateral provided until satisfactory alternative collateral arrangements are made. In the normal course of business and our capital planning we are always looking for opportunities to relieve capital strain relating to Regulation XXX reserve requirements for our previously existing business as well as the business acquired from ING. We anticipate implementing capital markets related solutions relating to these requirements as cost efficient opportunities arise. ING has agreed to assist with the transition of the acquired business to Scottish Re (U.S.), Inc.'s and Scottish Re Life (Bermuda) Limited's systems for a fee for up to 18 months from December 31, 2004. In addition, Scottish Re (U.S.), Inc. and Scottish Re Life (Bermuda) Limited will provide administrative services to Security Life of Denver Insurance Company and Security Life of Denver International Limited for the acquired business. The acquisition increased our policy count in North America from approximately 7.1 million to approximately 14.2 million and increased our gross face amount of in-force business in North America from approximately $305.1 billion to approximately $1.0 trillion. With the closing of the acquisition, we believe we have become the third largest US life reinsurer based on life reinsurance in-force. In order to provide additional capital to support the acquired business described above, Scottish Re signed a securities purchase agreement on October 17, 2004 with Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (collectively, the "Cypress Entities"). Pursuant to this agreement, Scottish Re issued to the Cypress Entities on December 31, 2004, 3,953,183 ordinary shares, Class C Warrants to purchase 3,206,431 ordinary shares and $41,282,479 aggregate principal amount of 7.00% Convertible Junior Subordinated Notes, as described in "Management's Discussion and Analysis - -Liquidity & Capital Resources". Additional Information Our website address is www.scottishre.com. Forms 10-K, Forms 10-Q, Forms 8-K and all amendments to those reports are available free of charge on our website. These reports are posted to the website as soon as reasonably practical after they have been filed with the SEC. We will also provide electronic or paper copies of these reports on request. Information contained on our website does not constitute part of this Annual Report on Form 10-K. 2 Our Business Life Reinsurance Reinsurance is an arrangement under which an insurance company known as the reinsurer agrees in a contract called a treaty to assume specified risks of another insurance company known as the ceding company. The reinsurer may assume all or a portion of the insurance underwritten by the ceding company. In exchange for assuming the risks of the ceding company, the reinsurer receives some or all of the premium and, in certain cases, investment income derived from the assets supporting the reserves of the reinsured policies. Reinsurance permits primary insurers to diversify their risks over larger pools of risks, and to write insurance policies in amounts larger than they are willing or able to retain. Also, reinsurers have the ability to structure treaties that allow the ceding companies to achieve other business and financial objectives such as: o decreasing the volatility of their earnings by reducing their maximum exposure to any one risk, o improving their capital position by reducing the financial strain associated with new business production or by increasing their risk-based capital ratios, o entering new lines of business and offering new products, and o exiting discontinued lines of business. In addition, reinsurers may also purchase reinsurance, or "retrocession" coverage, to limit their own risk exposure. We have two categories of life reinsurance lines of business, which we call Traditional Solutions and Financial Solutions. o Traditional Solutions. In our Traditional Solutions business, we reinsure the mortality risk on life insurance policies written by primary insurers. This business is often referred to as traditional life reinsurance. We write our Traditional Solutions business predominantly on an automatic basis with respect to newly written life insurance policies. This means that we automatically reinsure all policies written by a ceding company that meet the underwriting criteria specified in the treaty with the ceding company. In the North American market, our direct sales force targets the top 60 life insurance companies. Scottish Re Limited offers traditional life reinsurance products outside of North America, focusing primarily on the reinsurance of short-term, group life policies in niche market sectors. o Financial Solutions. In our Financial Solutions business, we offer reinsurance solutions that improve the financial position of our clients by increasing their capital availability and statutory surplus. These solutions include contracts under which we assume the investment and persistency risks of existing, as well as newly written, blocks of business. The products reinsured include annuities and annuity-type products, cash value life insurance and, to a lesser extent, disability products that are in a pay-out phase. This line of business includes acquired solutions products in which we provide our clients with exit strategies for discontinued lines, closed blocks, or lines not providing a good fit for a client's growth strategies. With our assuming full responsibility and management of these contracts, our clients can focus and concentrate their full efforts and resources on their core strategies. The traditional life reinsurance industry has experienced significant growth over the past several years. According to an industry survey, the face amount of traditional life reinsurance assumed in the United States has grown from approximately $261.0 billion in 1995 to approximately $1.1 trillion in 2003, a 19% compounded annual growth rate. During the same period, the face amount of life insurance written in the United States has grown from approximately $1.1 trillion in 1995 to approximately $1.6 trillion in 2003, a 5% compounded annual growth rate. Many other of the international markets in which we operate have also enjoyed significant growth in recent years. 3 We believe that the following trends have contributed and will continue to contribute to the increasing demand for life reinsurance and increased business opportunities for us: o Consolidation in the life insurance industry. Consolidation in the life insurance industry may create opportunities for life reinsurers. Life reinsurers provide financial reinsurance to help acquirors finance the cash portion of an acquisition, and we expect that any additional consolidation in the life insurance business may result in incremental opportunities for life reinsurers. In addition, in the context of an acquisition, an acquiror may focus on the most promising lines of business and divest non-core lines of business through reinsurance. o Consolidation in the life reinsurance industry. There have been a number of merger and acquisition transactions within the life reinsurance industry in recent years. The consolidation of the life reinsurance industry has reduced the amount of life reinsurance capacity available and caused primary insurers to be exposed to concentrated counter-party risk with the larger consolidating reinsurers. o Increased capital sensitivity. We believe that insurance companies are now more focused on capital efficiency and return on capital. As a result, primary insurers are increasingly utilizing the outside capital provided by reinsurance to help finance growth and to free up capital to pursue new businesses. We believe that the demutualization of life insurance companies contributes to this trend as these newly publicly traded companies are motivated to improve their operating performance for their investor base. o Flight to quality. Particularly in the wake of the terrorist attacks in the United States on September 11, 2001, we believe that ceding companies are increasingly focused on the financial strength ratings of their reinsurers, as well as the aggregate amount of capital maintained by their reinsurers. o Expanding overseas markets. We believe that the trends described above in the North American market are also influencing the reinsurance industry throughout the world. In addition, we believe there are increasing opportunities in markets such as Asia, Europe, Latin America, the Middle East, and North Africa, where the life reinsurance industry is either developing or expanding. o Changing demographics. We expect that the increasing number of "baby boomers" reaching middle and late middle age will increase the demand for products which address retirement planning, estate planning and survivorship issues. In addition, we believe that longer life expectancies and the reduction in government and employer sponsored benefit programs will increase the demand for life insurance and annuities. We expect this increased demand for insurance to increase demand for reinsurance products. Wealth Management Our variable life insurance and variable annuity products offer high net worth clients the benefits of investment-oriented insurance products for use in tax and estate planning. We receive fee income based on the assets associated with our products. Our products are targeted towards high net worth individuals and families who generally have a liquid net worth of more than $10.0 million. The wealth management business requires relatively little capital and we believe that it generates a stable source of fee income. Our Strategy Our strategy is to use our experience, and structural advantages to focus on life reinsurance and insurance products where we can deliver specialized advice and products to our customers. We plan to increase the value of our franchise by focusing on the following: 4 o Expanding the size and depth of our North American reinsurance client base. We will continue to expand our core North American business by attempting to gain a larger share of the North American life reinsurance market both by adding new clients and expanding the business relationships with existing clients. In addition, we may pursue selected strategic acquisitions of other life reinsurance businesses. Our recent acquisition of the in-force individual life reinsurance business of ING is an example of this strategy. See "ING Individual Life Reinsurance Acquisition." o Growing our international business. We will continue to leverage the specialized knowledge and established relationships of Scottish Re Limited to gain a larger share of the life reinsurance markets outside of North America. We will explore opportunities in new markets as well as seeking to add new clients and expand business relationships with existing clients. In addition, we may pursue selected strategic acquisitions of other life reinsurance businesses. o Enhancing our financial strength. We will continue to enhance our capital position and financial strength to meet the security needs of our customers and the capital requirements of rating agencies. By enhancing our financial strength and capital resources, we would expect to have opportunities to participate in reinsurance transactions in which we might not be currently eligible to participate. We also expect that enhancing our financial position will allow us to reduce our cost of, and improve our access to, capital. o Capitalizing on our reinsurance experience. We will continue to focus our marketing efforts on products that allow us to capitalize on the extensive experience of our management and key employees. o Leveraging efficient operating structure and organizational flexibility. We will continue to leverage our ability to conduct business in multiple jurisdictions, which provides us with a flexible and efficient operating platform. Moreover, as we grow our businesses and leverage the capabilities of our corporate infrastructure, we expect to improve our operating margins. Products Offered Life Reinsurance North America In our Life Reinsurance North America Segment we reinsure a broad range of life insurance and annuity products. Life insurance products that we reinsure include yearly renewable term, term with multi-year guarantees, ordinary life and variable life. Retail annuity products that we reinsure include fixed immediate annuities and fixed deferred annuities. In addition, we reinsure and may issue directly institutional annuity-type products such as funding agreements, guaranteed investment contracts, and pension termination and structured settlement annuities. We do not accept mortality or longevity guarantees associated with variable annuity products. For these products, we write reinsurance generally in the form of yearly renewable term, coinsurance or modified coinsurance. Under yearly renewable term, we share only in the mortality risk for which we receive a premium. In a coinsurance or modified coinsurance arrangement, we generally share proportionately in all material risks inherent in the underlying policies including mortality, lapses and fluctuations in investments. Under such agreements, we agree to indemnify the primary insurer for all or a portion of the risks associated with the underlying insurance policy in exchange for a proportionate share of premiums. Coinsurance differs from modified coinsurance with respect to ownership of the assets supporting the reserves. Under our coinsurance arrangements, ownership of these assets is transferred to us, whereas, in modified coinsurance arrangements, the ceding company retains ownership of these assets, but we share in the investment income and risk associated with the assets. Our reinsurance treaties are written predominantly on an automatic basis. An automatic treaty provides for a ceding company to cede contractually agreed-upon risks on specific blocks of business to us. The reinsurance may be solicited directly by us or through reinsurance intermediaries and may be written on either: 5 o a proportional basis under which a specified percentage of each risk in the reinsured class of risk is assumed by us from the ceding company, along with our portion of the underlying premiums in proportion to such assumed risk; or o an excess of loss basis under which we indemnify the ceding company, up to a contractually specified amount, for a portion of claims exceeding a specified retention amount, in consideration of non-proportional premiums being paid. In order to diversify our mortality exposure, we have historically sought to limit our consolidated enterprise wide retained exposure under life policies to no more than $500,000 per life for life reinsurance written in our North American operations. This limit has been increased to $1.0 million per life for newly underwritten business effective January 1, 2005. Our retention on business acquired in the ING individual life reinsurance acquisition, effective December 31, 2004, is $2.0 million per life. Our reinsurance treaties may provide for recapture rights, permitting the ceding company to reassume all or a portion of the risk ceded to us after an agreed-upon period of time (generally 10 years), subject to certain other conditions. Some of our reinsurance treaties allow the ceding company to recapture the ceded risk if we fail to maintain a specified rating or if other financial conditions relating to us are not satisfied. Recapture of business previously ceded does not affect premiums ceded prior to the recapture of such business and typically involves the payment of a recapture fee to us. Nevertheless, we may need to liquidate substantial assets in order to return the assets supporting the reserves to the ceding company, and we may also have to accelerate the amortization of unamortized deferred acquisition costs associated with the recaptured business, which would reduce our earnings. The potential adverse effects of recapture rights are mitigated by the following factors: o By recapturing reinsurance, ceding companies increase the amount of risk they retain. o Ceding companies generally must recapture the same amount of risk on each policy reinsured under a treaty once a retention increase is made after the treaty stated non-recapture period expires and a recapture program is undertaken. o We price our treaties with the goal of achieving our target return before the recapture date. Life Reinsurance International Through our subsidiary, Scottish Re Limited, we reinsure life insurance and aircrew loss of license products. Life insurance products that we reinsure include short-term group and individual life, and to a lesser extent, disability and critical illness. We reinsure aircrew loss of license products on a short-term group basis. The majority of these risks are written on a facultative basis which allows for the ceding company to offer risks for which we may either quote terms or, alternatively, decline. They, in turn, are not obliged to cede any risk to us. While the majority of our international business is facultative, we do write some automatic treaty business similar to the business written in our Life Reinsurance North America Segment. We will continue to provide products on a facultative basis and will expand our capability to reinsure a broad range of life insurance and annuity products on an automatic treaty basis in our Life Reinsurance International Segment. Our principal international market is the Middle East, where we have been active since the early 1990s. For the year ended December 31, 2004, approximately 26% of total written premiums in the international business originated from Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and the United Arab Emirates. In Latin America, we do business primarily in Argentina, Columbia and Peru, and to a lesser extent in Chile and Ecuador. In Asia, our target niche market is in Japan, which is experiencing the development of small affinity group mutual organizations known as kyosai, as a parallel sector to large insurance companies. As noted above, we reinsure aircrew loss of license coverage, which entails the payment of lump sum benefits if aircrew cannot perform their job for medical reasons, as well as temporary benefits for the period of time during which the aircrew is grounded and waiting for the results of the medical examination. 6 We attempt to diversify mortality risk in our Life Reinsurance International Segment by limiting our consolidated enterprise wide retained exposure under life policies to no more than $250,000 per life for our international life reinsurance business. Wealth Management Our wealth management business consists of the issuance of variable life insurance policies and variable annuities and similar products to high net worth individuals and families. Premiums, net of expenses, paid by the policyholder with respect to our variable products are placed in a separate account for the benefit of the policyholder. We invest premiums in each separate account with one or more investment managers, some of whom the policyholder may recommend and all of whom are appointed by us in our sole discretion. The policyholder retains the benefits of favorable investment performance, as well as the risk of adverse investment results. Assets held in the separate accounts are generally not subject to the claims of our general creditors. We do not provide any investment management or advisory services directly to any individual variable life or variable annuity policyholder. Our revenues earned from these policies consist of insurance and administrative fees assessed against the assets in each separate account. Our variable products do not guarantee investment returns. See Notes to the Consolidated Financial Statements for more information on our Life Reinsurance North America, Life Reinsurance International and Other Segments. Marketing Life Reinsurance In our life reinsurance business, we market to life insurance and life reinsurance companies. We also target institutions, such as pension plans, that have life insurance-related risks and that we believe would benefit from our reinsurance products based on our analysis of publicly available information and other industry data. Where permitted by law, we actively market our reinsurance products primarily on a direct basis. We also seek to capitalize on the relationships developed by our executive officers and marketing staff with members of the actuarial profession and senior insurance company executives, at both primary insurers and other reinsurers. Finally, we work with reinsurance intermediaries, brokers and consultants who are engaged in obtaining reinsurance on behalf of their clients. Wealth Management In our wealth management business, we seek to write variable life insurance and variable annuity products for high net worth individuals and families with at least $10.0 million of liquid net worth. Because we offer variable products that we believe comply with U.S. Internal Revenue Code requirements for insurance products, we typically insure U.S. persons, individuals with U.S. beneficiaries or non-U.S. persons with a U.S. tax presence. Our wealth management subsidiaries are not licensed to conduct insurance business in any jurisdiction in the United States, and therefore cannot utilize traditional life insurance marketing channels such as agents, nor can we use mail-order or other direct-marketing channels to conduct business with persons in the United States or certain other jurisdictions. Accordingly, we rely primarily on referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries to generate wealth management business. None of these intermediaries represents us as agent or in any other capacity, nor do they receive any commissions or other remuneration from us for activities undertaken on our behalf in the United States. Risk Management Life Reinsurance We bear five principal classes of risk in our life reinsurance products: o mortality risk, 7 o investment risk, o persistency risk, o expense risk, and o counter-party risk. Mortality risk is the risk that death claims exceed what we expect. A greater frequency or higher average size of death benefits than we expected can cause us to pay greater death benefits, adversely affecting our profitability. Even if the total death benefits paid over the life of our contracts do not exceed the expected amount, sporadic timing of deaths can cause us to pay more death benefits in a given time period than expected, adversely impacting our profitability in that period. We address these risks through selection, diversification and retrocession. We analyze each block of business based on an evaluation of the ceding company's history, management, target market, products and underwriting criteria relative to the industry. In North America, we target primarily first dollar quota share pools of top producing direct writing companies so that we participate proportionately with other reinsurers on all of the ceded risks. In addition, we diversify our risks by participating in annuity and disability products in the payout stage where the mortality risk is the risk of later, rather than earlier, deaths than expected. A mix of these products with life products can help offset general trends in population mortality. We mitigate our risk of exposure to any one block of business or any one individual life by limiting our share to generally 20-25% in any one pool. We further address the risk of any one large claim by utilizing retrocession above our retention of $1.0 million per life, effective January 1, 2005, for newly underwritten business written in our Life Reinsurance North America Segment. Our retention on business acquired in the ING individual life and reinsurance acquisition, effective December 31, 2004, is $2.0 million per life. Our retention in our Life Reinsurance International Segment is approximately $250,000 per life. In addition, we maintain catastrophe cover on our entire retained life reinsurance business, which effective January 1, 2005 provides reinsurance for losses of $50.0 million in excess of $10.0 million for our North American risks, and $57.5 million excess of $2.5 million for our International risks. This catastrophe cover includes protection for terrorism, nuclear, biological and chemical risks. Our investments, which primarily consist of fixed income securities, are subject to market value, reinvestment and liquidity risk. Our invested assets are funded not only by capital but also by the proceeds of reinsurance transactions, some of which entail substantial deposits of funds or assets. The policies that we reinsure contain provisions that tend to increase benefits to customers depending on movements in interest rates. We analyze the potential results of a transaction, including the cash flows of the liabilities and of the related assets and any risk mitigation measures, and we price transactions to cover our costs, including estimated credit losses, and earn a desirable risk-adjusted return under various scenarios. We use interest rate swaps and may use other hedging instruments as tools to mitigate these risks. We may also retrocede some risks to other reinsurers. Persistency risk is the risk that policyholders maintain their policies for either longer or shorter periods than expected. Persistency can be affected by surrenders and policy lapses. Surrenders are the voluntary termination of a policy by the policyholder and lapses are the termination of the policy due to non-payment of the premium. Surrenders usually involve the return of the policy's cash surrender value to the policyholder. The risk is that actual persistency is significantly different from the persistency we assumed in pricing. Persistency significantly higher than priced for can cause us to pay greater than expected death benefits in future years, adversely impacting our profitability. Persistency significantly lower than priced for can cause our deferred acquisition costs to be unrecoverable, possibly causing loss recognition that would adversely impact our profitability. For policies with cash surrender benefits, surrenders significantly greater from expected will also cause increased liquidity risk. We address these risks through diversification and surrender charges. Expense risk is the risk that actual expenses will be higher than those covered in pricing. The risk is that expenses per policy reinsured are higher as a result of a lower number of policies than anticipated, or that our operations are less efficient than anticipated. We address this risk through the use of automation, bulk reporting and management of general expenses. 8 Counter-party risk is the risk that retrocessionaires will be unable to pay claims as they become due. We limit and diversify our counter-party risk by spreading our retrocession over a pool comprised of highly rated retrocessionaires. Our underwriting guidelines provide that any retrocessionaire to whom we cede business must have a financial strength rating of at least "A-" or higher from A.M. Best or an equivalent rating by another major rating agency. However, even if a retrocessionaire does not pay a claim submitted by us, we are still responsible for paying that claim to the ceding company. Wealth Management The two principal risks associated with our wealth management business are mortality risk and counter-party risk. Since we do not have the direct investment risks associated with our wealth management products, the principal risk in our variable life insurance business is mortality risk. Mortality risk tends to be more stable when spread across large numbers of insureds. We expect that our variable life insurance policies will have relatively large face amounts and will be held by a relatively small number of policyholders. Consequently, our associated mortality risk exposure will be greater in the aggregate, and our probability of loss less predictable, than an insurer with a broader risk pool. Therefore, pursuant to our underwriting guidelines, we reinsure substantially all of the mortality risk associated with our variable life insurance business with highly rated reinsurers and accordingly rely upon our reinsurers' obligation and ability to pay death claims. The counter-party risk is that one or more of our reinsurers may fail to pay a reinsured death claim under a variable life insurance policy. Investment Portfolio General Our general account investment portfolio consists of investments and cash and cash equivalents, which we control, and funds withheld at interest, which are associated with modified coinsurance agreements. In modified coinsurance transactions, the ceding insurance company retains the assets supporting the ceded business and manages them for our account. Although the ceding company must adhere to general standards agreed to by us for the management of these assets, we do not control the selection of the specific investments or the timing of the purchase or sale of investments made by the ceding company. The portfolio that we control consists primarily of investment-grade fixed income securities and cash. We seek to generate attractive levels of investment income while limiting exposure to risks of changing interest rates, excess default experience and adverse changes in asset values. Third party investment managers manage the portfolio. Although we retain control over asset-liability management, investment policy and strategy, compliance and evaluation of results, we may not be able to effectively manage investment results and risks in an asset-liability context, which could adversely affect our ability to support our businesses, our results of operations and our financial condition. Investment Oversight Our Finance and Investment Committee reviews our investment portfolio and the performance of our investment managers. In addition, our Finance and Investment Committee approves changes in the investment policy proposed by management and oversees compliance with the investment policy. Our Finance and Investment Committee can approve exceptions to our investment policy and periodically reviews our investment policy in light of prevailing market conditions. The investment managers and our investment policy may be changed from time to time as a result of such reviews. Investment Policy Our investment policy includes limits requiring diversification by asset class, fixed income sector and single issuers and limits exposure to lower-rated securities. It also limits reinvestment risk and requires effective asset-liability management processes including the maintenance of adequate liquidity to meet potential cash outflows. 9 We are exposed to three primary sources of investment risk on fixed income investments: market value, reinvestment and liquidity risk. Market value risk is the risk that our invested assets will decrease in value due to a change in the yields realized on our assets, a change in the prevailing market yields for similar assets, an unfavorable change in the liquidity of the investment or an unfavorable change in the financial prospects or a downgrade in the credit rating of the issuer of the investment. Reinvestment risk is the risk that interest rates will decline and funds reinvested will earn less than expected. Liquidity risk is the risk that liabilities are surrendered or mature sooner than anticipated, requiring us to sell assets at an undesirable time to provide for policyholder surrenders or withdrawals. We manage these risks through industry and issuer diversification, overall limits on the amounts of credit risk taken and asset-liability management, which we refer to as ALM. Our primary ALM practices include: o modeling the cash flows necessary to service each existing and newly written reinsurance liability by considering various interest rate scenarios; o targeting new investments with cash flows suitable for new and existing liabilities; o evaluating and quantifying the risks to earnings and the economic value of shareholders' equity created by gaps between the projected cash flows from existing assets and those required by in-force liabilities; o reducing the risks caused by mismatches by opportunistically buying matching new investments. We may use foreign denominated securities to manage currency risk if the related reinsurance transaction has a foreign currency component. We may enter into interest rate swaps, futures, forwards and other hedging transactions to manage our risks. We use derivatives only to manage interest rate risk rather than as a speculative investment. Investment Managers As of December 31, 2004, we utilized 6 asset managers to manage the portion of our investment portfolio that we control. General Re-New England Asset Management, which we refer to as NEAM, managed 39.3%; Principal Capital Management, managed 34.4%; Wellington Management, managed 16.7%; Asset Allocation and Management, managed 7.9%; Stephens Capital Management, managed 0.2%; and company directed funds amounted to 1.5%. We may engage other asset managers to manage some or all of our controlled investment portfolio in the future. In the instances where we enter modified coinsurance transactions we do not directly control the underlying investment portfolio. Instead, the investments are held and managed by the ceding company for our account in accordance with contractually agreed upon standards. Competition and Ratings Competition in the life reinsurance industry is based on price, financial strength ratings, reputation, experience, relationships and service. Because we currently rely on a small but growing number of clients in our life reinsurance business and expect to continue to do so for the near future, we are more susceptible to the adverse effects of competition than life reinsurers with larger client bases. We consider Swiss Re, Reinsurance Group of America, Transamerica Reinsurance, Generali USA Life Re, Canada Life, and Munich American Reassurance Company to be our primary competitors. Insurance ratings are used by prospective purchasers of insurance policies, insurers and reinsurance intermediaries in assessing the financial strength and quality of insurers and reinsurers. Rating organizations periodically review the financial performance and condition of insurers, including our insurance subsidiaries. Rating organizations assign ratings based upon several factors. While most of the factors considered relate to the rated company, some of the factors take into account general economic conditions and circumstances outside the rated company's control. Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (U.S.), Inc., and Scottish Re Limited are each rated "A- (excellent)" for financial strength by A.M. Best Company, which is fourth 10 highest of sixteen rating levels, "A (strong)" for financial strength by Fitch Ratings, which is sixth highest of twenty-two rating levels, and "A- (strong)" for financial strength by Standard & Poor's, which is seventh highest of twenty-two rating levels. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re (U.S.), Inc. are also rated "A3 (good)" by Moody's, which is seventh highest of twenty-one rating levels. Scottish Re Life Corporation is rated "A- (excellent)" for financial strength by A.M. Best Company, which is the fourth highest of sixteen rating levels. These ratings are based upon factors of concern to policyholders, treaty holders, retrocessionaires, agents and intermediaries and are not directed toward the protection of investors. A.M. Best assigns an "A- (excellent)" rating to companies that have, in its opinion, on balance, excellent balance sheet strength, operating performance and business profile, as well as a strong ability to meet their ongoing obligations to policyholders. A.M. Best maintains a letter scale rating system ranging from "A++ (superior)" to "F (in liquidation)." "A- (excellent)" is the fourth highest designation of A.M. Best's sixteen rating levels. Fitch assigns an "A (strong)" or "A- (strong)" rating to companies that it characterizes as having, in its opinion, strong capacity to meet policyholder and contract obligations and moderate risk factors and where the impact of any adverse business and economic factors is expected to be small. Fitch's insurer financial strength ratings range from "AAA (exceptionally strong)" to "D (distressed)." "A (strong)" is the sixth highest of Fitch's twenty-two rating levels. Moody's assigns an "A3 (good)" rating to companies that offer, in its opinion, good financial security, but possess elements that suggest a susceptibility to impairment sometime in the future. Moody's long term insurance financial strength ratings range from "Aaa (exceptional)" to "C (lowest)." "A3 (good)" is the seventh highest designation of Moody's twenty-one rating levels. Standard & Poor's assigns an "A- (strong)" rating to companies that have, in its opinion, a strong capacity to meet financial commitments, but are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than insurers with higher ratings. Standard & Poor's insurer financial strength ratings range from "AAA (extremely strong)" to "R (under regulatory supervision)." "A- (strong)" is the seventh highest designation of Standard & Poor's twenty-two rating levels. Employees As of February 28, 2005, we employed approximately 271 full time employees, of which 82 were formerly employed by ING in connection with the business we acquired from ING, and none of whom are unionized. We believe our relations with our employees are good. Regulation General U.S. State Supervision Various state insurance departments enforce insurance and reinsurance regulation. The extent and nature of regulation varies from state to state. Scottish Re (U.S.), Inc. is a Delaware-domiciled reinsurer, which is licensed, accredited, approved or authorized to write reinsurance in 50 states and the District of Columbia. Scottish Re Life Corporation is a Delaware-domiciled reinsurer, which is licensed, accredited, approved or authorized to conduct reinsurance in 50 states, the District of Columbia, Guam and the Federated States of Micronesia. Orkney Re, Inc. is a special purpose financial captive insurance company formed under the laws of South Carolina. Insurance Holding Company Regulation Scottish Re, Scottish Re (U.S.), Inc. and Scottish Re Life Corporation are subject to regulation under the insurance holding company laws of Delaware. The insurance holding company laws and regulations vary from state to state, but generally require insurers and reinsurers that are subsidiaries of insurance holding companies to register and file with state regulatory authorities certain reports including information concerning their capital structure, ownership, financial condition and general business operations. Generally, all transactions between Scottish Re (U.S.), Inc. and/or Scottish Re Life Corporation and their affiliates must be fair and, if material, require prior notice and approval or non-disapproval by the Delaware state insurance department. Orkney Re, Inc. is not subject to the South Carolina insurance holding company act, but it is required to obtain the approval of the South Carolina Director of Insurance before it may materially amend any agreements to which it is a party, enter into any new agreements or otherwise amend its business plan. State insurance holding company laws typically place limitations on the amounts of dividends or other distributions payable by insurers and reinsurers. 11 State insurance holding company laws also require prior notice or state insurance department approval of changes in control of an insurer or reinsurer or its holding company. The insurance laws of Delaware provide that no person, including a corporation or other legal entity, may acquire control of a domestic insurance or reinsurance company unless it has given notice to such company and obtained prior written approval of the state insurance commissioner. Any purchaser of 10% or more of the outstanding voting securities of an insurance or reinsurance company or its holding company is presumed to have acquired control, unless this presumption is rebutted. In addition, many state insurance laws require prior notification to the state insurance department of a change in control of a non-domiciliary insurance company licensed to transact insurance business in that state. While these pre-notification statutes do not authorize the state insurance departments to disapprove the change in control, they authorize regulatory action in the affected state if particular conditions exist such as undue market concentration. Any future transactions that would constitute a change in control of Scottish Re (U.S.), Inc. and Scottish Re Life Corporation or any of their U.S. insurance subsidiaries may require prior notification in the states that have adopted pre-acquisition notification laws. These prior notice and prior approval laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Scottish Re Group Limited, including transactions that some or all of our shareholders might consider to be desirable. Dividend Restrictions State insurance holding company laws typically place limitations on the amounts of dividends or other distributions payable by insurers and reinsurers. Delaware provides that, unless the prior approval of the state insurance commissioner has been obtained, dividends may be paid only from earned surplus and the maximum annual amount payable is limited to the greater of 10% of policyholder surplus at the end of the prior year or 100% of statutory net gain from operations for the prior year. Orkney Re, Inc. may only pay dividends in accordance with restrictions and guidelines contained in its licensing order issued by the South Carolina Director of Insurance. Any dividends Orkney Re, Inc. pays are subject to the lien of the indenture relating to the long term debt of its parent entity, Orkney Holdings LLC. U.S. Reinsurance Regulation Scottish Re (U.S.), Inc. and Scottish Re Life Corporation are subject to insurance regulation and supervision that in many respects is similar to the regulation of licensed primary insurers. Generally, state regulatory authorities monitor compliance with, and periodically conduct examinations regarding, state mandated standards of solvency, licensing requirements, investment limitations, restrictions on the size of risks which may be reinsured, deposits of securities for the benefit of reinsureds, methods of accounting, and reserves for unearned premiums, losses and other purposes. However, in contrast with primary insurance policies, which are regulated as to rate, form, and content, the terms and conditions of reinsurance agreements are generally not subject to regulation by state insurance regulators. Scottish Re (U.S.), Inc. is licensed, accredited, approved or authorized to write reinsurance in 50 states and the District of Columbia. Scottish Re Life Corporation is licensed, accredited, approved and authorized to write reinsurance in all 50 states, the District of Columbia, Guam, and the Federated States of Micronesia. The ability of any primary insurer to take credit for the reinsurance placed with reinsurers is a significant component of reinsurance regulation. Typically, a primary insurer will only enter into a reinsurance agreement if it can obtain credit on its statutory financial statements for the reinsurance ceded to the reinsurer. Credit is usually granted when the reinsurer is licensed, accredited, approved or authorized to write reinsurance in the state where the primary insurer is domiciled. In addition, many states allow credit for reinsurance ceded to a reinsurer if the reinsurer is licensed in another jurisdiction and meets certain financial requirements, or if the primary insurer is provided with collateral in the form of letters of credit, trusts, funds withheld or modified coinsurance contracts, to secure the reinsurer's obligations. U.S. Reinsurance Regulation of our Non-U.S. Reinsurance Subsidiaries Our non-U.S. reinsurance subsidiaries also assume reinsurance from primary U.S. insurers. In order for primary U.S. insurers to obtain financial statement credit for the reinsurance obligations of our non-U.S. reinsurers, our non-U.S. reinsurance subsidiaries must satisfy reinsurance requirements. Non-U.S. reinsurers that are not 12 licensed in a state generally may become accredited by filing certain financial information with the relevant state commissioner and maintaining a U.S. trust fund for the payment of valid reinsurance claims. In addition, many states allow credit for reinsurance ceded to unlicensed and unaccredited reinsurers if the primary insurer is provided with collateral in the form of letters of credit, trusts, funds withheld or modified coinsurance contracts, to secure the reinsurer's obligations. U.S. Insurance Regulation of our Non-U.S. Insurance Subsidiaries Our non-U.S. insurance subsidiaries which sell wealth management products are not licensed to conduct insurance business in any jurisdiction in the United States. Therefore, they cannot utilize traditional life insurance marketing channels such as agents, nor can they use mail-order or other direct marketing channels to conduct business with persons in the United States or certain other jurisdictions. Accordingly, they rely primarily on referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the United States to generate wealth management business. None of these intermediaries represents us as agent or in any other capacity, nor do they receive any commissions or other remuneration from us for activities undertaken in the United States. In addition, policy solicitation, issuance and servicing must occur outside of the United States. NAIC Ratios The National Association of Insurance Commissioners, which we refer to as the NAIC, has developed a set of financial relationships or tests known as the NAIC Insurance Regulatory Information System to assist state regulators in monitoring the financial condition of insurance companies and identifying companies that require special attention or action by insurance regulatory authorities. A second set of confidential ratios, called Financial Analysis Solvency Tracking System, "FAST," are also used for monitoring. Insurance companies generally submit data quarterly to the NAIC, which in turn analyzes the data using prescribed financial data ratios, each with defined "usual ranges." If an insurance company's results vary significantly from expected ranges, regulators may make further inquiries. Regulators have the authority to impose remedies ranging from increased monitoring to certain business limitations to various degrees of supervision. Our U.S. reinsurance subsidiaries are not currently subject to increased regulatory scrutiny based on our ratios, as computed under these systems. Risk-Based Capital The Risk-Based Capital (RBC) for Insurers Model Act, or the Model Act, as it applies to insurers and reinsurers, was adopted by the NAIC in 1993. The main purpose of the Model Act is to provide a tool for insurance regulators to evaluate the capital of insurers relative to the risks assumed by them and determine whether there is a need for possible corrective action. U.S. insurers and reinsurers are required to report the results of their risk-based capital calculations as part of the statutory annual statements filed with state insurance regulatory authorities. The Model Act provides for four different levels of regulatory actions based on annual statements, each of which may be triggered if an insurer's Total Adjusted Capital, as defined in the Model Act, is less than a corresponding level of risk-based capital, which we call RBC. o The Company Action Level is triggered if an insurer's Total Adjusted Capital is less than 200% of its Authorized Control Level RBC, as defined in the Model Act. At the Company Action Level, the insurer must submit a plan to the regulatory authority that discusses proposed corrective actions to improve its capital position. o The Regulatory Action Level is triggered if an insurer's Total Adjusted Capital is less than 150% of its Authorized Control Level RBC. At the Regulatory Action Level, the regulatory authority will perform a special examination of the insurer and issue an order specifying corrective actions that must be followed. o The Authorized Control Level is triggered if an insurer's Total Adjusted Capital is less than 100% of its Authorized Control Level RBC, and at that level the regulatory authority is authorized (although not mandated) to take regulatory control of the insurer. 13 o The Mandatory Control Level is triggered if an insurer's Total Adjusted Capital is less than 70% of its Authorized Control Level RBC, and at that level the regulatory authority must take regulatory control of the insurer. Regulatory control may lead to rehabilitation or liquidation of an insurer. As of December 31, 2004, the risk-based capital of Scottish Re (U.S.), Inc. and Scottish Re Life Corporation exceeded the level that would require either of them to take any corrective action. The Gramm-Leach-Bliley Act In November 1999, the Gramm-Leach-Bliley Act of 1999, or the GLBA, was enacted, implementing fundamental changes in the regulation of the financial services industry in the United States. The GLBA permits the transformation of the already converging banking, insurance and securities industries by permitting mergers that combine commercial banks, insurers and securities firms under one holding company, a "financial holding company." Bank holding companies and other entities that qualify and elect to be treated as financial holding companies may engage in activities, and acquire companies engaged in activities, that are "financial" in nature or "incidental" or "complementary" to such financial activities. Such financial activities include acting as principal, agent or broker in the underwriting and sale of life, property, casualty and other forms of insurance and annuities. However, although a bank cannot act as an insurer nor can it own an insurer as a subsidiary in most circumstances, a financial holding company can own any kind of insurer, insurance broker or agent. Under the GLBA, national banks retain their existing ability to sell insurance products in some circumstances. Under state law, the financial holding company must apply to the insurance commissioner in the insurer's state of domicile for prior approval of the acquisition of the insurer. Under the GLBA, no state may prevent or restrict affiliations between banks and insurers, insurance agents or brokers. Further, states cannot prevent or significantly interfere with bank or bank subsidiary sales activities. Finally, both bank and bank affiliates can obtain licenses as producers. Until the passage of the GLBA, the Glass-Steagall Act had limited the ability of banks to engage in securities-related businesses, and the Bank Holding Company Act had restricted banks from being affiliated with insurers. With the passage of the GLBA, among other things, bank holding companies may acquire insurers, and insurance holding companies may acquire banks. The ability of banks to affiliate with insurers may materially affect our U.S. reinsurance subsidiary's product lines by substantially increasing the number, size and financial strength of potential competitors. Possible Initiatives Relating to the September 11th Events The terrorist attacks in the United States on September 11, 2001 resulted in significant losses for the insurance and reinsurance industries. In response to the attacks and a resulting decline in the availability of terrorism insurance, Congress enacted the Terrorism Risk Insurance Act of 2002. The Act, commonly referred to as TRIA, provides U.S. Federal reinsurance of "commercial property and casualty" coverage written to protect against losses which result from a specified category of foreign terrorist acts. At present, the protections of TRIA are available only to defined "commercial property and casualty" insurers. In addition, TRIA expires on December 31, 2005, and it is not known whether Congress will act to extend the term of the program or expand it to cover life insurers that issue group life insurance. By its own terms, all reinsurance is specifically excluded from the protections available through TRIA. Therefore, absent the possible extension of TRIA protections to group life insurance, TRIA is not expected to provide any protection for providers of life reinsurance. To the extent that TRIA protections are extended to group life insurance, the availability of U.S. Federal reinsurance for terrorism losses would relieve some of the economic pressure to reinsure terrorism losses that life reinsurers may currently experience. We have no information regarding other proposed or enacted federal or state legislation that would restrict insurers' ability to exclude or limit coverage for terrorism risks. 14 Bermuda Our Bermuda subsidiaries are subject to regulation under the Bermuda Companies Act of 1981, and our Bermuda insurance subsidiaries are subject to regulation under the Bermuda Insurance Act of 1978, as amended by the Insurance Amendment Act 1995 (which we refer to as the Bermuda Insurance Act), and the regulations promulgated thereunder. They are required, among other things, to meet and maintain certain standards of solvency, to file periodic reports in accordance with Bermuda statutory accounting rules, to produce annual audited financial statements and to maintain a minimum level of statutory capital and surplus. In general, the regulation of insurers in Bermuda relies heavily upon the auditors, directors and managers of the Bermuda insurer, each of which must certify that the insurer meets the solvency and capital requirements of the Bermuda Insurance Act of 1978. Under the Bermuda Insurance Act, a Bermuda insurance company carrying on long-term business (which includes the writing of annuity contracts and life insurance policies with respect to human life) must hold all receipts in respect of its long-term business and earnings thereon in a separate long-term business fund. Payments from such long-term business fund may not be made directly or indirectly for any purpose other than those of the insurer's long-term business, except in so far as such payment is made out of surplus certified by the insurer's approved actuary to be available for distribution other than to policyholders. In addition, certain of our Bermuda subsidiaries are authorized by private acts of the Bermuda Legislature (the Scottish Annuity & Life International Insurance Company (Bermuda) Ltd. Consolidation and Amendment Act 2001 and the Scottish Annuity & Life Insurance Company (Bermuda) Limited Consolidation and Amendment Act 2001, which we refer to as the private acts) to establish separate accounts in respect of one or more life insurance policies or annuity contracts. In the event of an inconsistency between the Bermuda Insurance Act and our private acts, the terms of the private acts control subject, however, to later amendments of the Bermuda Insurance Act or other relevant laws. Under our private acts, each insurance subsidiary is permitted to credit to relevant separate accounts such portion of the premiums and other receipts from the related policy or contract, and any property of the insurance subsidiary derived from or purchased with such premiums, as the related policies or contracts stipulate. To the extent provided in the relevant policies or contracts, income, interest or other gains earned from, and any property acquired by, the investing or dealing in the assets of the separate account are credited to the separate account, and all expenses, fees or losses relating to the separate account are charged against the separate account. The assets and property held in the separate account are to be used for the sole purpose of paying any and all claims arising from or under the related policies or contracts, and no other person has any right or interest in such assets. Upon the termination of policies or contracts related to a separate account, and the discharge of obligations under the policies or contracts, the insurance subsidiary may terminate the separate account, and credit any remaining assets or property to its general account. In the event of insolvency of one of our Bermuda subsidiaries, the liquidator is bound to recognize the separate nature of each separate account, and is not empowered to apply property identified as the property of any one separate account to pay the claims of creditors of the insurance company or policyholders other than the policyholder to whom the separate account relates. The private acts also permit our Bermuda subsidiaries to issue certain securities based on separate accounts that are subject to similar provisions. Cayman Islands Our Cayman Islands subsidiaries are subject to regulation as licensed insurance companies under Cayman Islands law. These subsidiaries hold unrestricted Class B insurance licenses under Cayman Islands Insurance Law and may therefore carry on an insurance business from the Cayman Islands, but may not engage in any Cayman Islands domestic insurance business. Unless specifically exempted, a Cayman Islands insurance company must engage a licensed insurance manager operating in the Cayman Islands to provide insurance expertise and oversight. Our subsidiaries are exempt from this requirement. In addition, under the Cayman Islands Insurance Law, a Cayman Islands insurance company carrying on long-term business (which includes the writing of life insurance policies) must hold all receipts in respect of its long-term business and earnings thereon in a separate long-term business fund. Payments from such long-term business fund may not be made directly or indirectly for any purpose other than those of the insurer's long-term business except in so far as such payments can be made out of any surplus disclosed on an actuarial valuation and certified by an actuary to be distributable otherwise than to policyholders. Every Cayman Islands insurance company carrying on long-term business may establish any number of separate accounts in respect of premiums paid to it to provide (i) annuities on human life and (ii) contracts of insurance on human life, and such respective premiums shall be kept segregated one from the other and independent of all other funds of the Cayman Islands insurer, and, notwithstanding the provisions of any other written law to the 15 contrary, are not chargeable with any liability arising from any other business of the insurer. The scope and the validity of the Cayman Islands law regarding separate accounts has not been tested in the courts of the Cayman Islands. Guernsey WorldWide Insurance PCC Limited is a protected cell company incorporated under the laws of the Island of Guernsey that is licensed by the Guernsey Financial Services Commission ("GFSC") to carry on international insurance business under the Insurance Business (Bailiwick of Guernsey) Law, 2002. The activities of World-Wide Insurance PCC Limited are supervised by the GFSC. Insurers in Guernsey are required to maintain a minimum margin of solvency and to ensure that they have funds available sufficient to meet a total annual aggregate risk retention together with any forecasted annual expenses. Insurance companies are also required to report annually to the GFSC and must also retain a general representative. The GFSC also has powers to investigate and intervene in the affairs of insurance companies in Guernsey. Ireland Scottish Re (Dublin) Limited is a reinsurance company incorporated under the laws of Ireland. Under Irish law, a reinsurance company such as Scottish Re (Dublin) Limited is required to maintain a minimum level of paid up share capital. As a general matter, Scottish Re (Dublin) Limited is not subject to the same level of regulation in Ireland as a direct writing insurance company. However, the Irish Financial Services Regulatory Authority has the power under Section 22 of the Insurance Act, 1989 (as inserted by Section 5 of the Insurance Act, 2000) to direct Irish reinsurance companies to cease writing business indefinitely or for a specified period for, among other grounds, inadequate capitalization, unsuitable directors and/or management or insufficient staff based in Ireland. Section 22A of the Insurance Act, 1989 (as inserted by Section 6 of the Insurance Act, 2000) provides that the Irish Financial Services Regulatory Authority may create regulations to provide for the application of the general insurance laws and regulations in Ireland to reinsurance companies such as Scottish Re (Dublin) Limited where it considers it necessary to do so, in the public interest, in the interest of policyholders and in the interest of the orderly and proper regulation of the insurance industry. United Kingdom Scottish Re Limited is a U.K. insurance company incorporated and registered in England and Wales and subject to regulation and supervision in the United Kingdom under English domestic and European Community law. The Insurance Companies Act of 1982 of the United Kingdom, as amended, imposes solvency and liquidity standards and auditing and reporting requirements on insurance and reinsurance companies organized under English law, and on companies that own such insurance companies, and further grants to the U.K. Financial Services Authority powers to supervise, investigate and intervene in the affairs of insurance companies. Scottish Re Limited is authorized to carry on long-term business and certain classes of general business. An insurance company carrying on long-term business (which includes the writing of life insurance policies) must hold all receipts in respect of its long-term business and earnings thereon in a separate long-term business fund. Payments from such long-term business funds may not be made directly or indirectly for any purpose other than those of the insurer's long-term business. An exception exists wherein payments may be made from a surplus in the long-term business fund. In such instance the insurer must disclose the surplus on an actuarial valuation and have the valuation certified by its appointed actuary in order to distribute the surplus. New Jurisdictions If Scottish Re or any of our subsidiaries were to become subject to the laws of a new jurisdiction where Scottish Re or that subsidiary is not presently admitted, they may not be in compliance with the laws of the new jurisdiction. Any failure to comply with applicable laws could result in the imposition of significant restrictions on our ability to do business, and could also result in fines and other sanctions, any or all of which could adversely affect our financial results and operations. 16 RISK FACTORS Investing in our securities involves a high degree of risk. Potential investors should consider carefully the following risk factors, in addition to the other information set forth in this Form 10-K, prior to investing in our securities. Risks Related to Our Business A downgrade in the financial ratings of our insurance subsidiaries could make us less competitive. Ratings are an important factor in attracting business in our life reinsurance business. Rating organizations periodically review the financial performance and condition of insurers, including our insurance subsidiaries. Rating organizations assign ratings based upon several factors. Although most of the factors considered relate to the rated company, some of the factors take into account general economic conditions and circumstances outside the rated company's control. Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (U.S.), Inc., and Scottish Re Limited are each rated "A- (excellent)" for financial strength by A.M. Best, which is fourth highest of sixteen rating levels, "A (strong)" for financial strength by Fitch Ratings, which is sixth highest of twenty-two rating levels, and "A- (strong)" for financial strength by Standard & Poor's, which is seventh highest of twenty-two rating levels. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re (U.S.), Inc. are also rated "A3 (good)" for financial strength by Moody's, which is seventh highest of twenty-one rating levels. Scottish Re Life Corporation is rated "A- (excellent)" for financial strength by A.M. Best Company, which is the fourth highest of sixteen rating levels. The objective of ratings organizations is to provide an opinion of an insurer's financial strength and ability to meet ongoing obligations to its policyholders. These ratings are subject to periodic review by the relevant rating agency and may be revised downward or withdrawn at the sole discretion of the rating agency. In addition, these ratings are not an evaluation directed to investors in our securities and are not recommendations to buy, sell or hold our securities. Although since our formation in 1998 none of our operating subsidiaries has been downgraded, a downgrade in or withdrawal of one or more ratings of any one of our insurance subsidiaries could adversely affect its ability to sell products, retain existing business (through recapture provisions and non-renewal) and compete for attractive acquisition opportunities. Inadequate risk analysis and underwriting may result in a decline in our profits. Our success depends on our ability to accurately assess and manage the risks associated with the business that we reinsure. We have developed risk analysis and underwriting guidelines, policies, and procedures with the objective of controlling the quality of the business as well as the pricing of the risks we are assuming. Among other things, these processes rely heavily on our underwriting, our analysis of mortality trends and lapse rates, and our understanding of medical improvements and their impact on mortality. If these processes are inadequate or are based on inadequate information, we may not establish appropriate premium rates and our reserves may not be adequate to cover our losses. In addition, we are dependent on the original underwriting decisions made by, and information provided to us by, ceding companies. For example, we incurred a charge to net income of $10.4 million in the third quarter of 2003 when we discovered that one of our ceding insurers had underreported death claims to us over a three-year period. We are also subject to the risk that the ceding clients may not have adequately evaluated the risks to be reinsured and that the premiums ceded may not adequately compensate us for the risks we assume. To the extent actual claims exceed our underlying assumptions, we will be required to increase our liabilities, which will reduce our profits in the period in which we identify the deficiency. Reserves are estimates based on actuarial and statistical projections, at a given point in time, of what we ultimately expect to pay out on claims and benefits, based on facts and circumstances then known, predictions of future events, estimates of future trends in mortality, morbidity and other variable factors such as persistency, inflation and interest rates. Because of the many assumptions and estimates involved in establishing reserves, the reserving process is inherently uncertain. 17 Our estimation of reserves may be less reliable than the reserve estimations of a reinsurer with a greater volume of business and more established loss history. Actual losses and benefits may deviate, perhaps substantially, from estimates of reserves contained in our financial statements and could at times exceed our reserves. If our losses and benefits exceed our reserves, our earnings may significantly decline. Our life reinsurance contracts and variable life insurance policies expose us to mortality risk. Adverse mortality risk is the risk that death claims may differ from the amount we assumed in pricing our reinsurance contracts and our variable life insurance policies. Mortality experience that is less favorable than the mortality rates that we assumed will negatively affect our net income. Additionally, we are a relatively new company and many of our competitors for reinsurance contracts and variable life insurance policies are significantly larger, have larger operating histories and a broader risk pool. As a consequence, our associated mortality risk exposure is likely to be greater in the aggregate, and its probability of loss less predictable, than that of a competitor with a broader risk pool. Furthermore, with mortality exposure, even if the total benefits paid over the life of the contract do not exceed the expected amount, sporadic timing of deaths can cause us to pay more benefits in a given accounting period than expected, adversely impacting short-term profitability in any particular quarter or year. If our investment strategy is not successful, we could suffer unexpected losses. The success of our investment strategy is crucial to the success of our business. Specifically, we are subject to: o market value risk, which is the risk that our invested assets will decrease in value. This decrease in value may be due to a change in the yields realized on our assets and prevailing market yields for similar assets, an unfavorable change in the liquidity of the investment or an unfavorable change in the financial prospects or a downgrade in the credit rating of the issuer of the investment; o reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less than expected; and o duration matching risk, which is the risk that liabilities are surrendered or mature sooner than anticipated and that we may have to sell assets at an undesirable time to provide for policyholder surrenders or withdrawals. We attempt to address such risks in product pricing and in establishing policy reserves. If our assets do not properly match our anticipated liabilities or our investments do not provide sufficient returns to enable us to satisfy our guaranteed fixed benefit obligations then our profits and financial condition would deteriorate. Also, declines in the value of our investments that provide collateral for reinsurance contracts would require us to post additional collateral. In addition, our investment portfolio includes mortgage-backed securities, known as MBSs, and collateralized mortgage obligations, known as CMOs. As of December 31, 2004, MBSs and CMOs constituted approximately 15.2% of our invested assets. As with other fixed income investments, the fair value of these securities fluctuates depending on market and other general economic conditions and the interest rate environment. Changes in interest rates can expose us to prepayment risks on these investments. In periods of declining interest rates, mortgage prepayments generally increase and MBSs and CMOs are prepaid more quickly, requiring us to reinvest the proceeds at the then current market rates. We may also enter into foreign currency, interest rate and credit derivatives and other hedging transactions in an effort to manage risks. Structuring these derivatives and hedges so as to effectively manage these risks is an inherently uncertain process. If our calculations are incorrect, or if we do not properly structure our derivatives or 18 hedges, we may have unexpected losses and our assets may not be adequate to meet our needed reserves, which could adversely affect our business, earnings and financial condition. General economic conditions affect the markets for interest-rate-sensitive securities, including the level and volatility of interest rates and the extent and timing of investor participation in such markets. Unexpected changes in general economic conditions could create volatility or illiquidity in these markets in which we hold positions and harm our investment return. In certain reinsurance contracts we do not maintain control of the invested assets, which may limit our ability to control investment risks on these assets and may expose us to credit risk of the ceding company. As part of our business we enter into reinsurance agreements on a modified coinsurance and funds withheld coinsurance basis. In these transactions, the ceding insurance company retains the assets supporting the ceded business and manages them for our account. As of December 31, 2004, $2.1 billion of assets were held by ceding companies under such agreements and were recorded under "funds withheld at interest" on our balance sheet. Although the ceding company must adhere to general standards agreed to by us for the management of these assets, we do not control the selection of the specific investments or the timing of the purchase or sale of investments made by the ceding company. Accordingly, we may be at risk if the ceding company selects investments that deviate from our agreed standards or if the ceding company performs poorly in the purchase, sale and management of those assets. In addition, these assets are not segregated from the ceding company's other assets, and we may not be able to recover all of these assets in the event of the insolvency of the ceding insurer. In certain other reinsurance arrangements, we may place assets in a trust in order to provide the ceding company with credit for reinsurance on its financial statements. Although we generally have the right to direct the investment of assets in these trusts, in the event of the insolvency of the ceding company, its receiver may attempt to take control of those assets. Interest rate fluctuations could lower the income we derive from the difference between the interest rates we earn on our investments and interest we pay under our reinsurance contracts. Significant changes in interest rates expose us to the risk of not earning income or experiencing losses based on the difference between the interest rates earned on investments and the credited interest rates paid on outstanding reinsurance contracts. Both rising and declining interest rates can negatively affect the income we derive from these interest rate spreads. During periods of falling interest rates, our investment earnings will be lower because new investments in fixed maturity securities will likely bear lower interest rates. We may not be able to fully offset the decline in investment earnings with lower crediting rates on our contracts that reinsure life insurance policies or annuities with cash value components. A majority of our annuity and certain other products have multi-year guarantees and guaranteed floors on their crediting rates. During periods of rising interest rates, we may be contractually obligated to increase the crediting rates on our contracts that reinsure annuities or life insurance policies with cash value components. We may not, however, have the ability to immediately acquire investments with interest rates sufficient to offset the increased crediting rates under our reinsurance contracts. Although we develop and maintain asset/liability management programs and procedures designed to reduce the volatility of our income when interest rates are rising or falling, significant changes in interest rates caused by factors beyond our control such as changes in governmental monetary policy or political conditions may negatively affect our interest rate spreads. Changes in interest rates may also affect our business in other ways. Lower interest rates may result in lower sales of certain insurance and investment products of our customers, which would reduce the demand for our reinsurance of these products. 19 A prolonged economic downturn could reduce the demand for annuity and life insurance products, which could substantially reduce our revenues. A prolonged general economic downturn or poor performance of the equity and other capital markets, such as the U.S. economy has recently experienced, or similar conditions in the future, could lower the demand for many annuity and life insurance products. Because we obtain substantially all of our revenues through reinsurance arrangements that cover a portfolio of life insurance products, as well as annuities, our business would be harmed if the demand for annuities or life insurance decreased. Policyholder withdrawals or recaptures of reinsurance treaties could force us to sell investments at a loss and take a larger than anticipated charge for amortization of deferred acquisition costs. Some of the products offered by our insurance subsidiaries and some of the products offered by primary insurance companies that we reinsure allow policyholders and contract holders to withdraw their funds under defined circumstances. In addition, our reinsurance agreements may provide for recapture rights on the part of our insurance company customers. Recapture rights permit these customers to reassume all or a portion of the risk formerly ceded to us after an agreed upon time, usually 10 years, subject to various conditions or upon a downgrade of any of our financial strength ratings or our failure to satisfy other financial conditions. Recapture of business previously ceded does not affect premiums ceded prior to the recapture, but may result in immediate payments to our insurance company customers. In addition, when we issue a new insurance policy or annuity contract or write a reinsurance contract, we defer a portion of the related acquisition costs by establishing a deferred acquisition cost asset on the balance sheet. This asset is amortized over the expected term of the acquired business based on certain assumptions about the performance and persistency of that business and investment experience. To the extent surrender, withdrawal or recapture activity is greater than we assumed, or investment experience is worse than we assumed, we may incur a non-cash charge to write down the deferred acquisition cost asset. Any such charge may be partially offset by recapture and surrender fees. One of our customers exercised a right of recapture in April 2001, requiring us to pay $185.7 million to the customer. Because we had expected the recapture, we did not have to dispose of assets at a loss and we had already fully amortized the deferred acquisition costs. In December 2002, another of our customers exercised a right of recapture requiring us to pay $49.3 million to the customer. In that case, we did not have to dispose of assets at a loss and we recovered all of our unamortized deferred acquisition costs relating to the transaction. However, because recapture rights can be triggered by circumstances, which may be unforeseeable, such as rating decreases or production shortfalls, we may not be able to anticipate future recaptures and make adequate preparations to reduce their impact on us. If recaptures occur and we do not make adequate preparations, our earnings and financial condition could decline. We take counter-party risk with respect to our retrocessionaires. We cede some of the business that we reinsure to other reinsurance companies, known as retrocessionaires. We assume the risk that the retrocessionaire will be unable to pay amounts due to us because of its own financial difficulties. The failure of our retrocessionaires to pay amounts due to us will not absolve us of our responsibility to pay ceding companies for risks that we reinsure. Failure of retrocessionaires to pay us could materially harm our business, results of operations and financial condition. Terrorist attacks and related events may adversely affect our business and results of operations. The terrorist attacks on the United States and ensuing events or any future attacks may have a negative impact on our business and results of operations due to the loss of lives that we insure or reinsure and the impact on the U.S. and global economies and the demand for our products. Our reinsurance programs, including our catastrophe coverage, limited our net losses in individual life claims relating to the September 11, 2001 terrorist attacks to approximately $750,000. We continue to utilize reinsurance programs, including catastrophe coverage, to 20 limit any future losses relating to such events. We cannot assure you, however, that if there are future terrorist attacks, our business, financial condition or results of operations will not be adversely affected. Economic and political instability in developing countries could harm our business prospects. We conduct our business in various developing countries within Asia, Latin America, the Middle East, North Africa and Southern and Eastern Europe. We plan to continue to expand our business in these locations. Political and economic instability as well as armed conflict in these countries could adversely impact our ability to write new business originating in these countries. Such adverse impact, if significant, could reduce our earned premiums and, accordingly, could reduce our net income. The acquisition of the individual life reinsurance business of ING, and any future acquisition, exposes us to operational risks. On December 31, 2004, we acquired the in-force individual life reinsurance business of ING, and we may make future acquisitions, either of companies or other selected blocks of business. While we will evaluate business opportunities on a regular basis, we may not be successful in identifying any attractive acquisitions. We may not have, or be able to raise on acceptable terms, sufficient financial resources to make acquisitions. In addition, the acquisition from ING and any other acquisitions we make will be subject to all of the risks inherent in an acquisition strategy, including o integrating financial and operational reporting systems; o establishing satisfactory budgetary and other financial controls; o funding increased capital needs and overhead expenses; o obtaining management personnel required for expanded operations; o funding cash flow shortages that may occur if anticipated sales and revenues are not realized or are delayed, whether by general economic or market conditions or unforeseen internal difficulties; and o the value of assets acquired may be lower than expected or may diminish due to credit defaults or changes in interest rates and liabilities assumed may be greater than expected. Our failure to manage successfully these operational challenges and risks may impact our results of operations. In addition, growth by acquisition may divert a substantial amount of management time that would otherwise be devoted to our operations. Pursuant to the terms of a Securities Purchase Agreement, we could be subject to various penalties if we have not received shareholder approval prior to June 30, 2005, which could negatively impact our business and ratings. We are a signatory to a Securities Purchase Agreement with certain affiliates of The Cypress Group. Pursuant to the terms of the agreement, if we have not by June 30, 2005 obtained shareholder approval to amend our articles of association and issue ordinary shares pursuant to the terms of certain securities, we will be required to make additional payments under the Class C Warrants, and to pay a penalty rate on notes, until such time as shareholder approval is obtained. While we intend to seek shareholder approval as soon as possible, and have scheduled an Extraordinary General Meeting of Shareholders for April 7, 2005, for such purpose, no assurances can be given that the requisite shareholder approval will be received prior to June 30, 2005. If we are not able to receive such approval in a timely manner, the additional payments and the penalty rate on the 7.00% Convertible Junior Subordinated Notes may have a negative impact on our business, results of operations and ratings. 21 The loss of any of our key employees or our inability to retain them could negatively impact our business. Our success substantially depends upon our ability to attract and retain qualified employees and upon the ability of our senior management and other key employees to implement our business strategy. We believe there are only a limited number of available qualified executives in the business lines in which we compete. We rely substantially upon the services of Scott E. Willkomm, our Chief Executive Officer, Paul Goldean, our General Counsel, David Huntley, the Chief Executive Officer of Scottish Re Limited, Thomas A. McAvity, Jr., our Chief Investment Officer, Hugh McCormick, our Executive Vice President of Corporate Development, Elizabeth A. Murphy, our Chief Financial Officer, Oscar R. Scofield, the Chairman of Scottish Re (U.S.), Inc., Seth Vance, the Chief Executive Officer of Scottish Holdings, Inc., and Clifford J. Wagner, our Chief Actuary. Each of the foregoing members of senior management have employment agreements and we maintain $5,000,000 key man life insurance policies for Mr. Scofield and $2,500,000 key man life insurance policies for each of Mr. Willkomm, Ms. Murphy, and Mr. Wagner. The loss of the services of members of our senior management, or our inability to hire and retain other talented personnel from the very limited pool of qualified insurance professionals, could delay or prevent us from fully implementing our business strategy which could harm our financial performance. We are exposed to foreign currency risk. Our functional currency is the United States dollar. However, our U.K. subsidiaries, Scottish Re Holdings Limited and Scottish Re Limited, maintain operating expense accounts in British pounds, parts of their investment portfolio in Euros and British pounds and receive other currencies in payment of premiums. All of Scottish Re Limited's original U.S. business is settled in United States dollars, all Canadian, Latin American and certain Asia and Middle East business is converted and settled in United States dollars, and all other currencies are converted and settled in either Euros or British pounds. The results of the business recorded in Euros or British pounds are then translated to United States dollars. Scottish Re Limited attempts to limit substantial exposures to foreign currency risk, but does not actively manage currency risks. To the extent our foreign currency exposure is not properly managed or otherwise hedged, we may experience exchange losses, which in turn would lower our results of operations and harm our financial condition. Our insurance subsidiaries are highly regulated, and changes in these regulations could harm our business. Our insurance and reinsurance subsidiaries are subject to government regulation in each of the jurisdictions in which they are licensed or authorized to do business. Governmental agencies have broad administrative power to regulate many aspects of the insurance business, which may include trade and claim practices, accounting methods, premium rates, marketing practices, advertising, acceptability of collateral for purposes of taking credit for reinsurance, policy forms, affiliate transactions, changes of control and capital adequacy. These agencies are concerned primarily with the protection of policyholders rather than shareholders. Moreover, insurance laws and regulations, among other things: o establish solvency requirements, including minimum reserves and capital and surplus requirements; o limit the amount of dividends, tax distributions, intercompany loans and other payments our insurance subsidiaries can make without prior regulatory approval; o impose restrictions on the amount and type of investments we may hold; and o require assessments to pay claims of insolvent insurance companies. The National Association of Insurance Commissioners, which we call the NAIC, continuously examines existing laws and regulations. We cannot predict the effect that any NAIC recommendations or proposed or future legislation or rule making in the United States or elsewhere may have on our financial condition or operations. If Scottish Re or any of our subsidiaries were to become subject to the laws of a new jurisdiction where Scottish Re or that subsidiary is not presently admitted, they may not be in compliance with the laws of the new 22 jurisdiction. Any failure to comply with applicable laws could result in the imposition of significant restrictions on our ability to do business, and could also result in fines and other sanctions, any or all of which could harm our financial results and operations. The European Commission is currently finalizing a draft Directive to introduce a harmonized framework for the authorization and supervision of EU reinsurers (the "Reinsurance Directive"). Once implemented by EU member states, the Reinsurance Directive will introduce a single passport system for reinsurers similar to that which currently applies to direct insurers. This will mean that EU reinsurers will be authorized by their home state supervisor and will, on that basis, be entitled to transact business anywhere in the European Union either under the rules of "freedom of establishment" or under the "freedom of services" rules. A draft of the Reinsurance Directive was issued on November 5, 2004 by the EU Presidency (the "November Draft"). Some key provisions of the November Draft for life reinsurers such as Scottish Re (Dublin) Limited include the following: o EU reinsurers will be required to limit their purposes to the business of reinsurance and related operations. o EU reinsurers will be obliged to establish adequate technical reserves to cover their reinsurance obligations. Additionally, reinsurers will be required to invest the assets covering their technical reserves and their equalization reserves (which are required in the case of credit reinsurers) in accordance with a prescribed set of rules. These rules require a reinsurer to match its investments to its expected claims payments and also require diversity across asset classes and counterparties. Investments in derivatives are permitted only to reduce investment risks or to facilitate efficient portfolio management. In addition, home member states are permitted to require reinsurers to also comply with the more quantitative rules set out in the November Draft provided they are prudentially justified. o EU reinsurers will be obliged to maintain a solvency margin "free of any foreseeable liabilities". In the case of life reinsurers, the required solvency margin will be based on the higher of a premium basis or a claims basis calculation. In respect of premiums, a ratio of 18% will apply on the first EUR50 million, with 16% applying on the excess. In respect of claims, a ratio of 26% will apply on the average burden of claims determined by reference to a number of preceding financial years up to EUR35 million with 23% applying on the excess. (For unit linked business, home member states may require the solvency margin to be calculated in accordance with the rules set out in the Directive applicable to direct life assurance companies). o One third of the required solvency margin will constitute a minimum guarantee fund, which must be not less than EUR 3.0 million. o As regards transitional arrangements, the November Draft provides that member states may allow EU reinsurers which are carrying on business at the date of entry into force of the Reinsurance Directive, a further two years within which to comply with, inter alia, the requirements regarding establishment of technical provisions and reserves and relating to the solvency margin and the guarantee fund described above. However, it is currently unclear whether the Irish Financial Services Regulatory Authority will provide for such transitional arrangements and therefore Scottish Re (Dublin) Limited may be required to comply with the foregoing requirements on implementation of the Reinsurance Directive in Ireland. If Scottish Re (Dublin) Limited were unable to comply with these provisions, it would not be lawful for it to continue to carry on its business and it would have to cease operations. 23 Life reinsurance is a highly competitive industry, which could limit our ability to gain or maintain our competitive position. The life reinsurance industry is highly competitive, and we encounter significant competition from other reinsurance companies, as well as competition from other providers of financial services. Competition in the reinsurance business is based on price, financial strength ratings, reputation, experience, relationships and service. Many of our competitors are significantly larger, have greater financial resources and have longer operating histories than we do. Competition from other reinsurers could adversely affect our competitive position. We consider our major competitors to include Swiss Re, Reinsurance Group of America Inc., Munich American Reassurance Company, Generali USA Life Re, Canada Life and Transamerica Reinsurance. The outcome of current industry investigations and litigation may adversely impact our business. The attorneys general and the insurance departments of New York and numerous other states have announced investigations of insurance broker compensation arrangements, bid-rigging and other practices within the insurance industry, and may propose changes in the regulation of broker compensation arrangements and disclosure. Some regulators have also announced investigations into improper uses of finite reinsurance. We have not been contacted by any government agency (including through receipt of a subpoena) in connection with these investigations. It is impossible to predict the outcomes of these investigations, whether they will expand into other industry practices not yet contemplated, how they will affect our business, financial condition or results of operation, or whether they will result in changes in insurance regulation or practices. Our ability to pay dividends is limited. We are a holding company, with our principal assets consisting of the stock of our insurance company subsidiaries. Our ability to pay dividends on the ordinary shares and HyCUs depends significantly on the ability of our insurance company subsidiaries, our principal sources of cash flow, to declare and distribute dividends or to advance money to us in the form of intercompany loans. Our insurance company subsidiaries are subject to various state and foreign government statutory and regulatory restrictions applicable to insurance companies generally, that limit the amount of dividends, loans and advances that those subsidiaries may pay to us. If insurance regulators at any time determine that payment of a dividend or any other payment to an affiliate would be detrimental to an insurance subsidiary's policyholders or creditors, because of the financial condition of the insurance subsidiary or otherwise, the regulators may block dividends or other payments to affiliates that would otherwise be permitted without prior approval. Our ordinary shares are subject to voting and transfer limitations. Under our articles of association, our board of directors (or its designee) is required, except for transfers of ordinary shares executed on any recognized securities exchange or inter-dealer quotation system, including the NYSE, to decline to register any transfer of ordinary shares, if our directors have any reason to believe that such transfer would result in a person (or any group of which such person is a member) beneficially owning, directly or indirectly, 10% or more of any class of our shares, except that Pacific Life (as defined in our articles of association), is permitted to transfer ordinary shares to other Pacific Life Entities, so long as the number of ordinary shares beneficially owned directly or indirectly by the Pacific Life Entities in the aggregate does not exceed 24.9% of a class of our shares. With respect to a transfer of ordinary shares executed on any recognized securities exchange or inter-dealer quotation system, including the NYSE, if our directors have any reason to believe that such transfer would result in a person (or any group of which such person is a member) beneficially owning, directly or indirectly, 10% or more of any class of our shares, the directors may demand that such person surrender the ordinary shares to an agent designated by the directors, who will sell the ordinary shares on any recognized securities exchange or inter-dealer quotation system, including the NYSE. After applying the proceeds of the sale toward reimbursing the transferee for the price paid for the ordinary shares, the agent will pay the remaining proceeds to certain charitable organizations designated by the directors. The proceeds of such sale may be used to reimburse the agent for its duties. Similar restrictions apply to issuances and repurchases of ordinary shares by us. Our directors (or their designee) also may, in their absolute discretion, decline to register the transfer of any ordinary shares, except for transfers of ordinary shares executed on any recognized securities exchange or inter-dealer quotation system, including the NYSE, if they have reason to believe that such transfer may expose us, our subsidiaries or 24 shareholders or any person insured or reinsured or proposing to be insured or reinsured by us to adverse tax or regulatory treatment in any jurisdiction or if they have reason to believe that registration of such transfer under the Securities Act, under any state "blue sky" or other U.S. securities laws or under the laws of any other jurisdiction is required and such registration has not been duly effected. With respect to a transfer of ordinary shares executed on any recognized securities exchange or inter-dealer quotation system, including the NYSE, if our directors have any reason to believe that such transfer may expose us, our subsidiaries or shareholders or any person insured or reinsured or proposing to be insured or reinsured by us to adverse tax or regulatory treatment in any jurisdiction, the directors may demand that such person surrender the ordinary shares to an agent designated by the directors, who will sell the ordinary shares on any recognized securities exchange or inter-dealer quotation system, including the NYSE. After applying the proceeds of the sale toward reimbursing the transferee for the price paid for the ordinary shares, the agent will pay the remaining proceeds to certain charitable organizations designated by the directors. The proceeds of such sale may be used to reimburse the agent for its duties. A transferor of ordinary shares will be deemed to own such shares for dividend, voting and reporting purposes until a transfer of such ordinary shares has been registered on our register of members. We are authorized to request information from any holder or prospective acquirer of ordinary shares as necessary to effect registration of any such transaction, and may decline to register any such transaction if complete and accurate information is not received as requested. In addition, our articles of association generally provide that any person (or any group of which such person is a member) other than the Pacific Life Entities, holding directly, or by attribution, or otherwise beneficially owning our voting shares carrying 10% or more of the total voting rights attached to all of our outstanding voting shares, will have the voting rights attached to its voting shares reduced so that it may not exercise more than approximately 9.9% of such total voting rights. In addition, in the event the Pacific Life Entities hold directly or by attribution or otherwise beneficially own voting shares with more than 24.9% of the total voting rights of our voting shares, the voting rights of the Pacific Life Entities will be reduced so that they may not exercise in the aggregate more than approximately 24.9% of the total voting rights of our voting shares at any given time. Because of the attribution provisions of the Code and the rules of the SEC regarding determination of beneficial ownership, this requirement may have the effect of reducing the voting rights of a shareholder whether or not such shareholder directly holds of record 10% or more of our voting shares. Further, our board of directors (or its designee) has the authority to request from any shareholder certain information for the purpose of determining whether such shareholder's voting rights are to be reduced. Failure to respond to such a notice, or submitting incomplete or inaccurate information, gives our board of directors (or its designee) discretion to disregard all votes attached to such shareholder's ordinary shares. We have scheduled an Extraordinary General Meeting of shareholders for April 7, 2005. At this meeting, the shareholders will vote on whether to approve (i) certain amendments to our articles of association and (ii) the issuance of ordinary shares pursuant to certain securities issued to the Cypress Entities. If the amendments to our articles of association are approved, the Cypress Entities would have the position under our articles of association previously occupied by Pacific Life, as the only shareholder permitted to own more than 9.9% of our outstanding ordinary shares and to own or control ordinary shares constituting 10% or more of the total combined voting rights attaching to our issued ordinary shares. Our articles of association make it difficult to replace directors and to effect a change of control. Our articles of association contain certain provisions that make it more difficult for the shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions may make more difficult the acquisition of control of Scottish Re by means of a tender offer, open market purchase, a proxy fight or otherwise, including by reason of the limitation on transfers of ordinary shares and voting rights described above. While these provisions are designed to encourage persons seeking to acquire control to negotiate with our board of directors, they could have the effect of discouraging a prospective purchaser from making a tender offer or otherwise attempting to obtain control and may prevent a shareholder from receiving the benefit from any premium over the market price of our ordinary shares offered by a bidder in a potential takeover. Examples of provisions in our articles of association that could have such an effect include: o election of our directors is staggered, meaning that the members of only one of three classes of our directors are elected each year; 25 o the total voting power of any shareholder owning 10% or more of the total voting rights attached to our ordinary shares will be reduced to approximately 9.9% of the total voting rights of our ordinary shares; o our directors must decline to register the transfer of ordinary shares on our share register that would result in a person owning 10% or more of any class of our shares and may declined certain transfers that they believe may have adverse tax or regulatory consequences; o shareholders do not have the right to act by written consent; and o our directors have the ability to change the size of the board of directors. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our ordinary shares if they are viewed as discouraging changes in management and takeover attempts in the future. The Cypress Entities own approximately 9.9% of our outstanding ordinary shares. If our shareholders approve certain amendments to our articles of association and the issuance of ordinary shares, as described above, the Cypress Entities will own approximately 20.5% of our outstanding ordinary shares. In addition, pursuant to a shareholders' agreement, as long as the Cypress Entities continue to hold the lesser of (i) 9.9% or more of the voting power of our voting securities on an as-converted basis or (ii) 35% or more of the securities purchased on an as-converted basis, the Cypress Entities have the non-assignable right to appoint one director and one non-voting observer to our board of directors. The Cypress Entities' share ownership and ability to nominate persons for election to the board of directors might provide the Cypress Entities with significant influence over potential change in control transactions. Applicable insurance laws make it difficult to affect a change of control. Under applicable Delaware insurance laws and regulations, no person may acquire control of Scottish Re, Scottish Re (U.S.), Inc. or Scottish Re Life Corporation Limited, our Delaware insurance subsidiaries, unless that person has filed a statement containing specified information with the Delaware Insurance Commissioner and approval for such acquisition is obtained. Under applicable laws and regulations, any person acquiring, directly by stock ownership or indirectly (by revocable proxy or otherwise), 10% or more of the voting stock of any other person is presumed to have acquired control of such person, and a person who beneficially acquires 10% or more of our ordinary shares without obtaining the approval of the Delaware Insurance Commissioner would be in violation of Delaware's insurance holding company act and would be subject to injunctive action requiring disposition or seizure of the shares and prohibiting the voting of such shares, as well as other action determined by the Delaware Insurance Commissioner. In addition, many state insurance laws require prior notification to the state insurance department of a change in control of a non-domiciliary insurance company licensed to transact insurance in that state. While these pre-notification statutes do not authorize the state insurance departments to disapprove the change in control, they authorize regulatory action in the affected state if particular conditions exist such as undue market concentration. Any future transactions that would constitute a change in control of us or Scottish Re (U.S.), Inc. and Scottish Re Life Corporation Limited may require prior notification in the states that have pre-acquisition notification laws. These prior notice and prior approval laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Scottish Re Group Limited, including transactions that some or all of our shareholders might consider to be desirable. Any change in control of Scottish Re Limited would need the approval of the U.K. Financial Services Authority, which is the body responsible for the regulation and supervision of the U.K. insurance and reinsurance industry. 26 The market price of our ordinary shares could decrease due to the significant number of shares eligible for future sale. As of February 28, 2005, we had 39,991,745 ordinary shares outstanding, 3,007,380 of which were held by Pacific Life, and 3,953,183 of which were held by the Cypress Entities. In addition, we had options outstanding to purchase an aggregate of 2,491,236 ordinary shares, Class A Warrants to purchase an aggregate of 2,650,000 ordinary shares, 5,297,095 ordinary shares issuable upon conversion of the Senior Convertible Notes, 6,118,063 ordinary shares (at the current market price) issuable upon conversion of the HyCUs, Class C Warrants issued to the Cypress Entities to purchase 3,206,431 ordinary shares and 2,130,709 ordinary shares issuable upon conversion of the 7.00% Convertible Junior Subordinated Notes issued to the Cypress Entities. The ordinary shares held by Pacific Life, the ordinary shares issuable upon the exercise of the Class A Warrants and the ordinary shares issuable upon conversion of our 4.50% Senior Convertible Notes have been registered pursuant to a registration statement that became effective on April 4, 2003, and they may be sold at any time and from time to time by the holders thereof in open market or privately negotiated transactions. The ordinary shares issuable upon settlement of the purchase contracts and the convertible preferred shares underlying the HyCUs have been registered pursuant to a registration statement which became effective on April 24, 2003 and may be sold at any time and from time to time by the holders thereof in open market or privately negotiated transactions after the date of issuance. The ordinary shares issued and the ordinary shares issuable upon the exercise of Class C Warrants and upon conversion of the 7.00% Convertible Junior Subordinated Notes issued to the Cypress Entities have not been registered. The Cypress Entities have demand and piggyback registration rights and are locked-up from selling their securities until December 31, 2005, unless shareholder approval is not received by June 30, 2005 or certain other events occur relating to sales by officers or directors or a change of control. Upon termination of the lock-up, the Cypress Entities would be free to demand registration and the securities could be sold at any time and from time to time in the open market or in privately negotiated transactions. We cannot predict the effect, if any, that future sales of our ordinary shares, or the availability of ordinary shares for future sale, will have on the market price of our ordinary shares prevailing from time to time. Sales of substantial amounts of ordinary shares in the public market following the offering, or the perception that such sales could occur, could lower the market price of our ordinary shares and may make it more difficult for us to sell our equity securities in the future at a time and at a price which we deem appropriate. If the persons holding Class A Warrants or Class C Warrants or options cause a large number of the ordinary shares underlying such securities to be sold in the market, (or if Pacific Life or the Cypress Entities were to sell a large number of their ordinary shares) or if the convertible holders or the Cypress Entities were able to convert to our ordinary shares and then sell those ordinary shares, such sales could cause a decline in the market price for the ordinary shares. Investors may have difficulties in suing or enforcing judgments against us in the United States. Scottish Re is a holding company organized under the laws of the Cayman Islands with its principal executive office in Bermuda. Certain of our directors and officers are residents of various jurisdictions outside the United States. All or a substantial portion of our assets and those of such directors and officers, at any one time, are or may be located in jurisdictions outside the United States. Although we have irrevocably agreed that we may be served with process in New York, New York with respect to actions arising out of or in connection with violations of United States Federal securities laws relating to offers and sales of ordinary shares made hereby, it could be difficult for investors to effect service of process within the United States on our directors and officers who reside outside the United States or to recover against us or such directors and officers on judgments of United States courts predicated upon the civil liability provisions of the United States federal securities laws. Risks Related to Taxation If Scottish Re or any of its non-U.S. subsidiaries is determined to be conducting business in the United States we could be liable for U.S. federal income taxes. Scottish Re is a holding company organized under the laws of the Cayman Islands with its principal executive office in Bermuda. Scottish Re and its non-U.S. subsidiaries believe they have operated and intend to continue operating in a manner such that neither Scottish Re nor any of its non-U.S. subsidiaries should be treated as engaging in a trade or business in the United States and thus should not be subject to U.S. federal income taxation on 27 net income. Because there are no definitive standards provided by the Internal Revenue Code of 1986, as amended (the "Code"), regulations or court decisions as to which activities constitute being engaged in the conduct of a trade or business within the United States and as the determination is essentially factual in nature, the United States Internal Revenue Service (which we refer to as the IRS) could contend that Scottish Re or one or more of its non-U.S. subsidiaries, is engaged in a trade or business in the United States for U.S. federal income tax purposes, and thus may be subject to U.S. federal income tax and "branch profits" tax on net income. The highest marginal federal income tax rates currently are 35% for a corporation's income that is effectively connected with a U.S. trade or business and 30% for the "branch profits" tax unless the "branch profits" tax is reduced by an applicable income tax treaty. If Scottish Re or any of its non-U.S. subsidiaries is treated as a controlled foreign corporation or a passive foreign investment company or if any of our non-U.S. or insurance subsidiaries generate more than a permissible amount of related person insurance income, U.S. persons who own our convertible preferred shares or ordinary shares may be subject to U.S. federal income taxation on our undistributed earnings and may recognize ordinary income upon disposition of our convertible preferred shares or ordinary shares. We believe that we were not a controlled foreign corporation or a passive foreign investment company, nor have we generated an impermissible amount of related person insurance income for the year ended December 31, 2004. Although no assurances can be given, based upon (i) our current beliefs with respect to the dispersion of our share ownership and (ii) our financial information for the period ending December 31, 2004, we do not expect to be a controlled foreign corporation or a passive foreign investment company or to generate an impermissible amount of related person insurance income for the current year or in the future. Our shareholders who are U.S. persons may be required to include in gross income for U.S. federal income tax purposes our undistributed earnings if we are treated as a controlled foreign corporation or a passive foreign investment company or if we have generated more than a permissible amount of related person insurance income. In addition, in certain cases gain on the disposition of our convertible preferred shares or ordinary shares may be treated as ordinary income. Controlled Foreign Corporation. Each U.S. 10% holder of a controlled foreign corporation on the last day of the controlled foreign corporation's taxable year generally must include in gross income for U.S. federal income tax purposes such shareholder's pro-rata share of the controlled foreign corporation's subpart F income, even if the subpart F income has not been distributed. For purposes of this discussion, the term "U.S. 10% holder" includes only persons who, directly or indirectly through non-U.S. Entities (or through the application of certain "constructive" ownership rules, which we refer to as constructively), own 10% or more of the total combined voting power of all classes of stock of the foreign corporation. In general, a non-U.S. company is treated as a controlled foreign corporation if such U.S. 10% holders collectively own more than 50% of the total combined voting power or value of the company's stock for an uninterrupted period of 30 days or more during any year and a non-U.S. insurance company is treated as a controlled foreign corporation if such U.S. 10% holders collectively own more than 25% of the total combined voting power or value of the company's stock for an uninterrupted period of 30 days or more during any year. We believe we currently have no U.S. 10% holders. In order to prevent Scottish Re or any of its non-U.S. subsidiaries from being treated as a controlled foreign corporation, our articles of association prohibit the ownership by any person of shares that would equal or exceed 10% (or, in the case of Pacific Life, Pacific Mutual Holding Company, Pacific LifeCorp and/or any direct or indirect wholly-owned subsidiary of Pacific Mutual Holding Company, each of which we call a Pacific Life Entity, that would exceed 24.9%) of any class of the issued and outstanding Scottish Re shares and provide a "voting cutback" that would, in certain circumstances, reduce the voting power with respect to Scottish Re shares to the extent necessary to prevent the Pacific Life Entities from owning more than 24.9% of the voting power of Scottish Re, and any other person owning more than 9.9% of the voting power of Scottish Re. We believe, based upon information made available to us regarding our existing shareholder base, that the dispersion of our share ownership (other than with respect to the Pacific Life Entities) and the provisions of our articles of association restricting the transfer, issuance and voting power of our shares should prevent any person (other than the Pacific Life Entities) from becoming a U.S. 10% holder of Scottish Re; however, some of these provisions have not been directly passed on by the IRS, or by any court, in this context. If, however, one or more U.S. persons owning (directly, indirectly through non-U.S. Entities or constructively) 10% or more of our voting stock were to acquire separately or in the aggregate 25% of the vote or 28 value of the stock of Scottish Re, our non-U.S. insurance subsidiaries would be treated as controlled foreign corporations. In addition, Scottish Re and its other (non-insurance) non-U.S. subsidiaries would be characterized as controlled foreign corporations if such U.S. persons were to acquire more than 50% of the vote or value of the stock of Scottish Re. In either case, any such U.S. 10% shareholder would be required to include in gross income its allocable share of subpart F income of Scottish Re and/or its non-U.S. subsidiaries. Related Person Insurance Income. If (i) any of our non-U.S. insurance subsidiaries' related person insurance income, referred to as RPII, determined on a gross basis were to equal or exceed 20% of its gross insurance income in any taxable year, (ii) direct or indirect insureds and persons related to such insureds were to own directly or indirectly 20% or more of the voting power or value of Scottish Re's stock or any of our non-U.S. insurance subsidiaries' stock, and (iii) U.S. persons (without regard to whether any U.S. person is a U.S. 10% holder) directly, indirectly or constructively own collectively by voting power or value 25% or more of our aggregate shares (taking into account the relative vote and value of our convertible preferred shares and ordinary shares), such U.S. persons who directly or indirectly own our convertible preferred shares or ordinary shares on the last day of the taxable year would be required to include the U.S. person's pro-rata share of our non-U.S. insurance subsidiaries' related person insurance income for the taxable year in its gross income for U.S. federal income tax purposes, determined as if such related person insurance income were distributed proportionately to U.S. persons at that date, taking into account any differences existing with respect to the distribution rights applicable to the convertible preferred shares and ordinary shares. Related person insurance income is generally underwriting premium and related investment income attributable to insurance or reinsurance policies when the direct or indirect insureds are direct or indirect U.S. shareholders or are related to such direct or indirect U.S. holders. At present we believe that our non-U.S. insurance subsidiaries should satisfy the 20% RPII ownership exception described herein because the direct or indirect ownership of the shares of Scottish Re or any of its non-U.S. insurance subsidiaries by any shareholders that are direct or indirect insureds of any of Scottish Re's non-U.S. insurance subsidiaries (or any person related to such insureds) should be less than 20% of the voting power or value of Scottish Re or any of its non-U.S. insurance subsidiaries. Even if the 20% RPII ownership exception described above is not met, although no assurances can be given, we do not believe that the 20% gross insurance income threshold has been met and we do not expect such threshold to be met in the future. If this is not, or will not continue to be, the case, such U.S. persons who directly or indirectly own our convertible preferred shares or ordinary shares on the last day of such taxable year would be required to include the U.S. person's pro-rata share of the relevant non-U.S. insurance subsidiaries' related person insurance income for the taxable year in its gross income for U.S. federal income tax purposes, determined as if such related person insurance income were distributed proportionately to such U.S. person at that date, taking into account any differences existing with respect to the distribution rights applicable to the convertible preferred shares and ordinary shares. Dispositions of Our Convertible Preferred Shares or Ordinary Shares. If we are considered to be a controlled foreign corporation, any gain from the sale or exchange by a U.S. 10% holder of our convertible preferred shares or ordinary shares may be treated as ordinary income to the extent of our earnings and profits during the period that such shareholder held our shares (with certain adjustments). If we are considered to have related person insurance income and U.S. persons (without regard to whether any U.S. person is a U.S. 10% holder) collectively own directly, indirectly or constructively 25% or more of the voting power or value of our aggregate shares (taking into account the relative vote and value of our convertible preferred shares and ordinary shares), any gain from the disposition by a U.S. holder of our convertible preferred shares or ordinary shares will generally be treated as ordinary income to the extent of such U.S. holder's portion of our undistributed earnings and profits that were accumulated during the period that the U.S. holder owned the shares (with certain adjustments). In addition, such U.S. holder will be required to comply with certain reporting requirements, regardless of the amount of shares owned directly or indirectly. However, because Scottish Re is not itself directly engaged in the insurance business and because proposed U.S. Treasury regulations applicable to this situation appear to apply only to sales of shares of corporations that are directly engaged in the insurance business, we do not believe that sale of Scottish Re shares should be subject to these rules. The IRS, however, could interpret the proposed regulations, or the proposed regulations could be promulgated in final form, in a manner that would cause these rules to apply to dispositions of our convertible preferred shares or ordinary shares. 29 Passive Foreign Investment Company. In order to avoid significant potential adverse U.S. federal income tax consequences for any U.S. person who owns our convertible preferred shares or ordinary shares, we must not be subject to treatment as a passive foreign investment company, referred to as a PFIC, in any year in which such U.S. person is a shareholder. In general, a non-U.S. corporation is a PFIC for a taxable year if 75% or more of its income constitutes passive income or 50% or more of its assets produce passive income. Passive income generally includes interest, dividends and other investment income. Passive income does not, however, include income derived in the active conduct of an insurance business by a corporation that is predominantly engaged in an insurance business. This 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. Although we believe that Scottish Re and its non-U.S. subsidiaries, taken as a whole, are engaged predominantly in insurance and reinsurance activities that involve significant risk transfer and that are otherwise activities of a type normally undertaken by insurance or reinsurance companies, and do not expect to have financial reserves in excess of the reasonable needs of their insurance businesses, it is possible that the IRS could take the position that we are a PFIC. Although we do not believe that we are or will be a passive foreign investment company, the IRS or a court could concur that we are a passive foreign investment company with respect to any given year. If we are a controlled foreign corporation or if any of our non-U.S. insurance subsidiaries generate related person insurance income, U.S. tax-exempt organizations that own our convertible preferred shares or ordinary shares may recognize unrelated business taxable income. A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of our insurance income is allocated to the organization. In general, insurance income will be allocated to a U.S. tax-exempt organization if either we are a controlled foreign corporation and the tax-exempt shareholder is a U.S. 10% holder or there is related person insurance income and certain exceptions do not apply. Although we do not believe that any U.S. persons should be allocated subpart F insurance income, potential U.S. tax-exempt investors are advised to consult their own tax advisors. Changes in U.S. federal income tax law could materially adversely affect an investment in our convertible preferred shares or ordinary shares. 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. While there are no currently pending legislative proposals which, if enacted, would have a material adverse effect on us or our shareholders, it is possible that broader-based legislative proposals could emerge in the future that could have an adverse impact on us, or our 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 passive foreign investment company, or whether U.S. persons would be required to include in their gross income the subpart F income or the related person insurance income of a controlled foreign corporation are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the passive foreign investment company rules to insurance companies and the regulations regarding related person insurance income are still in proposed form. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. We 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. If we do not receive further undertakings from the Cayman Islands, we may become subject to taxes in the Cayman Islands in the future. Scottish Re and our Cayman Islands subsidiaries, Scottish Annuity & Life Insurance Company (Cayman) Ltd. and The Scottish Annuity Company (Cayman) Ltd., have received undertakings from the Governor-in-Council of the Cayman Islands pursuant to the provisions of the Tax Concessions Law, as amended (1999 Revision), that until the year 2018 with respect to Scottish Re and Scottish Annuity & Life Insurance Company (Cayman) Ltd., and until the year 2014 with respect to The Scottish Annuity Company (Cayman) Ltd., (1) no subsequently enacted Cayman Islands law imposing any tax on profits, income, gains or appreciation shall apply to Scottish Re and its Cayman Islands subsidiaries and (2) no such tax and no tax in the nature of an estate duty or an inheritance tax shall 30 be payable on any shares, debentures or other obligations of Scottish Re and its Cayman Islands subsidiaries. We could be subject to Cayman Islands taxes after the applicable dates. If Bermuda law changes, we may become subject to taxes in Bermuda in the future. Bermuda currently imposes no income tax on corporations. The Bermuda Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of Bermuda, has assured us 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 Scottish Re or any of our Bermuda subsidiaries until March 28, 2016. Scottish Re or any of our Bermuda subsidiaries could be subject to Bermuda taxes after that date. The impact of letters of commitment from Bermuda and the Cayman Islands to the Organization for Economic Cooperation and Development to eliminate harmful tax practices may impact us. The Organization for Economic Cooperation and Development, which is commonly referred to as the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD's report dated April 18, 2002, and updated as of June 2004, Bermuda and the Cayman Islands were not listed as uncooperative tax haven jurisdictions because each had previously committed itself to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes. Item 2: PROPERTIES We currently lease office space in Hamilton, Bermuda where our executive and principal offices are located, and in Charlotte, North Carolina, Denver, Colorado, George Town, Grand Cayman, and Windsor, England. Our life reinsurance business operates out of the Bermuda, Grand Cayman, Charlotte, Denver and Windsor offices while our wealth management business operates out of the Grand Cayman office. The Bermuda lease expires in 2005, the Grand Cayman lease expires in 2006, the Denver lease expires in 2010, with an additional five year option, the Charlotte lease expires in 2012, and the Windsor lease expires in 2023. Item 3: LEGAL PROCEEDINGS In the normal course of our business, we and our subsidiaries are occasionally involved in litigation. The ultimate disposition of such litigation is not expected to have a material adverse effect on our financial condition, liquidity or results of operations. Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Scottish Re did not submit any matter to the vote of shareholders during the fourth quarter of 2004. 31 PART II Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for the Ordinary Shares The ordinary shares, par value $0.01 per share, of Scottish Re have been traded on the New York Stock Exchange under the symbol "SCT" since January 23, 2002. Prior to our listing on the New York Stock Exchange our ordinary shares were listed and traded on the Nasdaq National Market under the symbol "SCOT" since November 24, 1998. This table shows for the indicated periods the high and low closing sales prices per share for our ordinary shares, as reported in The Wall Street Journal, and dividend declared per share. Per Share High Low Dividend ---- --- -------- Year ended December 31, 2002 First Quarter ............................. $ 19.00 $ 15.89 $ 0.05 Second Quarter ............................ 21.63 18.53 0.05 Third Quarter ............................. 19.00 13.90 0.05 Fourth Quarter ............................ 19.05 16.50 0.05 Year ended December 31, 2003 First Quarter ............................. $ 18.06 $ 16.55 $ 0.05 Second Quarter ............................ 20.52 17.18 0.05 Third Quarter ............................. 24.15 20.00 0.05 Fourth Quarter ............................ 24.50 19.30 0.05 Year ended December 31, 2004 First Quarter ............................. $ 24.59 $ 20.21 $ 0.05 Second Quarter ............................ 24.40 20.50 0.05 Third Quarter ............................. 23.79 19.59 0.05 Fourth Quarter ............................ 26.15 20.90 0.05 Period Ended February 28, 2005 January 1, 2005 to February 28, 2005 ...... $ 26.08 $ 22.67 $ - As of February 28, 2005, Scottish Re had 31 record holders of its ordinary shares. Scottish Re paid cash dividends of $0.20 per ordinary share in each of 2004, 2003, and 2002. Pursuant to the terms of a Securities Purchase Agreement, we issued to the Cypress Entities on December 31, 2004 (i) 3,953,183 ordinary shares, (ii) Class C Warrants to purchase 3,206,431 ordinary shares, and $41,282,479 aggregate principal amount of 7.00% Convertible Junior Subordinated Notes with a maturity date 30 years from issuance. The aggregate offering price for these securities was $180.0 million. In connection with the sale of securities to the Cypress Entities, we paid on January 4, 2005 an equity commitment fee to The Cypress Advisors, Inc., an affiliate of The Cypress Group, L.L.C., in the amount of $2.0 million. These securities were not registered under the Securities Act and were issued in reliance on the exemption from registration contained in Section 4(2) of the Securities Act. The Class C Warrants will be exercisable at an exercise price equal to $0.01 per share. The number of ordinary shares for which the Class C Warrants are exercisable will be subject to customary anti-dilution adjustments. The Class C Warrants are not exercisable until (i) our shareholders approve (A) certain amendments to our articles of association to allow the Cypress Entities to hold more than 9.9% of our issued and outstanding ordinary shares, and (B) the issuance of more than 20% of our ordinary shares to the Cypress Entities, as required by New York Stock Exchange rules (the "Shareholder Proposals"), and (ii) requisite regulatory approvals have been obtained from insurance regulators in Delaware and the United Kingdom. Notwithstanding the foregoing, the Class C Warrants will become exercisable (i) immediately upon their transfer to an unaffiliated third party provided that such transfer complies with the ownership limitations contained in our articles of association or (ii) to the extent the 32 exercise thereof would not cause the Cypress Entities to own in the aggregate greater than 9.9% of the ordinary shares then outstanding. Upon approval of the Shareholder Proposals and the receipt of all requisite regulatory approvals, the Class C Warrants will automatically be exercised for the applicable number of ordinary shares. Upon the approval of our shareholders and the receipt of all requisite regulatory approvals, the 7.00% Convertible Junior Subordinated Notes will automatically be converted into ordinary shares at an initial conversion price of $19.375 per ordinary share, subject to customary anti-dilution adjustments. If upon approval of the Shareholder Proposals the requisite regulatory approvals have not been obtained, the 7.00% Convertible Junior Subordinated Notes will automatically be exchanged for additional Class C Warrants to purchase the number of ordinary shares into which the 7.00% Convertible Junior Subordinated Notes (including any accrued and unpaid interest through the date of conversion) were convertible. 33 Item 6: SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related Notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Consolidated balance sheet data as of December 31, 2001 reflects the acquisition of Scottish Re Holdings Limited, but consolidated statements of income data for the periods ended December 31, 2001 and 2000 and consolidated balance sheet data as of December 31, 2000 do not reflect the results of Scottish Re Holdings Limited, as the transaction was completed at the close of business on December 31, 2001. Consolidated balance sheet data as of December 31, 2003 and 2004 and consolidated statements of income data for the year ended December 31, 2004 reflect the acquisition of Scottish Re Life Corporation, but consolidated statement of income data for the years ended December 31, 2000 to December 31, 2002 and consolidated balance sheet data as of December 31, 2000 to 2002 do not reflect the results of Scottish Re Life Corporation as the transaction was completed on December 22, 2003. Consolidated statement of income data for the year ended December 31, 2003 includes net income of $1.2 million in respect of Scottish Re Life Corporation. Consolidated balance sheet data as of December 31, 2004 reflect the acquisition of the ING individual life reinsurance business, but consolidated statements of income data for the periods ended December 31, 2000 to 2004 do not reflect this data as the acquisition was completed at close of business on December 31, 2004.
Year Ended Year Ended Year Ended Year Ended Year Ended December December December December December 31, 2004 31, 2003 31, 2002 31, 2001 31, 2000 -------- -------- -------- -------- -------- Consolidated statements of income data: Total revenues ............................ $ 811,817 $ 557,367 $ 306,212 $ 120,962 $ 83,935 Total benefits and expenses ............... 756,366 519,621 274,871 103,729 68,074 Income before income taxes and ............ 55,451 37,746 31,341 17,233 15,861 minority interest Income from continuing operations before cumulative effect of change in 71,599 48,789 33,235 17,245 15,971 accounting principle Net income ................................ $ 71,391 $ 27,281 $ 32,524 $ 16,839 $ 15,971 Per share data: Basic earnings per share: Income from continuing operations before cumulative effect of change in accounting principle and discontinued operations .............. $ 2.00 $ 1.59 $ 1.32 $ 1.10 $ 1.01 Cumulative effect of change in accounting principle .............. - (0.64) - (0.02) - Discontinued operations ................ (0.01) (0.06) (0.03) - - ------------ ------------ ------------ ------------ ---------- Net income ............................. $ 1.99 $ 0.89 $ 1.29 $ 1.08 $ 1.01 ============ ============ ============ ============ ========== 34 Year Ended Year Ended Year Ended Year Ended Year Ended December December December December December 31, 2004 31, 2003 31, 2002 31, 2001 31, 2000 -------- -------- -------- -------- -------- Diluted earnings per share: Income from continuing operations before cumulative effect of change in accounting principle and discontinued operations .............. $ 1.91 $ 1.51 $ 1.25 $ 1.05 $ 1.00 Cumulative effect of change in accounting principle .............. - (0.60) - (0.03) - Discontinued operations ................ (0.01) (0.06) (0.02) - - ------------ ------------ ------------ ------------ ---------- Net income ............................. $ 1.90 $ 0.85 $ 1.23 $ 1.02 $ 1.00 ============ ============ ============ ============ ========== Book value per share (1) ... $ 21.60 $ 18.73 $ 18.24 $ 16.44 $ 15.34 Market value per share ...... $ 25.90 $ 20.78 $ 17.45 $ 19.35 $ 11.98 Cash dividends per share .... $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 Weighted average number of shares outstanding: Basic ....................... 35,732,522 30,652,719 25,190,283 15,646,106 15,849,657 Diluted ..................... 37,508,292 32,228,001 26,505,612 16,485,338 15,960,542 Balance sheet data: Total fixed maturity investments ............... $ 3,392,463 $ 2,014,719 $ 1,003,946 $ 583,890 $ 581,020 Total assets ................ 9,021,084 6,053,517 3,291,226 2,141,566 1,168,518 Total liabilities ........... 8,006,264 5,242,450 2,800,134 1,810,284 921,673 Minority interest ........... 9,697 9,295 - - - Mezzanine equity ............ 142,449 141,928 - - - Total shareholders' equity .. $ 862,674 $ 659,844 $ 491,092 $ 331,282 $ 239,564 Actual number of ordinary shares outstanding .................... 39,931,145 35,228,411 26,927,456 20,144,956 15,614,240
______________ (1) Book value per share is calculated as shareholders' equity at December 31, 2004 divided by the number of shares outstanding at December 31, 2004. Included in shareholders' equity are proceeds from the issuance of Class C Warrants to the Cypress Entities. The number of shares at December 31, 2004, does not include the 3,206,431 shares to be issued on conversion of the Class C Warrants. These will be issued once shareholder approval has been obtained. If these shares had been included, book value per share would have amounted to $20.00. Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a holding company organized under the laws of the Cayman Islands with our principal executive office in Bermuda. We are a reinsurer of life insurance, annuities and annuity-type products. These products are written by life insurance companies and other financial institutions located principally in the United States, as well as around the world. We refer to this portion of our business as Life Reinsurance North America. Scottish Re Holdings Limited and its subsidiary, Scottish Re Limited, specialize in niche markets in developed countries and broader life insurance markets in the developing world. We refer to this portion of our business as Life Reinsurance International. Life Reinsurance North America and Life Reinsurance International are each a reporting operating segment. To a lesser extent, we directly issue variable life insurance and variable annuities and similar products to high net worth individuals and families for insurance, investment and estate planning purposes. In prior years, we referred to this portion of our business as Wealth Management, which was another reportable operating segment. As this business is no longer a material contributor to our results, we have combined it with the Other Segment for all 35 periods presented. Other revenues and expenses not related to Life Reinsurance are reported in the "Other" Segment. On December 31, 2004, we completed the acquisition of the individual life reinsurance business of ING. We have reinsured the liabilities of all of ING's individual life reinsurance business through a coinsurance transaction. ING transferred to us assets of approximately $1.9 billion. The assets transferred are subject to certain post closing adjustments. Certain of these assets will be held in trust to secure the reserve obligations of the business. Additionally, ING transferred certain operating assets associated with the business. In addition to the assets transferred by ING, we have raised an additional $230.0 million in new capital, which will be used to satisfy the capital requirements for the acquired business. This new capital includes equity of $180.0 million provided by The Cypress Group, a private equity firm, and an additional $50.0 million in capital raised through the issuance by one of our subsidiaries of trust preferred securities guaranteed by Scottish Annuity & Life Insurance Company (Cayman) Ltd. in a private transaction to institutional investors. On December 22, 2003, we completed the acquisition of 95% of the outstanding capital stock of Scottish Re Life Corporation (formally ERC Life Reinsurance Corporation), for $169.9 million in cash. On February 19, 2004 ERC Life Corporation's name was changed to Scottish Re Life Corporation. Scottish Re Life Corporation was a subsidiary of General Electric's Employers Reinsurance Corporation, which we call GE ERC, and was one of the companies through which GE ERC conducted life reinsurance business in the United States. Scottish Re Life Corporation's business consists primarily of a closed block of traditional life reinsurance. No GE ERC employees were transferred to Scottish Re. GE ERC agreed to administer the business of Scottish Re Life Corporation for a fixed monthly fee for up to nine months from the date of acquisition and to assist with the transition of the business to Scottish Re's systems. This transition period has now been completed. All amounts are reported in thousands of United States dollars, except per share amounts. Revenues We derive revenue from three principal sources: o premiums from reinsurance assumed on life business; o investment income from our investment portfolio; and o realized gains and losses from our investment portfolio. Premiums from reinsurance assumed on life business are included in revenues over the premium paying period of the underlying policies. When we acquire blocks of in-force business, we account for these transactions as purchases, and our results of operations include the net income from these blocks as of their respective dates of acquisition. Reinsurance assumed on annuity business does not generate premium income but generates investment income over time on the assets we receive from the ceding company. We also earn fees in our financial reinsurance transactions with U.S. insurance company clients. Because some of these transactions do not satisfy the risk transfer rules for reinsurance accounting, the premiums and benefits are not reported in the consolidated statements of income. A deposit received on a funding agreement also does not generate premium income but does create income to the extent we earn an investment return in excess of our interest payment obligations thereon. Our investment income includes interest earned on our fixed income investments and income from funds withheld at interest under modified coinsurance agreements. Under GAAP, because our fixed income investments are held as available for sale, these securities are carried at fair value, and unrealized appreciation and depreciation on these securities is not included in investment income on our statements of income, but is included in comprehensive income as a separate component of shareholders' equity. Realized gains and losses include gains and losses on investment securities that we sell during a period, write downs of securities deemed to be other than temporarily impaired and foreign currency exchange gains and losses. 36 Expenses We have five principal types of expenses: o claims and policy benefits under our reinsurance contracts; o interest credited to interest sensitive contract liabilities; o acquisition costs and other insurance expenses; o operating expenses; and o interest expense. When we issue a life reinsurance contract, we establish reserves for future benefits. These reserves are our estimates of what we expect to pay in claims and policy benefits and related expenses under the contract or policy. From time to time, we may change the reserves if our experience leads us to believe that benefit claims and expenses will ultimately be greater than the existing reserve. We report the change in these reserves as an expense during the period when the reserve or additional reserve is established. In connection with reinsurance of annuity and annuity-type products, we record a liability for interest sensitive contract liabilities, which represents the amount ultimately due to the policyholder. We credit interest to these contracts each period at the rates determined in the underlying contract, and the amount is reported as interest credited to interest sensitive contract liabilities on our consolidated statements of income. A portion of the costs of acquiring new business, such as commissions, certain internal expenses related to our policy issuance and underwriting departments and some variable selling expenses are capitalized. The resulting deferred acquisition costs asset is amortized over future periods based on our expectations as to the emergence of future gross profits from the underlying contracts. These costs are dependent on the structure, size and type of business written. For certain products, we may retrospectively adjust our amortization when we revise our estimate of current or future gross profits to be realized. The effects of this adjustment are reflected in earnings in the period in which we revise our estimate. Acquisition costs also include collateral financing and letter of credit costs. Operating expenses consist of salary and salary related expenses, legal and professional fees, rent and office expenses, travel and entertainment, directors' expenses, insurance and other similar expenses, except to the extent capitalized in deferred acquisition costs. Interest expense consists of interest charges on our borrowings. Factors affecting profitability We seek to generate profits from two principal sources. First, in our Life Reinsurance business, we seek to receive reinsurance premiums and financial reinsurance fees that, together with income from the assets in which those premiums are invested, exceed the amounts we ultimately pay as claims and policy benefits, acquisition costs and ceding commissions. Second, within our investment guidelines, we seek to maximize the return on our unallocated capital. The following factors affect our profitability: o the volume of business we write; o our ability to assess and price adequately for the risks we assume; o the mix of different types of business that we reinsure, because profits on some kinds of business emerge later than on other types; 37 o our ability to manage our assets and liabilities to manage investment and liquidity risk; and o our ability to control expenses. In addition, our profits can be affected by a number of factors that are not within our control. For example, movements in interest rates can affect the volume of business that we write, the income earned from our investments, the interest we credit on interest sensitive contracts, the level of surrender activity on contracts that we reinsure and the rate at which we amortize deferred acquisition costs. Other external factors that can affect profitability include mortality experience that varies from our assumed mortality, changes in regulation or tax laws which may affect the attractiveness of our products or the costs of doing business and changes in foreign currency exchange rates. Critical Accounting Policies Statement of Financial Accounting Standard ("SFAS") No. 60 "Accounting and Reporting by Insurance Enterprises" applies to our traditional life policies with continuing premiums. For these policies, future benefits are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on anticipated experience, which, together with interest and expense assumptions, provide a margin for adverse deviation. Acquisition costs are deferred and recognized as expense in a constant percentage of the gross premiums using these assumptions established at issue. Should the liabilities for future policy benefits plus the present value of expected future gross premiums for a product be insufficient to provide for expected future benefits and expenses for that product, deferred acquisition costs will be written off and thereafter, if required, a premium deficiency reserve will be established by a charge to income. Changes in the assumptions for mortality, persistency and interest could result in material changes to the financial statements. SFAS No. 97 "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" applies to investment contracts, limited premium contracts, and universal life-type contracts. For investment and universal life-type contracts, future benefit liabilities are held using the retrospective deposit method, increased for amounts representing unearned revenue or refundable policy charges. Acquisition costs are deferred and recognized as expense as a constant percentage of gross margins using assumptions as to mortality, persistency, and expense established at policy issue without provision for adverse deviation and are revised periodically to reflect emerging actual experience and any material changes in expected future experience. Liabilities and the deferral of acquisition costs are established for limited premium policies under the same practices as used for traditional life policies with the exception that any gross premium in excess of the net premium is deferred and recognized into income as a constant percentage of insurance in force. Should the liabilities for future policy benefits plus the present value of expected future gross premiums for a product be insufficient to provide for expected future benefits and expenses for that product, deferred acquisition costs will be written off and thereafter, if required, a premium deficiency reserve will be established by a charge to income. Changes in the assumptions for mortality, persistency, maintenance expense and interest could result in material changes to the financial statements. Our premiums earned are recorded generally in accordance with information received from our ceding companies, or are estimated where this information is not current with the reporting period. These premium estimates are based on historical experience as adjusted for current treaty terms and other information. Actual results could differ from these estimates. Management monitors actual experience, and should circumstances warrant, will revise its estimates of premiums earned. The development of policy reserves and amortization of deferred acquisition costs for our products requires management to make estimates and assumptions regarding mortality, lapse, expense and investment experience. Such estimates are primarily based on historical experience and information provided by ceding companies. Actual results could differ materially from those estimates. Management monitors actual experience, and should circumstances warrant, will revise its assumptions and the related reserve estimates. 38 In the normal course of business, we acquire in-force blocks of business. The determination of the fair value of the assets acquired and the liabilities assumed require management to make estimates and assumptions regarding mortality, lapse rates and expenses. These estimates are based on historical experience, actuarial studies and information provided by the ceding companies. Actual results could differ materially from these estimates. Present value of in-force business is established upon the acquisition of a subsidiary and is amortized over the expected life of the business at the time of acquisition. The amortization each year will be a function of the gross profits or revenues each year in relation to the total gross profits or revenues expected over the life of business, discounted at the assumed net credit rate. The determination of the initial value and the subsequent amortization require management to make estimates and assumptions regarding the future business results that could differ materially from actual results. Estimates and assumptions involved in the present value of in-force business and subsequent amortization are similar to those necessary in the establishment of reserves and amortization of deferred acquisition costs. Goodwill is established upon the acquisition of a subsidiary. Goodwill is calculated as the difference between the price paid and the value of individual assets and liabilities on the date of acquisition. We account for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Goodwill deemed to have an indefinite life is subject to an annual impairment test. Goodwill recognized in the consolidated balance sheet relates to our acquisition of Scottish Re Holdings Limited and has been tested for impairment. We have determined that there is no impairment. Fixed maturity investments are evaluated for other than temporary impairments in accordance with SFAS No. 115: "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and Emerging Issues Task Force 99-20: "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Assets" ("EITF 99-20") as described in Note 2 to the consolidated financial statements. Under these pronouncements, realized losses are recognized on securities if the securities are determined to be other than temporarily impaired. Factors involved in the determination of potential impairment include fair value as compared to amortized cost, length of time the value has been below amortized cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers. Our funds withheld at interest arise on modified coinsurance and funds withheld coinsurance transactions. Derivatives Implementation Group Issue No. B36 "Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates Both Interest Rate and Credit Rate Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of that Instrument" ("DIG B36") indicates that these transactions contain embedded derivatives. The embedded derivative feature in our funds withheld treaties is similar to a fixed-rate total return swap on the assets held by the ceding companies. The swap consists of two parts. The first is the market value of the underlying asset portfolio and the second is a hypothetical loan to the ceding company. The hypothetical loan is based on the expected cash flows of the underlying reinsurance liability. We have developed models to systematically estimate the value of the total return swap. The fair value of the embedded derivative is affected by changes in expected cash flows, credit spreads of the assets and changes in "risk-free" interest rates. The change in fair value is included in our calculation of estimated gross profits and, therefore, also affects the amortization of deferred acquisition costs. In addition to our quota share indemnity funds withheld contracts, we have entered into various financial reinsurance treaties that, although considered funds withheld, do not transfer significant insurance risk and are recorded on a deposit method of accounting. As a result of the experience refund provisions of these treaties the value of the embedded derivative is currently considered immaterial. Changes in our expectations of future cash flows could result in material changes to the financial statements. Our accounting policies addressing premiums earned, reserves, deferred acquisition costs, value of business acquired, goodwill, investment impairment and embedded derivatives involve significant assumptions, judgments and estimates. Changes in these assumptions, judgments and estimates could create material changes in our consolidated financial statements. 39 Results of Operations Consolidated results of operations Our results of operations for the years ended December 31, 2002 to 2004 do not include the results of the acquisition of the ING individual life reinsurance business, which was completed on December 31, 2004. Our results of operations for the year ended December 31, 2002 does not include the results of operations of Scottish Re Life Corporation, which we acquired on December 22, 2003. The results for the year ended December 31, 2003 include net income of $1.2 million in respect of the results of Scottish Re Life Corporation for the period from December 22, 2003 to December 31, 2003.
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Premiums earned.............................. $ 586,875 $ 391,976 $ 202,536 Investment income, net....................... 217,138 148,028 107,906 Fee income................................... 11,547 7,907 6,574 Realized losses.............................. (8,304) (4,448) (10,804) Change in value of embedded derivatives...... 4,561 13,904 - ---------- ---------- ---------- Total revenues............................... 811,817 557,367 306,212 ---------- ---------- ---------- Claims and other policy benefits............. 425,965 275,887 142,158 Interest credited to interest sensitive contract liabilities....................... 106,525 89,156 48,140 Acquisition costs and other insurance expenses, net................................ 151,559 116,000 60,073 Operating expenses........................... 54,658 31,021 23,086 Due diligence costs.......................... 4,643 - - Interest expense............................. 13,016 7,557 1,414 ---------- ---------- ---------- Total benefits and expenses.................. 756,366 519,621 274,871 ---------- ---------- ---------- Income before income taxes and minority interest..................................... 55,451 37,746 31,341 Income tax benefit ......................... 16,679 11,105 1,894 ---------- ---------- ---------- Income from continuing operations before minority interest............................ 72,130 48,851 33,235 Minority interest............................ (531) (62) - ---------- ---------- ---------- Income before cumulative effect of change in accounting principle......................... 71,599 48,789 33,235 Cumulative effect of change in accounting principle.................................... - (19,537) - Loss from discontinued operations............ (208) (1,971) (711) ---------- ---------- ---------- Net income................................... $ 71,391 $ 27,281 $ 32,524 ========== ========== ==========
Total revenues increased by 46% to $811.8 million in the year ended December 31, 2004 from $557.4 million in 2003. Total revenues include premiums earned in our Life Reinsurance Segments, investment income on our invested assets, fee income, realized losses and the change in the value of embedded derivatives. The increase in premiums earned is primarily due to the acquisition of Scottish Re Life Corporation and growth in the traditional solutions line of business in our Life Reinsurance North America Segment. The increase in fee income arises principally from our acquisition of Scottish Re Life Corporation. The increase in investment income is due to growth in our invested assets, which arises from business growth and acquisition, our offering of ordinary shares in July 2003 and our HyCU offering in the fourth quarter of 2003 and trust preferred debt offerings in the fourth quarter of 2003 and the second quarter of 2004. Growth in these areas has been offset by realized losses and a decrease in the change in value of embedded derivatives. Total benefits and expenses increased by 46% to $756.4 million in the year ended December 31, 2004 from $519.6 million in 2003. The increase was due to the acquisition of Scottish Re Life Corporation, continued growth in our Life Reinsurance North America Segment, additional operating costs required to meet the growth in our 40 business, additional operating costs necessary to meet the requirements of the Sarbanes-Oxley Act of 2002, costs relating to due diligence activities and additional interest expense arising from the HyCU offering and trust preferred debt offerings in the fourth quarter of 2003 and the second quarter of 2004. During the year ended December 31, 2003, total revenues increased by 82% to $557.4 million. Total revenues include premiums earned in our Life Reinsurance operations, investment income on our invested assets, fee income, realized losses on our investment portfolio and the change in the value of embedded derivatives. The increase in premiums earned is primarily due to continued growth in our Life Reinsurance North America and Life Reinsurance International Segments. The increase in investment income is due to growth in our invested assets, which arises from business growth, our equity offering in July 2003 and our debt offerings in November and December 2002. The change in value of the embedded derivatives arises from the application of DIG B36. During the year ended December 31, 2003, total benefits and expenses increased by 89% to $519.6 million from 2002 to 2003. The increase was due to continued growth in our Life Reinsurance North America and Life Reinsurance International Segments, a $12.5 million charge to account for revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts, additional operating costs required to meet the growth in our business and additional interest expense arising from the debt issuance in November and December 2002. During the year ended December 31, 2003 we implemented the requirements of DIG B36 which addresses whether SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36 modified coinsurance and coinsurance funds withheld reinsurance agreements where interest is determined by reference to a pool of fixed maturity assets, are arrangements containing embedded derivatives requiring bifurcation. In addition, reinsurance contacts with experience refunds are also considered to be arrangements containing embedded derivatives requiring bifurcation. DIG B36 was effective for fiscal quarters beginning October 1, 2003. We reviewed all contracts at October 1, 2003 and determined that the value of this derivative, net of related deferred acquisition costs, after taxation was a loss of $19.5 million. This is shown in the consolidated statements of income as a cumulative effect of change in accounting principle for the year ended December 31, 2003. The change in value of the derivative, net of related deferred amortization costs, during the year ended December 31, 2004 amounted to a gain of $4.6 million. In the quarter and year ended December 31, 2003, the change in value of this derivative amounted to a gain of $13.9 million. The change in value is primarily due to movements in risk free interest rates. During 2003, we decided to discontinue our Wealth Management operations in Luxembourg. We have transferred our Luxembourg Wealth Management business to third parties, closed the Luxembourg office and are in the process of liquidating our Luxembourg subsidiary. We have reported the results of the Luxembourg wealth management activities as discontinued operations. Losses incurred in respect of these operations in the years ended December 31, 2004, 2003 and 2002 amounted to $0.2 million, $2.0 million and $0.7 million, respectively. 41 Earnings per ordinary share
Year Ended December 31, ---------------------------------------------- 2004 2003 2002 -------------- ------------- -------------- (dollars in thousands, except per share data) Income from continuing operations before cumulative effect of change in accounting principle .............. $ 71,599 $ 48,789 $ 33,235 Cumulative effect of change in accounting principle ... - (19,537) - Loss from discontinued operations ..................... (208) (1,971) (711) -------------- ------------- -------------- Net income ............................................ $ 71,391 $ 27,281 $ 32,524 ============== ============= ============== Basic earnings per share: Income from continuing operations before cumulative effect of change in accounting principle and discontinued operations ............. $ 2.00 $ 1.59 $ 1.32 Cumulative effect of change in accounting principle - (0.64) - Discontinued operations ........................... (0.01) (0.06) (0.03) -------------- ------------- -------------- Net income......................................... $ 1.99 $ 0.89 $ 1.29 ============== ============= ============== Diluted earnings per share: Income from continuing operations before cumulative effect of change in accounting principle $ 1.91 $ 1.51 $ 1.25 Cumulative effect of change in accounting principle and discontinued operations ............. - (0.60) - Discontinued operations ........................... (0.01) (0.06) (0.02) -------------- ------------- -------------- Net income ........................................ $ 1.90 $ 0.85 $ 1.23 ============== ============= ============== Weighted average number of ordinary shares outstanding: Basic ............................................... 35,732,522 30,652,719 25,190,283 Diluted ............................................. 37,508,292 32,228,001 26,505,612
Income from continuing operations for the year ended December 31, 2004 increased 47% to $71.6 million from $48.8 million in the same period in 2003. Diluted earnings per share from continuing operations increased from $1.51 per ordinary share in 2003 to $1.91 in 2004. In the year ended December 31, 2003 we incurred a charge of $12.5 million to account for revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Income from continuing operations has increased primarily due to the acquisition of Scottish Re Life Corporation, continued growth in our Life Reinsurance North America Segment, and an increase in investment income primarily due to the increase in average invested assets. These increases were offset in part by increased operating costs, due diligence costs, and interest expense and realized losses. Net income for the year ended December 31, 2004 increased 162% to $71.4 million from $27.3 million in the same period in 2003. In 2003 we implemented DIG B36 and incurred a charge of $19.5 million in respect of the cumulative effect of this change in accounting principle. In 2003 we also incurred a loss of $2.0 million in respect of costs relating to the closure of our Luxembourg Wealth Management Operations. Net income has also increased for the reasons discussed above related to income from continuing operations. Diluted earnings per ordinary share amounted to $1.90 for the year ended December 31, 2004 and $0.85 in the same period in 2003, an increase of 124%. Diluted earnings per ordinary share increased as a result of the growth in net income discussed above. The weighted average number of ordinary shares outstanding, on a fully diluted basis, has increased from 32,228,001 for the year ended December 31, 2003 to 37,508,292 for the year ended December 31, 2004, principally as a result of the offering of 9,200,000 million ordinary shares in July 2003. Income from continuing operations for the year ended December 31, 2003 increased by 47% to $48.8 million from $33.2 million in 2002. Diluted earnings per ordinary share from continuing operations amounted to 42 $1.51 for the year ended December 31, 2003 and $1.25 per ordinary share in 2002, an increase of 21%. The growth in both income from continuing operations and diluted earnings per share arises from the growth in both our Life Reinsurance North America and Life Reinsurance International Segments. The growth in diluted earnings per share from continuing operations was offset by the increase in the weighted average number of ordinary shares outstanding due to the public offering of 9,200,000 ordinary shares in July 2003. Diluted earnings per ordinary share amounted to $0.85 and $1.23 for the year ended December 31, 2003 and 2002, respectively. Diluted earnings per ordinary share for 2003 decreased due to the adoption of DIG B36 and the resultant cumulative effect of change in accounting principle. In addition, the number of weighted average shares outstanding increased from 26,505,611 to 32,228,001 mainly due to the public offering of 9,200,000 ordinary shares in July 2003. Segment Operating Results Life Reinsurance North America
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Revenues Premiums earned ................................ $ 464,719 $ 230,708 $ 122,794 Investment income, net ......................... 206,009 135,731 97,406 Fee income ..................................... 7,867 4,067 3,148 Realized losses ................................ (7,974) (6,124) (4,833) Change in value of embedded derivatives ........ 4,561 13,904 - ----------- ------------ ----------- Total revenues ............................... 675,182 378,286 218,515 ----------- ------------ ----------- Benefits and expenses Claims and other policy benefits ............... 344,319 171,711 91,774 Interest credited to interest sensitive contract liabilities .................................. 106,525 89,156 48,140 Acquisition costs and other insurance expenses, net .......................................... 132,174 83,594 48,401 Operating expenses ............................. 18,408 8,646 7,323 Interest expense ............................... 4,605 1,109 - ----------- ------------ ----------- Total benefits and expenses .................. 606,031 354,216 195,638 ----------- ------------ ----------- Income before income taxes and minority interest $ 69,151 $ 24,070 $ 22,877 =========== ============ ===========
In our Life Reinsurance North America Segment we reinsure life insurance, annuities and annuity-type products. These products are written by life insurance companies and other financial institutions located principally in the United States. The results of Scottish Re Life Corporation, which we acquired on December 22, 2003, are included in the results of this segment for the year ended December 31, 2004 and the period from December 22, 2003 to December 31, 2003. Premiums earned in our Life Reinsurance North America Segment during the year ended December 31, 2004 increased 101% to $464.7 million in comparison with $230.7 million in 2003. A significant portion of the increase is due to the acquisition of Scottish Re Life Corporation, which contributed $122.2 million in earned premiums. The remaining increase is due to the increase in the number of client ceding companies and the increase in business from these clients in our Life Reinsurance North America Segment. As of December 31, 2004, we had approximately $1.0 trillion of life reinsurance in force covering approximately 14.2 million lives with an average benefit per life of $71,000 in our North American operations. Excluding the business acquired from ING, we had approximately $305.1 billion of life reinsurance in force covering 7.1 million lives with an average benefit per life of $43,000. As of December 31, 2003, we had approximately $275.0 billion of life insurance in-force on 6.2 million lives and our average benefit coverage per life was $43,000. Net investment income increased by 52% to $206.0 million for the year ended December 31, 2004 from $135.7 million for the prior year. The increase is due to the growth in our average invested assets. Yields increased 43 marginally during 2004. At December 31, 2004, total invested assets in this segment, excluding those assets acquired in the purchase of ING, increased to $4.5 billion from $3.6 billion at December 31, 2003. On the portfolio managed by our external investment managers the yields on fixed rate assets less cash were 5.22% and 5.13% at December 31, 2004 and 2003, respectively. Yields on floating rate assets are indexed to LIBOR. The yield on our floating rate assets less cash increased to 3.44% as at December 31, 2004 from 3.43% as at December 31, 2003, and the yield on our cash and cash equivalents increased to 1.78% as at December 31, 2004 from 1.01% as at December 31, 2003. In 2004, the market value of floating-rate assets increased to $963.8 million, excluding those assets acquired in the purchase of ING, from $301.8 million in 2003 as a result of our increased floating rate liabilities. Fee income during the year ended December 31, 2004 increased to $7.9 million from $4.1 million in 2003 principally because of the acquisition of Scottish Re Life Corporation. The change in value of derivatives, net of related deferred amortization costs, arises from the application of DIG B36. During the year ended December 31, 2004 this amounted to a gain of $4.6 million. This change in value arose principally because of an increase in risk free interest rates. DIG B36 was implemented at October 1, 2003. The change in value of the embedded derivatives during the period from October 1, 2003 to December 31, 2003 amounted to a gain of $13.9 million. The gain arose from an increase in the risk free rates. Claims and other policy benefits increased by 101% to $344.3 million during the year ended December 31, 2004 from $171.7 million in the same period in 2003. The increase is a result of the acquisition of Scottish Re Life Corporation, the increased number of clients and the increase in business from these clients in our Life Reinsurance North America Segment as described above. Death claims are reasonably predictable over a period of many years, but are less predictable over shorter periods and are subject to fluctuation from period to period. Our targeted maximum retention in our Life Reinsurance operations is $1.0 million per life. For periods up to December 31, 2004 we ceded amounts in excess of $500,000. However, effective January 1, 2005, we have increased our retention to $1.0 million per life. Our retention on business acquired in the ING individual life reinsurance acquisition, effective December 31, 2004, is $2.0 million per life. In addition, we maintain catastrophe cover on our entire retained life reinsurance business, which effective January 1, 2005 provides reinsurance for losses of $50.0 million in excess of $10.0 million, and provides protection for terrorism, nuclear, biological and chemical risks. For the year ended December 31, 2004, interest credited to interest sensitive contract liabilities increased by 19% to $106.5 million from $89.2 million in 2003. During the year ended December 31, 2003 we incurred $12.5 million due to revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Excluding this charge interest credited increased by 39% in comparison with the year ended December 31, 2003. Interest credited includes interest in respect of funding agreements. The amounts due on funding agreements are included in interest sensitive contract liabilities on our balance sheet and amount to $500.6 million at December 31, 2004 in comparison with $330.7 million at December 31, 2003. Interest credited on these agreements was $9.0 million in 2004 in comparison with $2.4 million in 2003. The remaining increase is due to interest credited on new reinsurance treaties and increases in interest credited on existing treaties due to increasing average liability balances. Interest sensitive contract liabilities amounted to $3.2 billion at December 31, 2004 in comparison with $2.6 billion at December 31, 2003. During the year ended December 31, 2004 acquisition costs and other insurance expenses increased by 58% to $132.2 million from $83.6 million in 2003. The increase was a result of the acquisition of Scottish Re Life Corporation, including the amortization of the present value of in-force arising on this business, and the increased life and annuity business in our Life Reinsurance North America Segment as discussed above. The interest and costs of the collateral finance facility described, in "Liquidity and Capital Resources" are included in acquisition costs and other insurance expenses and amounted to $2.8 million in the year ended December 31, 2004. 44 The components of these expenses are as follows:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------- ------------ ------------- (dollars in thousands) Commissions, excise taxes and other insurance expenses............................................ $ 245,403 $ 183,769 $ 137,009 Deferral of expenses................................ (184,446) (151,636) (116,182) ------------- ------------ ------------- 60,957 32,133 20,827 Amortization -- Present value of in-force business... 4,353 - - Amortization -- Deferred acquisition costs........... 66,864 51,461 27,574 ------------- ------------ ------------- Total............................................... $ 132,174 $ 83,594 $ 48,401 ============= ============ =============
Operating expenses increased by 110% to $18.4 million during the year ended December 31, 2004 from $8.6 million in 2003. The increase is primarily the result of the acquisition of Scottish Re Life Corporation, additional personnel costs incurred as we continue to grow our business and the costs necessary to meet the requirements of the Sarbanes Oxley Act of 2002. The costs of Scottish Re Life Corporation include the cost of the transition services agreement with GE ERC of $2.4 million. Total employees in this segment have grown from 64 at December 31, 2003 to 91 at December 31, 2004. Interest expense in this segment arises on the trust preferred securities. The increase in interest expense to $4.6 million for the year ended December 31, 2004 from $1.1 million in 2003 results from the issuance of an additional $62.0 million of these securities in October 2003, November 2003, and May 2004. An additional $50.0 million were issued in December 2004. Premiums earned in our Life Reinsurance North America Segment during the year ended December 31, 2003 increased 88% to $230.7 million from $122.8 million in 2002. The increase is due to increases in the amounts of life insurance in-force on existing traditional solutions treaties and on new business written during the year. As of December 31, 2003, the Company had reinsurance of approximately $275.0 billion of life insurance in-force on 6.2 million lives and our average benefit coverage per life was $43,000. As of December 31, 2002, we reinsured approximately $67.0 billion of life insurance in-force on 1.2 million lives and our average benefit coverage per life was $51,000. Net investment income increased by $38.3 million or 39% to $135.7 million for the year ended December 31, 2003 from $97.4 million for the prior year. The increase was due to the growth in our average invested assets offset in part by decreases in realized yields during 2003. Our total invested assets increased because of growth in our Life Reinsurance North America financial solutions business and investment of the proceeds of the HyCU offering in December 2003, our equity offering in July 2003 and long-term debt offerings in October and November 2003. Total invested assets, in the segment, increased from $2.1 billion at December 31, 2002 to $3.6 billion at December 31, 2003. During the year ended December 31, 2003, average book yields were lower than in 2002. On the $2.4 billion portfolio managed by our external investment managers the yields on fixed rate assets were 5.13% and 5.84% at December 31, 2003 and 2002, respectively. The reduction in yield was due primarily to the much lower market yields at which new cash flows were invested and proceeds of maturities and sales were reinvested. Yields on floating rate assets are indexed to LIBOR. The yield on our floating rate assets increased to 3.43% from 3.11%, and the yield on our cash and cash equivalents decreased to 1.01% from 1.48%. The market value of floating rate assets increased to $301.8 million in 2003 from $159.2 million in 2002 as a result of our increased floating rate funding agreements and our increased floating rate liabilities. Claims and other policy benefits in our Life Reinsurance North America Segment increased by 87% to $171.7 million in the year ended December 31, 2003 from $91.8 million in 2002. The increase is as a result of the increased number of clients and the increase in our traditional solutions business from these clients as previously 45 described. Death claims are reasonably predictable over a period of many years, but are less predictable over shorter periods and are subject to fluctuation from year to year. For the year ended December 31, 2003 interest credited to interest sensitive contract liabilities increased by $41.1 million or 85% to $89.2 million from $48.1 million in 2002. Included in interest credited to interest sensitive contract liabilities during the year ended December 31, 2003 is $12.5 million due to revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. Interest credited includes interest in respect of funding agreements. The amounts due on funding agreements are included in interest sensitive contract liabilities on our balance sheet and amount to $330.7 million at December 31, 2003 in comparison with $100.0 million at December 31, 2002. Interest credited on these agreements was $2.4 million in 2003 in comparison with $1.2 million in 2002. The remaining increase is due to interest credited on new reinsurance treaties and increases in interest credited on existing treaties due to increasing average liability balances. Interest sensitive contract liabilities amounted to $2.6 billion at December 31, 2003 in comparison with $1.6 billion at December 31, 2002. Acquisition costs and other insurance expenses for our Life Reinsurance North America Segment increased to $83.6 million in 2003 from $48.4 million in 2002. The increase was a result of the growth of our business as described above. As discussed above, we incurred charges of $12.5 million this year due to revised reporting by a ceding company client in connection with two fixed annuity reinsurance contracts. In light of the impact of the revised reporting on the estimated gross profits of the two treaties in question, we revised the amortization of deferred acquisition costs on the two treaties, along with two other related treaties. Operating expenses increased by 18% to $8.6 million during the year ended December 31, 2003 from $7.3 million in 2002. The increase is primarily the result of additional personnel costs incurred as we continued to grow our business. Interest expense in 2003 was in respect of trust preferred securities issued during 2003. Life Reinsurance International
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------- ------------ ------------- Revenues Premiums earned................................ $ 122,156 $ 161,268 $ 79,742 Investment income, net......................... 10,023 7,537 6,716 Realized gains (losses)........................ 1,685 548 (5,942) ------------- ------------ ------------- Total revenues............................... 133,864 169,353 80,516 ------------- ------------ ------------- Benefits and expenses Claims and other policy benefits............... 81,646 104,176 50,384 Acquisition costs and other insurance expenses, net.......................................... 17,272 30,143 8,281 Operating expenses............................. 18,798 11,518 6,647 ------------- ------------ ------------- Total benefits and expenses.................. 117,716 145,837 65,312 ------------- ------------ ------------- Income before income taxes and minority interest $ 16,148 $ 23,516 $ 15,204 ============= ============ =============
Our Life Reinsurance International Segment specializes in niche markets in developed countries and broader life insurance markets in the developing world and focuses on the reinsurance of short term group life policies and aircrew loss of license insurance. Premiums earned in our Life Reinsurance International Segment during the year ended December 31, 2004 decreased 24% to $122.2 million in comparison with $161.3 million in 2003. The majority of business in our Life Reinsurance International Segment is in respect of short duration contracts. We experience considerable reporting delays from some of our cedents on this business. In 2003, as part of the implementation of this segment's new administrative system, improved data was compiled to allow us to more accurately estimate our premium earned. As a result, premiums earned in 2003 included $23.4 million in respect of revisions in estimates of premiums earned. 46 Premiums earned from a portfolio acquired in 2002 were $11.5 million lower in 2004 compared to 2003 due to the run off nature of the portfolio. During 2004 we decided not to renew certain contracts, which did not meet our return thresholds. Earned premium for general reinsurance business, which consists of aircrew loss of license and related personal accident, decreased 5% from $35.8 million to $34.0 million. Premiums earned in 2004 include $4.2 million relating to a share of two Lloyd's of London life syndicates. Investment income during the year ended December 31, 2004 has increased to $10.0 million compared to $7.5 million in 2003. The agreements for the acquisition of a portfolio of business completed late in 2002 included conditions for recapture of certain business by the ceding company. This recapture has been completed and resulted in additional investment income of $1.1 million in the year ended December 31, 2004. The remainder of the increase is due to the increased level of invested assets arising principally from growth in business. Claims and other policy benefits in our Life Reinsurance International Segment decreased by 22% to $81.6 million in the year ended December 31, 2004 from $104.2 million in 2003. Claims in comparison to the prior year have been impacted by the introduction of the estimates process as described above. During the current year we have recognized claims and other policy benefits of $1.8 million in respect of the recapture of business on the portfolio acquisition described above. In addition, during the year we incurred $1.0 million in respect of a claim from our stop loss business. We also released reserves of $3.1 million relating to revisions of estimated claims arising from the portfolio acquired in 2002. Claims and other policy benefits in 2004 also include $2.1 million of claims relating to our share of two Lloyd's of London life syndicates. Claims and other policy benefits in the prior year were favorably impacted by a $3.4 million release of reserves on the sale of our unit linked business in 2003. Our targeted maximum corporate retention per life in our Life Reinsurance International Segment is $250,000. In addition, we maintain catastrophe cover on our entire retained life reinsurance business, which effective January 1, 2005 provides reinsurance for losses of $57.5 million in excess of $2.5 million, and provides protection for terrorism, nuclear, biological and chemical risks. During the year ended December 31, 2004 acquisition costs and other insurance expenses decreased by $12.8 million or 43% to $17.3 million from $30.1 million in 2003. Acquisition costs for a portfolio acquired in late 2002 are $2.3 million lower due to the run off nature of the portfolio. Acquisition costs include the amortization of the present value of in-force business. This was $1.8 million lower in 2004 compared to 2003 primarily due to the sale of the unit linked business in 2003. In the current year we recognized profit commission income of $1.8 million arising from a run off book of business. Acquisition costs in 2004 also include $2.4 million relating to our share of two Lloyd's of London life syndicates. Operating expenses have increased by 63% to $18.8 million for the year ended December 31, 2004 from $11.5 million in the prior year. The increases are principally due to increased personnel costs as resources have been added as we continue to grow our business and include costs for recruitment expenses. Operating expenses have also increased due to implementation of the requirements of the Sarbanes Oxley Act of 2002 and United Kingdom regulatory changes. Other expense increases compared to 2003 include office costs due to the move to larger offices in the second quarter of 2003 and amortization of the costs of a new administration system. Operating expenses in this segment are incurred in pounds sterling. These expenses have increased as a result of the depreciation of the United States dollar in comparison with pounds sterling during 2004. Premiums earned in our Life Reinsurance International Segment during the year ended December 31, 2003 increased by 102% to $161.3 million in comparison with $79.7 million in 2002. Our Life Reinsurance International Segment completed the acquisition of an in-force reinsurance transaction effective October 1, 2002. This transaction contributed $28.0 million to premiums earned during 2003 compared to $4.8 million of premiums earned in 2002. Premiums earned on other life business increased $48.4 million in the year ended December 31, 2003 in comparison with the prior year. The increase is due to an increase in the number of contracts to 2,115 in 2003 from 1,387 in 2002. Of the $48.4 million, $23.4 million resulted from revisions in estimates of premiums earned. The majority of business in our Life Reinsurance International Segment is in respect of short duration contracts. We have experienced considerable reporting delays from some of our cedents on this business. As part of the implementation of this segment's new administrative system, improved data was compiled which allowed us to more accurately estimate our premium earned. Premiums earned on aircrew loss of license insurance increased to $23.6 million during the current year in comparison with $16.5 million in the prior year due principally to new business. At December 31, 2003, there were 252 loss of license contracts in comparison with 186 at December 31, 2002. 47 Claims and other policy benefits increased by 107% to $104.2 million in 2003 compared to $50.4 million in 2002. The increase is a result of the increased volume of business, as previously described, the revisions of estimates of premiums earned together with the acquisition of an in-force block of business effective October 2002. The estimate process contributed a further $17.5 million to claims and other policy benefits. Claims on the in-force block amounted to $18.8 million and $3.5 million for the year ended December 31, 2003 and 2002, respectively. During 2003, we entered into an agreement to novate our unit-linked liabilities. The outstanding liabilities were settled by transferring an agreed number of unit-linked securities to the novation agreement counter-party. The settlement was less than the liability previously recorded of $15.5 million and therefore resulted in a release of liabilities of $3.4 million. Acquisition costs and other insurance expenses for our Life Reinsurance International Segment increased to $30.1 million in 2003 from $8.3 million in 2002. This was a result of the growth in our business as described above, the revision of estimates of premiums earned discussed above and the acquisition of an in-force block of business effective October 2002. Acquisition costs on the in-force block amounted to $5.7 million in 2003 and $0.3 million in 2002. The revision of estimates of premiums earned contributed a further $6.0 million to acquisition costs and other insurance expenses. Operating expenses increased by $4.8 million to $11.5 million in 2003 from $6.6 million in 2002. The increase was principally in respect of increased personnel costs. The number of employees in our Life Reinsurance International Segment grew from 48 at December 31, 2002 to 62 at December 31, 2003. This growth resulted in additional costs for office running expenses. In 2003, we also experienced increased costs for our defined benefit pension plan. Other
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------- ------------ ------------- Revenues Investment income, net................. $ 1,106 $ 4,760 $ 3,784 Fee income............................. 3,680 3,840 3,426 Realized gains (losses)................ (2,015) 1,128 (29) ------------- ------------ ------------- Total revenues......................... 2,771 9,728 7,181 ------------- ------------ ------------- Benefits and expenses Acquisition costs and other 2,113 2,263 3,391 insurance expenses, net................ Operating expenses..................... 17,452 10,857 9,116 Due diligence costs.................... 4,643 - - Interest expense....................... 8,411 6,448 1,414 ------------- ------------ ------------- Total benefits and expenses............ 32,619 19,568 13,921 ------------- ------------ ------------- Loss before income taxes and minority interest...................... $ (29,848) $ (9,840) $ (6,740) ============= ============ ============
The Other Segment comprises revenues and expenses not included elsewhere and includes corporate overhead. As previously discussed our Wealth Management operations, which were previously designated as a separate segment, are now included in the Other Segment. Investment income arises in the Other Segment on capital not specifically allocated to the Life Reinsurance North America or Life Reinsurance International Segments. Investment income will increase or decrease as we 48 raise capital and deploy it into our operating segments. Fee income and acquisition expenses arise from our Wealth Management operations. Operating expenses include the costs of running our principal office in Bermuda, compensation costs for our board of directors and legal and professional fees including those in respect of corporate governance legislation. Operating expenses have increased by 61% to $17.5 million the year ended December 31, 2004. These increases relate primarily to increased personnel costs and the costs of corporate governance initiatives, including implementation of the requirements of the Sarbanes Oxley Act of 2002. Due diligence costs of $4.6 million were incurred in respect of various proposed acquisitions. For the year December 31, 2004, interest expense has increased by 30% to $8.4 million from $6.4 million in 2003 as a result of the HyCU issuance in December 2003. We incurred interest expense of $6.4 million during the year ended December 31, 2003 in comparison with $1.4 million during 2002. Interest expense in 2003 comprises principally interest on the $115.0 million of convertible debt issued in November 2002. Interest expense in 2002 was in respect of borrowings under our credit facility and reverse repurchase arrangements. The credit facility borrowings were repaid in April 2002. Realized gains (losses) During the year ended December 31, 2004, realized losses amounted to $8.3 million in comparison with realized losses of $4.4 million in 2003. Included in realized losses is $2.2 million resulting from the mark to market of an interest rate swap. We entered into this contract in relation to certain of our investment assets not supporting reinsurance liabilities. This derivative has not been designated as a hedge and accordingly changes in the fair value are recorded in the determination of net income. During the year ended December 31, 2004, we recognized losses of $9.9 million in respect of impairments on the portfolio controlled by us. These losses were offset by net realized gains on the portfolio. During the year ended December 31, 2003, realized losses amounted to $4.4 million in comparison with realized losses of $10.8 million in the same period in 2002. During the year ended December 31, 2003, we recognized $1.9 million in losses in respect of "other than temporary impairments" on investments, impairment losses of $4.4 million under EITF 99-20 and $2.9 million (net of related deferred acquisition costs) of "other than temporary impairment losses" notified by ceding companies on contracts written on a modified coinsurance basis. These losses were offset by realized exchange gains of $1.3 million and net gains and losses on disposals of investments amounting to $3.5 million. At December 31, 2002, we held unit-linked securities amounting to $16.5 million. These securities comprised investments in a unit trust denominated in British pounds. These securities were acquired as part of the purchase of Scottish Re Holdings Limited and were recorded at quoted market value. Changes in market value were recorded as net realized gains or losses. During 2003, we novated our liabilities on our unit-linked contracts as discussed in "Life Reinsurance International". The liabilities were settled by transferring a portion of the unit-linked securities to the original ceding company. The remaining unit-linked securities were sold realizing a gain of $0.3 million during the year. During the year ended December 31, 2003, changes in market value of those securities of $0.8 million were recognized as realized losses. During the year ended December 31, 2002, realized losses amounted to $10.8 million. The losses in 2002 consist of realized investment losses on unit linked securities held by Scottish Re Holdings Limited of $5.6 million, impairment losses recognized under EITF 99-20 of $6.7 million "and other than temporary impairments" on fixed maturity investments of $3.3 million. These losses were partially offset by net realized gains on the sales of fixed maturity investments of $4.8 million. Management reviews securities with material unrealized losses and tests for "other than temporary impairments" on a quarterly basis. Factors involved in the determination of impairment include fair value as compared to amortized cost, length of time the value has been below amortized cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers. We review all investments with fair values less than amortized cost, and pay particular attention to those that have traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months and other assets with material differences between amortized cost and fair value. Investments meeting those criteria are analyzed in detail for "other than 49 temporary impairment." When a decline is considered to be "other than temporary" a realized loss is incurred and the cost basis of the impaired asset is adjusted to its fair value. Under EITF 99-20, a decline in fair value below "amortized cost" basis is considered to be an "other than temporary impairment" whenever there is an adverse change in the amount or timing of cash flow to be received, regardless of the resulting yield, unless the decrease is solely a result of changes in market interest rates. The following tables provide details of the sales proceeds, realized loss, the length of time the security had been in an unrealized loss position and reason for sale for securities sold during 2004, 2003, and 2002.
Year ended December 31, 2004 -------------------------------------------------------------------------------------- Credit Concern Relative Value Other Total -------------- -------------- ----- ----- Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss - ---- -------- ---- -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90 ........ $ 7,528 $ (474) $ 54,772 $ (1,284) $ 77,107 $ (1,859) $139,407 $ (3,617) 91-180 ...... 1,909 (136) 22,884 (266) 6,543 (46) 31,336 (448) 181-270 ..... 10,483 (159) 3,904 (23) 127 (1) 14,514 (183) 271-360 ..... - - 488 (10) 1,886 (31) 2,374 (41) Greater than 360 ......... 8,011 (710) 306 (11) 321 (33) 8,638 (754) -------- --------- --------- ---------- --------- --------- --------- --------- Total ....... $ 27,931 $ (1,479) $ 82,354 $ (1,594) $ 85,984 $ (1,970) $196,269 $ (5,043) ======== ========= ========= ========== ========= ========= ========= =========
Year ended December 31, 2003 -------------------------------------------------------------------------------------- Credit Concern Relative Value Other Total -------------- -------------- ----- ----- Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss - ---- -------- ---- -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90 ....... $ 924 $ (5) $ 15,389 $ (166) $ 20,686 $ (191) $ 36,999 $ (362) 91-180 ..... 3,529 (295) 3,693 (35) 1,720 (15) 8,942 (345) 181-270 .... 3,300 (251) 776 (29) 656 (4) 4,732 (284) 271-360 .... - - 545 (12) 479 (55) 1,024 (67) Greater than 360 ........ 6,008 (951) 1,380 (116) - - 7,388 (1,067) -------- --------- --------- ---------- --------- --------- --------- --------- Total ...... $ 13,761 $(1,502) $ 21,783 $ (358) $ 23,541 $ (265) $ 59,085 $ (2,125) ======== ========= ========= ========== ========= ========= ========= =========
Year ended December 31, 2002 -------------------------------------------------------------------------------------- Credit Concern Relative Value Other Total -------------- -------------- ----- ----- Days Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss - ---- -------- ---- -------- ---- -------- ---- -------- ---- (dollars in thousands) 0-90........ $ 7,708 $ (520) $ 21,488 $ (130) $ 3,377 $ (41) $ 32,573 $ (691) 91-180...... 4,162 (196) 2,044 (45) - - 6,206 (241) 181-270..... 3,408 (213) - - - - 3,408 (213) Greater than 360......... 5,284 (325) - - - - 5,284 (325) -------- --------- --------- ---------- --------- --------- --------- --------- Total....... $ 20,562 $ (1,254) $ 23,532 $ (175) $ 3,377 $ (41) $ 47,471 $ (1,470) ======== ========= ========= ========== ========= ========= ========= =========
Income Taxes The 2004 income tax benefit is in respect of certain of our U.S. taxable entities and our U.K. and Irish entities, offset by income tax expenses arising on our other U.S. entities. Included in the 2004 income tax benefit is $1.7 million in respect of U.S. state taxes and $10.0 million arising in our Irish entity relating to the acquisition of 50 the ING individual life business. In 2004, we established reserves of $3.3 million in respect of certain tax positions. The acquisition of the ING individual life reinsurance business is reflected under U.S. generally accepted accounting principles in accordance with purchase accounting requirements but for taxation is a currently taxable transaction. As a result, approximately $84.0 million of current tax expense and a corresponding $84.0 million of deferred tax benefit is not reflected in the income statement consistent with purchase accounting principles. At December 31, 2004 we believe that it is more likely than not that all gross deferred tax assets will reduce taxes payable in future years except for a valuation allowance of $21.6 million established in 2004. The change in our effective tax rate is due primarily to the ratio of earnings on taxable jurisdictions to that in non-taxable jurisdictions. The 2003 and 2002 income tax benefits are in respect of certain of our U.S. taxable entities and are offset by income tax expenses arising on our U.K., Irish and other U.S. entities. Included in the 2003 income tax benefit is $2.1 million in respect of state taxes. Financial Condition Investments At December 31, 2004, the portfolio controlled by us consisted of $4.3 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded; however, $330.3 million represent investments in private securities. Of the total portfolio controlled by us, $3.5 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $752.5 million represented other cash balances. At December 31, 2003, the portfolio controlled by us consisted of $2.4 billion of fixed income securities, preferred stock and cash. The majority of these assets are traded; however, $175.2 million represented investments in private securities. Of the total portfolio, $2.1 billion represented the fixed income and preferred stock portfolio managed by external investment managers and $262.7 million represented other cash balances. At December 31, 2004, the average Standard & Poor's rating of that portfolio was "AA-", the average effective duration was 3.8 years and the average book yield was 4.2% as compared with an average rating of "AA-", an average effective duration 3.9 years and an average book yield of 4.5% at December 31, 2003. At December 31, 2004, the unrealized appreciation on investments, net of tax and deferred acquisition costs, was $13.7 million as compared with unrealized appreciation on investments, net of tax, of $16.8 million at December 31, 2003. The unrealized appreciation on investments is included in our consolidated balance sheet as part of shareholders' equity. In the table below are the total returns earned by our portfolio for the year ended December 31, 2004, compared to the returns earned by three indices: the Lehman Brothers Global Bond Index, the S&P 500, and a customized index that we developed to take into account our investment guidelines. We believe that this customized index is a more relevant benchmark for our portfolio's performance. Year Ended December 31, 2004 ------------------ Portfolio performance.................................... 4.42% Customized index......................................... 3.87% Lehman Brothers Global Bond Index........................ 9.27% S&P 500.................................................. 10.87% The following table presents the fixed income investment portfolio (market value) credit exposure by category as assigned by Standard & Poor's.
December 31, 2004 December 31, 2003 ------------------------ --------------------- Ratings $ in millions % $ in millions % ------------- --- ------------- --- AAA.......................................... $ 1,754.2 41.1% $ 785.4 32.7% AA........................................... 451.1 10.5 298.4 12.4 A............................................ 1,284.0 30.1 762.7 31.7 51 BBB.......................................... 750.5 17.6 540.8 22.5 BB or below.................................. 30.3 0.7 16.6 0.7 ------------ ----- ------------ ------ Total........................................ $ 4,270.1 100.0% $ 2,403.9 100.0% ============ ===== ============ ======
The following table illustrates the fixed income investment portfolio (market value) sector exposure.
December 31, 2004 December 31, 2003 ------------------------ --------------------- Sector $ in millions % $ in millions % ------------- --- ------------- --- U.S. Treasury securities and U.S. government agency obligations......................... $ 89.5 2.1% $ 74.6 3.1% Corporate securities......................... 1,618.3 37.9 1,119.6 46.6 Municipal bonds.............................. 20.8 0.5 1.8 0.1 Mortgage and asset backed securities......... 1,663.8 39.0 818.7 34.0 Preferred stock.............................. 125.2 2.9 126.5 5.3 ------------- ------- ------------- ------ 3,517.6 82.4 2,141.2 89.1 Cash......................................... 752.5 17.6 262.7 10.9 ------------- ------- ------------- ------ Total........................................ $ 4,270.1 100.0% $ 2,403.9 100.0% ============= ======= ============= ======
The data in the tables above excludes the assets held by ceding insurers under modified coinsurance and funds withheld coinsurance agreements. At December 31, 2004, our fixed income portfolio had 1,773 positions and $12.0 million of gross unrealized losses. No single position had an unrealized loss greater than $0.9 million. There were $42.1 million of unrealized gains on the remainder of the portfolio. There were 44 private securities in an unrealized loss position totaling $0.7 million. At December 31, 2003 our fixed income portfolio had 1,375 positions and $14.6 million of gross unrealized losses. No single position had an unrealized loss greater than $1.6 million. There were $37.0 million of unrealized gains on the remainder of the portfolio. There were 34 private securities in an unrealized loss position totaling $0.8 million. The composition by category of securities that have an unrealized loss at December 31, 2004 and December 31, 2003 are presented in the tables below.
December 31, 2004 ------------------------------------------------- Estimated Unrealized Fair Value % Loss % ------------- ------- ------------ ------- Dollars in thousands Corporate securities....................... $ 292,441 28.7% $ (2,834) 23.5% Other structured securities................ 339,441 33.3 (5,526) 45.9 Collateralized mortgage obligations........ 229,168 22.5 (1,925) 16.0 Governments................................ 51,123 5.0 (139) 1.2 Municipal 12,130 1.2 (158) 1.3 Preferred stock.............................. 35,462 3.5 (641) 5.3 Mortgage backed securities................... 58,670 5.8 (825) 6.8 ----------- ------ ----------- ------ Total........................................ $ 1,018,435 100.0% $ (12,048) 100.0% =========== ====== =========== ======
52
December 31, 2003 ------------------------------------------------- Estimated Unrealized Fair Value % Loss % ------------- ------- ------------ ------- Dollars in thousands Corporate securities....................... $ 223,555 41.4% $ (3,823) 26.2% Other structured securities................ 154,065 28.5 (8,943) 61.3 Collateralized mortgage obligations........ 95,455 17.7 (863) 5.9 Governments................................ 25,838 4.8 (400) 2.7 Preferred stock............................ 21,303 3.9 (299) 2.1 Mortgage backed securities................. 19,900 3.7 (255) 1.8 ----------- ------ ----------- ------ Total........................................ $ 540,116 100.0% $ (14,583) 100.0% =========== ====== =========== ======
The following tables provide information on the length of time securities have been continuously in an unrealized loss position:
December 31, 2004 ------------------------------------------------------------------- Estimated Unrealized Days Book Value % Fair Value % Loss % - ---- ---------- --- ---------- --- ----------- --- Dollars in thousands 0-90................. $ 471,909 45.8% $ 468,924 46.0% $ (2,985) 24.8% 91-180............... 154,062 14.9 153,237 15.0 (825) 6.8 181-270.............. 231,798 22.5 229,026 22.5 (2,772) 23.0 271-360.............. 86,468 8.4 84,142 8.3 (2,326) 19.3 Greater than 360 .... 86,246 8.4 83,106 8.2 (3,140) 26.1 ---------- ------ ---------- ------ ----------- ------ Total $1,030,483 100.0% $1,018,435 100.0% (12,048) 100.0% ========== ====== ========== ====== =========== ======
December 31, 2003 ------------------------------------------------------------------- Estimated Unrealized Days Book Value % Fair Value % Loss % - ---- ---------- --- ---------- --- ----------- --- Dollars in thousands 0-90................. $ 308,267 55.6% $ 304,511 56.4% $ (3,756) 25.8% 91-180............... 115,702 20.9 113,405 21.0 (2,297) 15.7 181-270.............. 56,362 10.1 55,243 10.2 (1,119) 7.7 271-360.............. 13,486 2.4 13,064 2.4 (422) 2.9 Greater than 360..... 60,882 11.0 53,893 10.0 (6,989) 47.9 --------- ------ ---------- ----- ----------- ------ Total $ 554,699 100.0% $ 540,116 100.0% $ (14,583) 100.0% ========= ====== ========== ===== =========== ======
Unrealized losses on securities that have been in an unrealized loss position for periods greater than 2 years amounted to $2.1 million at December 31, 2004 and $2.0 million at December 31, 2003. Unrealized losses on non-investment grade securities amounted to $2.1 million and $3.0 million at December 31, 2004 and December 31, 2003, respectively. Of these amounts, non-investment grade securities with unrealized losses of $1.0 million at December 31, 2004 and $1.8 million at December 31, 2003 had been in an unrealized loss position for a period greater than one year, of which $1.0 million at December 31, 2004 and $0.9 million at December 31, 2003 had been in an unrealized loss position for periods greater than 2 years. The following tables illustrate the industry analysis of the unrealized losses at December 31, 2004 and 2003: 53
December 31, 2004 ---------------------------------------------------------------------- Amortized Estimated Unrealized Cost % Fair Value % Loss % ---------- ------ ---------- ------ ----------- ------ Industry Dollars in thousands Mortgage and asset backed securities. $ 635,556 61.7% $ 627,279 61.6% $ (8,277) 68.7% Banking............. 89,131 8.7 88,371 8.7 (760) 6.3 Insurance........... 30,229 2.9 29,831 2.9 (398) 3.3 Financial Other..... 30,081 2.9 29,645 2.9 (436) 3.6 Brokerage........... 25,071 2.4 24,893 2.4 (178) 1.5 Financial companies. 24,293 2.4 24,080 2.4 (213) 1.8 Communications...... 16,734 1.6 16,503 1.6 (231) 1.9 Other............... 179,388 17.4 177,833 17.5 (1,555) 12.9 ---------- ------ ---------- ------- ----------- ------ Total............... $1,030,483 100.0% $1,018,435 100.0% $ (12,048) 100.0% ========== ====== ========== ======= =========== ======
December 31, 2003 --------------------------------------------------------------------- Amortized Estimated Unrealized Cost % Fair Value % Loss % ---------- ------ ---------- ------ ----------- ------ Industry Dollars in thousands Mortgage and asset backed securities. $ 279,481 50.4% $ 269,420 49.9% $ (10,061) 69.0% Banking............. 38,738 7.0 38,201 7.1 (537) 3.7 Consumer non-cyclical...... 23,009 4.1 22,632 4.2 (377) 2.6 Communications...... 27,401 5.0 27,055 5.0 (346) 2.4 Financial companies. 21,900 4.0 21,539 4.0 (361) 2.5 Insurance........... 17,467 3.1 17,289 3.2 (178) 1.2 Transportation...... 7,382 1.3 6,534 1.2 (848) 5.8 Other............... 139,321 25.1 137,446 25.4 (1,875) 12.8 ---------- ------ ---------- ------- ----------- ------ Total............... $ 554,699 100.0% $ 540,116 100.0% $ (14,583) 100.0% ========== ====== ========== ======= =========== ======
________________ Other industries each represent less than 2% of estimated fair value The expected maturity dates of our fixed maturity investments that have an unrealized loss at December 31, 2004 and 2003 are presented in the table below.
December 31, 2003 --------------------------------------------------------------------- Book Estimated Unrealized Value % Fair Value % Loss % ---------- ------ ---------- ------ ----------- ------ Maturity Dollars in thousands Due in one year or less... $ 162,787 15.8% $ 160,087 15.7% $ (2,700) 22.4% Due in one through five years..................... 532,436 51.7 527,660 51.8 (4,776) 39.6 Due in five through ten years..................... 256,319 24.9 252,939 24.9 (3,380) 28.1 Due after ten years....... 78,941 7.6 77,749 7.6 (1,192) 9.9 ---------- ------ ---------- ------- ----------- ------ Total..................... $1,030,483 100.0% $1,018,435 100.0% $ (12,048) 100.0% ========== ====== ========== ======= =========== ======
54
December 31, 2003 ---------------------------------------------------------------------- Book Estimated Unrealized Value % Fair Value % Loss % ---------- ------ ---------- ------ ----------- ------ Maturity Dollars in thousands Due in one year or less... $ 57,517 10.4% $ 57,129 10.6% $ (388) 2.7% Due in one through five 220,835 39.8 214,836 39.8 (5,999) 41.1 years..................... Due in five through ten 232,231 41.9 225,844 41.8 (6,387) 43.8 years..................... Due after ten years....... 44,116 7.9 42,307 7.8 (1,809) 12.4 ---------- ------ ---------- ------- ----------- ------ Total..................... $ 554,699 100.0% $ 540,116 100.0% $ (14,583) 100.0% ========== ====== ========== ======= =========== ======
At December 31, 2004, there were 647 securities with unrealized loss positions with no security having an unrealized loss greater than $0.9 million. At December 31, 2003, there were 409 securities with unrealized loss positions with 2 securities having an unrealized loss greater than $1.0 million. The increase in the number of securities with unrealized losses is primarily attributable to increases in interest rates. At December 31, 2004, there were two securities with fair values that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $1.1 million and the largest unrealized loss position was $0.9 million. At December 31, 2003 there were 12 securities with fair values that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $7.2 million and the largest unrealized loss position was $1.6 million. Funds withheld at interest Funds withheld at interest arise on contracts written under modified coinsurance agreements and funds withheld coinsurance agreements. In substance, these agreements are identical to coinsurance treaties except that the ceding company retains control of and title to the assets. The deposits paid to the ceding company by the underlying policyholders are held in a segregated portfolio and managed by the ceding company or by investment managers appointed by the ceding company. These treaties transfer a quota share of the risks. The funds withheld at interest represent our share of the ceding companies' statutory reserves. The cash flows exchanged with each monthly settlement are netted and include, among other items, our quota share of investment income on our proportionate share of the portfolio, realized losses, realized gains (amortized to reflect the statutory rules relating to interest maintenance reserve), interest credited and expense allowances. At December 31, 2004, funds withheld at interest were in respect of seven contracts with four ceding companies. At December 31, 2003, funds withheld at interest were in respect of six contracts with three ceding companies. At December 31, 2004, we had three contracts with Lincoln National Insurance Company that accounted for $1.3 billion or 63% of the funds withheld balances. Additionally we had two contracts with Security Life of Denver International that accounted for $0.5 billion or 27% of the funds withheld balances. The remaining contracts were with Illinois Mutual Insurance Company and American Founders Life Insurance Company. Lincoln National Insurance Company has financial strength ratings of "A+" from A.M. Best, "AA-" from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of insolvency of the ceding companies on these arrangements we would need to exert a claim on the assets supporting the contract liabilities. However, the risk of loss is mitigated by our ability to offset amounts owed to the ceding company with the amounts owed to us by the ceding company. Reserves for future policy benefits and interest sensitive contract liabilities relating to these contracts amounted to $2.0 billion and $1.7 billion at December 31, 2004 and December 31, 2003, respectively. At December 31, 2004, the funds withheld at interest totaled $2.0 billion with an average rating of "A+", an average effective duration of 3.9 years and an average book yield of 5.2% as compared with an average rating of "A-", an average effective duration of 5.1 years and an average book yield of 6.3% at December 31, 2003. These are fixed income investments and include marketable securities, commercial mortgages, private placements and cash. The market value of the funds withheld amounted to $2.1 billion and $1.6 billion at December 31, 2004 and December 31, 2003, respectively. 55 The investment objectives for these arrangements are included in the agreements. The primary objective is to maximize current income, consistent with the long-term preservation of capital. The overall investment strategy is executed within the context of prudent asset/liability management. The investment guidelines permit investments in fixed maturity securities, and include marketable securities, commercial mortgages, private placements and cash. The maximum percentage of below investment grade securities is 10% and other guidelines limit risk, ensure issuer and industry diversification as well as maintain liquidity and overall portfolio credit quality. According to data provided by our ceding companies, the following table reflects the market value of assets backing the funds withheld at interest portfolio using the lowest rating assigned by the three major rating agencies.
December 31, 2004 December 31, 2003 ---------------------- -------------------- Ratings $ in $ in millions % millions % ----------- ----- ----------- ----- AAA.......................................... $ 692.6 33.3% $ 216.6 13.9% AA........................................... 85.0 4.1 76.9 4.9 A ........................................... 527.7 25.4 528.6 34.0 BBB.......................................... 579.7 27.9 537.6 34.6 BB or below.................................. 63.3 3.1 66.0 4.3 ----------- ------ ----------- ------ 1,948.3 93.8 1,425.7 91.7 Commercial mortgage loans.................... 129.9 6.2 129.4 8.3 ----------- ------ ----------- ------ Total........................................ $ 2,078.2 100.0% $ 1,555.1 100.0% =========== ====== =========== ======
According to data provided by our ceding companies, the following table reflects the market value of assets backing the funds withheld at interest portfolio by sector.
December 31, 2004 December 31, 2003 ---------------------- -------------------- Sector $ in $ in millions % millions % ----------- ----- ----------- ----- U.S. Treasury securities and U.S. government agency obligations......................... $ 39.7 1.9% $ 32.0 2.1% Corporate securities......................... 1,096.3 52.8 1,041.2 67.0 Municipal bonds.............................. 25.2 1.2 23.1 1.5 Mortgage and asset backed securities......... 314.7 15.1 329.4 21.1 Commercial mortgage loans.................... 129.9 6.3 129.4 8.3 Cash......................................... 472.4 22.7 - - ----------- ------ ----------- ------ Total $ 2,078.2 100.0% $ 1,555.1 100.0% =========== ====== =========== ======
Liquidity and Capital Resources Cash flow Cash provided by operating activities amounted to $38.9 million in the year ended December 31, 2004 in comparison with $88.5 million in 2003. Operating cash flow includes cash inflows from premiums, fees and investment income, and cash outflows for benefits and expenses paid. In periods of growth of new business our operating cash flow may decrease due to first year commissions paid on new business generated. For income recognition purposes these commissions are deferred and amortized over the life of the business. The decrease in operating cash flow is partly attributable to settlement of a tax liability of approximately $23.0 million. This liability resulted from actions taken by the former owner of Scottish Re Life Corporation immediately prior to its acquisition in December 2003. When adjusted for this payment, cash inflows from operations in the year ended December 31, 2004 were $61.9 million compared to inflows $88.5 million in 2003. This decrease is due to the timing of receipt of reinsurance receivables and settlement of reinsurance payables. During the year ended December 31, 2004 we settled reinsurance payables outstanding at December 30, 2003. 56 Cash provided by operating activities amounted to $88.5 million in 2003 in comparison with cash flow of $9.2 million used in operating activities in 2002. The increase in operating cash flow from 2002 was $97.7 million. It related primarily to increases in premiums, fees, and investment income being greater than increases in benefits, reserve movements and expenses paid. Cash from premiums and fees increased by $116.3 million due to growth in our Life Reinsurance business. Cash from investment income increased by $68.7 million due to the growth in our invested asset base. The increase was offset by declining yields. Cash used to settle benefits increased by $66.9 million due to the growth in our Life Reinsurance business. This use of cash was offset by an increase in related reserves of $64.1 million. Cash used to pay acquisition and other expenses, including commissions and interest, increased by $84.5 million. This increase related principally to new business written in our Life Reinsurance North America Segment, increased operating expenses and increased debt. Acquisition costs include commissions on first year business that are deferred when paid and therefore do not impact net income until later years. We believe cash flows from operations will be positive over time. However, they may be positive or negative in any one period depending on the amount of new life reinsurance business written, the level of ceding commissions paid in connection with writing that business, the level of renewal premiums earned in the period and the timing of receipt of reinsurance receivables and settlement of reinsurance payables. To address the risk that operating cash flows may not be sufficient in any given period we maintain a high quality, fixed maturity portfolio with positive liquidity characteristics. These securities are available for sale and can be sold to meet obligations if necessary. Capital At December 31, 2004, total capitalization was $1.3 billion compared to $964.3 million and $623.6 million at December 31, 2003 and 2002, respectively. Total capitalization is analyzed as follows:
December 31, 2004 December 31, 2003 December 31, 2002 ------------------- ------------------- ------------------- (dollars in thousands) Shareholders' equity ....................... $ 862,674 $ 659,844 $ 491,092 Mezzanine equity............................. 142,449 141,928 - Long-term debt............................... 244,500 162,500 132,500 7.00% Convertible Junior Subordinated Notes.. 41,282 - - ------------------ ---------------- ------------------ $ 1,290,905 $ 964,272 $ 623,592 ================== ================ ==================
The increase in capitalization is due to the net income for the year ended December 31, 2004 of $71.4 million, the issuance of ordinary shares, warrants and notes to the Cypress Entities, totaling $168.3 million, the issuance of trust preferred debt of $82.0 million, the issuance of share capital to employees on the exercise of options of $8.3 million and an increase in other comprehensive income of $13.5 million offset by dividends paid of $7.1 million. Other comprehensive income consists of the unrealized appreciation on investments and the cumulative translation adjustment arising from the translation of Scottish Re Holdings Limited's balance sheet at exchange rates as of December 31, 2004. The $340.7 million increase in capitalization in 2003 is due primarily to the net proceeds of our 2003 equity offering of $180.1 million, the net proceeds of the offering of HyCUs which are included in mezzanine equity of $138.2 million, the trust preferred securities offerings of $30.0 million, net income for the year of $27.3 million and increases in other comprehensive income. These increases have been offset by dividends paid of $6.2 million. Other comprehensive income consists of the unrealized appreciation on investments, the cumulative translation adjustment arising from the translation of Scottish Re Holdings Limited's balance sheet at exchange rates as of December 31, 2003 and a minimum pension liability adjustment at December 31, 2002, only. On April 4, 2002 we completed a public offering of 6,750,000 ordinary shares (which included an over-allotment option of 750,000 ordinary shares) in which we raised aggregate net proceeds of $114.3 million. We used the net proceeds of the offering to repay short-term borrowings of $40.0 million, which we had borrowed under a credit facility with a U.S. bank, and for general corporate purposes. 57 On November 22, 2002 we completed the private offering of $115.0 million of 4.5% Senior Convertible Notes due 2022 (which included an over allotment option of $15.0 million) in which we raised aggregate net proceeds of $110.9 million. We used the net proceeds of the offering to repay short-term borrowings of $23.5 million, under reverse repurchase agreements, and for general corporate purposes. On December 4, 2002 we privately placed $17.5 million of capital securities which were issued by a trust subsidiary holding a thirty year $18.0 million aggregate principal amount subordinated note of Scottish Holdings, Inc. which is guaranteed by Scottish Annuity & Life Insurance Company (Cayman) Ltd. Net proceeds were $16.9 million. Scottish Holdings, Inc. provided a $15.0 million capital infusion to its direct subsidiary, Scottish Re (U.S.), Inc. and used the remainder of the net proceeds for general corporate purposes. On July 23, 2003, we completed a public offering of 9,200,000 ordinary shares (which included an over-allotment option of 1,200,000 ordinary shares) at an offering price of $20.75 per share in which we raised aggregate net proceeds of $180.1 million. The gross proceeds of this offering were $190.9 million. We used $30.0 million of these proceeds to repurchase 1,525,000 ordinary shares from Pacific Life at a purchase price of $19.66 per share. On August 20, 2003, the 200,000 Class B Warrants originally issued as part of our initial public offering with a strike price of $15.00 were repurchased at a price of $8.00 per warrant or $1.6 million in aggregate. On October 29, 2003 and November 14, 2003 we privately placed $30.0 million of trust preferred securities which were issued by trust subsidiaries holding thirty year $30.9 million aggregate principal amount subordinated notes of Scottish Holdings, Inc. which is guaranteed by Scottish Annuity & Life Insurance Company (Cayman) Ltd. Net proceeds were $29.0 million. Scottish Holdings, Inc. provided a $21.0 million capital infusion to its direct subsidiary Scottish Re (U.S.), Inc. and used the remainder of the net proceeds for general corporate purposes. On December 17 and December 22, 2003, we completed a public offering of 5,750,000 (which included an over allotment option of 750,000) HyCUs. The net proceeds of the offering were $138.2 million. Each HyCU consists of a purchase contract issued by us and a convertible preferred share redeemable on May 21, 2007. The purchase contract obligates the holder to purchase from us, no later than February 15, 2007, for a price of $25 in cash, the following number of shares, subject to anti dilution adjustments: o if the average closing price of our ordinary shares over a 20 day trading period ending on the fourth trading day before February 15, 2007 exceeds $19.32, a number of ordinary shares, based on the 20 day average closing price, equal to $25.00; and o if the average closing price during that period is less than or equal to $19.32, 1.294 ordinary shares. The proceeds of the sale of these ordinary shares will be used to redeem the convertible preferred shares on May 21, 2007. The convertible preferred shares will be convertible into 1.0607 ordinary shares per $25.00 liquidation preference only on May 21, 2007. Upon conversion we will deliver an amount of cash equal to the $25.00 liquidation preference of the convertible preferred share and ordinary shares for the value of the excess, if any, of the conversion value minus the liquidation preference. We will deliver ordinary shares only if the average closing price is greater than $23.57. On May 12, 2004, we privately placed $32.0 million of trust preferred securities (the "2034 Trust Preferred Securities") which were issued by a trust subsidiary holding a thirty year $32.0 million aggregate principal amount subordinated note of Scottish Holdings, Inc. which is guaranteed by Scottish Annuity & Life Insurance Company (Cayman) Ltd. Net proceeds were $31.0 million. Scottish Holdings, Inc. provided $30.0 million capital infusion to its direct subsidiary Scottish Re (U.S.), Inc. and used the remainder of the net proceeds for general corporate purposes. On December 18, 2004, Scottish Financial (Luxembourg) S.a.r.l., a subsidiary of Scottish Annuity & Life Insurance Company (Cayman) Ltd., privately placed $50.0 million of trust preferred securities (the "December 2034 Trust Preferred Securities") which were issued by a subsidiary trust holding a thirty year $51.5 million aggregate 58 principal amount subordinated note of Scottish Financial (Luxembourg) S.a.r.l. which is guaranteed by Scottish Annuity & Life Insurance Company (Cayman) Ltd. Net proceeds were $48.5 million, which was used for general corporate purposes. In order to provide additional capital to support the individual life reinsurance business acquired from ING we signed a securities purchase agreement on October 17, 2004, with the Cypress Entities. Pursuant to this agreement, we issued to the Cypress Entities on December 31, 2004: (i) 3,953,183 ordinary shares, par value $0.01 per share (equal to 9.9% of the aggregate number of ordinary shares issued and outstanding on December 31, 2004, taking into account such issuance); (ii) Class C Warrants to purchase 3,206,431 ordinary shares (equal to the difference between (A) 19.9% of the ordinary shares issued and outstanding on December 31, 2004 (without taking into account the issuance of ordinary shares pursuant to (i) above) and (B) the number of ordinary shares issued to the Cypress Entities as provided in (i) above); and (iii) $41,282,479 aggregate principal amount of 7.00% Convertible Junior Subordinated Notes with a maturity date 30 years from issuance. The proceeds from the Cypress Entities net of a commitment fee and other expenses amounted to $168.3 million. The ordinary shares, the Class C Warrants and the 7.00% Convertible Junior Subordinated Notes purchased by the Cypress Entities are collectively referred to as the "Purchased Securities." The effective purchase price was $19.375 per ordinary share (the "Purchase Price"). Upon exercise of the Class C Warrants and conversion of the 7.00% Convertible Junior Subordinated Notes (which is subject to certain conditions as described below), the Cypress Entities will become the largest shareholder group of Scottish Re. The Class C Warrants are exercisable at an exercise price equal to $0.01 per share. The number of ordinary shares for which the Class C Warrants are exercisable will be subject to customary anti-dilution adjustments. The Class C Warrants do not have voting rights and are not exercisable until (i) our shareholders approve (A) certain amendments to our Articles of Association to allow the Cypress Entities to hold more than 9.9% of our issued and outstanding ordinary shares, and (B) the issuance of more than 20% of our ordinary shares to the Cypress Entities, as required by New York Stock Exchange rules (the "Shareholder Proposals"), and (ii) requisite regulatory approvals have been obtained from insurance regulators in Delaware and the United Kingdom. Notwithstanding the foregoing, the Class C Warrants will become exercisable (i) immediately upon their transfer to an unaffiliated third party provided that such transfer complies with the ownership limitations contained in our articles of association or (ii) to the extent the exercise thereof would not cause the Cypress Entities to own in the aggregate greater than 9.9% of the ordinary shares then outstanding. Upon approval of the Shareholder Proposals and the receipt of all requisite regulatory approvals, the Class C Warrants will automatically be exercised for the applicable number of ordinary shares. In the event that a change of control of Scottish Re occurs and the Class C Warrants cannot be exercised in full for ordinary shares by the terms of our articles of association or by applicable law, the holders of Class C Warrants may require us to repurchase the unexercised Class C Warrants pursuant to the terms specified in the Class C Warrants. If the shareholders do not approve the Shareholder Proposals by June 30, 2005 (a "Failed Condition"), we will make additional payments on the Class C Warrants by paying cash equal to, on a per annum basis, 5% of the product of (i) the number of ordinary shares underlying the Class C Warrants then held by the Cypress Entities and (ii) the Purchase Price, or, Scottish Re Group Limited's option in lieu of cash, by issuing additional 7.00% Convertible Junior Subordinated Notes with an equivalent aggregate principal amount, such payment or issuance to be made on the business day immediately following the date of occurrence of the Failed Condition, and on each six-month anniversary thereafter, until the Shareholder Proposals have been approved. In addition, until the Shareholder Proposals have been approved, we will make an additional payment on the Class C Warrants equal to the dividend then currently payable on ordinary shares, which will be assumed to be no less than $0.20 per share per annum. 59 Holders of the 7.00% Convertible Junior Subordinated Notes do not have voting rights. The 7.00% Convertible Junior Subordinated Notes are unsecured obligations, subordinated to all indebtedness that does not by its terms rank pari passu or junior to the 7.00% Convertible Junior Subordinated Notes, including any guarantees issued by us in respect of senior or senior subordinated indebtedness. The accrued but unpaid interest on the 7.00% Convertible Junior Subordinated Notes will be payable in kind on December 1 and June 1 of each year, beginning June 1, 2005, by the issuance of additional 7.00% Convertible Junior Subordinated Notes of the same series, having the same terms and conditions as the 7.00% Convertible Junior Subordinated Notes and having a principal amount equal to the amount of such accrued and unpaid interest. However, (i) during the period from December 31, 2007 to December 31, 2014, we may at our option pay any of such accrued but unpaid interest in cash in lieu of in kind, and (ii) subsequent to December 31, 2014, the Cypress Entities may at their option receive any of such accrued but unpaid interest in cash in lieu of in kind. Upon the approval of our shareholders and the receipt of all requisite regulatory approvals, the 7.00% Convertible Junior Subordinated Notes will automatically be converted into our ordinary shares at an initial conversion price of $19.375 per ordinary share, subject to customary anti-dilution adjustments. If upon approval of the Shareholder Proposals the requisite regulatory approvals have not been obtained, the 7.00% Convertible Junior Subordinated Notes will automatically be exchanged for additional Class C Warrants to purchase the number of ordinary shares into which the 7.00% Convertible Junior Subordinated Notes (including any accrued and unpaid interest through the date of conversion) were convertible. If we have sought approval of the Shareholder Proposals unsuccessfully at least twice, after December 31, 2005, we may redeem all (but not less than all) of the then-outstanding 7.00% Convertible Junior Subordinated Notes for cash at a redemption price per share equal to the greater of (i) an amount equal to, (A) if prior to December 31, 2007, the initial Purchase Price paid by the Cypress Entities for the 7.00% Convertible Junior Subordinated Notes, plus an amount calculated based on an annual, compounded internal rate of return equal to the Penalty Rate (described below) on such investment for the period from December 31, 2004 through December 31, 2007(applying the 19% Penalty Rate to such period), or (B) if after December 31, 2007, the principal amount thereof plus accrued and unpaid interest thereon through the date of repurchase, and (ii) the market value at the time of such redemption of the number of ordinary shares into which the 7.00% Convertible Junior Subordinated Notes are then convertible. In the event of a change of control of Scottish Re, we will be required to repurchase the 7.00% Convertible Junior Subordinated Notes pursuant to the terms specified in the 7.00% Convertible Junior Subordinated Notes. In the event of a Failed Condition, the 7.00% Convertible Junior Subordinated Notes will bear interest at the Penalty Rate applied retroactively from December 31, 2004 until the earliest to occur of a cure of such condition, early redemption of the 7.00% Convertible Junior Subordinated Notes or the maturity thereof. The "Penalty Rate" means a rate per annum equal to, (i) if a Failed Condition occurs in 2005, 15% applicable through December 31, 2005, (ii) if a Failed Condition occurs or continues in 2006, 17% through December 31, 2006 and (iii) 19% thereafter. Subject to certain limited exceptions, the Cypress Entities have agreed not to divest the Purchased Securities for a period of 12 months from the Closing Date. We have granted the Cypress Entities demand and piggyback registration rights as well as, subject to certain exceptions, preemptive rights. Scottish Re, Pacific Life, and certain of Scottish Re Group Limited's officers and directors have also entered into Voting Agreements with the Cypress Entities. Under these agreements, each of the signatories has agreed to vote any ordinary shares held by them in favor of the Shareholder Proposals. During 2004, we paid quarterly dividends totaling $7.1 million or $0.20 per share. During 2003, we paid quarterly dividends totaling $6.2 million or $0.20 per share. During 2002, we paid quarterly dividends totaling $5.0 million or $0.20 per share. Collateral We must have sufficient assets available for use as collateral to support borrowings, letters of credit, and certain reinsurance transactions. With these reinsurance transactions, the need for collateral or letters of credit arises in five ways: 60 o when Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited or Scottish Re Limited enters into a reinsurance treaty with a U.S. customer, we must contribute assets into a reserve credit trust with a U.S. bank or issue a letter of credit in order that the ceding company may obtain reserve credit for the reinsurance transaction; o when Scottish Re (U.S.), Inc. enters into a reinsurance transaction, it typically incurs a need for additional statutory capital This need can be met by its own capital surplus, an infusion of cash or assets from Scottish Re or an affiliate or by ceding a portion of the transaction to another company within the group or an unrelated reinsurance company, in which case that reinsurer must provide reserve credit by contributing assets in a reserve credit trust or a letter of credit; o Scottish Re (U.S.), Inc. is licensed, accredited, approved or authorized to write reinsurance in 50 states and the District of Columbia. When Scottish Re (U.S.), Inc. enters into a reinsurance transaction with a customer domiciled in a state in which it is not a licensed, accredited, authorized or approved reinsurer, it likewise must provide a reserve credit trust or letter of credit; o Scottish Re Life Corporation is licensed, accredited, approved or authorized to write reinsurance in 50 states, the District of Columbia, Guam and the Federated States of Micronesia. When Scottish Re Life Corporation enters into a reinsurance transaction with a customer domiciled in a state in which it is not a licensed, accredited, authorized or approved reinsurer, it likewise must provide a reserve credit trust or letter of credit; and o even when Scottish Re (U.S.), Inc. is licensed, accredited, approved or authorized to write reinsurance in a state, it may agree with a customer to provide a reserve credit trust or letter of credit voluntarily to mitigate the counter-party risk from the customer's perspective, thereby doing transactions that would be otherwise unavailable or would be available only on significantly less attractive terms. We have a number of facilities in place to provide the collateral required for our reinsurance business. Credit Facilities On June 25, 2004, we closed a collateral finance facility with HSBC Bank USA, N.A. This facility provides $200.0 million that can be used to collateralize reinsurance obligations under intercompany reinsurance agreements. Simultaneously, we entered into a total return swap with HSBC Bank USA, N.A. under which we are entitled to the total return of the investment portfolio of the trust established in respect of this facility. As a result, the balances and activities of the trust have been consolidated in these financial statements. On December 29, 2004, Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited closed a $175.0 million, 364-day revolving credit facility with a syndicate of banks led by Bank of America, N.A. The facility provides capacity for borrowing and for extending letters of credit. The proceeds from the facility will be used for working capital, capital expenditures and general corporate purposes. The facility is a direct financial obligation of each of the borrowers; however, Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed the payment of obligations of Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re. The facility may be increased to an aggregate principal amount of $200.0 million. The interest rate on each loan made under the facility, as determined by the nature of the loan, will be at (i) the Federal Funds Rate plus 0.50%, (ii) the prime rate as announced by Bank of America, N.A., or (iii) the British Bankers Association LIBOR Rate plus an applicable margin. The facility requires that Scottish Annuity & Life Insurance Company (Cayman) Ltd. maintain a minimum amount of shareholders' equity, a debt to capitalization ratio of less than 20% and uncollateralized assets of 1.2 times borrowings. In addition, the facility requires that Scottish Re maintain a minimum amount of shareholders' equity, and a debt to capitalization ratio of less than 30%. The facility also requires that Scottish Re (U.S.), Inc. 61 maintain minimum capital and surplus equal to the greater of (i) $20 million or (ii) the amount necessary to prevent a company action level event from occurring under the risk based capital laws of Delaware. Our failure to comply with the requirements of the credit facility would, subject to grace periods, result in an event of default, and we could be required to repay any outstanding borrowings. At December 31, 2004 we were in compliance with the requirements of the facility. At December 31, 2004, there were no borrowings under the facilities. Outstanding letters of credit under these facilities amounted to $35.8 million as at December 31, 2004. We also have a reverse repurchase agreement with a major broker/dealer. Under this agreement, we have the ability to sell agency mortgage backed securities with the agreement to repurchase them at a fixed price, providing the dealer with a spread that equates to an effective borrowing cost linked to one-month LIBOR. This agreement is renewable monthly at the discretion of the broker/dealer. At December 31, 2004, there were no borrowings under this agreement. ING Collateral Arrangement ING is obligated to maintain collateral for the Regulation XXX and AXXX reserve requirements of the business we acquired from them for the duration of such requirements (which relate to state insurance law reserve requirements applying to reserves for level premium term life insurance policies and universal life policies). We will pay ING a fee based on the face amount of the collateral provided until satisfactory alternative collateral arrangements are made. In the normal course of business and our capital planning we are always looking for opportunities to relieve capital strain relating to XXX reserve requirements for our existing business as well as the business acquired from ING. We anticipate implementing capital markets related solutions relating to these requirements as cost efficient opportunities arise. Stingray Pass-Through Trust On January 12, 2005, Stingray Pass-Through Trust ("Pass-Through Trust") issued $325.0 million in aggregate principal amount of 5.902% collateral facility securities (the "Pass-Through Certificates") in a private transaction. On the same date, Pass-Through Trust used the proceeds of this issuance to purchase an aggregate principal amount of $325 million of 5.902% investor certificates (the "Investor Certificates") from Stingray Investor Trust ("Investor Trust"). Investor Trust used the proceeds of this issuance to purchase a portfolio of high-grade commercial paper notes. Under a Put Agreement between Investor Trust and Scottish Annuity & Life Insurance Company (Cayman) Ltd., the Investor Trust agrees to purchase at a pre-determined price Funding Agreements issued by Scottish Annuity & Life Insurance Company (Cayman) Ltd., up to any amount such that the aggregate face amount of Funding Agreements outstanding at any time does not exceed $325.0, in exchange for a portfolio of highly rated 30-day commercial paper. In consideration for the Investor Trust's agreement to purchase Funding Agreements, Scottish Annuity & Life Insurance Company (Cayman) Ltd. will pay the Investor Trust a Put Premium on a monthly payment date. Although Scottish Annuity & Life Insurance Company (Cayman) Ltd. participated in the transactions leading to the establishment of the Pass-Through Trust and the Investor Trust, the trusts are independent entities and are not owned, controlled or managed by Scottish Annuity & Life Insurance Company (Cayman) Ltd. The Pass-Through Certificates are direct financial obligations of the Pass-Through Trust, the Investor Certificates are direct financial obligations of the Investor Trust, and the Funding Agreements are a direct financial obligation of Scottish Annuity & Life Insurance Company (Cayman) Ltd. when and if issued. The Pass-Through Trust expects to pay income distributions on the Pass-Through Certificates monthly, commencing February 14, 2005, at a rate per annum equal to 5.902%. The Pass-Through Trust expects to repay the stated amount of the Pass-Through Certificates on January 12, 2015. The Pass-Through Certificates are not subject to redemption prior to the scheduled maturity date other than as a result of certain tax events. The Investor Trust expects to pay income distributions on the Investor Certificates monthly, commencing February 14, 2005, at a rate per annum equal to 5.902%. The Investor Certificates are not subject to redemption prior to the scheduled maturity date other than as a result of certain tax events. The Investor Trust expects to repay the stated amount of the Investor Certificates on January 12, 2015. Scottish Annuity & Life Insurance Company (Cayman) Ltd. expects to pay interest on the Funding Agreements monthly, commencing February 11, 2005 (which is one business day immediately preceding each distribution date on the Pass-Through Certificates and the Investor Trust Certificates), at a rate equal to the 30-Day CP Index Rate for the related accrual period plus 1.477%. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has the right to redeem the Funding Agreements on any payment date selected 62 by Scottish Annuity & Life Insurance Company (Cayman) Ltd. upon not less than 35 nor more than 65 days prior notice. The Funding Agreements are unsecured obligations of Scottish Annuity & Life Insurance Company (Cayman) Ltd. and will mature in 2015. Orkney Holdings, LLC On February 11, 2005, Orkney Holdings, LLC, a Delaware limited liability company, and a direct wholly-owned subsidiary of Scottish Re (U.S.), Inc., issued $850.0 million in aggregate principal amount of Series A Floating Rate Insured Notes due February 11, 2035 (the "Orkney Notes") in a private placement. The payment of scheduled interest payments under the Orkney Notes and the ultimate repayment of principal on February 11, 2035 are insured by MBIA Insurance Corporation, a New York stock insurance company, through a financial guaranty insurance policy (the "Orkney Notes Policy"). MBIA Insurance Corporation will not guarantee the payment of any redemption premium, the early repayment of principal on the Orkney Notes, taxes or shortfalls for withholding taxes. The Orkney Notes are direct financial obligations of Orkney Holdings, LLC, and no affiliate of Orkney Holdings, LLC, including without limitation neither us nor Scottish Re (U.S.), Inc., is an obligor or guarantor on the Orkney Notes. Orkney Holdings, LLC will rely upon the receipt of dividend payments from its wholly-owned subsidiary, Orkney Re, Inc., a special purpose financial captive insurance company incorporated under the laws of the State of South Carolina, to make payments of interest and principal on the Orkney Notes. The ability of Orkney Re, Inc. to make dividend payments to Orkney Holdings, LLC is contingent upon meeting certain regulatory requirements and upon the performance of the block of business retroceded by Scottish Re (U.S.), Inc. to Orkney Re, Inc. This block of business consists of specified term life insurance policies with guaranteed level premiums issued by third party ceding insurers and reinsured with Scottish Re (U.S.), Inc. The annual interest rate on the Orkney Notes will equal the 3-month London Interbank Offered Rate, plus a spread. Such interest will be payable quarterly in arrears on each February 11, May 11, August 11, and November 11 (each an "Orkney Scheduled Payment Date"), for each period beginning on (and including) February 11, 2005, and each succeeding Orkney Scheduled Payment Date, and ending on (but excluding) the next succeeding Orkney Scheduled Payment Date. Under the terms of the Orkney Notes Policy, MBIA Insurance Corporation may direct JPMorgan Chase Bank, N.A., as trustee, under an indenture (the "Orkney Indenture") among Orkney Holdings, LLC, Scottish Re (U.S.), Inc., JPMorgan Chase Bank, N.A., as trustee, and MBIA Insurance Corporation, to foreclose on certain accounts of Orkney Re, Inc. (the "Orkney Collateral") securing the Orkney Notes Policy if any of the following events of default occurs: o payment by MBIA Insurance Corporation under the Orkney Notes Policy, or advancement of funds for payment to the holders of the Orkney Notes; o nonpayment of interest when due and payable in accordance with the terms of the Orkney Notes; o nonpayment of all, or part, of the principal of the Orkney Notes; o the security interest in the Orkney Collateral ceases to be a perfected security interest, other than as any act or omission on the part of MBIA Insurance Corporation; o failure to make payments to MBIA Insurance Corporation under ancillary agreements; o Scottish Re (U.S.), Inc. fails to make a required payment under certain tax agreements, and such failure remains unremedied for a period of 30 days after receiving notice; 63 o breach or misrepresentation of any representation or warranty under the Indenture by either Orkney Holdings, LLC or Orkney Re, Inc., if unremedied for a period of 30 days after receiving notice; or o bankruptcy, insolvency, reorganization, liquidation conservation, rehabilitation or other similar proceeding of Orkney Holdings, LLC or Orkney Re, Inc. If an event of default occurs and is continuing, the entire principal thereof and interest accrued thereon may be declared to be due and payable immediately. The Orkney Notes are not redeemable prior to February 11, 2010, unless Scottish Re (U.S.), Inc. has recaptured all or part of the business reinsured to Orkney Re, Inc. Such redemption would be on an Orkney Scheduled Payment Date, in cash, at 105% of the principal amount to be redeemed. Orkney Holdings, LLC may redeem all or part of the Orkney Notes on any Orkney Scheduled Payment Date between February 11, 2010 and February 11, 2017 at a redemption price equal to 103%, 102% or 101% of the principal amount, as determined by the specified Orkney Scheduled Payment Date, payable in cash. The Orkney Notes are redeemable at a redemption price equal to 100% of the principal amount, payable in cash, after February 11, 2017. Pursuant to an insurance and indemnity agreement with MBIA Insurance Corporation, Orkney Holdings, LLC is obligated to pay a periodic premium to MBIA Insurance Corporation in respect of the Orkney Notes Policy. Regulatory Capital Requirements Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re (U.S.), Inc. that it will (1) cause Scottish Re, (U.S.), Inc. to maintain capital and surplus equal to the greater of $20.0 million or such amount necessary to prevent the occurrence of a Company Action Level Event under the risk-based capital laws of the state of Delaware and (2) provide Scottish Re (U.S.), Inc. with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re Life Corporation that it will (1) cause Scottish Re Life Corporation to maintain capital and surplus equal to at least 175% of Company Action Level RBC, as defined under the laws of the state of Delaware and (2) provide Scottish Re Life Corp. with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re have agreed with Scottish Re Limited that in the event Scottish Re Limited is unable to meet its obligations under its insurance or reinsurance agreements, Scottish Annuity & Life Insurance Company (Cayman) Ltd. (or if Scottish Annuity & Life Insurance Company (Cayman) Ltd. cannot fulfill such obligations, then Scottish Re) will assume all of Scottish Re Limited's obligations under such agreements. Scottish Re and Scottish Annuity & Life Insurance Company (Cayman) Ltd. have executed similar agreements for Scottish Re (Dublin) Limited and Scottish Re Life (Bermuda) Limited and may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries. Our business is capital and collateral intensive. We expect that our cash and investments, together with cash generated from our businesses, will be sufficient to meet our current liquidity and letter of credit needs. However, if our business continues to grow significantly, we will need to raise additional capital. 64 Contractual Obligations and Commitments The following table shows our contractual obligations and commitments as of December 31, 2004 including our payments due by period:
Less Than More Than 1 Year 1-3 Years 4-5 Years 5 Years Total ------------- ------------- ----------- ----------- ---------- (dollars in thousands) Long-term debt.................... $ - $ 162,500 $ 82,000 $ - $ 244,500 Mezzanine equity................. - 143,750 - - 143,750 Operating leases.................. 2,656 5,349 5,430 20,159 33,594 ING transition services agreements 4,392 2,196 - - 6,588 Funding agreements................ - 300,000 300,000 - 600,000 Collateral financing facility liability......................... - - 200,000 - 200,000 Interest sensitive contract liabilities....................... 222,012 451,073 440,743 1,466,815 2,580,643 Reserves for future policy benefit........................... 123,609 321,149 385,352 2,409,872 3,239,982 ----------- ------------ ----------- ----------- ----------- $ 352,669 $ 1,386,017 $ 1,413,525 $ 3,896,846 $ 7,049,057 =========== ============ =========== =========== ===========
Our long-term debt is described in Note 18 to the Consolidated Financial Statements. Long term debt includes $115.0 million 4.5% senior convertible notes which are due December 1, 2022. The notes are subject to repurchase by us at a holder's option at various dates, the earliest of which is December 6, 2006. Long term debt also includes capital securities with various maturities from 2032 onwards. They are however, redeemable at earlier dates. They have been included in the above table at the earliest redemption date. We have not included in the table above 7.00% Convertible Junior Subordinated Notes payable to the Cypress Entities as described in Note 17 to the Consolidated Financial Statements as they are expected to convert into shares on shareholder approval in 2005. Our mezzanine equity is described in Note 19 to the Consolidated Financial Statements and consists of 5,750,000 HyCU. On February 15, 2007, we shall receive proceeds from the sale of our ordinary shares of $143.8 million as required by the purchase contract forming part of each HyCU. The proceeds from this offering will be used by us to repay the convertible preferred shares of $143.8 million on May 21, 2007. We lease office space in the countries in which we operate. These leases expire at various dates through 2023. Amounts due under funding agreements are reported in interest sensitive contract liabilities. These are agreements in which we earn a spread over LIBOR. The contractual repayment terms are detailed in the table above. Amounts due under interest sensitive contract liabilities, (excluding funding agreements) and reserves for future policy benefits are estimated using the discounted projected net cash flow arising from premiums, fees, death benefits, surrender benefits, contractual expenses and commissions. On December 31, 2004, we completed the acquisition of the individual in-force life reinsurance business of ING. ING has agreed to provide certain transition services to support the acquired business for up to 18 months from the date of acquisition at a cost of $6.6 million. Off balance sheet arrangements We have no obligations, assets or liabilities other than those disclosed in the financial statements forming part of this Form 10-K; no trading activities involving non-exchange traded contracts accounted for at fair value; and no relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties. 65 Changes in Accounting Standards In July 2003, the Accounting Standards Executive Committee issued Statement of Position 03-01 ("SOP"), "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Insurance Contracts and for Separate Accounts". This SOP provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts and is effective for financial statements for fiscal years beginning after December 15, 2003. In implementing the SOP we have made various determinations, such as qualification for separate account treatment, classification of securities in separate account arrangements, significance of mortality and morbidity risk, adjustments to contract holder liabilities, and adjustments to estimated gross profits as defined in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". Implementation of this SOP has not had a material effect on our financial statements. Effective December 31, 2003, we adopted the disclosure requirements EITF 03-1. This EITF provides guidance on disclosures for other than temporary impairments of debt and marketable equity investments that have been accounted for under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities". During the quarter ended September 30, 2004, the effective date of the application of EITF 03-01 for debt securities that are impaired because of interest rate and/or sector spread increases was delayed pending issuance of further guidance. In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46 provides a framework for identifying variable interest entities and determining when a company should include its assets, liabilities, non-controlling interests and results of activities in the consolidated financial statements. A variable interest entity is a legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. FIN 46 requires a variable interest entity to be consolidated if a party with an ownership, contractual or other financial interest in the variable interest entity is obligated to absorb a majority of the risk of loss from the variable interest entity's activities, is entitled to receive a majority of the variable interest entity's residual returns, or both. A variable interest holder that consolidates the variable interest entity is called the primary beneficiary. We are the primary beneficiary of the collateral finance facility discussed in note 16 and thus have consolidated the variable interest entity in accordance with FIN 46. During the quarter ended September 30, 2004, EITF 04-8 "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share" was issued. EITF 04-8 requires that certain instruments with embedded conversion features that are contingent upon market price triggers be included in diluted earnings per share calculations regardless of whether the contingency has been met. Our 4.5% senior convertible notes are convertible on the basis of a market price trigger. On October 26, 2004 we amended the terms of these notes so that we are required to settle the principal amount of $115.0 million in cash on conversion or repurchase. As a result we shall continue to apply the treasury stock method in calculating diluted earnings per share for amounts in excess of the principal of $115.0 million. In December 2004, the FASB issued a revision to Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123R). This statement requires us to recognize in the determination of income , the grant date fair value of all stock options and other-equity based compensation issued to employees. It is effective for the interim period commencing after June 15, 2005. As described in note 2 to our financial statements, we have currently adopted SFAS 148 in relation to our stock options and are therefore expensing our equity based compensation issued after January 1, 2002. The adoption of SFAS 123R is expected to reduce net income in 2005 by less than $400,000. Forward-Looking Statements Some of the statements contained in this report are not historical facts and are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include information 66 with respect to our known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will," "continue," "project" and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include: o uncertainties relating to the ratings accorded to our insurance subsidiaries; o the risk that our risk analysis and underwriting may be inadequate; o exposure to mortality experience which differs from our assumptions; o risks arising from our investment strategy, including risks related to the market value of our investments, fluctuations in interest rates and our need for liquidity; o uncertainties arising from control of our invested assets by third parties; o developments in global financial markets that could affect our investment portfolio and fee income; o changes in the rate of policyholder withdrawals or recapture of reinsurance treaties; o the risk that our retrocessionaires may not honor their obligations to us; o terrorist attacks on the United States and the impact of such attacks on the economy in general and on our business in particular; o political and economic risks in developing countries; o the impact of acquisitions, including the ability to successfully integrate acquired businesses, the competing demands for our capital and the risk of undisclosed liabilities; o the risk that we do not receive shareholder approval for new shares to be issued to The Cypress Group; o loss of the services of any of our key employees; o losses due to foreign currency exchange rate fluctuations; o uncertainties relating to government and regulatory policies (such as subjecting us to insurance regulation or taxation in additional jurisdictions); o the competitive environment in which we operate and associated pricing pressures; and o changes in accounting principles. The effects of these factors are difficult to predict. New factors emerge from time to time and we cannot assess the potential impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date of this report and we do not undertake any obligation, other than as may 67 be required under the Federal securities laws, to update any forward-looking statement to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We measure and manage market risks and other risks as part of an enterprise-wide risk management process. The market risks described in this section relate to financial instruments, primarily in our investment portfolio, that are sensitive to changes in interest rates, credit risk premiums or spreads, foreign exchange rates and equity prices. Our investments, which are primarily fixed income securities, are subject to market value, reinvestment, and liquidity risk. Our invested assets are funded not only by capital but also by the proceeds of reinsurance transactions, some of which entail substantial deposits of funds or assets. The cash flows required to pay future benefits are subject to actuarial uncertainties and, in some cases, the policies that we reinsure contain provisions that tend to increase benefits to customers depending on movements in interest rates. We analyze the potential results of a transaction, including the cash flows of the liabilities and of the related assets, and any risk mitigation measures, and we price transactions to cover our costs, including estimated credit losses, and earn a desirable risk-adjusted return under various scenarios. We use interest rate swaps as tools to mitigate these risks. We may also retrocede some risks to other reinsurers. Interest Rate Risk Interest rate risk consists of two components: (1) in a falling rate scenario, we have reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less than is necessary to match anticipated liabilities; and (2) in a rising rate scenario, we have the risk that cash outflows will have to be funded by selling assets, which will then be trading at depreciated values. With some annuity liabilities, these risks are compounded by variability in liability cash flows arising from adverse experience in withdrawals, surrenders, mortality, and election of early retirement. We mitigate both components of risk through asset-liability management, including the technique of simulating future results under a variety of interest rate scenarios and modifying the investment and hedging strategy to mitigate downside risk to earnings. Our investment portfolio is composed of fixed-maturity bond investments, of which the majority are at fixed interest rates. For fixed-rate investments backing reinsurance liabilities, the maturity structure has been designed to have approximately the same exposure to changes in interest rates as the related liabilities. Floating-rate liabilities, including borrowings, are backed primarily by floating-rate assets. In the capital account, however, we own investments that are also sensitive to interest rate changes and this sensitivity is not offset by liabilities. Our overall objective is to limit interest rate exposure. Credit Risk Credit risk relates to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest. We measure and manage credit risk not only of bond issuers but also of counter-parties in reinsurance, retrocession and hedging transactions. In our investment portfolio, credit risk is manifested in three ways: o actual and anticipated deterioration in the creditworthiness of an issue, as may be reflected in downgrades in its ratings, tend to reduce its market value; o our managers might react to the actual or expected deterioration and/or downgrade of an issuer by selling some or all of our positions, realizing a loss (or a profit smaller than would have been realized if the deterioration or downgrade had not occurred); and o the issuer may go into default, ultimately causing us to realize a loss. 68 One of our key objectives in managing credit risk is to keep actual credit losses below both the amounts that we have assumed and allowed for in pricing reinsurance transactions and the amounts we would have lost, given the general level of experience for comparably rated securities of the same type in the general market. We seek to prevent credit risk, in the aggregate, from becoming the dominant source of risk in our overall book of retained risks as a reinsurer. We mitigate credit risk by adopting an investment policy, approved by our board of directors, which limits overall exposure to credit risk and requires diversification by limiting exposure to any single issuer. We also use outside professional money management firms and monitor their capabilities, performance and compliance with our investment and risk management policies. Foreign Currency Risk Our functional currency is the United States dollar. However, our U.K. subsidiaries, Scottish Re Holdings Limited and Scottish Re Limited, maintain operating expense accounts in British pounds, parts of their investment portfolios in Euros and British pounds, and receive other currencies in payment of premiums. All of Scottish Re Limited's original U.S. business is settled in United States dollars, all Canadian, Latin American and certain Asia and Middle East business is converted and settled in United States dollars, and all other currencies are converted and settled in Euros or British pounds. The results of the business recorded in Euros and in British pounds are then translated to United States dollars. Scottish Re attempts to limit substantial exposures to foreign currency risk, but does not actively manage currency risks. To the extent our foreign currency exposure is not properly managed or otherwise hedged, we may experience exchange losses, which in turn would adversely affect our results of operations and financial condition. We may enter into investment, insurance and reinsurance transactions in the future in currencies other than United States dollars. Our objective is to avoid substantial exposures to foreign currency risk. We will manage these risks using policy limits, asset-liability management techniques and hedging transactions. Sensitivity Analysis--Change In Interest Rates We regularly conduct analyses to gauge the financial impact of changes in interest rates on our financial condition. Techniques include, but are not limited to, comparison of option-adjusted duration of assets and liabilities and simulation of future asset and liability cash flows under multiple interest rate scenarios. Financial simulations are also used to evaluate exposure to credit spreads and will be used as we consider investments and liabilities denominated in foreign currencies. On a monthly basis, we measure the gap between the effective duration of the investments and the target duration. For assets supporting liabilities, we set the target duration to minimize interest rate risk for each liability transaction. Our investment policy limits the duration gap to 0.75 years. For floating-rate borrowings and liabilities, we target floating-rate assets, which have a duration near zero. For capital account assets, we target a duration of 3.0 years. Quantitative Disclosure Of Interest Rate Risk The following tables provide information as of December 31, 2004 about the interest rate sensitivity of the portion of our investment portfolio managed by external managers. The tables do not include other cash balances of $752.5 million, or modified coinsurance assets of $2.1 billion. The tables show the aggregate amount, by book value and fair value, of the securities that are expected to mature in each of the next five years and thereafter, as well as the weighted average book yield of those securities. The expected maturity is the weighted average life of a security and takes into consideration par amortization (for mortgage-backed securities), call features and sinking fund features. In addition to the maturity structure of our controlled asset portfolio illustrated below, Scottish Re has entered into an interest rate swap agreement with a notional amount of $100.0 million and a maturity of July 2009. This swap is used to manage a portion of the interest rate exposure on the balance sheet and has the effect of shortening the duration on our overall controlled portfolio by 0.12 years or approximately equivalent to reducing our five-year maturity exposure by $100.0 million. 69 December 31, 2004 market interest rates were used as discounting rates in the estimation of fair value.
Expected Maturity Date ------------------------------------------------------------------------------------- Total Fair Total 2005 2006 2007 2008 2009 Thereafter Total Value ----- ---- ---- ---- ---- ---- ---------- ----- ----- (dollars in thousands) Principal amount. $920,672 $290,183 $320,435 $426,975 $380,186 $1,612,457 $3,950,907 $3,517,667 Book value....... 296,174 297,365 330,843 437,068 394,803 1,731,305 3,487,558 Weighted average book yield....... 4.2% 3.8% 4.2% 4.3% 4.3% 5.3% 4.7%
Expected Maturity Date ------------------------------------------------------------------------------------- Total Fair Fixed Rate Only 2005 2006 2007 2008 2009 Thereafter Total Value - --------------- ---- ---- ---- ---- ---- ---------- ----- ----- (dollars in thousands) Principal amount....... $784,311 $126,217 $187,473 $261,425 $220,388 $1,364,617 $2,944,431 $2,551,011 Book value............. 179,125 133,327 197,321 272,741 234,942 1,505,534 2,522,990 Weighted average book yield.................. 4.7% 4.4% 4.9% 4.9% 4.9% 5.5% 5.2%
Expected Maturity Date ------------------------------------------------------------------------------------- Total Fair Floating Rate Only 2005 2006 2007 2008 2009 Thereafter Total Value - ------------------ ---- ---- ---- ---- ---- ---------- ----- ----- (dollars in thousands) Principal amount....... $136,361 $163,966 $132,961 $165,550 $159,798 $247,840 $1,006,476 $966,656 Book value............. 117,049 164,038 133,522 $164,327 159,861 225,771 964,568 Weighted average book yield.................. 3.4% 3.3% 3.1% 3.4% 3.4% 3.8% 3.4%
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is set forth in "Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K." Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants on accounting and financial disclosure for the fiscal year ended December 31, 2004. Item 9A: CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this Annual Report. Management's Report on Internal Control over Financial Reporting 70 Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting (as defined in the Rule 13a-15(f) of the Securities and Exchange Act of 1934, as amended). Under the supervision and with the participation of management, including our principal executive and financial officers, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004. In designing and evaluating the internal control over financial reporting, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on their evaluation, management has concluded that a material weakness exists regarding internal control over financial reporting in our U.K. subsidiary as of December 31, 2004. The material weakness identified relates to the monthly financial statement closing process. A significant control over the financial reporting involves the analysis of results of operations and the reconciliation of premium receivable balances. Such controls were not performed on a timely basis and in sufficient level of detail and resulted in adjustments to various accounts including receivables, premiums, reserves and related accounts. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. In making its assessment of internal control over financial reporting, management used criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of the material weakness described above, management believes that, as of December 31, 2004, we did not maintain effective internal control over financial reporting based on those criteria. On December 31, 2004, we completed the acquisition of the ING individual life reinsurance business. Management's assessment did not include internal control over financial reporting for this business. There was no impact on the statement of income as the business was acquired on December 31, 2004. Total assets include $1.9 billion in respect of this business. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this report, have issued an attestation report on management's assessment of internal control over financial reporting. Remediation Steps to Address the Material Weakness The material weakness identified relates to the monthly financial statement closing process in our U.K. subsidiary. Consequently, substantial additional procedures were undertaken and changes in internal control over financial reporting effected in order that management could conclude that reasonable assurance exists regarding the reliability of financial reporting and the preparation of the financial statements contained in this filing. When we acquired Scottish Re Limited (formerly World-Wide Reassurance Company Limited) on December 31, 2001, the financial reporting and administration of that business was largely performed manually. Since the acquisition, we have enhanced staffing resources, implemented modern administrative and general ledger systems and converted the manual records to these systems. These systems have resulted in improved data and we have implemented internal controls over financial reporting in respect of these systems. Nevertheless, in management's opinion, inadequacies remain regarding the timing and detail of the analysis of results of operations and the reconciliation of premium receivable balances that existed at the time of the systems implementation. We have recently implemented a number of additional controls that have not yet been in place long enough to evaluate their effectiveness. In addition, we continue to take a number of other steps to improve the internal control over financial reporting in our U.K. subsidiary, including: a) Implementing control improvements that have been recommended by our Internal Audit Department, as well as remediating control deficiencies identified by our Internal Audit Department and our external auditors; 71 b) Hiring a new Chief Financial Officer and Chief Actuary for the U.K. subsidiary as of February 1, 2005; c) Hiring a new Head of Administration for the U.K. subsidiary as of January 1, 2005; d) Completing the reconciliation of all premium receivable balances in 2005; and e) With the assistance of a major international accounting and auditing firm, continuing to review the U.K. subsidiary's finance function and implementing recommended process and control improvements by September 30, 2005. Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Scottish Re Group Limited We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting that Scottish Re Group Limited did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of the material weakness associated with the United Kingdom operations, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Scottish Re Group Limited's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management's assessment has concluded that a material weakness exists regarding internal controls over 72 financial reporting in the company's United Kingdom operation. The material weakness identified relates to the monthly financial statement closing process in the company's United Kingdom operations. A significant control over the financial reporting involves the analysis of results of operations and the reconciliation of premium receivable balances. Such controls were not performed on a timely basis and in sufficient level of detail and resulted in adjustments to various accounts including receivables, premiums, reserves and related accounts. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 financial statements, and this report does not affect our report dated March 11, 2005 on those financial statements. As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the ING individual life reinsurance business acquired by the company on December 31, 2004. Included in the December 31, 2004 consolidated financial statements of Scottish Re Group Limited are approximately $1.9 billion of both total assets and liabilities associated with this business. Our audit of internal control over financial reporting of Scottish Re Group Limited also did not include an evaluation of the internal control over financial reporting of the ING individual life reinsurance business. In our opinion, management's assessment that Scottish Re Group Limited did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Scottish Re Group Limited has not maintained effective internal control over financial reporting as of December 31, 2004, based on the COSO control criteria. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 11, 2005 Changes in internal controls. As a result of issues identified in our Forms 10-Q/A for the quarters ended June 30, 2004 and September 30, 2004 we have taken a series of steps in our ongoing process to improve control processes, including those involving the compilation of information used in reporting premium accruals in our International Segment, and to avoid similar errors going forward. We have also taken steps to improve controls around segregation of responsibilities and review of manually prepared information and have strengthened procedures for the reconciliation of all material general ledger balances. We are continuing the process of designing and implementing, new systems and procedures involving our general ledger and reporting capabilities, which are expected to enhance internal control processes. We have also implemented controls in order to comply with Section 404 of the Sarbanes-Oxley Act of 2002. NYSE CEO Certification We filed our 2004 annual CEO certification with the New York Stock Exchange on March 3, 2004. We anticipate filing our 2005 annual CEO certification with the NYSE on or about March 18, 2005. Additionally, we filed with the SEC as exhibits to our Form 10-K for the year ended December 31, 2004 the CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act of 2002. Item 9B: OTHER INFORMATION None PART III Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this Item 10 will be set forth in our Proxy Statement for 2005 Annual Meeting of Shareholders (the "2005 Proxy Statement") under the captions "Proposal for Election of Directors," "Principal 73 Shareholders and Management Ownership" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. Item 11: EXECUTIVE COMPENSATION The information required by this Item 11 will be set forth in the 2005 Proxy Statement under the captions "Management Compensation" and "Report on Executive Compensation" and is incorporated herein by reference. Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 will be set forth in the 2005 Proxy Statement under the caption "Principal Shareholders and Management Ownership" and is incorporated herein by reference. Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 will be set forth in the 2005 Proxy Statement under the caption "Certain Transactions" and is incorporated herein by reference. Item 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 will be set forth in the 2005 Proxy Statement under the caption "Fees Billed to the Company by Ernst & Young LLP" and is incorporated herein by reference. PART IV Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K EXHIBITS EXCEPT AS OTHERWISE INDICATED, THE FOLLOWING EXHIBITS ARE FILED HEREWITH MADE A PART HEREOF: 3.1 Memorandum of Association of Scottish Re Group Limited, as amended as of December 14, 2001 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K/A). (6) 3.2 Articles of Association of Scottish Re Group Limited, as amended as of May 2, 2002 (incorporated herein by reference to Scottish Re Group Limited 's Current Report on Form 8-K filed with the SEC on April 14, 2003). 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.3 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.4 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.4 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.5 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Non-Shareholder Investors (incorporated herein by reference to Exhibit to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.6 Certificate of Designations of Convertible Preferred Shares of Scottish Re Group Limited (Incorporated herein by reference to Scottish Re Group Limited's Current Report on form 8-K). (10) 10.1 Employment Agreement dated June 18, 1998 between Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Exhibit 10.1 to Scottish Re Group Limited 's Registration Statement on Form S-1). (1)(16) 74 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to Scottish Re Group Limited's Registration Statement on Form S-1). (1)(16) 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to Scottish Re Group Limited's Registration Statement on Form S-1). (1)(16) 10.4 Investment Management Agreement dated October 22, 1998 between Scottish Re Group Limited and General Re-New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 10.5 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 10.6 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K). (2)(16) 10.7 Form of Stock Options Agreement in connection with 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.15 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K). (2)(16) 10.8 Employment Agreement dated September 18, 2000 between Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to Exhibit 10.16 to Scottish Re Group Limited's 2000 Annual Report on Form 10-K). (3)(16) 10.9 Share Purchase Agreement by and between Scottish Re Group Limited and Pacific Life dated August 6, 2001 (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (7) 10.10 Amendment No. 1, dated November 8, 2001, to Share Purchase Agreement dated August 6, 2001 by and between Scottish Re Group Limited and Pacific Life (incorporated by reference to the Company's Current Report on Form 8-K). (5) 10.11 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(16) 10.12 Form of Nonqualified Stock Option Agreement in connection with 2001 Stock Option Plan. (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(16) 10.13 Tax Deed of Covenant dated December 31, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (5) 10.14 Letter Agreement dated December 28, 2001 between Scottish Re Group Limited and Pacific Life (incorporated by reference to Scottish Re Group Limited's Current Report on Form 8-K). (5) 10.15 Form of Indemnification Agreement between Scottish Re Group Limited and each of its directors and officers (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(16) 10.16 Employment Agreement dated July 1, 2002 between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Thomas A. McAvity, Jr. (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(16) 10.17 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Paul Goldean (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004). (14)(16) 10.18 Employment Agreement dated July 1, 2002 between Scottish Re Group Limited and Elizabeth Murphy (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(16) 10.19 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Clifford J. Wagner (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(16) 10.20 Employment Agreement dated July 8, 2002 between Scottish Re Group Limited and Scott E. Willkomm (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(16) 10.21 Employment Agreement dated February 10, 2003 between Scottish Re Group Limited and Michael C. French (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(16) 10.22 Employment Agreement dated February 10, 2003 between Scottish Re (U.S), Inc. and Oscar R. Scofield (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(16) 75 10.23 Amended employment Agreement dated February 10, 2003 between Scottish Re Group Limited and Thomas A. McAvity (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(16) 10.24 Indenture, dated November 22, 2002, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.25 Registration Rights Agreement, dated November 22, 2002, between Scottish Re Group Limited and Bear Stearns & Co. and Putnam Lovell Securities Inc. (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.26 Employment Agreement dated May 1, 2003 between Scottish Re Holdings Limited and David Huntley (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended September 30, 2003). (13)(16) 10.27 Stock Purchase Agreement, dated as of October 24, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on form 8-K). (11) 10.28 Tax Matters Agreement, dated as of January 22, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on form 8-K). (11) 10.29 Transition Services Agreement, dated as of January 22, 2003, by and among Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on form 8-K). (11) 10.30 Employment Agreement dated April 21, 2004, by and among Scottish Holdings, Inc. and Seth W. Vance (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004). (14)(16) 10.31 Amendment to Employment Agreement dated March 29, 2004, by and between Scottish Re (U.S.), Inc. and Oscar R. Scofield (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed with the SEC on August 9, 2004). (16) 10.32 Asset Purchase Agreement, dated as of October 17, 2004, by and among Security Life of Denver Insurance Company, Security Life of Denver International Limited, ING America Insurance Holdings, Inc. (for purposes of Section 11.11), Scottish Re Group Limited, Scottish Re (U.S.), Inc., Scottish Annuity & Life Insurance Company (Cayman) Ltd. (for purposes of Section 5.26) and Scottish Re Life Corporation (for purposes of Section 5.24) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.33 Securities Purchase Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form of Subordinated Note, Class C Warrant, Shareholders' Agreement and Amendments to Articles of Association) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.34 Form of Voting Agreement, by and among Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P., Scottish Re Group Limited and, respectively, each director and each officer of Scottish Re Group Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.35 Voting Agreement, dated as of October 15, 2004, by and among Scottish Re Group Limited, Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. and Pacific Life Insurance Company (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.36 Letter Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.37 First Supplemental Indenture, dated as of October 26, 2004, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Current Report on form 8-K, filed with the SEC on October 29, 2004). 10.38 Amendment to Employment Agreement dated as of March 29, 2004, by and among the Company and Michael C. French (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the nine month period ended September 30, 2004, filed with the SEC on November 8, 2004). (16) 76 10.39 Employment Agreement, dated as of March 29, 2004, by and among the Company and Deborah G. Percy (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the nine month period ended September 30, 2004, filed with the SEC on November 8, 2004). (16) 10.40 Employment Agreement, dated as of January 1, 2005, between Scottish Holdings, Inc. and Gary Dombowsky. (16) 10.41 Amendment to Employment Agreement, dated as of February 7, 2005, between Scottish Re Group Limited and Michael C. French. (16) 10.42 Employment Agreement, dated as of February 1, 2005, between Scottish Re Group Limited and Hugh T. McCormick. (16) 10.43 Employment Agreement, dated as of December 1, 2004, between Scottish Holdings, Inc. and Kenneth R. Stott. (16) 10.44 Credit Agreement, dated as of December 29, 2004, among Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited as borrowers, Bear Stearns Corporate Lending, Inc. and Wachovia Bank, National Association as Co-Syndication Agents, Bank of America, N.A., as Administrative Agent and L/C Issuer, and The Other Lenders Party Hereto, Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager. 10.45 Administrative Services Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company and Security Life of Denver International Limited and Scottish Re (U.S.), Inc. 10.46 Coinsurance Agreement dated December 31, 2004 between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. 10.47 Coinsurance/ Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. 10.48 Retrocession Agreement, dated December 31, 2004, between Scottish Re (U.S.), Inc. and Security Life of Denver Insurance Company. 10.49 Retrocession Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited Bermuda and Security Life of Denver Insurance Company. 10.50 Reserve Trust Agreement, dated as of December 31, 2004, between Scottish Re (U.S.) Inc., as Grantor, and Security Life of Denver Insurance Company, as Beneficiary, and The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary. 10.51 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re (U.S.), Inc., as Grantor, Security Life of Denver Insurance Company, as Beneficiary, The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary. 10.52 Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited. 10.53 Coinsurance/ Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited. 10.54 Coinsurance Funds Withheld Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited. 10.55 Reserve Trust Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited, as Grantor, and Security Life of Denver International Limited, as Beneficiary, and The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary. 10.56 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re Life (Bermuda) Limited, as Grantor, Security Life of Denver International Limited, as Beneficiary, The Bank of New York, as Trustee, and the Bank of New York, as Securities Intermediary. 10.57 Technology Transfer and License Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company, ING North America Insurance Corporation and Scottish Re (U.S.), Inc. 10.58 Transition and Integration Services Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. 21.1 List of Subsidiaries 23.1 Consent of Ernst & Young LLP 24.1 Power of Attorney 77 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ____________________ (1) Scottish Re Group Limited's Registration Statement on Form S-1 was filed with the SEC on June 19, 1998, as amended. (2) Scottish Re Group Limited's 1999 Annual Report on Form 10-K was filed with the SEC on April 3, 2000. (3) Scottish Re Group Limited's 2000 Annual Report on Form 10-K was filed with the SEC on March 30, 2001. (4) Scottish Re Group Limited's 2001 Annual Report on Form 10-K was filed with the SEC on March 5, 2002. (5) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 31, 2001. (6) Scottish Re Group Limited's Current Report on Form 8-K/A was filed with the SEC on January 11, 2002. (7) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 9, 2001. (8) Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A was filed with the SEC on August 8, 2002. (9) Scottish Re Group Limited's Registration Statement on Form S-3 was filed with the SEC on January 31, 2003, as amended. (10) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 17, 2003. (11) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on January 6, 2004. (12) Scottish Re Group Limited's 2002 Annual Report on Form 10-K was filed with the SEC on March 31, 2003. (13) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on August 12, 2003. (14) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on May 10, 2004. (15) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on October 21, 2004. (16) This exhibit is a management contract or compensatory plan or arrangement. 78 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Report of Independent Registered Public Accounting Firm..................... 80 Consolidated Balance Sheets................................................. 81 Consolidated Statements of Income........................................... 82 Consolidated Statements of Comprehensive Income............................. 83 Consolidated Statements of Shareholders' Equity............................. 84 Consolidated Statements of Cash Flows....................................... 85 Notes to Consolidated Financial Statements.................................. 86 All other schedules are omitted because they are either not applicable or the required information is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements or Notes thereto appearing elsewhere in this Form 10-K. REPORTS ON FORM 8-K The following reports on Form 8-K were filed with the SEC during the three months ended December 31, 2004: Scottish Re Group Limited filed a report on Form 8-K on October 18, 2004 to report under Items 7.01 (Regulation FD Disclosure) and 9.01 (Financial Statements and Exhibits) that it had signed an asset purchase agreement to acquire the individual in-force life reinsurance business of ING. Scottish Re Group Limited filed a report on Form 8-K on October 21, 2004 to report under Items 1.01 (Entry into a Material Definitive Agreement), 3.02 (Unregistered Sales of Equity Securities) and 9.01 (Financial Statements and Exhibits) that (i) it had signed an asset purchase agreement to acquire the individual in-force life reinsurance business of ING and (ii) it had signed a securities purchase agreement with certain affiliates of The Cypress Group, L.L.C. Scottish Re Group Limited filed a report on Form 8-K on October 29, 2004 to report under Items 1.01 (Entry into a Material Definitive Agreement) and 9.01 (Financial Statements and Exhibits) that it had entered into a first supplemental indenture with respect to the indenture, dated as of November 22, 2002, pursuant to which Scottish Re Group Limited's 4.50% senior convertible notes due 2022 were issued and sold. Scottish Re Group Limited filed a report on Form 8-K on November 9, 2004, to report under Item 5.02 (Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers) the appointment of Jean-Claude Damerval to the Board of Directors. Scottish Re Group Limited filed a report on Form 8-K on November 9, 2004 to report under Items 2.02 (Results of Operations and Financial Condition) and 9.01 (Financial Statements and Exhibits) Scottish Re Group Limited's financial results for the nine months ended September 30, 2004. Scottish Re Group Limited filed a report on Form 8-K on December 8, 2004 to report under Items 5.02 (Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers) and 9.01 (Financial Statements and Exhibits) the appointment of Scott Willkomm as Scottish Re Group Limited's Chief Exectuive Officer. Scottish Re Group Limited filed a report on Form 8-K on December 20, 2004 to report under Item 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant) that a wholly-owned subsidiary had issued $50,000,000 in aggregate principal amount of floating rate trust preferred capital securities with a stated term of thirty years. Scottish Re Group Limited filed a report on Form 8-K on December 29, 2004 to report under Item 2.03 (Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant) that certain of its subsidiaries had entered into a credit facility with a syndicate of banks. 79 Scottish Re Group Limited filed a report on Form 8-K on December 30, 2004 to report under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review) that it had determined that its International Segment had incorrectly reported premiums earned, claims and other policy benefits, acquisition costs and other insurance expenses and related income tax benefits in the quarters ended June 30, 2004 and September 30, 2004. Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Scottish Re Group Limited We have audited the accompanying consolidated balance sheets of Scottish Re Group Limited and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scottish Re Group Limited and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the financial statements, in 2003 the Company changed its accounting related to its funds withheld at interest and stock options. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 11, 2005 80 SCOTTISH RE GROUP LIMITED CONSOLIDATED BALANCE SHEETS (Expressed in Thousands of United States Dollars)
December 31, December 31, ASSETS 2004 2003 ------------- ------------ Fixed maturity investments, available for sale, at fair value (Amortized cost $3,362,929; 2003 - $1,993,247)............... $ 3,392,463 $ 2,014,719 Preferred stock (Cost $124,629; 2003 - $125,460)............... 125,204 126,449 Cash and cash equivalents...................................... 794,639 298,149 Other investments.............................................. 16,250 17,678 Funds withheld at interest..................................... 2,056,280 1,469,425 ------------- ------------ Total investments............................................ 6,384,836 3,926,420 Accrued interest receivable.................................... 32,092 22,789 Reinsurance balances and risk fees receivable.................. 470,817 196,192 Deferred acquisition costs..................................... 417,306 308,591 Amounts recoverable from reinsurers............................ 774,503 737,429 Present value of in-force business............................. 62,164 44,985 Goodwill....................................................... 34,125 35,847 Fixed assets................................................... 17,177 11,800 Other assets................................................... 21,749 13,703 Current income tax receivable.................................. 7,712 - Deferred tax benefit........................................... 15,030 12,624 Segregated assets.............................................. 783,573 743,137 ------------- ------------ Total assets................................................. $ 9,021,084 $ 6,053,517 ============= ============ LIABILITIES Reserves for future policy benefits............................ $ 3,370,562 $ 1,502,415 Interest sensitive contract liabilities........................ 3,181,447 2,633,346 Collateral finance facility liability.......................... 200,000 - Accounts payable and accrued expenses.......................... 23,337 31,673 Reinsurance balances payable................................... 116,589 125,756 Other liabilities.............................................. 44,974 30,546 Current income tax payable..................................... - 13,077 7.00% Convertible Junior Subordinated Notes.................... 41,282 - Long term debt................................................. 244,500 162,500 Segregated liabilities......................................... 783,573 743,137 ------------- ------------ Total liabilities............................................ 8,006,264 5,242,450 ============= ============ MINORITY INTEREST 9,697 9,295 MEZZANINE EQUITY 142,449 141,928 SHAREHOLDERS' EQUITY Share capital, par value $0.01 per share: Issued and fully paid: 39,931,145 ordinary shares (2003-35,228,411).......................................... 399 352 Additional paid-in capital..................................... 684,719 548,750 Accumulated other comprehensive income......................... 31,604 29,034 Retained earnings.............................................. 145,952 81,708 ------------- ------------ Total shareholders' equity................................... 862,674 659,844 ------------- ------------ Total liabilities and shareholders' equity..................... $ 9,021,084 $ 6,053,517 ============= ============
See Accompanying Notes to Consolidated Financial Statements 81 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF INCOME (Expressed in Thousands of United States Dollars, except per share data)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Revenues Premiums earned................................ $ 586,875 $ 391,976 $ 202,536 Investment income, net......................... 217,138 148,028 107,906 Fee income..................................... 11,547 7,907 6,574 Realized losses................................ (8,304) (4,448) (10,804) Change in value of embedded derivatives, net... 4,561 13,904 - ------------ ------------ ------------ Total revenues............................... 811,817 557,367 306,212 ------------ ------------ ------------ Benefits and expenses Claims and other policy benefits............... 425,965 275,887 142,158 Interest credited to interest sensitive contract liabilities......................... 106,525 89,156 48,140 Acquisition costs and other insurance expenses, net.......................................... 151,559 116,000 60,073 Operating expenses............................. 54,658 31,021 23,086 Due diligence costs............................ 4,643 - - Interest expense............................... 13,016 7,557 1,414 ------------ ------------ ------------ Total benefits and expenses.................. 756,366 519,621 274,871 ------------ ------------ ------------ Income before income taxes and minority interest 55,451 37,746 31,341 Income tax benefit............................. 16,679 11,105 1,894 ------------ ------------ ------------ Income before minority interest................ 72,130 48,851 33,235 Minority interest.............................. (531) (62) - ------------ ------------ ------------ Income from continuing operations before cumulative effect of change in accounting principle and discontinued operations........ 71,599 48,789 33,235 Cumulative effect of change in accounting principle (net of taxation of $3,415) ....... - (19,537) - Loss from discontinued operations.............. (208) (1,971) (711) ------------ ------------ ------------ Net income..................................... $ 71,391 $ 27,281 $ 32,524 ============ ============ ============ Basic earnings per share: Income from continuing operations before cumulative effect of change in accounting principle.................................. $ 2.00 $ 1.59 $ 1.32 Cumulative effect of change in accounting principle.................................. - (0.64) - Discontinued operations.................... (0.01) (0.06) (0.03) ------------ ------------ ------------ Net income................................. $ 1.99 $ 0.89 $ 1.29 ============ ============ ============ Diluted earnings per share: Income from continuing operations before cumulative effect of change in accounting principle................................. $ 1.91 $ 1.51 $ 1.25 Cumulative effect of change in accounting principle.................................. - (0.60) - Discontinued operations.................... (0.01) (0.06) (0.02) ------------ ------------ ------------ Net income................................. $ 1.90 $ 0.85 $ 1.23 ============ ============ ============ Weighted average number of ordinary shares outstanding Basic...................................... 35,732,522 30,652,719 25,190,283 ============ ============ ============ Diluted.................................... 37,508,292 32,228,001 26,505,612 ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements 82 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Expressed in Thousands of United States Dollars)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Net income..................................... $ 71,391 $ 27,281 $ 32,524 ------------ ------------ ------------ Other comprehensive income, net of tax: Unrealized appreciation on investments......... 3,644 10,270 18,049 Add: reclassification adjustment for investment losses included in net income................ (6,831) (2,352) (5,493) ------------ ------------ ------------ Net unrealized appreciation on investments, net of income taxes and deferred acquisition costs of $ 1,699, $2,222 and $3,853.......... (3,187) 7,918 12,556 Cumulative translation adjustment ............. 5,757 6,278 5,908 Minimum pension liability adjustment, net of income taxes of $(588) and $588.............. - 1,371 (1,371) ------------ ------------ ------------ Other comprehensive income..................... 2,570 15,567 17,093 ------------ ------------ ------------ Comprehensive income........................... $ 73,961 $ 42,848 $ 49,617 ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements 83 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Expressed in Thousands of United States Dollars, except for number of shares)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Ordinary shares: Beginning of year .......................... 35,228,411 26,927,456 20,144,956 Ordinary shares issued ..................... 3,953,183 9,200,000 6,750,000 Ordinary shares repurchased ................ -- (1,525,000) -- Issuance to employees on exercise of options 749,551 425,955 32,500 Issuance on exercise of warrants ........... -- 200,000 -- ------------ ------------ ------------ End of year ................................ 39,931,145 35,228,411 26,927,456 ============ ============ ============ Share capital: Beginning of year .......................... $ 352 $ 269 $ 201 Ordinary shares issued ..................... 40 92 68 Ordinary shares repurchased ................ -- (15) -- Issuance to employees on exercise of options 7 4 -- Issuance on exercise of warrants ........... -- 2 -- ------------ ------------ ------------ End of year ................................ 399 352 269 ------------ ------------ ------------ Additional paid in capital: Beginning of year .......................... 548,750 416,712 301,542 Ordinary shares issued ..................... 64,824 179,995 114,252 Ordinary shares repurchased ................ -- (29,966) -- Issuance to employees on exercise of options 8,339 4,575 279 Issuance on exercise of warrants ........... -- 2,998 -- Issuance of HyCUs .......................... -- (24,171) -- Warrants issued ............................ 62,125 -- -- Warrants repurchased ....................... -- (1,600) -- Other ...................................... 681 207 639 ------------ ------------ ------------ End of year ................................ 684,719 548,750 416,712 ------------ ------------ ------------ Accumulated other comprehensive income: Unrealized appreciation on investments Beginning of year ........................ 16,848 8,930 (3,626) Change in period (net of tax) ............ (3,187) 7,918 12,556 ------------ ------------ ------------ End of year ................................ 13,661 16,848 8,930 ------------ ------------ ------------ Cumulative translation adjustment Beginning of year ........................ 12,186 5,908 -- Change in period (net of tax) ............ 5,757 6,278 5,908 ------------ ------------ ------------ End of year .............................. 17,943 12,186 5,908 ------------ ------------ ------------ Minimum pension liability adjustment Beginning of year ........................ -- (1,371) -- Change in period (net of tax) ............ -- 1,371 (1,371) ------------ ------------ ------------ End of year .............................. -- -- (1,371) ------------ ------------ ------------ Total accumulated other comprehensive income .. 31,604 29,034 13,467 ------------ ------------ ------------ Retained earnings: Beginning of year .......................... 81,708 60,644 33,165 Net income ................................. 71,391 27,281 32,524 Dividends paid ............................. (7,147) (6,217) (5,045) ------------ ------------ ------------ End of year ................................ 145,952 81,708 60,644 ------------ ------------ ------------ Total shareholders' equity .................... $ 862,674 $ 659,844 $ 491,092 ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements 84 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in Thousands of United States Dollars)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Operating activities Income before cumulative effect of change in accounting principle ........................ $ 71,391 $ 46,818 $ 32,524 Items not affecting cash: Realized losses ............................. 8,306 4,448 10,803 Changes in value of embedded derivatives .... (4,561) 13,904 - Amortization of investments ................. 11,140 5,619 667 Amortization of deferred acquisition costs .. 80,235 74,239 28,179 Amortization of present value of in-force business ................................ 7,689 4,926 2,777 Changes in assets and liabilities: Accrued interest ........................ (894) (6,731) (2,575) Reinsurance balances and risk fees receivable ........................... (112,092) (54,689) 29,019 Deferred acquisition costs .............. (180,908) (167,281) (127,797) Deferred tax liability .................. 68,807 (17,350) 863 Other assets and liabilities ............ (24,807) (25,561) (804) Current income tax receivable and payable (95,631) (1,459) 1,514 Reserves for future policy benefits ..... 187,201 159,242 (1,377) Interest sensitive contract liabilities, net of funds withheld at interest .... 34,550 25,546 16,260 Unit linked contract liabilities ........ - - (11,280) Accounts payable and accrued expenses ... (5,443) 11,989 9,504 Other ................................... (6,131) 14,844 2,539 ------------ ------------ ------------ Net cash provided by (used in) operating activities .............................. 38,852 88,504 (9,184) ------------ ------------ ------------ Investing activities Purchase of fixed maturity investments .......... (1,832,494) (1,254,226) (710,791) Proceeds from sales of fixed maturity investments 595,059 288,611 183,588 Proceeds from maturity of fixed maturity investments ................................. 345,778 216,617 122,000 Purchase of preferred stock ..................... (26,186) (82,717) - Proceeds from sale of preferred stock ........... 19,620 18,530 - Proceeds from maturity of preferred stock ....... 6,257 5,137 - Other ........................................... (1,898) - 5,291 Cash received on ING acquisition ................ 414,008 - - Acquisition of subsidiary net of cash acquired .. - (140,228) (2,270) Purchase of fixed assets ........................ - (4,984) (1,034) ------------ ------------ ------------ Net cash used in investing activities ....... (479,856) (953,260) (403,216) ------------ ------------ ------------ Financing activities Proceeds from collateral facility liability ..... 200,000 - - Deposits to interest sensitive contract liabilities ................................. 571,843 736,884 320,338 Withdrawals from interest sensitive contract liabilities ................................. (83,319) (40,783) (27,627) Borrowings ...................................... - - (65,145) Issuance of ordinary shares ..................... 73,210 187,666 114,599 Issuance of warrants ............................ 62,125 - - Repurchase of ordinary shares ................... - (29,981) - Repurchase of warrants .......................... - (1,600) - Issuance of long term debt ...................... 79,500 29,047 127,782 Issuance of notes payable to buy Cypress Entities 41,282 - - Net funds received on issuance of HyCUs ......... - 138,223 - Dividends paid .................................. (7,147) (6,217) (5,045) ------------ ------------ ------------ Net cash provided by financing activities ....... 937,494 1,013,239 464,902 ------------ ------------ ------------ Net change in cash and cash equivalents ......... 496,490 148,483 52,502 Cash and cash equivalents, beginning of year .... 298,149 149,666 97,164 ------------ ------------ ------------ Cash and cash equivalents, end of year .......... $ 794,639 $ 298,149 $ 149,666 ============ ============ ============ Supplemental cash flow information: Interest paid ................................... $ 16,418 $ 6,195 $ 738 ============ ============ ============ Taxes paid (refunded) ........................... $ 28,726 $ 1,156 $ (124) ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements 85 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 1. Organization, business and basis of presentation Organization Scottish Re is a holding company organized under the laws of the Cayman Islands with its principal executive office in Bermuda. We are a reinsurer of life insurance, annuities and annuity-type products. These products are written by life insurance companies and other financial institutions located principally in the United States, as well as around the world. We refer to this portion of our business as Life Reinsurance. To a lesser extent, we directly issue variable life insurance and variable annuities and similar products to high net worth individuals and families for insurance, investment and estate planning purposes. We refer to this portion of our business as Wealth Management. We have operating companies in Bermuda, the Cayman Islands, Guernsey, Ireland, the United Kingdom and the United States. Business Life Reinsurance In our Life Reinsurance North America Segment, we provide solutions to insurance companies seeking reinsurance of life insurance, annuities and annuity-type products. We reinsure lines of business that may be subject to significant reserve or capital requirements by regulatory and rating agencies. We assume risks associated with primary life insurance policies and annuities, both in force and new business. We reinsure: (i) mortality, (ii) investment, (iii) persistency, and (iv) expense risks. Scottish Re (U.S.), Inc. originates reinsurance business predominantly by marketing its products and services directly to U.S. life insurance and reinsurance companies. Scottish Annuity & Life Insurance Company (Cayman) Ltd. originates reinsurance business predominantly through reinsurance brokers and intermediaries. In our Life Reinsurance International Segment, we reinsure life and aircrew loss of license products. Life products that we reinsure include short term group and individual life, and, to a lesser extent, disability and critical illness. In our Life Reinsurance International Segment, we primarily target customers in developing markets as well as selected developed markets. The developing markets include Asia, Latin America, the Middle East, North Africa and Southern and Eastern Europe. In the more developed markets, we target "niche" market sectors that require a high degree of knowledge and experience. Scottish Re Limited markets its products through international brokers and its own marketing staff. Wealth Management In our Wealth Management business, we directly issue variable life insurance and variable annuities and similar products to high net worth individuals and families, for insurance, investment and estate planning purposes. For us, high net worth generally means individuals and families with a liquid net worth in excess of $10.0 million. Variable life insurance and variable annuities have a cash value component that is placed in a separate account and invested by us on behalf of the policyholder with a money manager. Basis of presentation Accounting Principles--Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and all amounts are reported in thousands 86 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 1. Organization, business and basis of presentation (continued) of United States dollars (except per share amounts). Certain items in the prior year financial statements have been reclassified to conform with the current year presentation. Consolidation--We consolidate the results of all our subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. Estimates, Risks and Uncertainties--The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our most significant assumptions are for assumed reinsurance liabilities and deferred acquisition costs. We review and revise these estimates as appropriate. Any adjustments made to these estimates are reflected in the period the estimates are revised. 2. Summary of significant accounting policies The following are our significant accounting policies: A. Fixed maturity investments Fixed maturities are classified as available for sale, and accordingly, we carry these investments at fair values on our consolidated balance sheets. The fair value of fixed maturities is calculated using quoted market prices provided by independent pricing services. The cost of fixed maturities is adjusted for prepayments and the amortization of premiums and discounts. The unrealized appreciation (depreciation) is the difference between fair value and amortized cost and is recorded directly to equity with no impact to net income. The change in unrealized appreciation (depreciation) is included in accumulated other comprehensive income (loss) in shareholders' equity after deductions for adjustments for deferred acquisition costs. Investment transactions are recorded on the trade date with balances pending settlement reflected in the balance sheet as a component of other assets or other liabilities. Interest is recorded on the accrual basis. Short-term investments are carried at cost, which approximates fair value. Realized gains (losses) on securities are determined on a specific identification method. We track the cost of each security purchased so that we are able to identify and record a gain or loss when it is subsequently sold. In addition, declines in fair value that are determined to be other than temporary are included in realized gains (losses) in the consolidated statements of income. Realized gains and losses are stated net of associated amortization of deferred acquisition costs. EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," ("EITF 99-20") applies to all securities, purchased or retained, which represent beneficial interests in securitized assets, unless they meet certain exception criteria. Such securities include many collateralized mortgage, bond, debt and loan obligations (CMO, CBO, CDO, and CLO), mortgage-backed securities and asset-backed securities. Under EITF 99-20, a decline in fair value below the "amortized cost" basis is considered to be an other than temporary impairment whenever there is an adverse change in the amount or timing of cash flows to be received, regardless of the resulting yield, unless the decrease is solely a result of changes in market interest rates. Interest income is based on prospective estimates of future cash flows. Management reviews securities with material unrealized losses and tests for other than temporary impairments on a quarterly basis. Factors involved in the determination of potential impairment include fair value 87 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 2. Summary of significant accounting policies (continued) as compared to cost, length of time the value has been below cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers. When a decline is considered to be "other than temporary" a realized loss is incurred and the cost basis of the impaired asset is adjusted to its fair value. B. Cash and cash equivalents Cash and cash equivalents include fixed deposits with an original maturity, when purchased, of three months or less. Cash and cash equivalents are recorded at face value, which approximates fair value. C. Funds withheld at interest Funds withheld at interest are funds held by ceding companies under modified coinsurance and coinsurance funds withheld agreements whereby we receive the interest income earned on the funds. The balance of funds held represents the statutory reserves of the ceding companies. These agreements are considered to include embedded derivatives as further discussed in Note 2Q. D. Revenue recognition (i) Reinsurance premiums from traditional life policies and annuity policies with life contingencies are generally recognized as revenue when due from policyholders. Traditional life policies include those contracts with fixed and guaranteed premiums and benefits, and consist principally of whole life and term insurance policies. Our premiums earned are recorded in accordance with information received from our ceding companies, or are estimated where this information is not current with the reporting period. These premium estimates are based on historical experience as adjusted for current treaty terms and other information. Actual results could differ from these estimates. Management monitors actual experience, and should circumstances warrant, will revise its estimates of premiums earned. Benefits and expenses are matched with such income so as to result in the recognition of profits over the life of the contracts. This is achieved by means of the provision for liabilities for future policy benefits and deferral and subsequent amortization of policy acquisition costs. From time to time we acquire blocks of in-force business and account for these transactions as purchases. Results of operations only include the revenues and expenses from the respective dates of acquisition of these blocks of in-force business. The initial transfer of assets and liabilities is recorded on the balance sheet. Reinsurance assumed on annuity business does not generate premium insurance but generates investment income over time on the assets we receive from ceding companies. (ii) Fee income is recorded on an accrual basis: (iii) Investment income is reported on an accrual basis after deducting the related investment manager's fees. 88 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 2. Summary of significant accounting policies (continued) (iv) Realized capital gains and losses include gains and losses on the sale of investments available for sale and amounts recognized for other than temporary impairments on fixed maturities. Realized capital gains and losses are stated net of associated amortization of deferred acquisition costs. E. Deferred acquisition costs Costs of acquiring new business, which vary with and are primarily related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting. We perform periodic tests to determine that the cost of business acquired remains recoverable, and the cumulative amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. Deferred acquisition costs related to traditional life insurance contracts, substantially all of which relate to long-duration contracts, are amortized over the premium-paying period of the related policies in proportion to the ratio of individual period premium revenues to total anticipated premium revenues over the life of the policy. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits. Deferred acquisition costs related to interest-sensitive life and investment-type policies are amortized over the lives of the policies, in relation to the present value of estimated gross profits from mortality, investment income, and expense margins. The development of and amortization of deferred acquisition costs for our products requires management to make estimates and assumptions. Actual results could differ materially from those estimates. Management monitors actual experience, and should circumstances warrant, will revise its assumptions and the related estimates. F. Present value of in-force business The present value of the in-force business is established upon the acquisition of a book of business and will be amortized over the expected life of the business as determined at acquisition. The amortization each year will be a function of the gross profits or revenues each year in relation to the total gross profits or revenues expected over the life of the business, discounted at the assumed net credit rate. G. Goodwill Goodwill is established upon the acquisition of a subsidiary. Goodwill is calculated as the difference between the price paid and the value of individual assets and liabilities on the date of acquisition. Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. Goodwill was tested for impairment in 2002, 2003 and 2004. There was no impairment. H. Fixed assets and leasehold improvements Fixed assets include leasehold improvements, furniture and fittings and computer equipment. They are recorded at cost and are depreciated over their estimated useful lives ranging between 1 and 5 years on a straight-line basis. Accumulated depreciation at December 31, 2004 and 2003 amounted to $8.1 million and $5.4 million, respectively. 89 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 2. Summary of significant accounting policies (continued) I. Reserves for future policy benefits The development of policy reserves for our products requires management to make estimates and assumptions regarding mortality, lapse, expense and investment experience. Interest rate assumptions for individual life reinsurance reserves range from 2.5 to 7.0%. The interest assumptions for immediate and deferred annuities range from 4.0 to 6.5%. These estimates are based primarily on historical experience and information provided by ceding companies. Actual results could differ materially from those estimates. Management monitors actual experience, and where circumstances warrant, revises the assumptions and the related reserve estimates. For traditional life policies, future benefits are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on anticipated experience, which, together with interest and expense assumptions, provide a margin for adverse deviation. If the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future benefits and expenses for that product, deferred acquisition costs will be written off and thereafter, if required, a premium deficiency reserve will be established by a charge to income. J. Interest sensitive contract liabilities The liabilities for interest sensitive contract liabilities equal the accumulated account values of the policies or contracts as of the valuation date and include funds received plus interest credited less funds withdrawn and interest paid. Benefit liabilities for fixed annuities during the accumulation period equal their account values; after annuitization, they equal the discounted present value of expected future payments. K. Income taxes Income tax liability and deferred tax assets are recorded in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. In accordance with this statement we record deferred income taxes that reflect the net tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is applied to deferred tax assets if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. L. Stock-based compensation Effective January 1, 2003, we have prospectively adopted the fair value-based stock option expense provisions of Statement of Financial Accounting Standards ("SFAS") No. 148. "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment to FASB Statement No. 123". In prior years, we applied the intrinsic value method as detailed in Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for stock option plans. We did not recognize compensation cost because our options were issued with an exercise price equal to the market price of the stock on the date of issue. Note 21 contains a summary of the pro forma effects to reported net income and earnings per share for 2004, 2003 and 2002 had we elected to recognize compensation cost for all options based on the fair value of the options granted at grant date as prescribed by SFAS No. 123. 90 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 2. Summary of significant accounting policies (continued) M. Earnings per share In accordance with SFAS No. 128, "Earnings per Share" basic earnings per share is calculated based on weighted average ordinary shares outstanding and excludes any dilutive effects of options and warrants. Diluted earnings per share assume the exercise of all dilutive stock options, warrants, convertible debt instruments, and the HyCUs using the treasury stock method. N. Segregated assets Separate account investments are in respect of wealth management clients and include the net asset values of the underlying funds plus separate cash and cash equivalent balances less separate account fees payable to us. The funds in the separate accounts are not part of our general funds and are not available to meet our general obligations. The assets and liabilities of these transactions move in tandem. The client bears the investment risk on the account and we receive an asset-based fee for providing this service that is recorded as fee income. Included in these accounts is a total return swap transaction totaling approximately $32.0 million on behalf of a wealth management client. O. Segregated liabilities Separate account liabilities include amounts set aside to pay the deferred variable annuities and the cash values associated with life insurance policies. These balances consist of the initial premiums paid after consideration of the net investment gains/losses attributable to each separate account, less fees and withdrawals. These liabilities also include an amount in respect of a total return swap transaction totaling approximately $32.0 million. P. Fair value of financial instruments The fair value of assets and liabilities included on the consolidated balance sheets, which qualify as financial instruments under SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," approximate the carrying amount presented in the consolidated financial statements. Q. Derivatives All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheet at fair value as required by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The accounting for changes in the fair value of derivatives that have not been designated as a hedge are included in realized gains and losses in the consolidated statement of income. The gain or loss on derivatives designated as a hedge of our interest expense on floating rate securities is included in interest expense. Our funds withheld at interest arise on modified coinsurance and fund withheld coinsurance transactions. Derivatives Implementation Group Issue No. B36 "Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates Both Interest Rate and Credit Rate Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of that Instrument" indicates that these transactions contain embedded derivatives. The embedded derivative feature in our funds withheld treaties is similar to a fixed-rate total return swap on the assets held by the ceding companies. The swap consists of two parts. The first is the market value of the underlying asset portfolio and the second is a hypothetical loan to the ceding company. The hypothetical loan is based on the 91 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 2. Summary of significant accounting policies (continued) expected cash flows of the underlying reinsurance liability. We have developed models to systematically estimate the value of the total return swap. The fair value of the embedded derivative is affected by changes in expected cash flows, credit spreads of the assets and changes in "risk-free" interest rates. The change in fair value is included in our calculation of estimated gross profits and, therefore, also affects the amortization of deferred acquisition costs. In addition to our quota share indemnity funds withheld contracts, we have entered into various financial reinsurance treaties that, although considered funds withheld, do not transfer significant insurance risk and are recorded on a deposit method of accounting. As a result of the experience refund provisions of these treaties the value of the embedded derivative is currently considered immaterial. We adopted DIG B36 on October 1, 2003. The initial adoption has resulted in a loss, after tax and after related amortization of deferred acquisition costs of $19.5 million. This was recorded as a cumulative effect of change in accounting principle in our consolidated statement of income for the year ended December 31, 2003. The change in fair value of the derivative between October 1, 2003 and December 31, 2003 was a gain of $13.9 million, net of related amortization of deferred acquisition costs. The change in fair value of the derivative for the year ended December 31, 2004 was a gain of $4.6 million net of related deferred acquisition costs. The fair value of the derivative of $5.2 million and $9.3 million at December 31, 2004 and 2003, respectively, is included in other liabilities and other assets. 3. Business acquisitions On December 31, 2004, we completed the acquisition of ING's individual life reinsurance business. The acquisition was accounted for in accordance with SFAS No. 141 "Business Combinations". We received approximately $1.9 billion in assets from ING. This settlement is subject to certain post closing adjustments. The balance sheet of this business at December 31, 2004 consisted of: December 31, 2004 ----------------------- (dollars in millions) Total investments $ 1,494.4 Reinsurance balances receivable 219.6 Amounts recoverable from reinsurers 93.5 Other assets 86.0 ----------------------- Total assets $ 1,893.5 ======================= Reserves for future policy benefits $ 1,764.7 Other liabilities $ 128.8 ----------------------- Total liabilities $ 1,893.5 ======================= The following pro-forma information related to our acquisition of the ING individual life reinsurance business for the years ended December 31, 2004 and 2003 illustrates the effects of the acquisition as if it had occurred at the beginning of the periods presented. The pro-forma information is not intended to be indicative of the consolidated results of operations that would have been reported if the acquisition had occurred at January 1, 2004 and 2003 nor does it purport to be indicative of combined results of operations which may be reported in the future. 92 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 3. Business acquisitions (continued)
Year Ended Year Ended December 31, December 31, 2004 2003 --------------------- -------------------- (dollars in millions) (dollars in millions) Revenue............................ $ 2,115.6 $ 1,547.5 Net income......................... $ 132.0 $ 73.3 Earnings per ordinary share - Basic $ 3.08 $ 1.81 Earnings per ordinary share - Diluted $ 2.96 $ 1.75
On December 22, 2003, we completed the purchase of 95% of Scottish Re Life Corporation for $169.9 million in cash. During the year ended December 31, 2004, we have completed the analysis of purchase accounting for this acquisition. There was no goodwill arising on the acquisition. The present value of the in-force of the business acquired was $56.3 million. On February 19, 2004, ERC Life Reinsurance Corporation's name was changed to Scottish Re Life Corporation. The balance sheet of ERC Life Reinsurance Corporation at the date of acquisition, as finalized in 2004, was as follows: December 22, 2003 ----------------------- (dollars in millions) Total investments.................... $ 573.5 Reinsurance balances receivable...... 51.5 Amounts recoverable from reinsurers.. 730.0 Other assets......................... 60.6 --------------------- Total assets......................... $ 1,415.6 ===================== Reserves for future policy benefits.. $ 933.1 Interest sensitive contract liabilities........................ 177.5 Reinsurance balances payable......... 109.0 Other liabilities.................... 14.6 --------------------- Total liabilities.................... $ 1,234.2 ===================== The following pro forma information related to our acquisition of Scottish Re Life Corporation for the years ended December 31, 2003 and 2002 illustrates the effects of the acquisition as if it had occurred at the beginning of the periods presented. 93 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 3. Business acquisitions (continued)
Year Ended Year Ended December 31, December 31, 2003 2002 ------------------ ----------------- (dollars in (dollars in thousands) thousands) Revenue............................ $ 768.2 $ 473.0 Net income......................... $ 67.7 $ 29.1 Earnings per ordinary share - Basic $ 2.21 $ 1.16 Earnings per ordinary share - Diluted $ 2.10 $ 1.10
The pro-forma information is not intended to be indicative of the consolidated results of operations that would have been reported if the acquisition had occurred at January 1, 2003 and 2002 nor does it purport to be indicative of combined results of operations which may be reported in the future. The acquisitions described above were accounted for by the purchase method of accounting. In accordance with SFAS141 the accompanying consolidated statements of income do not include any revenues or expenses related to these acquisitions prior to the closing dates. 4. Discontinued operations During 2003, we decided to discontinue our Wealth Management operations in Luxembourg. We have transferred our Luxembourg Wealth Management business to third parties, closed the office and are in the process of liquidating our Luxembourg subsidiary. We have reported the results of the Luxembourg Wealth Management activities as discontinued operations. During the year ended December 31, 2004 losses from these operations amounted to $0.2 million, in comparison with $2.0 million in 2003 and $0.7 million in 2002. 94 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 5. Business Segments We report segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Our main lines of business are Life Reinsurance North America, Life Reinsurance International and Other. The segment reporting for the lines of business is as follows:
Year Ended December 31, 2004 ---------------------------------------------------------- Life Reinsurance Life Reinsurance North America International Other Total ------------- ------------- ----- ----- Premiums earned............... $ 464,719 $ 122,156 - $ 586,875 Investment income, net........ 206,009 10,023 1,106 217,138 Realized gains (losses) ...... (7,974) 1,685 (2,015) (8,304) Change in value of embedded derivative.................... 4,561 - - 4,561 Fee income.................... 7,867 - 3,680 11,547 ------------- ------------- --------- ---------- Total revenues............ 675,182 133,864 2,771 811,817 ------------- ------------- --------- ---------- Claims and other policy benefits 344,319 81,646 - 425,965 Interest credited to interest sensitive contract liabilities 106,525 - - 106,525 Acquisition costs and other insurance expenses, net....... 132,174 17,272 2,113 151,559 Operating expenses............ 18,408 18,798 17,452 54,658 Due diligence costs - - 4,643 4,643 Interest expense.............. 4,605 - 8,411 13,016 ------------- ------------- --------- ---------- Total benefits and expenses 606,031 117,716 32,619 756,366 ------------- ------------- --------- ---------- Income (loss) before income taxes and minority interest... $ 69,151 $ 16,148 $(29,848) $ 55,451 ============= ============= ========= ==========
Year Ended December 31, 2003 ---------------------------------------------------------- Life Reinsurance Life Reinsurance North America International Other Total ------------- ------------- ----- ----- Premiums earned............... $ 230,708 $ 161,268 $ - $ 391,976 Investment income, net........ 135,731 7,537 4,760 148,028 Realized gains (losses) ...... (6,124) 548 1,128 (4,448) Change in value of embedded derivative.................... 13,904 - - 13,904 Fee income.................... 4,067 - 3,840 7,907 ------------- ------------- --------- ---------- Total revenues............ 378,286 169,353 9,728 557,367 ------------- ------------- --------- ---------- Claims and other policy benefits 171,711 104,176 - 275,887 Interest credited to interest sensitive contract liabilities 89,156 - - 89,156 Acquisition costs and other insurance expenses, net....... 83,594 30,143 2,263 116,000 Operating expenses............ 8,646 11,518 10,857 31,021 Interest expense.............. 1,109 - 6,448 7,557 ------------- ------------- --------- ---------- 95 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 5. Business segments (continued) Year Ended December 31, 2003 ---------------------------------------------------------- Life Reinsurance Life Reinsurance North America International Other Total ------------- ------------- --------- ---------- Total benefits and expenses 354,216 145,837 19,568 519,621 ------------- ------------- --------- ---------- Income (loss) before income taxes and minority interest... $ 24,070 $ 23,516 $ (9,840) $ 37,746 ============= ============= ========= ==========
Year Ended December 31, 2002 ---------------------------------------------------------- Life Reinsurance Life Reinsurance North America International Other Total ------------- ------------- ----- ----- Premiums earned ................... $ 122,794 $ 79,742 $ - $ 202,536 Investment income, net ............ 97,406 6,716 3,784 107,906 Realized gains (losses) ........... (4,833) (5,942) (29) (10,804) Fee income ........................ 3,148 - 3,426 6,574 ------------- ------------- --------- ---------- Total revenues ................ 218,515 80,516 7,181 306,212 ------------- ------------- --------- ---------- Claims and other policy benefits .. 91,774 50,384 - 142,158 Interest credited to interest sensitive contract liabilities .... 48,140 - - 48,140 Acquisition costs and other insurance expenses, net ........... 48,401 8,281 3,391 60,073 Operating expenses ................ 7,323 6,647 9,116 23,086 Interest expense .................. - - 1,414 1,414 ------------- ------------- --------- ---------- Total benefits and expenses ... 195,638 65,312 13,921 274,871 ------------- ------------- --------- ---------- Income (loss) before income taxes and minority interest ....... $ 22,877 $ 15,204 $ (6,740) $ 31,341 ============= ============ ========= ==========
Assets December 31, 2004 December 31, 2003 ------------------ ----------------- Life Reinsurance: North America.................. $ 7,629,784 $ 4,882,222 International.................. 396,219 308,459 ---------------- -------------- Total Life Reinsurance................. 8,026,003 5,190,681 Other.................................. 995,081 862,836 ---------------- -------------- Total.................................. $ 9,021,084 $ 6,053,517 ================ ==============
96 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 6. Foreign sales and operations Our operations include Bermuda, the Cayman Islands, Guernsey, Ireland, the United Kingdom and the United States. Revenues relating to geographic areas:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Revenues U.S. business.................................. $ 695,498 $ 405,198 $ 218,515 Non--U.S. business............................. 116,319 152,169 87,697 ------------ ------------ ------------ Total.......................................... $ 811,817 $ 557,367 $ 306,212 ============ ============ ============
97 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 7. Earnings per ordinary share The following table sets forth the computation of basic and diluted earnings per ordinary share:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------- -------------- -------------- Numerator: Net income......................... $ 71,391 $ 27,281 $ 32,524 ============== ============== ============== Denominator: Denominator for basic earnings per ordinary share Weighted average number of ordinary shares.................. 35,732,522 30,652,719 25,190,283 Effect of dilutive securities - Stock options.................. 634,562 885,552 839,387 - Warrants....................... 885,363 689,730 475,942 - Convertible debt and HyCUs..... 255,845 - - Denominator for dilutive earnings -------------- -------------- -------------- per ordinary share............... 37,508,292 32,228,001 26,505,612 ============== ============== ============== Basic earnings per share: Income from continuing operations.. $ 2.00 $ 1.59 $ 1.32 Cumulative effect of change in (0.64) - accounting principle - Discontinued operations............ (0.01) (0.06) (0.03) -------------- -------------- -------------- Net income......................... $ 1.99 $ 0.89 $ 1.29 ============== ============== ============== Diluted earnings per share: Income from continuing operations.. $ 1.91 $ 1.51 $ 1.25 Cumulative effect of change in (0.60) - accounting principle............... - Discontinued operations............ (0.01) (0.06) (0.02) -------------- -------------- -------------- Net income......................... $ 1.90 $ 0.85 $ 1.23 ============== ============== ==============
8. Derivatives During 2004, we entered into an interest rate swap contract in the amount of $100.0 million in relation to certain of our investment assets not supporting reinsurance liabilities. This contract is accounted for in accordance with SFAS 133, which requires that all derivatives be recognized as either assets or liabilities on the balance sheet and be measured at fair value. This derivative has not been designated as a hedge. The fair value of the swap at December 31, 2004 was a negative $2.2 million. This loss of $2.2 million has been included in realized gains (losses) in the consolidated statement of income. 98 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 During 2004, we entered into interest rate swaps with varying notional amounts and maturities, which have been designated as hedges of the variable interest cash flows of four of the trust preferred debt issuances described in Note 18. These interest rate swaps require us to pay fixed rate interest in exchange for variable rate interest, based on a fixed notional, until the maturity of the contract, and have been used to eliminate interest rate risk from the hedged portions of our long term debt. The notional amounts, reset periods, variable interest rates and maturities of the interest rate swaps match the terms of the cash flows of the debt they have been designated to hedge and therefore the interest rate swaps are considered to be fully effective as required by SFAS 133. The loss on the interest rate swaps for the year of $0.2 million has been included in interest expense for 2004. 9. Investments The amortized cost, gross unrealized appreciation and depreciation and estimated fair values of our fixed maturity investments and preferred stock at December 31, 2004 and 2003 are as follows:
December 31, 2004 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost/Costs Appreciation Depreciation Fair Value ------------ -------------- ------------- ------------ U.S. Treasury securities and U.S. government $ 89,418 $ 200 $ (139) $ 89,479 agency obligations...................... Corporate securities........................ 1,719,502 27,542 (3,474) 1,743,570 Municipal bonds............................. 20,712 261 (158) 20,815 Mortgage and asset backed securities........ 1,657,926 14,154 (8,277) 1,663,803 ------------ -------------- ------------- ------------ Total....................................... $3,487,558 $ 42,157 $ (12,048) $3,517,667 ============= ============== ============= ============
December 31, 2003 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost/Costs Appreciation Depreciation Fair Value ------------ -------------- ------------- ------------ U.S. Treasury securities and U.S. government agency obligations...................... $ 74,548 $ 408 $ (400) $ 74,556 Corporate securities........................ 1,223,871 26,339 (4,122) 1,246,088 Municipal bonds............................. 1,800 5 -- 1,805 Mortgage and asset backed securities........ 818,488 10,292 (10,061) 818,719 ------------ -------------- ------------- ------------- Total....................................... $ 2,118,707 $ 37,044 $ (14,583) $ 2,141,168 ============ ============== ============= =============
99 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 9. Investments (continued) The contractual maturities of the fixed maturities and preferred stock are as follows (actual maturities may differ as a result of calls and prepayments):
December 31, 2004 ------------------------------ Amortized Estimated Fair Cost Value -------------- -------------- Due in one year or less..................................... $ 101,111 $ 101,335 Due in one year through five years.......................... 414,156 419,921 Due in five years through ten years......................... 649,402 662,971 Due after ten years......................................... 664,963 669,637 ------------- ------------- 1,829,632 1,853,864 Mortgage and asset backed securities........................ 1,657,926 1,663,803 ------------- ------------- Total....................................................... $ 3,487,558 $ 3,517,667 ============= =============
Gross realized gains and losses are as follows:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Proceeds from sale of investments.............. $ 665,012 $ 307,141 $ 183,588 ============ =========== ============ Gross realized gains on sale of investments.... $ 10,251 $ 7,796 $ 7,968 Gross realized losses on sale of investments... (16,161) (13,506) (18,595) ------------ ----------- ------------ Net realized losses on sale of investments..... (5,910) (5,710) (10,627) Other gains and losses......................... (2,394) 1,262 (177) ------------ ----------- ------------ Realized losses................................ $ (8,304) $ (4,448) $ (10,804) ============ =========== ============
______________________ (1) Includes $9.9 million, $6.3 million and $10.0 million in 2004, 2003 and 2002, respectively in respect of fixed maturity investments written down to market values and $0.3 million, $2.9 million and $2.5 million in 2004, 2003 and 2002 respectively in respect of modified coinsurance receivables written down to market values. At December 31, 2004 and 2003, we did not have a material concentration of investments in fixed income securities in a single issuer, industry or geographic location. 100 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 9. Investments (continued) The following tables provide information on the length of time securities have been continuously in an unrealized loss position:
December 31, 2003 --------------------------------------------------------------------- Estimated Unrealized Days Book Value % Fair Value % Loss % - ---- ---------- --- ---------- --- ----------- --- Dollars in thousands 0-90................. $ 471,909 45.8% $ 468,923 46.0% (2,986) 24.8% 91-180............... 154,062 14.9 153,237 15.0 (825) 6.9 181-270.............. 231,798 22.5 229,026 22.5 (2,772) 23.0 271-360.............. 86,468 8.4 84,142 8.3 (2,326) 19.3 Greater than 360 .... 86,246 8.4 83,107 8.2 (3,139) 26.0 ---------- ------ ---------- ------ ----------- ------ Total................ $1,030,483 100.0% $1,018,435 100.0% (12,048) 100.0% ========== ====== ========== ====== =========== ======
December 31, 2003 --------------------------------------------------------------------- Estimated Unrealized Days Book Value % Fair Value % Loss % - ---- ---------- --- ---------- --- ----------- --- Dollars in thousands 0-90................. $ 308,267 55.6% $ 304,511 56.4% $ (3,756) 25.8% 91-180............... 115,702 20.9 113,405 21.0 (2,297) 15.8 181-270.............. 56,362 10.1 55,243 10.2 (1,119) 7.7 271-360.............. 13,486 2.4 13,064 2.4 (422) 2.9 Greater than 360..... 60,882 11.0 53,893 10.0 (6,989) 47.8 ---------- ------ ---------- ------ ----------- ------ Total................ $ 554,699 100.0% $ 540,116 100.0% $ (14,583) 100.0% ========== ====== ========== ====== =========== ======
10. Funds withheld at interest At December 31, 2004, funds withheld at interest were in respect of seven contracts with four ceding companies. At December 31, 2003, funds withheld at interest were in respect of six contracts with three ceding companies. At both December 31, 2004, we had three contracts with Lincoln National Insurance Company that accounted for $1.3 billion or 63% of the funds withheld balances. Additionally, we had two contracts with Security Life of Denver International that accounted for $0.5 billion or 27% of the funds withheld balances. The remaining contracts were with Illinois Mutual Insurance Company and American Founders Life Insurance Company. Lincoln National Insurance Company, the largest exposure, has financial strength ratings of "A+" from A.M. Best, "AA-" from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of insolvency of the ceding companies on these arrangements we would need to exert a claim on the assets supporting the contract liabilities. However, the risk of loss is mitigated by our ability to offset amounts owed to the ceding company with the amounts owed to us by the ceding company. Reserves for future policy benefits and interest sensitive contract liabilities relating to these contracts amounted to $2.0 billion and $1.7 billion at December 31, 2004 and December 31, 2003, respectively. 101 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 10. Funds withheld at interest (continued) According to data provided by our ceding companies, the amortized cost, gross unrealized appreciation and depreciation and estimated fair values of invested assets, excluding cash of $472.4 million, backing our funds withheld at interest at December 31, 2004 and 2003 are as follows:
December 31, 2004 ----------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Appreciation Depreciation Fair Value ---- ------------ ------------ ---------- U.S. Treasury securities and U.S. government agency obligations.... $ 39,423 $ 458 $ (143) $ 39,738 Corporate securities............... 1,027,809 70,336 (1,896) 1,096,249 Municipal bonds.................... 24,728 738 (228) 25,238 Mortgage and asset backed securities....................... 303,833 11,969 (1,088) 314,714 ---------- -------- ---------- ---------- 1,395,793 83,501 (3,355) 1,475,939 Commercial mortgage loans.......... 121,468 9,212 (832) 129,848 ---------- -------- ---------- ---------- Total.............................. $1,517,261 $ 92,713 $ (4,187) $1,605,787 ========== ======== ========== ========== December 31, 2003 ----------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Appreciation Depreciation Fair Value ---- ------------ ------------ ---------- U.S. Treasury securities and U.S. government agency obligations..... $31,577 $ 526 $ (144) $ 31,959 Corporate securities................ 970,157 77,966 (2,074) 1,046,049 Municipal bonds..................... 22,481 835 (248) 23,068 Mortgage and asset backed securities........................ 318,151 12,254 (1,482) 328,923 ---------- -------- ---------- ---------- 1,342,366 91,581 (3,948) 1,429,999 Commercial mortgage loans........... 120,178 9,694 (496) 129,376 ---------- -------- ---------- ---------- Total $1,462,544 $ 101,275 $ (4,444) $1,559,375 ========== ======== ========== ==========
102 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 10. Funds withheld at interest (continued) According to data provided by our ceding companies, the contractual maturities (excluding cash) of the assets backing our funds withheld fixed maturities are as follows (actual maturities may differ as a result of calls and prepayments):
December 31, 2004 ----------------- Amortized Cost Estimated Fair Value -------------- -------------------- Due in one year or less..................... $ 47,483 $ 48,341 Due in one year through five years.......... 301,394 317,380 Due in five years through ten years......... 617,727 665,272 Due after ten years......................... 125,356 130,231 ------------ ------------ 1,091,960 1,161,224 Mortgage and asset backed securities........ 303,833 314,715 Commercial mortgage loans 121,468 129,848 ------------ ------------ Total ..................................... $ 1,517,261 $ 1,605,787 ============ ============
11. Reinsurance ceded Premiums earned are analyzed as follows:
Year ended Year ended Year ended December 31, 2004 December 31, 2003 December 31, 2002 ----------------- ----------------- ----------------- Premiums assumed ......... $ 804,420 $ 415,653 $ 210,166 Premiums ceded ........... (217,545) (23,677) (7,630) ---------- ---------- ---------- Premiums earned .......... $ 586,875 $ 391,976 $ 202,536 ========== ========== ==========
Reinsurance contracts do not relieve us from our obligations to our cedents. Failure of reinsurers to honor their obligations could result in losses to us. We evaluate the financial condition of our reinsurers to minimize our exposure to losses from reinsurer insolvencies. Claims and other policy benefits are net of reinsurance recoveries of $144.5 million, $21.4 million and $8.5 million during the years ended December 31, 2004, 2003 and 2002. 12. Goodwill During 2004, we received a payment of $1.7 million in respect of a settlement of the purchase price of Scottish Re Holdings Limited (formerly World-Wide Holdings Limited). This settlement arose on the finalization of income taxes due for periods prior to the acquisition and has resulted in a decrease in the goodwill arising on the acquisition. 103 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 13. Present value of in-force business A reconciliation of the present value of in-force business is as follows: December December December 31, 2004 31, 2003 31, 2002 -------- -------- -------- Balance at beginning of year................ $ 44,985 $ 18,181 $ 20,383 Acquisition of Scottish Re Life Corporation. 24,766 31,506 -- Amortization................................ (7,689) (4,926) (2,777) Other....................................... 102 224 575 --------- --------- --------- Balance at end of year...................... $ 62,164 $ 44,985 $ 18,181 ========= ========= ========= Future estimated amortization of the present value of in-force business is as follows: Year ending December 31 ----------------------- 2005 ................................ $ 6,284 2006 ................................ 6,277 2007 ................................ 5,617 2008 ................................ 5,707 2009 ................................ 5,916 Thereafter .......................... $32,363 14. Reinsurance transactions The following table summarizes the acquisitions of in-force reinsurance transactions completed by us during 2002. These transactions are accounted for as purchases. Our results of operations include the effects of these purchases only from the respective acquisition date. December 31, 2002 ------------ Fair value of assets acquired ....................... $26,032 ------- Deferred acquisition costs .......................... 6,571 ------- Total assets acquired ............................... $32,603 ======= Fair value of liabilities assumed ................... $32,603 ======= 104 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 15. Deferred acquisition costs The change in deferred acquisition costs is as follows:
December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Balance beginning of period....................... $ 308,591 $ 213,516 $ 113,898 Expenses deferred................................. 199,768 167,185 129,306 Amortization expense.............................. (80,235) (74,239) (28,178) Deferred acquisition costs on in-force reinsurance transactions purchased.............. - - 6,571 Deferred acquisition costs on unrealized (10,166) - - gains and losses................................ Deferred acquisition costs on realized losses..... (652) 2,129 (8,081) ------------ ------------ ------------ Balance at end of year............................ $ 417,306 $ 308,591 $ 213,516 ============ ============ ============
16. Collateral finance facility liability On June 25, 2004, we closed a structured finance facility with HSBC Bank USA, N.A. This facility provides $200.0 million that can be used to collateralize reinsurance obligations under intercompany reinsurance agreements. Simultaneously we entered into a total return swap with HSBC Bank USA, N.A. under which we are entitled to the total return of the investment portfolio of the trust established for this facility. In accordance with FIN 46 we are considered to hold a beneficial interest in the trust, which is in turn considered to be a variable interest entity. As a result, the trust has been consolidated in these financial statements. The assets of the variable interest entity have been recorded as fixed maturity investments. Our consolidated income statements show the investment return of the variable interest entity as investment income and the cost of the facility in acquisition costs and other insurance expenses. The creditors of the variable interest entity have no recourse against our general assets. 17. 7.00% Convertible Junior Subordinated Notes In order to provide additional capital to support the individual in-force life reinsurance business acquired from ING we signed a Securities Purchase Agreement on October 17, 2004 with the Cypress Entities. Pursuant to the Securities Purchase Agreement, we issued to the Cypress Entities on December 31, 2004, $41,282,479 aggregate principal amount of 7.00% Convertible Junior Subordinated Notes with a maturity date 30 years from issuance (the "7.00% Convertible Junior Subordinated Notes"). Holders of the 7.00% Convertible Junior Subordinated Notes do not have voting rights. The 7.00% Convertible Junior Subordinated Notes are unsecured obligations, subordinated to all indebtedness that does not by its terms rank pari passu or junior to the 7.00% Convertible Junior Subordinated Notes, including any guarantees issued by us in respect of senior or senior subordinated indebtedness. The accrued but unpaid interest on the 7.00% Convertible Junior Subordinated Notes is payable in kind on December 1 and June 1 of each year, beginning June 1, 2005, by the issuance of additional 7.00% Convertible Junior Subordinated Notes of the same series, having the same terms and conditions as the 7.00% Convertible Junior Subordinated Notes and having a principal amount equal to the amount of such accrued and unpaid interest. However, (i) during the period from December 31, 2007 to December 31, 2014, we may at our option pay any of such accrued but unpaid interest in cash in lieu of in kind, and 105 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 17. 7.00% Convertible Junior Subordinated Notes (continued) (ii) after December 31, 2014, the Cypress Entities may at their option receive any of such accrued but unpaid interest in cash in lieu of in kind. Upon the approval of our shareholders and the receipt of all requisite regulatory approvals, the 7.00% Convertible Junior Subordinated Notes will automatically be converted into our ordinary shares at an initial conversion price of $19.375 per ordinary share, subject to customary anti-dilution adjustments. If upon approval, the requisite regulatory approvals have not been obtained, the 7.00% Convertible Junior Subordinated Notes will automatically be exchanged for additional Class C Warrants to purchase the number of ordinary shares into which the 7.00% Convertible Junior Subordinated Notes (including any accrued and unpaid interest through the date of conversion) were convertible. If we have sought shareholder approval unsuccessfully at least twice, after December 31, 2005, we may redeem all (but not less than all) of the then-outstanding 7.00% Convertible Junior Subordinated Notes for cash at a redemption price per share equal to the greater of (i) an amount equal to, (A) if prior to December 31, 2007, the initial Purchase Price paid by the Cypress Entities for the 7.00% Convertible Junior Subordinated Notes, plus an amount calculated based on an annual, compounded internal rate of return equal to the Penalty Rate (described below) on such investment for the period from December 31, 2004 through December 31, 2007 (applying the 19% Penalty Rate to such period), or (B) if after December 31, 2007, the principal amount thereof plus accrued and unpaid interest thereon through the date of repurchase, and (ii) the market value at the time of such redemption of the number of ordinary shares into which the 7.00% Convertible Junior Subordinated Notes are then convertible. In the event of a change of control of Scottish Re, we will be required to repurchase the 7.00% Convertible Junior Subordinated Notes pursuant to the terms specified in the 7.00% Convertible Junior Subordinated Notes. In the event of a Failed Condition (as defined in Note 20), the 7.00% Convertible Junior Subordinated Notes will bear interest at the Penalty Rate applied retroactively from the Closing Date until the earliest to occur of a cure of such condition, early redemption of the 7.00% Convertible Junior Subordinated Notes or the maturity thereof. The "Penalty Rate" means a rate per annum equal to, (i) if a Failed Condition occurs in 2005, 15% applicable through December 31, 2005, (ii) if a Failed Condition occurs or continues in 2006, 17% through December 31, 2006 and (iii) 19% thereafter. 18. Long-term debt Long-term debt consists of : December 31, December 31, 2004 2003 ------------ ------------ 4.5% senior convertible notes due 2022.......... $ 115,000 $ 115,000 Capital securities due 2032..................... 17,500 17,500 Preferred trust securities due 2033............. 20,000 20,000 Trust preferred securities due 2033............. 10,000 10,000 Trust preferred securities due 2034............. 32,000 - Trust preferred securities due 2034............. 50,000 - ---------- --------- $ 244,500 $ 162,500 ========== ========= 106 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 18. Long-term debt (continued) 4.5% Senior convertible notes On November 22, 2002 and November 27, 2002 we issued $115.0 million (which includes an over allotment option of $15.0 million) of 4.5% senior convertible notes, which are due December 1, 2022, to qualified institutional buyers. The notes are general unsecured obligations, ranking on parity in right of payment with all our existing and future unsecured senior indebtedness, and senior in right of payment with all our future subordinated indebtedness. Interest on the notes is payable on June 1 and December 1 of each year. The notes are rated Baa2 by Moody's and BBB- by Standard & Poor's. The notes are convertible into our ordinary shares initially at a conversion rate of 46.0617 ordinary shares per $1,000 principal amount of notes (equivalent to an initial conversion price of $21.71 per ordinary share). On conversion, we shall settle the principal amount of $115.0 million in cash. The notes are redeemable at our option in whole or in part beginning on December 6, 2006, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. The notes are subject to repurchase by us upon a change of control of Scottish Re or at a holder's option on December 6, 2006, December 1, 2010, December 1, 2012 and December 1, 2017, at a repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. The notes are due on December 1, 2022 unless earlier converted, redeemed by us at our option or repurchased by us at a holder's option. A holder may surrender notes for conversion prior to the stated maturity only under the following circumstances: o during any conversion period if the sale price of our ordinary shares for at least 20 trading days in the period of 30 consecutive trading days ending on the first day of the conversion period exceeds 120% of the conversion price in effect on that 30th trading day; o during any period in which the notes are rated by either Moody's Investors Service, Inc. or Standard & Poor's Rating Group and the credit rating assigned to the notes by either rating agency is downgraded by two levels or more, suspended or withdrawn; o if we have called those notes for redemption; or o upon the occurrence of the certain specified corporate transactions. Under a registration rights agreement, we filed with the Securities and Exchange Commission, a shelf registration statement, for resale of the notes and our ordinary shares issuable upon conversion of the notes. Capital securities due 2032 On December 4, 2002, Scottish Holdings Statutory Trust I, a Connecticut statutory business trust ("Capital Trust") issued and sold in a private offering an aggregate of $17.5 million Floating Rate Capital Securities (the "Capital Securities"). All of the common shares of the Capital Trust are owned by Scottish Holdings, Inc., our wholly owned subsidiary. The Capital Securities mature on December 4, 2032. They are redeemable in whole or in part at any time after December 4, 2007. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 4%. At December 31, 2004 and December 31, 2003, the interest rates were 6.44% and 5.15%, respectively. Prior to December 4, 107 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 18. Long-term debt (continued) 2007, interest cannot exceed 12.5%. The Capital Trust may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than December 4, 2032. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the Debentures due December 4, 2032 (as defined below). The sole assets of the Capital Trust consist of $18.0 million principal amount of Floating Rate Debentures (the "Debentures") issued by Scottish Holdings, Inc. The Debentures mature on December 4, 2032 and interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 4%. At December 31, 2004 and December 31, 2003, the interest rates were 6.44% and 5.15%, respectively. Prior to December 4, 2007, interest cannot exceed 12.5%. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than December 4, 2032. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the Debentures at any time after December 4, 2007 in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Holdings, Inc.'s obligations under the Debentures and distributions and other payments due on the Capital Securities. Trust preferred securities due 2033 On October 29, 2003, Scottish Holdings, Inc. Statutory Trust II, a Connecticut statutory business trust ("Capital Trust II") issued and sold in a private offering an aggregate of $20.0 million Preferred Trust Securities (the "Trust Preferred Securities"). All of the common shares of Capital Trust II are owned by Scottish Holdings, Inc. The Trust Preferred Securities mature on October 29, 2033. They are redeemable in whole or in part at any time after October 29, 2008. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.95%. At December 31, 2004 and December 31, 2003, the interest rates were 6.08% and 5.10%, respectively. Prior to October 29, 2008, interest cannot exceed 12.45%. Capital Trust II may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than October 29, 2033. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the Floating Rate Debentures due October 29, 2033 (as described below). The sole assets of Capital Trust II consist of $20.6 million principal amount of Floating Rate Debentures (the "2033 Floating Rate Debentures") issued by Scottish Holdings, Inc. The 2033 Floating Rate Debentures mature on October 29, 2033 and interest is payable quarterly at 3 month LIBOR plus 3.95%. At December 31, 2004 and December 31, 2003, the interest rates were 6.08% and 5.10%, respectively. Prior to October 29, 2008, interest cannot exceed 12.45%. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than October 29, 2033. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the 2033 Floating Rate Debentures at any time after October 29, 2008 and in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Holdings, Inc.'s obligations under the 2033 Floating Rate Debentures and distributions and other payments due on the Trust Preferred Securities. 108 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 18. Long-term debt (continued) Trust preferred securities due 2033 On November 14, 2003, GPIC Holdings Inc. Statutory Trust, a Delaware statutory business trust ("GPIC Trust") issued and sold in a private offering an aggregate of $10.0 million Trust Preferred Securities (the "2033 Trust Preferred Securities"). All of the common shares of GPIC Trust are owned by Scottish Holdings, Inc. The 2033 Trust Preferred Securities mature on September 30, 2033. They are redeemable in whole or in part at any time after September 30, 2008. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.90%. At December 31, 2004 and December 31, 2003, the interest rates were 6.46% and 5.05%, respectively. GPIC Trust may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than September 30, 2033. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the Junior Subordinated Notes due September 30, 2033 (as described below). The sole assets of GPIC Trust consist of $10.3 million principal amount of Junior Subordinated Notes (the "Junior Subordinated Notes") issued by Scottish Holdings, Inc. The Junior Subordinated Notes mature on September 30, 2033 and interest is payable quarterly at 3 month LIBOR plus 3.90%. At December 31, 2004 and December 31, 2003, the interest rates were 6.46% and 5.05%, respectively. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than September 30, 2033. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the Junior Subordinated Notes at any time after September 30, 2008 and in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Holdings, Inc.'s obligations under the Junior Subordinated Notes and distributions and other payments due on the trust preferred securities. Trust preferred securities due 2034 On May 12, 2004, Scottish Holdings, Inc. Statutory Trust III, a Connecticut statutory business trust ("Capital Trust III") issued and sold in a private offering an aggregate of $32.0 million Trust Preferred Securities (the "2034 Trust Preferred Securities"). All of the common shares of Capital Trust III are owned by Scottish Holdings, Inc. The 2034 Trust Preferred Securities mature on June 17, 2034. They are redeemable in whole or in part at any time after June 17, 2009. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.80%. At December 31, 2004, the interest rate was 6.30125%. Prior to June 17, 2009, interest cannot exceed 12.50%. Capital Trust III may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than June 17, 2034. Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. defers interest on the 2034 Floating Rate Debentures due June 17, 2034 (as described below). The sole assets of Capital Trust III consist of $33.0 million principal amount of Floating Rate Debentures (the "2034 Floating Rate Debentures") issued by Scottish Holdings, Inc. The 2034 Floating Rate Debentures mature on June 17, 2034 and interest is payable quarterly at 3 month LIBOR plus 3.80%. At December 31, 2004 the interest rate was 6.30125%. Prior to June 17, 2009, interest cannot exceed 12.50%. Scottish Holdings, Inc. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than June 17, 2034. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Holdings, Inc. may redeem the 109 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 18. Long-term debt (continued) 2034 Floating Rate Debentures at any time after June 17, 2009 and in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Holdings, Inc.'s obligations under the 2034 Floating Rate Debentures and distributions and other payments due on the 2034 Trust Preferred Securities. Trust preferred securities due 2034 On December 18, 2004, SFL Statutory Trust I, a Delaware statutory business trust ("SFL Trust I") issued and sold in a private offering an aggregate of $50.0 million Trust Preferred Securities (the "December 2034 Trust Preferred Securities"). All of the common shares of SFL Trust I are owned by Scottish Financial (Luxembourg) S.a.r.l. The December 2034 Trust Preferred Securities mature on December 15, 2034. They are redeemable in whole or in part at any time after December 15, 2009. Interest is payable quarterly at a rate equivalent to 3 month LIBOR plus 3.50%. At December 31, 2004, the interest rate was 5.95%. Prior to December 15, 2009, interest cannot exceed 12.50%. SFL Trust I may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than December 15, 2034. Any deferred payments would accrue interest quarterly on a compounded basis. The sole assets of SFL Trust I consist of $51.5 million principal amount of Floating Rate Debentures (the "December 2034 Floating Rate Debentures") issued by Scottish Financial (Luxembourg) S.a.r.l. The December 2034 Floating Rate Debentures mature on December 15, 2034 and interest is payable quarterly at 3 month LIBOR plus 3.50%. At December 31, 2004 the interest rate was 5.95%. Prior to December 15, 2009, interest cannot exceed 12.50%. Scottish Financial (Luxembourg) S.a.r.l. may defer payment of the interest for up to 20 consecutive quarterly periods, but no later than December 15, 2034. Any deferred payments would accrue interest quarterly on a compounded basis. Scottish Financial (Luxemburg) S.a.r.l. may redeem the December 2034 Floating Rate Debentures at any time after December 15, 2009 and in the event of certain changes in tax or investment company law. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has guaranteed Scottish Financial (Luxembourg) S.a.r.l.'s obligations under the December 2034 Floating Rate Debentures and distributions and other payments due on the December 2034 Trust Preferred Securities. 19. Mezzanine equity On December 17, and December 22, 2003, we issued in a public offering 5,750,000 HyCUs. The aggregate net proceeds were $141.9 million. Each HyCU consists of: o A purchase contract under which the holder agrees to purchase an agreed upon number of ordinary shares on February 15, 2007 at a purchase price of $25.00; and o A convertible preferred share with a liquidation preference of $25.00, convertible into ordinary shares, which we will settle in cash and ordinary shares on May 21, 2007. 110 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 19. Mezzanine equity (continued) The agreed upon number of shares that a purchase contract will be settled for is called the "settlement rate". The settlement rate on each purchase contract is as follows: o If the average closing price per ordinary share on each of the 20 consecutive trading days ending on the fourth trading day preceding February 15, 2007 (the "Applicable Market Value"), is less than or equal to $19.32, then each purchase contract will be settled for 1.294 ordinary shares. o If the Applicable Market Value is greater than $19.32, then each purchase contract will be settled for a number of ordinary shares by dividing $25.00 by the Applicable Market Value. The convertible shares will be initially convertible into 1.0607 ordinary shares per $25.00 liquidation preference (referred to as the "conversion rate"), subject to anti-dilution adjustments. This reflects an initial conversion price of $23.57. Upon conversion we will deliver cash equal to the $25.00 liquidation preference and ordinary shares for the value of the excess, if any, of the conversion obligation minus the liquidation preference. The conversion obligation is the conversion rate at the time of conversion multiplied by the average trading price of our ordinary shares for a specified period following the redemption date. Amounts will accumulate under the HyCUs at a rate of 5.875% per year, payable quarterly beginning February 14, 2004. These amounts will consist of: o Quarterly contract adjustment payments at a rate of 4.875% per year; and o Dividends at a rate of 1.00% per year on the convertible preferred shares, payable quarterly when declared by our board of directors. We may defer contract adjustment payments until no later than the purchase contract settlement date. Each convertible preferred share is pledged to us to secure the holder's obligation under the purchase contract. A holder of the HyCU can obtain the release of the pledged convertible share by substituting zero-coupon treasury securities as security for the obligation under the purchase contract. The resulting unit is then known as a Treasury Unit. Holders of Treasury Units can recreate HyCUs by re-substituting the convertible preferred shares and withdrawing the treasury securities. The convertible preferred shares will be mandatorily redeemed on May 21, 2007. We have accounted for the HyCUs in accordance with SFAS No. 150 " Accounting for Certain Instruments with Characteristics of Debt and Equity". Accordingly, the HyCUs have been recorded as mezzanine equity of $142.4 million, which is net of issuance costs related to the convertible preferred shares. The present value of the contract adjustment payments (discounted at a rate of 4.75%) is included in other liabilities and resulted in a decrease in additional paid-in capital at the date of issuance. Issue costs on the forward contract have also been included in additional paid-in capital. The dividends on the convertible preferred shares are included in interest expense. 111 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 20. Shareholders' equity Ordinary shares We are authorized to issue 100,000,000 ordinary shares of par value $0.01 each. On April 4, 2002, we completed a public offering of 6,750,000 ordinary shares (which included the over-allotment option of 750,000 ordinary shares) in which we raised aggregate net proceeds of $114.3 million. We used the proceeds of the equity offering to repay short-term borrowings of $40.0 million and the remainder for general corporate purposes. During 2002, we issued 32,500 shares to employees upon the exercise of stock options. On July 23, 2003, we completed a public offering of 9,200,000 ordinary shares (which included an over-allotment option of 1,200,000 ordinary shares) in which we raised aggregate net proceeds of $180.1 million. We used $30.0 million of these proceeds to repurchase 1,525,000 ordinary shares from Pacific Life at a purchase price of $19.66 per share. During the year ended December 31, 2004 and 2003 we issued 750,000 and 180,000 ordinary shares, respectively, to employees upon the exercise of stock options. During the year ended December 31, 2003 we issued 200,000 ordinary shares upon the exercise of Class A Warrants and we repurchased 200,000 Class B Warrants for $3.0 million. In order to provide additional capital to support the individual life reinsurance business acquired from ING we signed a Securities Purchase Agreement on October 17, 2004 with the "Cypress Entities". Pursuant to the Securities Purchase Agreement, we issued to the Cypress Entities on December 31, 2004: (i) 3,953,183 ordinary shares, par value $0.01 per share (equal to 9.9% of the aggregate number of ordinary shares issued and outstanding on December 31, 2004, taking into account such issuance); (ii) Class C Warrants to purchase 3,206,431 ordinary shares (equal to the difference between (A) 19.9% of the ordinary shares issued and outstanding on December 31, 2004 (without taking into account the issuance of ordinary shares pursuant to (i) above) and (B) the number of ordinary shares issued to the Cypress Entities as provided in (i) above); and (iii) The 7.00% Convertible Junior Subordinated Notes discussed in Note 17. The proceeds from the Cypress Entities net of a commitment fee and other expenses amounted to $126.9 million. The Class C Warrants are exercisable at an exercise price equal to $0.01 per share. The number of ordinary shares for which the Class C Warrants are exercisable will be subject to customary anti-dilution adjustments. The Class C Warrants do not have voting rights and are not exercisable until (i) our shareholders approve (A) certain amendments to our articles of association to allow the Cypress Entities to hold more than 9.9% of our issued and outstanding ordinary shares, and (B) the issuance of more than 20% of our ordinary shares to the Cypress Entities, as required by New York Stock Exchange rules (the "Shareholder Proposals"), and (ii) requisite regulatory approvals have been obtained from insurance regulators in Delaware and the United Kingdom. Notwithstanding the foregoing, the Class C Warrants will become exercisable (i) immediately upon their transfer to an unaffiliated third party provided that such transfer complies with the ownership limitations contained in our articles of association or (ii) to the extent the exercise thereof would not cause the Cypress Entities to own in the aggregate greater than 9.9% 112 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 20. Shareholders' equity (continued) of the ordinary shares then outstanding. Upon shareholder approval and the receipt of all requisite regulatory approvals, the Class C Warrants will automatically be exercised for the applicable number of ordinary shares. In the event that a change of control of Scottish Re occurs and the Class C Warrants cannot be exercised in full for ordinary shares by the terms of the our articles of association or by applicable law, the holders of Class C Warrants may require us to repurchase the unexercised Class C Warrants pursuant to the terms specified in the Class C Warrants. If shareholder approval is not obtained by June 30, 2005 (a "Failed Condition"), we will make additional payments on the Class C Warrants by paying cash equal to, on a per annum basis, 5% of the product of (i) the number of ordinary shares underlying the Class C Warrants then held by the Cypress Entities and (ii) the Purchase Price, or, Scottish Re's option in lieu of cash, by issuing additional 7.00% Convertible Junior Subordinated Notes with an equivalent aggregate principal amount, such payment or issuance to be made on the business day immediately following the date of occurrence of the Failed Condition, and on each six-month anniversary thereafter, until shareholder approval has been obtained. In addition, until shareholder approval has been obtained, we will make an additional payment on the Class C Warrants equal to the dividend then currently payable on ordinary shares, which will be assumed to be no less than $0.20 per share per annum. At December 31, 2004, there were 39,931,145 outstanding ordinary shares. Preferred shares We are authorized to issue 50,000,000 preferred shares of par value $0.01 each. On December 17 and December 22, 2003, in connection with our HyCU offering, we issued 5,750,000 convertible preferred shares having a per share liquidation preference of $25 and an initial conversion rate of 1.067 ordinary shares per $25 liquidation preference, subject to anti-dilution adjustments. The convertible preferred shares have a 1% annual dividend rate and will be mandatorily redeemed by us on May 21, 2007. See Note 19 for additional description of the terms of the convertible preferred shares. Warrants At December 31, 2002 there were 2,850,000 Class A Warrants and 200,000 Class B Warrants outstanding, each class with an exercise price of $15.00. During the year ended December 31, 2003 we issued 200,000 ordinary shares upon the exercise of Class A Warrants and we repurchased 200,000 Class B Warrants for $3.0 million. As at December 31, 2003 there are 2,650,000 Class A Warrants outstanding. In connection with our initial capitalization, we issued Class A Warrants to related parties to purchase an aggregate of 1,550,000 ordinary shares. The aggregate consideration of $0.1 million paid for these Warrants is reflected as additional paid-in capital. In connection with our initial public offering, we issued an aggregate of 1,300,000 Class A Warrants. All Class A Warrants are exercisable at $15.00 per ordinary share, in equal amounts over a three-year period commencing November 1999 and expire in November 2008. On December 31, 2004, we issued Class C Warrants to the Cypress Entities as discussed above. 113 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 21. Employee benefit plans Pension plan We provide retirement benefits to the majority of employees, under defined contribution plans. Defined contribution plan expenses totaled $1.4 million and $1.1 million, and $0.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. In 2002 pension benefits were provided to Scottish Re Holdings Limited employees under a defined benefit pension plan. During 2003, we established a defined contribution plan for Scottish Re Holdings Limited. New employees in 2003 joined this plan and a number of employees transferred from the defined benefit scheme to the defined contribution scheme. A small number of employees remain in the defined benefit plan and, additionally, there are preserved benefits for some transferees and some ex-employees in the defined benefit plan. 114 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 21. Employee benefit plans (continued) The defined benefit plan asset activity and movement on the defined benefit plan obligation is as follows:
December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Change in plan assets Fair value of plan assets at beginning of year....... $ 8,243 $ 4,395 $ 3,838 Foreign currency translation adjustment.............. 726 712 - Actual return on plan assets......................... 598 721 (515) Contributions........................................ 925 2,487 1,330 Benefits paid........................................ (147) (72) (258) ---------- ---------- ---------- Fair value of plan assets at end of year $ 10,345 $ 8,243 $ 4,395 ========== ========== ========== December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Change in benefit obligation Benefit obligation at beginning of year.............. $ 8,181 $ 6,120 $ 4,155 Foreign currency translation adjustment.............. 719 738 - Service cost......................................... 331 508 314 Interest cost........................................ 478 363 243 Actuarial loss....................................... 675 524 1,666 Benefits paid........................................ (147) (72) (258) ---------- ---------- ---------- Benefits obligation at end of year $ 10,237 $ 8,181 $ 6,120 ========== ========== ========== Funded status........................................ $ 108 $ 62 $ (1,725) Unrecognized net loss................................ 3,452 2,747 2,475 ---------- ---------- ---------- Prepaid benefit cost................................. $ 3,560 $ 2,809 $ 750 ========== ========== ==========
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost................................. $ 3,560 $ 2,809 $ 750 Accumulated other comprehensive income............... - - (1,959) ---------- ---------- ---------- Net amount recognized................................ $ 3,560 $ 2,809 $ (1,209) ========== ========== ========== Weighted average assumptions as of December 31, 2004 and 2003 Weighted average discount rate..................... 5.50% 5.50% 5.50% Expected return on plan assets..................... 6.00% 6.50% 6.50% Rate of salary increases........................... 2.80% 4.25% 4.25% Rate of inflation.................................. 2.80% 2.50% 2.25%
115 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 21. Employee benefit plans (continued) Plan assets are invested in third party investment funds that are managed externally. The assets consist of equities, fixed maturities and cash. The components of net defined benefit pension costs are as follows:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Service cost....................................... $ 331 $ 553 $ 314 Interest cost...................................... 478 395 243 Expected return on plan assets..................... (514) (346) (295) Loss amortization.................................. 128 115 - ---------- ---------- ---------- Net periodic pension cost.......................... $ 423 $ 717 $ 262 ========== ========== ==========
As a result of the accumulated benefit obligation being in excess of plan assets at December 31, 2002 a minimum pension liability adjustment, net of tax, of $1.4 million was recorded in other accumulated comprehensive income. At December 31, 2003, plan assets were in excess of the accumulated benefit obligation resulting in a change in other comprehensive income of $1.4 million. At December 31, 2004, plan assets were in excess of the accumulated benefit obligation, resulting in no change in the comprehensive income during the year. 401(k) plan We sponsor a 401(k) plan in the U.S. in which employee contributions on a pre-tax basis are supplemented by matching contributions. These contributions are invested, at the election of the employee, in one or more investment portfolios. Expenses for the plan amounted to $697,000, $482,000, and $390,000, respectively, in the years ended December 31, 2004, 2003 and 2002. Stock option plans We have four stock option plans (the "1998 Plan", the "1999 Plan", the "Harbourton Plan" and the "2001 Plan", collectively the "Plans") and an equity incentive compensation plan ("the 2004 ECP"). The Plans allow us to grant non-statutory options, subject to certain restrictions, to certain eligible employees, non-employee directors, advisors and consultants. The minimum exercise price of the options will be equal to the fair market value, as defined in the Plans, of our ordinary shares at the date of grant. The term of the options is between seven and ten years from the date of grant. Unless otherwise provided in each option agreement, all granted options issued prior to December 31, 2001 become exercisable in three equal annual installments. All options granted between January 1, 2002 and May 4, 2004, will become exercisable in five equal installments commencing on the first anniversary of the grant date, except for annual grants of 2,000 to each director, which are fully exercisable on the date of grant. All options issued after May 5, 2004, become exercisable in three equal annual installments commencing on the first anniversary of the grant date. Total options authorized under the Plans are 3,750,000. At our Annual General Meeting held on May 5, 2004, our shareholders approved the 2004 ECP. This plan allows us to grant non-statutory options and restricted stock, subject to certain restrictions, to certain eligible employees, non-employee directors, advisors and consultants. For the first year of the 2004 ECP or the first 250,000 options issued, the minimum exercise price of the options will be equal to 110% of fair market value. At the 116 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 21. Employee benefit plans (continued) discretion of our Compensation Committee, option grants after the first year of the 2004 ECP or in excess of 250,000 options may have a minimum exercise price equal to the fair market value of our ordinary shares at the date of grant. The term of the options shall not be more than ten years from the date of grant. Options will become exercisable in three equal installments commencing on the first anniversary of the grant date. Total options authorized under the 2004 ECP are 750,000. In addition, 1,000,000 restricted shares have been authorized under the 2004 ECP of which at least 750,000 will vest based on achievement of certain performance goals. The remaining 250,000 restricted shares may be issued without performance goals. During the year we issued 90,000 units under the terms of the 2004 ECP. The issuance of these units resulted in a charge to income of $271,000 in 2004. In prior years, we adopted the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee stock options. Since the exercise price of the stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense was recognized. In December 2002, the Financial Accounting Standards Board issued SFAS No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123". Effective January 1, 2003, we adopted the modified prospective method of fair value-based stock option expense provisions of SFAS No. 123 as amended by SFAS No. 148. Compensation expense has been recognized for all stock options granted since January 1, 2003. This has resulted in a charge to income of $844,000, $207,000 and $422,000 in the years ended December 31, 2004, 2003, and 2002 respectively. Pro forma information regarding net income and earnings per share for all outstanding stock options is required by SFAS No. 148 and has been determined as if we accounted for all employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period using the Black-Scholes model. The Black-Scholes and Binomial option-pricing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. 117 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 21. Employee benefit plans (continued) Option activity under all Plans is as follows:
Year Ended Year Ended Year Ended December 31, 2004 December 31, 2003 December 31, 2002 ----------------- ----------------- ----------------- Outstanding, beginning of year.... 3,086,651 3,398,103 2,750,601 Granted........................... 253,000 180,000 861,500 Exercised......................... (749,551) (425,955) (32,500) Cancelled......................... (98,864) (65,497) (181,498) ---------- ---------- ---------- Outstanding and exercisable, end of year....................... 2,491,236 3,086,651 3,398,103 ========== ========== ========== Weighted average exercise price per share:....................... Granted........................... $ 23.5164 $ 18.2515 $ 18.0262 Exercised......................... $ 11.1209 $ 10.7494 $ 8.5982 Cancelled......................... $ 17.9752 $ 18.2339 $ 14.2490 Outstanding and exercisable, end of year....................... $ 14.8860 $ 13.3634 $ 12.8706
Summary of options outstanding at December 31, 2004:
Weighted Weighted Weighted Average Weighted Average Average Remaining Number of Average Remaining Year of Number of Range of Exercise Contractual Shares Exercise Contractual Grant Shares Exercise Prices Price Life Vested Price Life ----- ------ --------------- ----- ---- ------ ----- ---- 1998 403,336 $15.0000 $15.0000 3.92 403,336 $15.0000 3.92 1999 222,100 $8.0625 - $15.0000 $11.2936 3.12 222,100 $11.2936 3.12 2000 555,000 $7.7500 - $9.0000 $8.1896 4.90 555,000 $8.1896 4.90 2001 311,500 $7.0000 - $18.7600 $14.6627 5.32 311,500 $14.6627 5.32 2002 572,300 $15.5000 - $21.5100 $17.9842 7.17 239,000 $18.1194 7.17 2003 174,000 $16.6000 - $21.5100 $18.2276 8.43 46,000 $18.0991 8.41 2004 253,000 $21.7000 - $23.8700 $23.5164 9.34 22,000 $22.0864 9.57 --------- ------------------- -------- ---- --------- -------- --------- 2,491,236 $7.0000 - $23.8700 $14.8860 6.17 1,798,936 $11.7862 5.43 ========= =================== ======== ==== ========= ======== =========
Option Plans Option Plans not Approved Approved by by Total Option Shareholders Shareholders Plans ------------ ------------ ----- Outstanding....................................... 1,813,736 677,500 2,491,236 Weighted average exercise price................... $ 13.8338 $ 15.2791 $ 13.3634 Available for future issuance..................... 63,225 1,639,197 1,702,422
Pro forma information regarding net income and earnings per share is required by SFAS No. 148, and has been determined as if we accounted for all the employee stock options under the fair value method of that Statement. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the input of highly subjective assumptions including the expected price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. 118 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 21. Employee benefit plans (continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period using the Black-Scholes model. Our pro forma information is as follows:
Year Ended Year Ended Year Ended December December December 31, 2004 31, 2003 31, 2002 ---------- ---------- ---------- Net income -- as reported............................... $ 71,391 $ 27,281 $ 32,524 Stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported. 844 207 639 Stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards............... (1,448) (2,384) (3,432) --------- --------- --------- Net income -- pro forma................................. $ 70,787 $ 25,104 $ 29,731 ========= ========= ========= Year Ended Year Ended Year Ended December December December 31, 2004 31, 2003 31, 2002 ---------- ---------- ---------- Basic net income per share -- as reported............... $ 1.99 $ 0.89 $ 1.29 Basic net income per share -- pro forma................. $ 1.98 $ 0.82 $ 1.17 Diluted net income per share -- as reported............. $ 1.90 $ 0.85 $ 1.23 Diluted net income per share -- pro forma............... $ 1.89 $ 0.78 $ 1.11 The weighted average fair value of options granted in each year is as follows: Year Ended Year Ended Year Ended December December December 31, 2004 31, 2003 31, 2002 ---------- ---------- ---------- Discounted exercise price........................... -- -- -- Market price exercise price......................... $ 7.6581 $ 6.8170 $ 6.5239 Premium exercise price.............................. -- -- -- The fair value for the options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: 2004 2003 2002 ---- ---- ---- Expected dividend yield............................. 0.77% - 0.82% 1.00% - 0.82% 1.00% Risk free interest rate............................. 1.06% - 4.77% 1.06% - 4.44% 1.09%-4.14% Expected life of options............................ 7 years 7 years 7 years Expected volatility................................. 0.4 0.4 0.3
As of December 31, 2004, 133,334 options were outstanding in respect of non-employees (2003- 160,501; 2002- 89,001). In 2002 we modified the awards of certain employees on their termination of employment. The expense recorded in respect of this modification was $639,000. We apply the fair value method of SFAS No. 123 in accounting for stock options granted to non-employees who provide services to us. 119 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 22. Taxation There is presently no taxation imposed on income or capital gains by the Governments of Bermuda and the Cayman Islands. Our Bermuda companies have been granted an exemption from income, withholding or capital gain taxation in Bermuda until 2016. If any taxation on income or capital gains enacted in the Cayman Islands, Scottish Re and Scottish Annuity & Life Insurance Company (Cayman) Ltd. have been granted an exemption until 2018; and The Scottish Annuity Company (Cayman) Ltd. has been granted exemptions until 2014. These companies operate in a manner such that they will owe no U.S. tax other than premium excise taxes and withholding taxes on certain investment income. Additionally, we have operations in various jurisdictions around the world including, but not limited to, the U.S., U.K., Ireland and Luxembourg that are subject to relevant taxes in those jurisdictions. Undistributed earnings of our subsidiaries are considered indefinitely reinvested and, accordingly, no provision for U.S. federal withholding taxes has been provided thereon. Our U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. Upon distribution of current or accumulated earnings and profits in the form of dividends or otherwise from our U.S. subsidiaries to us, we would be subject to U.S. withholding taxes at a 5% rate. At December 31, 2004, we had net operating loss carry-forwards of approximately $129.2 million, (2003-$168.4 million) for income tax purposes that expire in years 2012 through 2024. These net operating loss carry-forwards resulted primarily from our 1999 acquisition of Scottish Re (U.S.), Inc. and from current operations of Scottish Re (U.S.), Inc. and Scottish Re Life Corporation. Significant components of our deferred tax assets and liabilities as of December 31, 2004 and 2003 were as follows: December 31, December 31, 2004 2003 ------------ ------------ Deferred tax asset: Net operating losses........................... $ 46,268 $ 61,077 Reserves for future policy benefits............ 29,029 13,656 Unrealized depreciation on investments......... 793 483 Intangible assets.............................. 8,933 -- Negative proxy deferred acquisition costs...... 14,025 1,816 Alternative minimum tax credit................. 2,318 -- Other.......................................... 6,783 3,121 ------------ ------------ Total deferred tax asset.......................... 108,149 80,153 ------------ ------------ Deferred tax liability:........................... Unrealized appreciation on investments......... (7,478) (8,387) Undistributed earnings of U.K. subsidiaries.... (4,959) (6,315) Deferred acquisition costs..................... (9,415) (21,893) Pension liability.............................. (1,068) (859) Reserves for future policy benefits............ (24,433) (27,086) Present value of in-force...................... (18,153) -- Other.......................................... (5,465) (2,989) ------------ ------------ Total deferred tax liability...................... (70,971) (67,529) ------------ ------------ Net deferred tax asset (liability)................ $ 37,178 $ 12,624 ------------ ------------ Valuation allowance (22,148) -- ============ ============ 120 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 22. Taxation (continued) Net deferred tax asset $ 15,030 $ 12,624 ============ ============ At December 31, 2004, we believe that it is more likely than not that all gross deferred tax assets will reduce taxes payable in future years except for a valuation allowance of $22.1 million established in 2004. This valuation allowance is in respect of negative proxy deferred acquisition costs and deferred acquisition costs arising in respect of the acquisition of the ING individual life reinsurance business. This was established as a result of the purchase accounting for the acquisition and therefore has not been included in the determination of net income. We have also established reserves when we believe that certain tax positions are likely to be challenged and we may not fully prevail in overcoming these challenges. For the years ended December 31, 2004, 2003 and 2002 we have income tax expense (benefit) from operations as follows:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Current tax expense (benefit).................. $ 8,526 $ 1,075 $ 1,421 Deferred tax benefit........................... (25,205) (12,180) (3,315) ----------- ----------- ----------- Total tax benefit.............................. $ (16,679) $ (11,105) $ (1,894) =========== =========== ===========
The acquisition of the ING individual life reinsurance business is reflected under U.S. generally accepted accounting principles in accordance with purchase accounting requirements but for taxation is a currently taxable transaction. As a result, approximately $84.0 million of current tax expense and a corresponding $84.0 million of deferred tax benefit are netted in the income statement and are not reflected in the table above. Income tax expense (benefit) attributable to continuing operations differ from the amount of income tax expense (benefit) that would result from applying the federal statutory rates to pretax income from operating due to the following:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Pretax GAAP income at 34%...................... $ 18,853 $ 12,833 $ 10,310 Income not subject to tax at 34%............... (28,588) (24,229) (16,819) Foreign taxes.................................. (8,578) 3,109 3,997 Negative deferred acquisition costs............ (934) (1,427) 695 Other and state taxes.......................... 2,568 (1,391) (77) ------------ ------------ ------------ Total tax benefit ............................. $ (16,679) $ (11,105) $ (1,894) ============ ============ ============
23. Statutory requirements and dividend restrictions Our Bermuda insurance companies are required to maintain a minimum capital of $0.25 million. Under The Insurance Law of the Cayman Islands, Scottish Annuity & Life Insurance Company (Cayman) Ltd. and The Scottish Annuity Company (Cayman) Ltd. must each maintain a minimum net capital worth of $0.24 million. 121 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 23. Statutory requirements and dividend restrictions (continued) Our ability to pay dividends depends significantly on the ability of Scottish Annuity & Life Insurance Company (Cayman) Ltd., The Scottish Annuity Company (Cayman) Ltd. and Scottish Re Holdings Limited to pay dividends to Scottish Re. While we are not subject to any significant legal prohibitions on the payment of dividends, Scottish Annuity & Life Insurance Company (Cayman) Ltd. and The Scottish Annuity Company (Cayman) Ltd. are subject to the Cayman Islands regulatory constraints, which affect their ability to pay dividends. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and The Scottish Annuity Company (Cayman) Ltd. are prohibited from declaring or paying a dividend if such payment would reduce their net capital worth below $0.24 million. The maximum amount of dividends that can be paid by Scottish Re (U.S.), Inc. (a Delaware domiciled insurance company) and Scottish Re Life Corporation (a Delaware domiciled insurance company) without prior approval of the Insurance Commissioner is subject to restrictions relating to statutory surplus and operating earnings. The maximum dividend payment that may be made without prior approval is limited to the greater of the net gain from operations for the preceding year or 10% of statutory surplus as of December 31 of the preceding year not exceeding earned surplus. The statutory earned surplus of Scottish Re (U.S.), Inc. and Scottish Re Life Corporation at December 31, 2004 were $(227.8) million (2003 - $(212.5) million) and $(68.3) million (2003- $(2.1) billion), respectively, accordingly no dividends can be paid from either company in 2005 without the prior approval of the Insurance Commissioner. Scottish Re (U.S.), Inc.'s net assets, which are restricted by the above are $253.7 million (2003 - $51.9 million) and Scottish Re Life Corporation's net assets, which are restricted are $75.5 million (2003- $143.8 million). The NAIC prescribes risk-based capital ("RBC") requirements for U.S. domiciled life and health insurance companies. As of December 31, 2004 and 2003, Scottish Re (U.S.), Inc. and Scottish Re Life Corporation exceeded all minimum RBC requirements. In connection with the Insurance Companies Act 1982 of the United Kingdom, Scottish Re Limited is required to maintain statutory minimum net capital of approximately $65.4 million at December 31, 2004 (December 31,2003 - $34.0 million). Scottish Re Limited had statutory capital of approximately $78.7 million at December 31, 2004 (December 31, 2003 - $58.0 million). 24. Commitments and contingencies Credit facilities On December 29, 2004, we, Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited closed a $175.0 million, 364-day revolving credit facility with a syndicate of banks led by Bank of America, N.A. The facility provides capacity for borrowing and for extending letters of credit. The proceeds from the facility will be used for working capital, capital expenditures and general corporate purposes. The facility is a direct financial obligation of each of the borrowers; however, we have guaranteed the payment of obligations of Scottish Re (Dublin) Limited, Scottish Re (U.S.), Inc., and Scottish Re Limited. The facility may be increased to an aggregate principal amount of $200.0 million. The interest rate on each loan made under the facility, as determined by the nature of the loan, will be at (i) the Federal Funds Rate plus 0.50%, (ii) the prime rate as announced by Bank of America, N.A., or (iii) the British Bankers Association LIBOR Rate plus an applicable margin. The facility requires that Scottish Annuity & Life Insurance Company (Cayman) Ltd. maintain a minimum amount of shareholder's equity, a debt to capitalization ratio of less than 20% and uncollateralized assets of 1.2 122 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 24. Commitments and contingencies (continued) times borrowings. In addition, the facility requires that Scottish Re Group Limited maintain a minimum amount of shareholders' equity, and a debt to capitalization ratio of less than 30%. The facility also requires that Scottish Re (U.S.), Inc. maintain minimum capital and surplus equal to the greater of (i) $20 million or (ii) the amount necessary to prevent a company action level event from occurring under the risk based capital laws of Delaware. Our failure to comply with the requirements of the credit facility would, subject to grace periods, result in an event of default, and we could be required to repay any outstanding borrowings. At December 31, 2004, there were no borrowings under the facilities. Outstanding letters of credit under these facilities amounted to $35.8 million as at December 31, 2004. We also have a reverse repurchase agreement with a major broker/dealer. Under this agreement, we have the ability to sell agency mortgage backed securities with the agreement to repurchase them at a fixed price, providing the dealer with a spread that equates to an effective borrowing cost linked to one-month LIBOR. This agreement is renewable monthly at the discretion of the broker/dealer. At December 31, 2004, there were no borrowings under this agreement. 123 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 24. Commitments and contingencies (continued) Lease commitments Scottish Re and its subsidiaries lease office space in the countries in which they conduct business under operating leases that expire at various dates through 2023. Total rent expense with respect to these operating leases for the years ended December 31, 2004, 2003 and 2002, were approximately $1.9 million, $1.7 million and $0.9 million respectively. Future minimum lease payments under the leases are expected to be: Year ending December 31 ---------------------------------------------- -------- 2005.......................................... $ 2,656 2006.......................................... 2,681 2007.......................................... 2,668 2008.......................................... 2,699 2009.......................................... 2,731 Later years................................... 20,158 -------- Total future lease commitments................ $ 33,593 ======== Legal proceedings In the normal course of our business, we and our subsidiaries are occasionally involved in litigation. The ultimate disposition of such litigation is not expected to have a material adverse effect on our financial condition, liquidity or results of operations. 25. Subsequent Events On January 12, 2005 we closed an offering of $325.0 million Collateral Facility Securities by Stingray Pass-Through Trust issued under Rule 144A. This facility allows Scottish Annuity & Life Insurance Company (Cayman) Ltd. to issue funding agreements at a pre-determined price, without any condition and at any time, in exchange for a portfolio of highly rated 30-day commercial paper. The facility matures on January 12, 2015. On February 11, 2005 we closed an offering of $850.0 million 30 year maturity securities from a newly formed , wholly owned subsidiary Orkney Holdings, LLC. Proceeds from this offering will fund the XXX reserve requirements for level premium term life insurance policies reinsured by Scottish Re (U.S.), Inc. between January 1, 2000 and December 31, 2003. The securities are guaranteed by MBIA Insurance Corporation, and are rated "AAA" by Standard & Poor's and Aaa by Moody's. 124 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2004 26. Quarterly financial data (Unaudited) Quarterly financial data for the year ended December 31, 2004 is as follows:
Quarter Ended ---------------------------------------------------- December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- Total revenue.......................................... $ 210,645 $ 195,085 $ 226,909 $ 179,178 Income (loss) from continuing operations before 10,970 6,194 26,970 11,317 income taxes and minority interest.................. Income from continuing operations...................... 21,257 11,578 28,671 10,093 Net income............................................. 21,049 11,578 28,671 10,093 Basic earnings per ordinary share...................... $ 0.58 $ 0.32 $ 0.80 $ 0.29 Diluted earnings per ordinary share.................... $ 0.56 $ 0.31 $ 0.77 $ 0.27 Quarterly financial data for the year ended December 31, 2003 is as follows: Quarter Ended ---------------------------------------------------- December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- Total revenue.......................................... $ 196,465 $ 134,550 $ 129,539 $ 96,813 Income from continuing operations before income taxes and minority interest......................... 27,224 (6,383) 9,233 7,672 Income from continuing operations...................... 30,268 1,782 9,317 7,422 Net income............................................. 10,542 1,625 7,872 7,242 Basic earnings per ordinary share...................... $ 0.30 $ 0.05 $ 0.29 $ 0.27 Diluted earnings per ordinary share.................... $ 0.29 $ 0.05 $ 0.28 $ 0.26
Computations of results per share for each quarter are made independently of results per share for the year. Due to rounding and transactions affecting the weighted average number of shares outstanding in each quarter, the sum of quarterly results per share does not equal results per share for the year. 125 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Michael C. French - ---------------------------------- Michael C. French Chairman and Director March 18, 2005 /s/ Michael Austin - ---------------------------------- Michael Austin Director March 18, 2005 /s/ G. William Caulfeild-Browne - ---------------------------------- G. William Caulfeild-Browne Director March 18, 2005 /s/ Robert M. Chmely - ---------------------------------- Robert M. Chmely Director March 18, 2005 /s/ Jean Claude Damerval - ---------------------------------- Jean Claude Damerval Director March 18, 2005 /s/ Lord Norman Lamont - ---------------------------------- Lord Norman Lamont Director March 18, 2005 /s/ Hazel O'Leary - ---------------------------------- Hazel O'Leary Director March 18, 2005 /s/ William Spiegel - ---------------------------------- William Spiegel Director March 18, 2005 /s/ Scott E. Willkomm - ---------------------------------- Scott E. Willkomm CEO, President and Director March 18, 2005
* The undersigned, by signing his name hereto, does hereby sign this Annual Report on Form 10-K pursuant to the Powers of Attorney executed on behalf of the above named officers and directors of the Registrant and contemporaneously filed herewith with the Securities and Exchange Commission. /s/ Michael C. French - --------------------- Michael C. French Attorney-in-Fact 126 EX-10.40 2 ex10-40.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of January 1, 2005, is made and entered into by and between Scottish Holdings, Inc., a company formed and existing under the laws of the State of Delaware (the "Company") and Gary Dombowsky (the "Executive"). WITNESSETH: WHEREAS, the Company desires to obtain the Executive's management and executive services by directly engaging Executive as Executive Vice President Chief Operating Officer of the Company; WHEREAS, in order to induce the Executive to serve in such position, the Company desires to provide the Executive with compensation and other benefits on the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to accept such employment and perform services for the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the agreements and covenants herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a.) "Act" means the Securities Exchange Act of 1934, as amended. (b.) "Board" means the Board of Directors of the Company. (c.) "Change in Control" means the occurrence during the Term of any of the following events: (i.) the acquisition by any individual, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (a "Person"), including as a result of a Business Combination (as defined in Section (c)(iii)), of beneficial ownership, within the meaning of Rule 13d-3 promulgated under the Act, of 25% or more of the combined voting power of the then outstanding Voting Stock of Scottish Re Group Limited (the "Parent Company"); provided, however, that for purposes of this Page 1 of 21 Section 1(c)(i), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by the Parent Company of Voting Stock of the Parent Company, or (B) any acquisition of Voting Stock of the Parent Company by any employee benefit plan (or related trust) sponsored or maintained by the Parent Company or any Subsidiary; or (ii.) individuals who, as of the date hereof, constitute the Board of Directors of the Parent Company (the "Incumbent Board" (as modified by this Section 1(c)(ii))) cease for any reason to constitute at least a majority of the Parent Company's Board; provided however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the Parent Company's shareholders, was approved by a vote of at least two-thirds of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Parent Company in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Parent Company's Board; or (iii.) consummation of a reorganization, merger or consolidation, a sale or other disposition of all or substantially all of the assets of the Parent Company, or other transaction (each, a "Business Combination"), unless, in each case, immediately following such Business Combination, either (A)(I) the individuals and entities who were the beneficial owners of Voting Stock of the Parent Company immediately prior to such Business Combination beneficially own in the aggregate, directly or indirectly, more than 50% of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Parent Company or all or substantially all of the Parent Company's assets either directly or through one or more subsidiaries), (II) no Person (other than the Parent Company, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by the Parent Company, any subsidiary or such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by the Parent Company, any Subsidiary or such entity resulting from such Business Combination) Page 2 of 21 beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the Board of Directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Parent Company Board providing for such Business Combination, or (B) the same as Section 1(c)(iii)(A), except in clause (I), substituting "one-third" for "50%" and in clause (III), substituting "two-thirds" for "a majority"; or (iv.) approval by the shareholders of the Parent Company of a complete liquidation or dissolution of the Parent Company, except pursuant to a Business Combination that complies with clause (A) or (B) of Section 1(c)(iii). (d.) "Competitive Activity" means the Executive's participation, without the written consent of the Board, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise engages in substantial and direct competition with the Company if such enterprise's sale of any product or service competitive with any product or service of the Company amounted to 10% of such enterprise's net sales for its most recently completed fiscal year. "Competitive Activity" shall not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise. (e.) "Director" means a member of the Board. (f.) "Ordinary Shares" means the ordinary shares, par value $0.01 per share, of the Parent Company. (g.) "Subsidiary" means an entity in which the Parent Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (h.) "Total Cash Compensation" means the sum of the (i) highest annual Base Salary in effect during the Term; and (ii) highest annual Incentive Bonus (as set forth in Section 6(b)) earned during the prior fiscal year. (i.) "Voting Stock" means securities entitled to vote generally in the election of directors. Page 3 of 21 2. Employment. The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed with the Company for the Term, upon the terms and conditions herein set forth. 3. Term. The term of employment under this Agreement (the "Initial Term") shall commence on January 1, 2005 ("Commencement Date") and subject to earlier termination pursuant to Section 7, expire on the second anniversary of the Commencement Date, this Agreement will automatically be renewed for successive one-year periods (the "Additional Term"), subject to earlier termination pursuant to Section 7, unless either party provides written notice of non-renewal to the other pursuant to Section 13, for the Company at least ninety (90) days and the Executive at least thirty (30) days, prior to the end of the Initial Term or any Additional Term. The Initial Term and any Additional Term shall be referred to under this Agreement as the "Term"; provided, however, that if a Change in Control occurs during the Term (as determined without regard to this clause), then the Term shall include the period ending on the first anniversary of the first occurrence of a Change in Control. 4. Positions and Duties. (a.) During the Term, Executive will serve in the position of Executive Vice President Chief Operating Officer of the Company, or such other position as may be agreed upon by the Company and the Executive, and will have such duties, functions, responsibilities and authority as are (i) reasonably assigned to him by the Chief Executive Officer, consistent with Executive's position as Executive Vice President Chief Operating Officer or (ii) assigned to his office in the Company's charter documents. Executive will report directly to the Chief Executive Officer. (b.) During the Term, Executive will be the Company's full-time employee and, except as may otherwise be approved in advance in writing by the Board, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, Executive will devote substantially all of his business time and attention to the performance of his duties to the Company. Notwithstanding the foregoing, Executive may (i) subject to the approval of the Board, serve as a director of a company, provided such service does not constitute a Competitive Activity, (ii) serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic Page 4 of 21 organizations, (iii) serve as an officer, director or trustee of, or otherwise participate in, any organizations and activities with respect to which Executive's participation was disclosed to the Company in writing prior to the date hereof and (iv) manage personal and family investments. 5. Place of Performance. In connection with his employment during the Term, Executive will be based at the Company's principal executive offices or Denver, Colorado; provided, however, that Executive agrees and acknowledges that in view of the nature of the Company's business operations, Executive may be required in the performance of his duties to undertake substantial travel on behalf of the Company and, if necessary, requested to relocate to another executive office of the Company. 6. Compensation and Related Matters. As compensation and consideration for the performance by Executive of his obligations pursuant to this Agreement, Executive shall be entitled to the following: (a.) Base Salary. During the Term, the Company shall pay Executive an annual base salary ("Base Salary") of $275,000, payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. The Company agrees to review such compensation not less frequently than annually during the Term. Once increased, the Base Salary may not be decreased. The Base Salary as increased from time to time shall be referred to herein as "Base Salary". (b.) Incentive Bonus. For each calendar year that begins during the Term, the Company shall pay a cash bonus to Executive based on pre-established performance goals established by the Board. Any Incentive or Discretionary Bonus shall be payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. (c.) Guaranteed Bonus. For the calendar year ending on December 31, 2005, Executive shall receive a guaranteed minimum bonus equal to $100,000 (the "Guaranteed Bonus") payable on December 31, 2005. (d.) Executive Benefits. During the Term, the Company will make available to Executive and his eligible dependents, participation in all Company-sponsored employee benefit plans including all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate, or any equivalent Page 5 of 21 successor policies, plans, programs or arrangements that may now exist or be adopted hereafter by the Company. (e.) Club Dues and Expenses. The Company hereby agrees to reimburse Executive for club dues and expenses up to $5,000 per calendar year in accordance with the Company's policy regarding substantiation of expenses. The Company also agrees to provide Executive membership at Ballantyne Country Club. Such membership limited only by the terms and conditions of the Company's corporate membership with Ballantyne Country Club. (f.) Expenses. The Company will promptly reimburse Executive for all reasonable business expenses Executive incurs in order to perform his duties to the Company under this Agreement in a manner commensurate with Executive's position and level of responsibility with the Company, and in accordance with the Company's policy regarding substantiation of expenses. (g.) Vacation and Holidays. Executive shall be entitle to 20 days of paid vacation per annum, in accordance with the Company's vacation policy. (h.) Tax Abatement. Upon Executive's relocation during the Term to a jurisdiction which provides for taxation on personal income, the Company shall provide tax abatement assistance up to 75% in year one, 50% in year two, 25% in year three and no further tax abatement for years after year three. (i.) Initial Equity Compensation Grant. The Company shall grant Executive an option (the "Option") to purchase 5,000 Ordinary Shares of Holdings. Additionally, the Company shall grant Executive 2,300 restricted shares (the "Restricted Shares") of Holdings. Any grant to Executive under the 2004 Equity Incentive Compensation Plan shall be subject to the terms and conditions of the plan as well as the performance requirements expressly adopted by the Holdings' Board and/or Compensation Committee. A copy of the 2004 Equity Incentive Compensation Plan is attached hereto as Exhibit A. Page 6 of 21 7. Termination. (a.) Termination by the Company with Cause. The Company shall have the right to terminate Executive's employment at any time with Cause by providing a Notice of Termination to Executive in accordance with Section 7(g) not more than sixty (60) days after the Board's actual knowledge of the Cause event, and such termination shall not be deemed to be a breach of this Agreement. For purposes of this Agreement, "Cause" shall mean: (i) habitual drug or alcohol use which impairs Executive's ability to perform his duties hereunder; (ii) Executive's conviction during Term by a court of competent jurisdiction, or a pleading of "no contest" or guilty to an arrestable criminal offense resulting in the imposition of a custodial sentence; (iii) Executive's engaging in fraud, embezzlement or any other illegal conduct with respect to the Company which acts are materially harmful to, either financially, or to the business reputation of the Company; (iv) Executive's willful breach of Section 9 hereof; (v) Executive's continued failure or refusal to perform his duties hereunder (other than such failure caused by Executive's Disability), after a written demand for performance is delivered to Executive by the Board that specifically identifies the manner in which the Board believes that Executive has failed or refused to perform his duties; or (vi) Executive otherwise breaches any material provision of this Agreement which is not cured, if curable, within thirty (30) days after written notice thereof. No act or failure to act on the part of Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (b.) Death. In the event Executive dies during the Term, his employment shall automatically terminate effective on the date of his death, such termination shall not be deemed to be a breach of this Agreement, and the Company shall pay or provide to the Executive's beneficiaries or estate, as appropriate, as soon as practicable after the Executive's death, the amounts and benefits provided for in Section 8(d). (c.) Disability. In the event Executive shall suffer from a mental or physical disability which shall have prevented him from performing his material duties hereunder for a period of at least ninety (90) non-consecutive days within any 365 day period, the Company shall have the right to terminate Executive's employment for "Disability", such termination to be effective upon giving of notice thereof to the Executive in accordance with Section 7(g) hereof, such termination shall not be deemed to be a breach of this Page 7 of 21 Agreement, and the Company shall provide to the Executive the amounts and benefits provided for in Section 8(d). Executive's employment hereunder shall terminate effective on the 30th day after receipt of such notice by Executive (the "Disability Effective Date"); provided that Executive shall not have returned to full-time performance of his duties hereunder within thirty (30) days following receipt of such notice. (d.) Good Reason. i. Executive may terminate his employment with the Company for "Good Reason" and such termination shall not be deemed to be a breach of this Agreement. Executive shall have Good Reason if Executive has knowledge that one of the events described in Section 7(d)(ii) has occurred without Executive's written consent and (A) if the event is not curable, Executive gives a Notice of Termination to the Company pursuant to Section 7(g) within sixty (60) days after having knowledge of the event, or (B) if the event is curable, (I) Executive gives written notice to the Company thereof in accordance with Section 13 within sixty (60) days after having knowledge of the event, (II) such event has not been cured with thirty (30) days after the Executive gives notice of the event to the Company, and (III) Executive gives a Notice of Termination to the Company in accordance with Section 7(g) within thirty (30) days after the expiration of the Company's 30-day cure period. ii. For purposes of this Agreement, "Good Reason" shall mean (A) prior to a Change in Control, (I) a failure by the Company to comply with any material provision of this Agreement; (II) the liquidation, dissolution, merger consolidation or reorganization of the Company or all of its business and/or assets, unless the successor(s) assume all duties and obligations of the Company pursuant to Section 12(a); or (III) upon the provision of notice by the Company under Section 3 of non-renewal of the Agreement, and (B) on or after a Change in Control, (I) any of the events set forth in Section 7(d)(ii)(A); (II) any material and adverse change to Executive's duties or authority which are inconsistent with his title and position set forth herein; (III) a diminution of Executive's title or position; (IV) the relocation of Executive's office; (V) a reduction in Executive's Base Salary; or (VI) a material reduction of Executive's benefits provided pursuant to Section 6 other than a reduction permitted under terms and conditions of the applicable Company policy or benefit plan. Page 8 of 21 (e.) Without Good Reason. Executive may voluntarily terminate his employment with the Company without Good Reason by giving written notice to the Company as provided in Section 7(g). Such notice must be provided to the Company at least thirty (30) days prior to such termination. Such Termination shall not be deemed to be a breach of this Agreement. (f.) Without Cause. This Company shall have the right to terminate Executive's employment hereunder without Cause by providing written notice to Executive as provided in Section 7(g), and such termination shall not be deemed to be a breach of this Agreement. "Without Cause" shall mean for any reason other than Cause, Death or Disability, as provided in Sections 7(a), 7(b) and 7(c). (g.) Notice of Termination. (i.) Any termination of Executive's employment by the Company pursuant to Section 7(a), 7(c) or 7(f), or by Executive pursuant to Section 7(d) or 7(e), shall be communicated by a Notice of Termination to the other party hereto in accordance with this Section 7(g) and Section 13. For purposes of this Agreement, a "Notice of Termination" means a written notice that (A) indicated the specific termination provision in this Agreement relied upon, (B) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (C) if the Date of Termination (as defined in Section 7(h)) is other than the date of receipt of such notice, specifies the Date of Termination. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or Company's rights hereunder. (ii.) Any Notice of Termination by the Company for Cause shall be ratified by a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board then in office (excluding, for this purpose, the Executive, if the Executive is then a member of the Board) at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to Page 9 of 21 have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constitution "Cause" as defined in Section 7(a) and specifying the particulars thereof in detail. (h.) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein (but not more than thirty (30) days thereafter), as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with Section 7(a) or 7(d) of this Agreement, as the case may be), (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date set forth in the Notice of Termination (iii) if Executive's employment is terminated by Executive without Good Reason, the Date of Termination shall be the date set forth in the Notice of Termination, but no sooner than thirty (30) days after such Notice of Termination is received by the Company and (iv) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of the Executive's death or the Disability Effective Date, as the case may be. 8. Compensation upon Termination. If the Company or Executive terminates the Executive's employment during the Term, the Company shall pay to the Executive the amount(s) set forth below in a lump sum in cash upon the later of (i) five (5) business days after the Date of Termination or date of expiration of this Agreement, as the case may be, (ii) the effective date of a release (if a release is required by this Section 8) or (iii) at the Executive's option, a date later than the dates specified in clauses (i) and (ii). (a.) Compensation upon Termination for Cause or Without Good Reason. In the event of termination of Executive's employment by the Company for Cause or by the Executive without Good Reason, or by reason of expiration of the Term (if applicable), the Company shall pay the Executive his accrued, but unpaid Base Salary, accrued vacation pay and unpaid business expenses through the Date of Termination (the "Compensation Payments"), and the Executive shall be entitled to no other compensation, except as otherwise due to the Executive under applicable law. The Executive shall not be entitled to the payment of any bonus or other incentive compensation for any portion of the fiscal year in which such termination occurs. Page 10 of 21 (b.) Compensation upon Termination by the Company Without Cause or upon Termination by the Executive for Good Reason. Subject to Section 8(c), in the event of the termination of the Executive's employment by the Company without Cause or upon termination of the Executive's employment by the Executive for Good Reason, the Company shall pay the Executive the Compensation Payments. In addition, conditioned upon receipt of the Executive's release of claims substantially in the form attached hereto as Exhibit B, subject to such changes as may be required to preserve the intent thereof for changes in applicable law, the Company shall pay or provide to the Executive (i) as a severance pay, an amount equal to the sum of one (1) full year's Total Cash Compensation (ii) earned, but unpaid Incentive Bonus for the year of termination, as determined in the good faith opinion of the Board base upon the relative achievement of performance targets through the Date of Termination (the "Termination Bonus"), and (iii) the welfare benefits set forth in Section 8(f). Notwithstanding the foregoing provisions of this Section 8(b), upon termination by the Executive for Good Reason due to Section 7(d)(ii)(A)(III) (Company's notice of non-renewal of the Agreement), the Company shall pay the Executive under Section 8(b)(i) an amount not less than one (1) full year's Total Cash Compensation, and any right of the Executive to receive termination payments and benefits under Section 8(b) shall be forfeited to the extent of any amounts payable or benefits to be provided after a material breach of any covenant set forth in Section 9. (c.) Compensation upon Termination in Connection with a Change in Control of the Company. If, within the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the first anniversary of such occurrence of a Change in Control or, if earlier, until the Executive's death the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, then the provisions of Section 8(b) shall be applicable. For purposes of the preceding sentence, if a Change in Control occurs and not more than one-hundred twenty (120) days prior to the date on which the Change in Control occurs, the Executive's employment is terminated by the Company without Cause, such termination of employment shall be deemed a termination of employment after a Change in Control if the Executive has reasonably demonstrated that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control. Page 11 of 21 (d.) Compensation upon Death or Disability. In the event of the Executive's death or the termination of employment due to Disability, the Company shall pay to the Executive (or beneficiaries, or estate, as the case may be) an amount equal to the sum of (i) the Compensation Payments and (ii) the Termination Bonus. Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (e.) Set-Off, Counterclaim or Late Payment. There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement. Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount or value thereof at an annualized rate of interest equal to the "prime rate" as set forth from time to time during the relevant period in The Wall Street Journal, "Money Rates" column, plus 4%. Such interest shall be payable as it accrues on demand. Any change in such prime rate shall be effective on and as of the date of such change. (f.) Welfare Benefits. If the Executive becomes entitled to the benefits provided by Section 8(b) or 8(c), then in addition to such benefits, for a period following the Date of Termination equal to the greater of the remaining Term or twelve (12) months (the "Continuation Period"), the Company shall arrange to provide the Executive with health insurance, life insurance, and other medical benefits substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Date of Termination (or, if greater, immediately prior to the reduction, termination, or denial described in Section 7(d)(ii)(B)(VI), if applicable). If and to the extent that any benefit described in this Section 8(f) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such benefits along with, in the case of any benefit described in this Section 8(f) that is subject to tax because it is not or cannot be paid or provided under any such policy, plan, program or arrangement of the Company, an additional amount such that after payment by the Executive, or his dependents or beneficiaries, as the case may be, of all taxes so imposed, the recipient retains an amount equal to such taxes. Page 12 of 21 (g.) Scope and Non-duplication. The provision or payment of termination benefits under this Section 8 shall not affect any rights the Executive may have pursuant to any agreement, plan, policy, program or arrangement of the Company providing employee benefits, which rights shall be governed by the terms thereof or by the release described in Section 8; provided, however, that to the extent, and only to the extent, a payment or benefit that is paid or provided under this Section 8 would also be paid or provided under the terms of any applicable plan, program or arrangement, including, without limitation, any severance program, such applicable plan, program, agreement or arrangement shall be deemed to have been satisfied by the payment made or benefit provided under this Agreement. (h.) Mitigation. In the event of the termination of the Executive's employment by the Company without Cause, or by the Executive with Good Reason, the Executive shall not be required to mitigate damages by seeking other employment or otherwise as a condition to receiving termination payments or benefits under this Agreement. No amounts earned by the Executive after the Executive's termination by the Company without Cause or by the Executive with Good Reason, whether from self-employment, as a common law employee, or otherwise, shall reduce the amount of any payment or benefit under any provision of this Agreement. Notwithstanding the foregoing, the Executive's coverage under the Company's group medical insurance as provided in Section 8(f) shall be reduced to the extent comparable welfare benefits are actually received by the Executive as soon as the Executive becomes covered under any group medical plan made available by another employer. The Executive shall report to the Company any such coverage actually received by the Executive. (i.) Resignations. Except to the extent requested by the Company, upon any termination of the Executive's employment with the Company, the Executive shall immediately resign all positions and directorships with the Company and each of its subsidiaries and affiliates. 9. Competitive Activity; Confidentiality; Non-solicitation. (a.) Executive acknowledges that during the course of his employment with the Company the Executive will learn business information valuable to the Company and Parent Company and will form substantial business relationships with the Company's and Parent Company's clients. To protect the Company's and Parent Company's legitimate business interests in preserving its valuable confidential business information and Page 13 of 21 client relationships, the Executive shall not without the prior written consent of the Company or Parent Company, which consent shall not be unreasonably withheld, (i) engage in any Competitive Activity during the Term and (ii) if the Executive shall have received or shall be receiving benefits under Section 8(b) or 8(c), engage in any Competitive Activity for a period ending on the first anniversary of the earlier of the Date of Termination or the date of expiration of this Agreement. (b.) During the Term, and in consideration for the Executive's agreement to enter into this Agreement, the Company and Parent Company agrees that it will disclose to Executive its Confidential or Proprietary Information (as defined in this Section 9(b)) to the extent necessary for Executive to carry out his obligations to the Company. The Executive hereby acknowledges the Company and Parent Company each has a legitimate business interest in protecting its Confidential or Proprietary Information and hereby covenants and agrees that he will not without the prior written consent of the Company or Parent Company, during the Term or thereafter (i) disclose to any person not employed by the Company or Parent Company, or use in connection with engaging I competition with the Company or Parent Company, any Confidential or Proprietary Information of the Company of Parent Company or (ii) remove, copy or retain in his possession any Company or Parent Company files or records. For purposes of this Agreement, the term "Confidential or Proprietary Information will include all information of any nature and in any form that is owned by the Company or Parent Company and that is not publicly available (other than by Executive's breach of this Section 9(b)) or generally known to persons engaged in business similar or related to those of the Company or Parent Company. Confidential or Proprietary Information will include, without limitation, the Company's and Parent Company's financial matters, customers, employees, industry contracts, strategic business plans, product development (or other proprietary product data), marketing plans, and all other secrets and all other information of a confidential or proprietary nature. Confidential or Proprietary Information shall not be deemed to have become public for purposes of this Agreement where it has been disclosed or made public by or through anyone acting in violation of a contractual, ethical, or legal responsibility to maintain its confidentiality. The foregoing obligations imposed by this Section 9(b) shall not apply (x) during the Term, in the course of the business of and for the benefit of the Company or Parent Company, (y) if such Confidential or Proprietary Information will have become, through no fault of the Executive, generally known to the public or (z) if the Executive is required by law to make disclosure (after giving Page 14 of 21 the Company or Parent Company notice and an opportunity to contest such requirement). (c.) The Executive hereby covenants and agrees that during the Term and for one (1) year after the Date of Termination Executive will not, without the prior written consent of the Company or Parent Company, which consent shall not unreasonably be withheld, on behalf of Executive or on behalf of any person, firm or company, directly or indirectly, attempt to influence, persuade or induce, or assist any other person in so persuading or inducing, any employee of the Company or Parent Company to give up employment or a business relationship with the Company or Parent Company, and the Executive shall not directly or indirectly solicit or hire employees of the Company or Parent Company for employment with any other employer. (d.) The Executive agrees that on or before the Date of Termination the Executive shall return all Company and Parent Company property, including without limitation all credit, identification and similar cards, keys and documents, books, records and office equipment. The Executive agrees that he shall abide by, through the Date of Termination, the Company's or Parent Company's policies and procedures for worldwide business conduct. (e.) Executive and Company agree that the covenants contained in this Section 9 are reasonable under the circumstances, and further agree that if in the opinion of any court of competent jurisdiction any such covenant is not reasonable in any respect, such court will have the right, power and authority to excise or modify any provision or provisions of such covenants as to the court will appear not reasonable and to enforce the remainder of the covenants as so amended. Executive acknowledges and agrees that the remedy at law available to the Company for breach of any of his obligations under this Section 9 would be inadequate and that damages flowing from such a breach may not readily be susceptible to being measured in monetary terms. Accordingly, Executive acknowledges, consents and agrees that, in addition to any other rights or remedies that the Company may have at law, in equity or under this Agreement, upon adequate proof of his violation of any such provision of this Agreement, the Company will be entitle to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage. (f.) Representations of the Executive. The Executive represents and warrants to the Company that: Page 15 of 21 (i) (A) There are no restrictions, agreements or understandings whatsoever to which the Executive is a party that would prevent or make unlawful the Executive's execution of this Agreement or the Executive's employment under this Agreement, or that is or would be inconsistent, or in conflict with this Agreement or the Executive's employment under this Agreement, or would prevent, limit or impair in any way the performance by the Executive of the obligations under this Agreement; and (B) the Executive has disclosed to the Company all restraints, confidentiality commitments or other employment restrictions that the Executive has with any other employer, person or entity. (ii) Upon and after the Executive's termination or cessation of employment with the Company, and until such time as no obligations of the Executive to the Company hereunder exist, the Executive: (A) shall provide a complete copy of this Agreement to any prospective employer or other person, entity or association in a competing business with whom or which the Executive proposes to be employed, affiliated, engaged, associated or to establish any business or remunerative relationship prior to the commencement thereof, provided that Executive shall first cause the compensation amounts hereunder to be deleted or not disclosed; and (B) shall notify the Company of the name and address of any such person, entity or association prior to the Executive's employment, affiliation, engagement, association or the establishment of any business or remunerative relationship. 10. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all applicable taxes that the Company is required to withhold pursuant to any applicable law, regulation or ruling. 11. Legal Fees and Expenses. If it should appear to Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Executive the benefits provided or intended to be provided to Executive hereunder, the Company irrevocably authorized Executive from time to time to retain counsel of Executive's choice at the expense of the Company as hereafter provided, to advise and represent Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any Page 16 of 21 litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and Executive agree that a confidential relationship shall exist between Executive and such counsel. Without respect to whether Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys, and related fees and expenses incurred by Executive in connection with any of the foregoing; provided that, in regard to such matters, the Executive has not acted in bad faith or with no colorable claim of success. Such payments shall be made within five (5) business days after delivery of Executive's written requests for payment, accompanied by such evidence of fees and expenses incurred as the Company may reasonably require. Notwithstanding the foregoing provisions of this Section 11, the obligations of the Company under this Section 11 shall not exceed, in the aggregate, $25,000. 12. Dispute Resolution. Any dispute between the parties under this Agreement shall be resolved (except as provided below) through informal arbitration by an arbitrator selected under the rules of the American Arbitration Association for arbitration of employment disputes (located in North Carolina) and the arbitration shall be conducted in that location under the rules of said Association. Each party shall be entitled to present evidence and argument to the arbitrator. The arbitrator shall have the right only to interpret and apply the provisions of this Agreement and may not change any of its provisions, except as expressly provided in Section 15 and only in the event the Company has not brought an action in a court of competent jurisdiction to enforce the covenants in Section 9. The arbitrator shall permit reasonable pre-hearing discovery of facts, to the extent necessary to establish a claim or a defense to a claim, subject to supervision by the arbitrator. The determination of the arbitrator shall be conclusive and binding upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof. The arbitrator shall give written notice to the parties stating the arbitrator's determination, and shall furnish to each party a signed copy of such determination. The expenses of arbitration shall be borne equally by the Company and the Executive or as the arbitrator equitably determines consistent with the application of state or federal law; provided, however, that the Executive's share of such expenses shall not exceed the maximum permitted by law. Any arbitration or action pursuant to this Section 11 shall be governed by and construed in accordance with the substantive laws of North Carolina without giving effect to the principles of conflict of laws of such State. Notwithstanding the foregoing, the Company shall not be required to seek or participate in arbitration regarding any actual or threatened breach of the Executive's Page 17 of 21 covenants in Section 99, but may pursue its remedies, including injunctive relief, for such breach in a court of competent jurisdiction in North Carolina, or in the sole discretion of the Company, in a court of competent jurisdiction where the Executive has committed or is threatening to commit a breach of the Executive's covenants, and no arbitrator may make any ruling inconsistent with the findings or rulings of such court. 13. Successors and Binding Agreement. a. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. b. This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. c. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 12(a) and 12(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 12(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 14. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand Page 18 of 21 delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five (5) business days after having been mailed by registered or certified mail, return receipt requested, postage prepaid, or three (3) business days after having been sent by an internationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Company) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 15. Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of North Carolina, without giving effect to the principles of conflict of laws, except as expressly provided herein. In the event the Company exercises its discretion under Section 9(e) to bring an action to enforce the covenants contained in Section 9 in a court of competent jurisdiction where the Executive has breached or threatened to breach such covenants, and in no other event, the parties agree that the court may apply the law of the jurisdiction in which such action is pending in order to enforce the covenants to the fullest extent permissible. 16. Validity. Any provision of this Agreement that is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective, to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal or unenforceable in any other jurisdiction. If any covenant in Section 9 should be deemed invalid, illegal or unenforceable because its time, geographical area, or restricted activity, is considered excessive, such covenant shall be modified to the minimum extent necessary to render the modified covenant valid, legal and enforceable. 17. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. The headings used in this Agreement are intended for convenience or Page 19 of 21 reference only and shall not in any manner amplify, limit, modify or otherwise be used in the construction or interpretation of any provision of this Agreement. References to Sections are references to Sections of this Agreement. Any reference in this Agreement to a provision of a statute, rule or regulation shall also include any successor thereto. 18. Survival. Notwithstanding any provision of this Agreement to the contrary, the parties' respective rights and obligations under Sections 8, 9, 10, 11, 12 and 13(b) will survive any termination or expiration of this Agreement or the termination of the Executive's employment for any reason whatsoever. 19. Beneficiaries. The Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Company written notice thereof in accordance with Section 14. In the event of the Executive's death or a judicial determination of the Executive's incompetence, reference in this Agreement to the "Executive" shall be deemed, where appropriate, to be the Executive's beneficiary, estate or other legal representative. 20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 21. Entire Agreement. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the Executive's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceedings to vary the terms of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Page 20 of 21 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above. /s/ Gary Dombowsky -------------------------------------- Gary Dombowsky SCOTTISH HOLDINGS, INC. By: /s/ Paul Goldean ---------------------------------- Name: Paul Goldean Title: EVP General Counsel Page 21 of 21 EX-10.41 3 ex10-41.txt AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"), dated as of February 7, 2005, is made and entered into by and between Scottish Re Group Limited, a Cayman Islands, British West Indies company (the "Company") and Michael C. French (the "Executive"). W I T N E S S E T H: WHEREAS, on February 10, 2003, the Company and Executive executed an employment agreement (the "Employment Agreement"); and WHEREAS, on March 29, 2004, the Company and Executive executed an amendment to the Employment Agreement; WHEREAS, the Company and Executive desire to amend the Employment Agreement; and NOW, THEREFORE, in consideration of the agreements and covenants herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree to modify and amend the Employment Agreement as follows: Section 4 (a) During the Term, Executive will serve in the position of Chairman of the Company, or such other position as may be agreed upon by the Company and the Executive, and will have such duties, functions, responsibilities and authority as are (i) reasonably assigned to him by the Board, consistent with Executive's position as the Company's Chairman or (ii) assigned to his office in the Company's Articles of Association. Executive will report directly to the Board. (b) During the Term, Executive will be the Company's full-time employee and, except as may otherwise be approved in advance in writing by the Board, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, Executive will devote substantially all of his business time and attention to the performance of his duties to the Company. Notwithstanding the foregoing, Executive may (i) subject to the approval of the Board, serve as a director of a company, provided such service does not constitute a Competitive Activity, (ii) serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic organizations, (iii) serve as an officer, director or trustee of, or otherwise participate in, any organizations and activities with respect to which Executive's participation was disclosed to the Company in writing prior to the date hereof and (iv) manage personal and family investments. Section 6 (b) Incentive Bonus. For each calendar year during the Term that begins after January 1, 2005, the Company shall pay a cash bonus to Executive based upon pre-established performance goals established by the Board (the "Incentive Bonus") and consistent with the Executive's duties and responsibilities outlined in the Employment Agreement and related amendments. For purposes of calculating the 2004 Incentive Bonus, Executive's position as Chief Executive Officer will be taken into consideration with such calculation being consistent with past practice regarding compensation of executive employees. Any Incentive Bonus shall be payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. (i) Office Allowance. The Company hereby agrees to provide Executive a monthly office allowance not to exceed $5,000 per month. Such office allowance shall be payable upon the termination of the Dallas office lease and for use by Executive at his sole discretion during the Term. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above. /s/ Michael C. French ------------------------------------------------ Michael C. French SCOTTISH RE GROUP LIMITED By: /s/ Paul Goldean --------------------------------------------- Name: Paul Goldean Title: EVP General Counsel 2 EX-10.42 4 ex10-42.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of February 1, 2005, is made and entered into by and between Scottish Re Group Limited (the "Company") and Hugh T. McCormick (the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to ensure that it retains the Executive's management and executive services by directly engaging Executive as its Executive Vice President - Corporate Development; WHEREAS, in order to induce the Executive to continue to serve in such position, the Company desires to provide the Executive with compensation and other benefits on the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to accept such employment and perform services for the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the agreements and covenants herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Board" means the Board of Directors of Scottish Re Group Limited, a Cayman Islands, British West Indies company. (c) "Change in Control" means the occurrence during the Term of any of the following events: (i) the acquisition by any individual, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (a "Person"), including as a result of a Business Combination (as defined in Section 1(c)(iii)), of beneficial ownership, within the meaning of Rule 13d-3 promulgated under the Act, of 25% or more of the combined voting power of the then outstanding Voting Stock of the Company; provided, however, that for purposes of this Section 1(c)(i), the following acquisitions shall not constitute a Change in Control: (A) any acquisition by the Company of Voting Stock of the Page 1 of 27 Company, or (B) any acquisition of Voting Stock of The Company by any employee benefit plan (or related trust) sponsored or maintained by The Company or any Subsidiary; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board," (as modified by this Section 1(c)(ii))) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the shareholders of The Company, was approved by a vote of at least two-thirds of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of The Company in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation, a sale or other disposition of all or substantially all of the assets of The Company, or other transaction (each, a "Business Combination"), unless, in each case, immediately following such Business Combination, either (A)(I) the individuals and entities who were the beneficial owners of Voting Stock of The Company immediately prior to such Business Combination beneficially own in the aggregate, directly or indirectly, more than 50% of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns The Company or all or substantially all of the assets of The Company either directly or through one or more subsidiaries), (II) no Person (other than The Company, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by The Company, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the Board of Directors of Page 2 of 27 the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination, or (B) the same as Section 1(c)(iii)(A), except in clause (I), substituting "one-third" for "50%," and in clause (III), substituting "two-thirds" for "a majority"; or (iv) approval by the shareholders of The Company of a complete liquidation or dissolution of The Company, except pursuant to a Business Combination that complies with clause (A) or (B) of Section 1(c)(iii). (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Competitive Activity" means the Executive's participation, without the written consent of the Board of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise engages in substantial and direct competition with the Company if such enterprise's sales of any product or service competitive with any product or service of the Company amounted to 10% of such enterprise's net sales for its most recently completed fiscal year and if the Company's net sales of said product or service amounted to 10% of the Company's net sales for its most recently completed fiscal year. "Competitive Activity" shall not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise. (f) "Director" means a member of the Board. (g) "Ordinary Shares" means the ordinary shares, par value $0.01 per share, of The Company. (h) "Subsidiary" means an entity in which The Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (i) "Total Cash Compensation" means the sum of the (i) highest annual Base Salary in effect during the Term; and (ii) highest annual Incentive Bonus (as set forth in Section 6(b)) earned during the prior three (3) fiscal years. (j) "Voting Stock" means securities entitled to vote generally in the election of directors. Page 3 of 27 2. Employment. The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed with the Company for the Term, upon the terms and conditions herein set forth. 3. Term. The term of employment under this Agreement (the "Initial Term") shall commence on February 1, 2005 ("Commencement Date") and subject to earlier termination pursuant to Section 7, expire on the third anniversary of the Commencement Date; provided, however, that commencing on the third anniversary of the Commencement Date, this Agreement will automatically be renewed for successive one-year periods (the "Additional Term"), subject to earlier termination pursuant to Section 7, unless either party provides written notice of non-renewal to the other pursuant to Section 15 at least ninety (90) days prior to the end of the Initial Term or any Additional Term. The Initial Term and any Additional Term shall be referred to under this Agreement as the "Term"; provided, however, that if a Change in Control occurs during the Term (as determined without regard to this clause), then the Term shall include the period ending on the second anniversary of the first occurrence of a Change in Control. 4. Positions and Duties. (a) During the Term, Executive will serve in the position of Executive Vice President - Corporate Development of the Company, or such other position as may be agreed upon by the Company and the Executive, and will have such duties, functions, responsibilities and authority as are (i) reasonably assigned to him by the Chief Executive Officer of the Company, consistent with Executive's position as the Company's Executive Vice President - Corporate Development or (ii) assigned to his office in the Company's Corporate Charter. Executive will report directly to the Chief Executive Officer of the Company. (b) During the Term, Executive will be the Company's full-time employee and, except as may otherwise be approved in advance in writing by the Board of the Company, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, Executive will devote substantially all of his business time and attention to the performance of his duties to the Company. Notwithstanding the foregoing, Executive may (i) subject to the approval of the Board of the Company, serve as a director of a company, provided such service does not constitute a Competitive Activity, (ii) serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and Page 4 of 27 civic organizations, (iii) serve as an officer, director or trustee of, or otherwise participate in, any organizations and activities with respect to which Executive's participation was disclosed to the Company in writing prior to the date hereof and (iv) manage personal and family investments. 5. Place of Performance. In connection with his employment during the Term, unless otherwise agreed by Executive, Executive will be based at the Company's executive offices in Charlotte, North Carolina; provided, however, that Executive agrees and acknowledges that in view of the nature of the Company's business operations, Executive may be required in the performance of his duties to undertake substantial travel on behalf of the Company. 6. Compensation and Related Matters. As compensation and consideration for the performance by Executive of his obligations pursuant to this Agreement, Executive shall be entitled to the following: (a) Base Salary. During the Term, the Company shall pay Executive an annual base salary ("Base Salary") of US $500,000, payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. The Company agrees to review such compensation not less frequently than annually during the Term. Base Salary may not be decreased. The Base Salary as increased from time to time shall be referred to herein as "Base Salary". (b) Incentive Bonus. For each calendar year that begins after December 31, 2004, the Company shall pay a cash bonus to Executive based upon pre-established performance goals established by the Company (the "Incentive Bonus"). For the calendar years ending on December 31, 2005 and December 31, 2006, Executive shall receive a guaranteed minimum Incentive Bonus equal to $300,000. Any Incentive Bonus shall be payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. (c) Executive Benefits. During the Term, the Company will make available to Executive and his eligible dependents, participation in all Company-sponsored employee benefit plans including all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate, including any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, disability, salary continuation, and any other deferred compensation, incentive compensation, group and/or executive life, Page 5 of 27 health, medical/hospital or other insurance, expense reimbursement or other employee benefit policies, plans, programs or arrangements, including without limitation financial counseling services or any equivalent successor policies, plans, programs or arrangements that may now exist or be adopted hereafter by the Company. (d) Expenses. The Company will promptly reimburse Executive for all reasonable business expenses Executive incurs in order to perform his duties to the Company under this Agreement in a manner commensurate with Executive's position and level of responsibility with the Company, and in accordance with the Company's policy regarding substantiation of expenses. (e) Club Dues and Expenses. The Company hereby agrees to reimburse Executive for club dues and expenses up to $5,000 per calendar year in accordance with the Company's policy regarding substantiation of expenses. In addition to the above allowance, the Company also agrees to provide Executive membership at Ballantyne Country Club. Such membership is limited only by the terms and conditions of the Company's corporate membership with Ballantyne Country Club. (f) Vacation and Holidays. Executive shall be entitled to four (4) weeks of paid vacation per annum, in accordance with the Company's vacation policy. (g) Indemnification. The Executive shall be offered an opportunity to enter into The Company' Indemnification Agreement substantially in the form attached hereto as Exhibit A effective as of the Commencement Date. (h) Signing Bonus. The Company shall pay Executive a $200,000 signing bonus upon execution of this Agreement. (i) Relocation expenses. The Company shall reimburse the Executive for his reasonable relocation costs to Charlotte, North Carolina, in accordance with the Company's Relocation Policy. (j) Initial Equity Compensation Grant. The Company shall grant Executive an option (the "Option") to purchase 50,000 Ordinary Shares of the Company. Additionally, the Company shall grant Executive 50,000 restricted shares (the "Restricted Shares") of The Company (collectively the "Grants"). Additionally, any grant to Executive under the 2004 Equity Incentive Compensation Plan shall be subject to the terms and conditions of the plan as well as the performance requirements expressly adopted by the Page 6 of 27 Company' Board and/or Compensation Committee. A copy of the 2004 Equity Incentive Compensation Plan is attached hereto as Exhibit B. (k) Initial Legal Fees. The Company shall pay all reasonable attorneys' fees and costs incurred by the Executive in connection with advice pertaining to and negotiation of this Agreement. 7. Termination. (a) Termination by the Company with Cause. The Company shall have the right to terminate Executive's employment at any time with Cause by providing a Notice of Termination to Executive in accordance with Section 7(g) not more than sixty (60) days after the Company's actual knowledge of the Cause event, and such termination shall not be deemed to be a breach of this Agreement. For purposes of this Agreement, "Cause" shall mean: (i) habitual drug or alcohol use which impairs Executive's ability to perform his or her duties hereunder; (ii) Executive's conviction during the Term by a court of competent jurisdiction, or a pleading of "no contest" or guilty to an arrestable criminal offense resulting in the imposition of a custodial sentence; (iii) Executive's engaging in fraud, embezzlement or any other illegal conduct with respect to the Company, which acts are materially harmful to, either financially, or to the business reputation of the Company; (iv) Executive's willful breach of Section 10 hereof; (v) Executive's willful and continued failure or refusal to perform his material duties hereunder (other than such failure caused by Executive's Disability), after a written demand for performance is delivered to Executive by the Company that specifically identifies the manner in which the Company believes that Executive has failed or refused to perform his duties, which is not cured, if curable, within thirty (30) days after written notice thereof; or (vi) Executive otherwise breaches any material provision of this Agreement which is not cured, if curable, within thirty (30) days after written notice thereof. No act or failure to act on the part of Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (b) Death. In the event Executive dies during the Term, his employment shall automatically terminate effective on the date of his death, such termination shall not be deemed to be a breach of this Agreement, and the Company shall pay or provide to the Executive's beneficiaries or estate, as appropriate, as soon as practicable after the Executive's death, the amounts and benefits provided for in Section 8(d). Page 7 of 27 (c) Disability. In the event Executive shall suffer from a mental or physical disability which shall have prevented him from performing his material duties hereunder for a period of at least one-hundred eighty (180) non-consecutive days within any 365 day period, the Company shall have the right to terminate Executive's employment for "Disability," such termination to be effective upon the giving of notice thereof to the Executive in accordance with Section 7(g) hereof, such termination shall not be deemed to be a breach of this Agreement, and the Company shall provide to the Executive the amounts and benefits provided for in Section 8(d). Executive's employment hereunder shall terminate effective on the 30th day after receipt of such notice by Executive (the "Disability Effective Date"); provided that Executive shall not have returned to full-time performance of his duties hereunder within thirty (30) days following receipt of such notice. (d) Good Reason. (i) Executive may terminate his employment with the Company for "Good Reason" and such termination shall not be deemed to be a breach of this Agreement. Executive shall have Good Reason if Executive has knowledge that one of the events described in Section 7(d)(ii) has occurred without Executive's written consent and (A) if the event is not curable, Executive gives a Notice of Termination to the Company pursuant to Section 7(g) within sixty (60) days after having knowledge of the event, or (B) if the event is curable, (I) Executive gives written notice to the Company thereof in accordance with Section 15 within sixty (60) days after having knowledge of the event, (II) such event has not been cured within thirty (30) days after the Executive gives notice of the event to the Company, and (III) Executive gives a Notice of Termination to the Company in accordance with Section 7(g) within thirty (30) days after the expiration of the Company's 30-day cure period. (ii) For purposes of this Agreement, "Good Reason" shall mean (A) prior to a Change in Control, (I) a failure by the Company to comply with any material provision of this Agreement; (II) the liquidation, dissolution, merger, consolidation or reorganization of the Company or all of its business and/or assets, unless the successor(s) assume all duties and obligations of the Company pursuant to Section 14(a); (III) upon the provision of notice by the Company under Section 3 of non-renewal of the Agreement; or (IV) on or after November 29, 2009, and (B) on or after a Change in Control, (I) any of the events set forth in Section 7(d)(ii)(A); (II) any material and adverse change to Executive's duties or authority which are Page 8 of 27 inconsistent with his title and position set forth herein; (III) a diminution of Executive's title or position; (IV) the relocation of Executive's office; (V) a reduction in Executive's Base Salary; or (VI) a material reduction of Executive's benefits provided pursuant to Section 6 other than a reduction permitted under terms and conditions of the applicable Company policy or benefit plan; or (VII) for any reason, or without reason. (e) Without Good Reason. Executive may voluntarily terminate his employment with the Company without Good Reason by giving written notice to the Company as provided in Section 7(g). Such notice must be provided to the Company at least thirty (30) days prior to such termination. Such termination shall not be deemed to be a breach of this Agreement. (f) Without Cause. This Company shall have the right to terminate Executive's employment hereunder without Cause by providing written notice to Executive as provided in Section 7(g), and such termination shall not be deemed to be a breach of this Agreement. "Without Cause" shall mean for any reason other than Cause, death or Disability, as provided in Sections 7(a), 7(b) and 7(c). (g) Notice of Termination. (i) Any termination of Executive's employment by the Company pursuant to Section 7(a), 7(c) or 7(f), or by Executive pursuant to Section 7(d) or 7(e), shall be communicated by a Notice of Termination to the other party hereto in accordance with this Section 7(g) and Section 15. For purposes of this Agreement, a "Notice of Termination" means a written notice that (A) indicates the specific termination provision in this Agreement relied upon, (B) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (C) if the Date of Termination (as defined in Section 7(h)) is other than the date of receipt of such notice, specifies the Date of Termination. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or Company's rights hereunder. Page 9 of 27 (ii) Any Notice of Termination by the Company for Cause shall be ratified by a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board of the Company then in office (excluding, for this purpose, the Executive, if the Executive is then a member of the Board) at a meeting of the Board of the Company called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board of the Company, finding that, in the good faith opinion of the Board of the Company, the Executive had committed an act constituting "Cause" as defined in Section 7(a) and specifying the particulars thereof in detail. (h) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein (but not more than thirty (30) days thereafter), as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with Section 7(a) or 7(d) of this Agreement, as the case may be), (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date set forth in the Notice of Termination (iii) if Executive's employment is terminated by Executive without Good Reason, the Date of Termination shall be the date set forth in the Notice of Termination, but no sooner than thirty (30) days after such Notice of Termination is received by the Company and (iv) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of the Executive's death or the Disability Effective Date, as the case may be. 8. Compensation upon Termination. If the Company or Executive terminates the Executive's employment during the Term, the Company shall pay to the Executive the amount(s) set forth below in a lump sum in cash upon the later of (i) five (5) business days after the Date of Termination or date of expiration of this Agreement, as the case may be, (ii) the effective date of a release (if a release is required by this Section 8) or (iii) at the Executive's option, a date later than the dates specified in clauses (i) and (ii). (a) Compensation upon Termination for Cause or Without Good Reason. In the event of termination of Executive's employment by the Company for Cause or by the Executive without Good Reason, the Company shall pay the Executive his accrued, but unpaid Base Salary, accrued vacation pay Page 10 of 27 and unpaid business expenses through the Date of Termination (the "Compensation Payments"), and the Executive shall be entitled to no other compensation, except as otherwise due to the Executive under applicable law. The Executive shall not be entitled to the payment of any bonus or other incentive compensation for any portion of the fiscal year in which such termination occurs. (b) Compensation upon Termination by the Company Without Cause or upon Termination by the Executive for Good Reason. Subject to Section 8(c), in the event of the termination of the Executive's employment by the Company without Cause or upon termination of the Executive's employment by the Executive for Good Reason, the Company shall pay the Executive the Compensation Payments. In addition, conditioned upon receipt of the Executive's release of claims substantially in the form attached hereto as Exhibit C, subject to such changes as may be required to preserve the intent thereof for changes in applicable law, the Company shall pay or provide to the Executive (i) as severance pay, an amount equal to the sum of the Total Cash Compensation that Executive would have received during the remaining Term of the Agreement, such amount to be calculated from the date the Executive's employment was terminated to the date that is the third anniversary of the Commencement Date (the "Severance Calculation Period"), (ii) earned, but unpaid Incentive Bonus for the year of termination, as determined in the good faith opinion of the Company based upon the relative achievement of performance targets through the Date of Termination (the "Termination Bonus"), and (iii) the welfare benefits set forth in Section 8(f). Notwithstanding the foregoing provisions of this Section 8(b), (x) where the Severance Calculation Period is for twelve (12) calendar months or less, the Company shall pay the Executive under Section 8(b)(i) an amount equal to the sum of two (2) full years' Total Cash Compensation, (y) upon termination by the Executive for Good Reason due to Section 7(d)(ii)(A)(III) (Company's notice of non-renewal of the Agreement), the Company shall pay the Executive under Section 8(b)(i) an amount not less than two (2) full years' Total Cash Compensation, and (z) any right of the Executive to receive termination payments and benefits under Section 8(b) shall be forfeited to the extent of any amounts payable or benefits to be provided after a material breach of any covenant set forth in Section 10. (c) Compensation upon Termination in Connection with a Change in Control of the Company. If, within the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the second anniversary of such occurrence of a Change in Control or, if earlier, until the Executive's death, the Executive's employment is terminated by the Page 11 of 27 Company without Cause or by the Executive for Good Reason, then the provisions of Section 8(b) shall be applicable, except that an amount equal to 300% of the Executive's Total Cash Compensation shall be substituted in lieu of the amount set forth in Section 8(b)(i), and the Severance Calculation Period shall be inapplicable. For purposes of the preceding sentence, if a Change in Control occurs and not more than one-hundred twenty (120) days prior to the date on which the Change in Control occurs, the Executive's employment is terminated by the Company without Cause, such termination of employment shall be deemed a termination of employment after a Change in Control if the Executive has reasonably demonstrated that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control. (d) Compensation upon Death or Disability. In the event of the Executive's death or the termination of employment due to Disability, the Company shall pay to the Executive (or beneficiaries, or estate, as the case may be) an amount equal to the sum of (i) the Compensation Payments, (ii) the Termination Bonus, and (iii) the additional severance payable pursuant to Section 8(b). Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provision of any agreements, plans or programs of the Company. (e) Set-Off, Counterclaim or Late Payment. There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement. Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount or value thereof at an annualized rate of interest equal to the "prime rate" as set forth from time to time during the relevant period in The Wall Street Journal "Money Rates" column, plus four (4)%. Such interest shall be payable as it accrues on demand. Any change in such prime rate shall be effective on and as of the date of such change. (f) Welfare Benefits. If the Executive becomes entitled to the benefits provided by Section 8(b) or 8(c), then in addition to such benefits, for a period following the Date of Termination equal to the greater of the remaining Term or twelve (12) months (the "Continuation Period"), the Company shall arrange to provide the Executive with health insurance, life insurance, and other medical benefits substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Date of Termination (or, if greater, immediately prior to the reduction, Page 12 of 27 termination, or denial described in Section 7(d)(ii)(B)(VI), if applicable). If and to the extent that any benefit described in this Section 8(f) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such benefits along with, in the case of any benefit described in this Section 8(f) that is subject to tax because it is not or cannot be paid or provided under any such policy, plan, program or arrangement of the Company, an additional amount such that after payment by the Executive, or his dependents or beneficiaries, as the case may be, of all taxes so imposed, the recipient retains an amount equal to such taxes. Notwithstanding the foregoing, or any other provision of the Agreement, for purposes of determining the period of continuation coverage to which the Executive or any of his dependents is entitled pursuant to Section 4980B of the Code under the Company's medical, dental and other group health plans, or successor plans, the Executive's "qualifying event" will be the termination of the Continuation Period and the Executive will be considered to have remained actively employed on a full-time basis through that date. (g) Scope and Nonduplication. The provision or payment of termination benefits under this Section 8 shall not affect any rights the Executive may have pursuant to any agreement, plan, policy, program or arrangement of the Company providing employee benefits, which rights shall be governed by the terms thereof or by the release described in Section 8; provided, however, that to the extent, and only to the extent, a payment or benefit that is paid or provided under this Section 8 would also be paid or provided under the terms of any applicable plan, program, or arrangement, including, without limitation, any severance program, such applicable plan, program, agreement or arrangement shall be deemed to have been satisfied by the payment made or benefit provided under this Agreement. (h) Mitigation. In the event of the termination of the Executive by the Company without Cause, or by the Executive with Good Reason, the Executive shall not be required to mitigate damages by seeking other employment or otherwise as a condition to receiving termination payments or benefits under this Agreement. No amounts earned by the Executive after the Executive's termination by the Company without Cause or by the Executive with Good Reason, whether from self-employment, as a common law employee, or otherwise, shall reduce the amount of any payment or benefit under any provision of this Agreement. Notwithstanding the foregoing, the Executive's coverage under the Company's group medical insurance as provided in Section 8(f) shall be reduced to the extent comparable welfare benefits are actually Page 13 of 27 received by the Executive as soon as the Executive becomes covered under any group medical plan made available by another employer. The Executive shall report to the Company any such coverage actually received by the Executive. (i) Resignations. Except to the extent requested by the Company, upon any termination of the Executive's employment with the Company, the Executive shall immediately resign all positions and directorships with the Company, The Company and each of their subsidiaries and affiliates. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment (other than the Gross-Up payments provided for in this Section 9) or distribution by the Company, The Company or any of their affiliates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code by reason of being considered "contingent on a change in ownership or control" of the Company or The Company, within the meaning of Section 280G of the Code or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); provided; however, that no Gross-up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. For purposes of determining the amount of the Gross-Up Payment, the Executive will be considered to pay (x) federal income taxes at the highest rate in effect in the year in which the Gross-Up Payment will be made and (y) state and local income taxes at the Page 14 of 27 highest rate in effect in the state or locality in which the Gross-Up Payment would be subject to state or local tax, net of the maximum reduction in federal income tax that could be obtained from deduction of such state and local taxes. (b) Subject to the provisions of Section 9(f), all determinations required to be made under this Section 9, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Executive and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within thirty (30) calendar days after the Date of Termination, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to any material benefit or amount (or portion thereof), it shall, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 9(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive within five (5) business days after receipt of such determination and calculations. (c) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, record and documents in the possession Page 15 of 27 of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and-otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 9(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) The federal, state and local income or other tax returns filed by the Executive shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall report and make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within five (5) business days pay to the Company the amount of such reduction. (e) The fees and expenses of Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 9(b) shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within five (5) business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. (f) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than thirty (30) business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notified the Executive in writing prior Page 16 of 27 to the expiration of such period that it desires to contest such claim, the Executive shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income or other tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 9(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 9(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to Page 17 of 27 which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(f), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(f), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 9. (h) Notwithstanding any provision of this Agreement to the contrary, but giving effect to any redetermination of the amount of Gross-Up payments otherwise required by this Section 9, if (i) but for this sentence, the Company would be obligated to make a Gross-Up Payment to the Executive and (ii) the aggregate "present value" of the "parachute payments" to be paid or provided to the Executive under this Agreement or otherwise does not exceed three times the Executive's "base amount" by more than $50,000, then the payments and benefits to be paid or provided under this Agreement will be reduced (or repaid to the Company, if previously paid or provided) to the minimum extent necessary so that no portion of any payment or benefit to the Executive, as so reduced or repaid, constitutes an "excess parachute payment." For purposes of this Section 9(h), the terms "excess parachute payment," "present value," "parachute payment," and "base amount" will have the meanings assigned to them by Section 280G of the Code. The determination of whether any reduction in or repayment of such payments or benefits to be provided under this Agreement is required pursuant to this Section 9(h) will be made at the expense of the Company, if requested by the Executive or the Company, by the Accounting Firm. Appropriate adjustments shall be made to amounts previously paid to Executive, or to amounts not paid pursuant to this Page 18 of 27 Section 9(h), as the case may be, to reflect properly a subsequent determination that the Executive owes more or less Excise Tax than the amount previously determined to be due. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced or repaid pursuant to this Section 9(h), the Executive shall be entitled to designate the payments and/or benefits to be so reduced or repaid in order to give effect to this Section 9(h). The Company shall provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails to make such designation within 10 business days prior to the Date of Termination or other due date, the Company may effect such reduction or repayment in any manner it deems appropriate. 10. Competitive Activity; Confidentiality; Non-solicitation. (a) Executive acknowledges that during the course of his employment with the Company the Executive will learn business information valuable to the Company and will form substantial business relationships with the Company's clients. To protect the Company's legitimate business interests in preserving its valuable confidential business information and client relationships, the Executive shall not without the prior written consent of the Company, which consent shall not be unreasonably withheld, (i) engage in any Competitive Activity during the Term and (ii) if the Executive shall have received or shall be receiving benefits under Section 8(b) or 8(c), engage in any Competitive Activity for a period ending on the first anniversary of the earlier of the Date of Termination or the date of expiration of this Agreement. (b) During the Term, and in consideration for the Executive's agreement to enter into this Agreement, the Company agrees that it will disclose or cause to be disclosed to Executive its Confidential or Proprietary Information (as defined in this Section 10(b)) to the extent necessary for Executive to carry out his obligations to the Company. The Executive hereby acknowledges the Company has a legitimate business interest in protecting its Confidential or Proprietary Information and hereby covenants and agrees that he will not without the prior written consent of the Company, during the Term or thereafter (i) disclose to any person not employed by the Company, or use in connection with engaging in competition with the Company, any Confidential or Proprietary Information of the Company or (ii) remove, copy or retain in his possession any Company files or records. For purposes of this Agreement, the term "Confidential or Proprietary Information" will include all information of any nature and in any form that is owned by the Company or by The Page 19 of 27 Company and that is not publicly available (other than by Executive's breach of this Section 10(b)) or generally known to persons engaged in businesses similar or related to those of the Company or The Company. Confidential or Proprietary Information will include, without limitation, the Company's and The Company' financial matters, customers, employees, industry contracts, strategic business plans, product development (or other proprietary product data), marketing plans, and all other secrets and all other information of a confidential or proprietary nature. Confidential or Proprietary Information shall not be deemed to have become public for purposes of this Agreement where it has been disclosed or made public by or through anyone acting in violation of a contractual, ethical, or legal responsibility to maintain its confidentiality. The foregoing obligations imposed by this Section 10(b) shall not apply (x) during the Term, in the course of the business of and for the benefit of the Company or The Company, (y) if such Confidential or Proprietary Information will have become, through no fault of the Executive, generally known to the public or (z) if the Executive is required by law to make disclosure (after giving the Company notice and an opportunity to contest such requirement). (c) The Executive hereby covenants and agrees that during the Term and for one (1) year after the Date of Termination Executive will not, without the prior written consent of the Company, which consent shall not unreasonably be withheld, on behalf of Executive or on behalf of any person, firm or company, directly or indirectly, attempt to influence, persuade or induce, or assist any other person in so persuading or inducing, any employee of the Company or The Company to give up employment or a business relationship with the Company or The Company, and the Executive shall not directly or indirectly solicit or hire employees of the Company or The Company for employment with any other employer. (d) The Executive agrees that on or before the Date of Termination the Executive shall return all Company property, including without limitation all credit, identification and similar cards, keys and documents, books, records and office equipment. The Executive agrees that he shall abide by, through the Date of Termination, the Company's and The Company' policies and procedures for worldwide business conduct. (e) Executive and the Company agree that the covenants contained in this Section 10 are reasonable under the circumstances, and further agree that if in the opinion of any court of competent jurisdiction any such covenant is not reasonable in any respect, such court will have the right, power and authority to excise or modify any provision or provisions of such Page 20 of 27 covenants as to the court will appear not reasonable and to enforce the remainder of the covenants as so amended. Executive acknowledges and agrees that the remedy at law available to the Company for breach of any of his obligations under this Section 10 would be inadequate and that damages flowing from such a breach may not readily be susceptible to being measured in monetary terms. Accordingly, Executive acknowledges, consents and agrees that, in addition to any other rights or remedies that the Company may have at law, in equity or under this Agreement, upon adequate proof of his violation of any such provision of this Agreement, the Company will be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage. (f) Representations of the Executive. The Executive represents and warrants to the Company that: (i) (A) There are no restrictions, agreements or understandings whatsoever to which the Executive is a party that would prevent or make unlawful the Executive's execution of this Agreement or the Executive's employment under this Agreement, or that is or would be inconsistent, or in conflict with this Agreement or the Executive's employment under this Agreement, or would prevent, limit or impair in any way the performance by the Executive of the obligations under this Agreement; and (B) the Executive has disclosed to the Company all restraints, confidentiality commitments or other employment restrictions that the Executive has with any other employer, person or entity. (ii) Upon and after the Executive's termination or cessation of employment with the Company, and until such time as no obligations of the Executive to the Company hereunder exist, the Executive: (A) shall provide a complete copy of this Agreement to any prospective employer or other person, entity or association in a competing business with whom or which the Executive proposes to be employed, affiliated, engaged, associated or to establish any business or remunerative relationship prior to the commencement thereof, provided that Executive shall first cause the compensation amounts hereunder to be deleted or not disclosed; and (B) during the period described in Section 10(a)(ii) the Executive shall notify the Company of the name and address of any such person, entity or association prior to the Executive's employment, affiliation, engagement, association or the establishment of any business or remunerative relationship. Page 21 of 27 11. Legal Fees and Expenses. If it should appear to Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Executive the benefits provided or intended to be provided to Executive hereunder, the Company irrevocably authorizes Executive from time to time to retain counsel of Executive's choice at the expense of the Company as hereafter provided, to advise and represent Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and Executive agree that a confidential relationship shall exist between Executive and such counsel. Without respect to whether Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys, and related fees and expenses incurred by Executive in connection with any of the foregoing; provided that, in regard to such matters, the Executive has not acted in bad faith or with no colorable claim of success. Such payments shall be made within five (5) business days after delivery of Executive's written requests for payment, accompanied by such evidence of fees and expenses incurred as the Company may reasonably require. Notwithstanding the foregoing provisions of this Section 11, the obligations of the Company under this Section 11 shall not exceed, in the aggregate, $100,000. 12. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all applicable taxes that the Company is required to withhold pursuant to any applicable law, regulation or ruling. 13. Dispute Resolution. Any dispute between the parties under this Agreement shall be resolved (except as provided below) through informal arbitration by an arbitrator selected under the rules of the American Arbitration Association for arbitration of employment disputes (located in Charlotte, North Carolina) and the arbitration shall be conducted in that location under the rules of said Association. Each party shall be entitled to present evidence and argument to the arbitrator. The arbitrator shall have the right only to interpret and apply the provisions of this Agreement and may not change any of its provisions, except as expressly provided in Section 17 and only in the event the Page 22 of 27 Company has not brought an action in a court of competent jurisdiction to enforce the covenants in Section 10. The arbitrator shall permit reasonable pre-hearing discovery of facts, to the extent necessary to establish a claim or a defense to a claim, subject to supervision by the arbitrator. The determination of the arbitrator shall be conclusive and binding upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof. The arbitrator shall give written notice to the parties stating the arbitrator's determination, and shall furnish to each party a signed copy of such determination. The expenses of arbitration shall be borne equally by the Company and the Executive or as the arbitrator equitably determines consistent with the application of state or federal law; provided, however, that the Executive's share of such expenses shall not exceed the maximum permitted by law. Any arbitration or action pursuant to this Section 13 shall be governed by and construed in accordance with the substantive laws of the State of Delaware and, where applicable, federal law, without giving effect to the principles of conflict of laws of such State. Notwithstanding the foregoing, the Company shall not be required to seek or participate in arbitration regarding any actual or threatened breach of the Executive's covenants in Section 10, but may pursue its remedies, including injunctive relief, for such breach in a court of competent jurisdiction in Charlotte, North Carolina, or in the sole discretion of the Company, in a court of competent jurisdiction where the Executive has committed or is threatening to commit a breach of the Executive's covenants, and no arbitrator may make any ruling inconsistent with the findings or rulings of such court. 14. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. Page 23 of 27 (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 14(a) and 14(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 14(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 15. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five (5) business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three (3) business days after having been sent by an internationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Board of the Company) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 16. Governing Law. Notwithstanding applicable conflicts of laws principles, the validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware and federal law, without giving effect to the principles of conflict of laws, except as expressly provided herein. In the event the Company exercises its discretion under Section 10(e) to bring an action to enforce the covenants contained in Section 10 in a court of competent jurisdiction where the Executive has breached or threatened to breach such covenants, and in no other event, the parties agree that the court may apply the law of the jurisdiction in which such action is pending in order to enforce the covenants to the fullest extent permissible. 17. Validity. Any provision of this Agreement that is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective, to the extent of such Page 24 of 27 invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal or unenforceable in any other jurisdiction. If any covenant in Section 10 should be deemed invalid, illegal or unenforceable because its time, geographical area, or restricted activity, is considered excessive, such covenant shall be modified to the minimum extent necessary to render the modified covenant valid, legal and enforceable. 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. The headings used in this Agreement are intended for convenience or reference only and shall not in any manner amplify, limit, modify or otherwise be used in the construction or interpretation of any provision of this Agreement. References to Sections are references to Sections of this Agreement. Any reference in this Agreement to a provision of a statute, rule or regulation shall also include any successor thereto. 19. Survival. Notwithstanding any provision of this Agreement to the contrary, the parties' respective rights and obligations under Sections 8, 9, 10, 11, 12, 13 and 14(b) will survive any termination or expiration of this Agreement or the termination of the Executive's employment for any reason whatsoever. 20. Beneficiaries. The Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Company written notice thereof in accordance with Section 15. In the event of the Executive's death or a judicial determination of the Executive's incompetence, reference in this Agreement to the "Executive" shall be deemed, where appropriate, to the Executive's beneficiary, estate or other legal representative. Page 25 of 27 21. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 22. Entire Agreement. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the Executive's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceedings to vary the terms of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Page 26 of 27 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above. /s/ Hugh T. McCormick ----------------------------------------- Hugh T. McCormick SCOTTISH RE GROUP LIMITED By: /s/ Paul Goldean -------------------------------------- Name: Paul Goldean ------------------------------------ Title: EVP General Counsel ----------------------------------- Page 27 of 27 EX-10.43 5 ex10-43.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement"), dated as of December 1, 2004, is made and entered into by and between Scottish Holdings, Inc., a Delaware company (the "Company") and Kenneth R. Stott (the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to ensure that it retains the Executive's management and executive services by directly engaging Executive as its Executive Vice President - Chief Information Officer; WHEREAS, in order to induce the Executive to continue to serve in such position, the Company desires to provide the Executive with compensation and other benefits on the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to accept such employment and perform services for the Company, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the agreements and covenants herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Board" means the Board of Directors of Scottish Holdings, Inc. (c) "Change in Control" means the occurrence during the Term of any of the following events: (i) the acquisition by any individual, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Act (a "Person"), including as a result of a Business Combination (as defined in Section 1(c)(iii)), of beneficial ownership, within the meaning of Rule 13d-3 promulgated under the Act, of 25% or more of the combined voting power of the then outstanding Voting Stock of Scottish Re Group Limited ("Holdings"); provided, however, that for purposes of this Section, the following acquisitions shall not constitute a Change in Control: (A) any acquisition by Holdings of Voting Stock of Holdings, or (B) any acquisition of Voting Stock of Page 1 of 26 Holdings by any employee benefit plan (or related trust) sponsored or maintained by Holdings or any Subsidiary; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board," (as modified by this Section 1(c)(ii))) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the shareholders of Holdings, was approved by a vote of at least two-thirds of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of Holdings in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation, a sale or other disposition of all or substantially all of the assets of Holdings, or other transaction (each, a "Business Combination"), unless, in each case, immediately following such Business Combination, either (A)(I) the individuals and entities who were the beneficial owners of Voting Stock of Holdings immediately prior to such Business Combination beneficially own in the aggregate, directly or indirectly, more than 50% of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns Holdings or all or substantially all of the assets of Holdings either directly or through one or more subsidiaries), (II) no Person (other than Holdings, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by Holdings, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the Board of Directors of the entity resulting from such Business Combination were members of the Page 2 of 26 Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination, or (B) the same as Section 1(c)(iii)(A), except in clause (I), substituting "one-third" for "50%," and in clause (III), substituting "two-thirds" for "a majority"; (iv) approval by the shareholders of Holdings of a complete liquidation or dissolution of Holdings, except pursuant to a Business Combination that complies with clause (A) or (B) of Section 1(c)(iii); or (v) a sale or other disposition of (A) shares of Voting Stock of the Company representing at least 50% of the combined voting power of the then outstanding shares of Voting Stock of the Company, or (B) all or substantially all of the assets of the Company, unless, in either case, the individuals and entities who were the beneficial owners of Voting Stock of Holdings immediately prior to such sale or disposition continue to beneficially own in the aggregate, directly or indirectly, more than 50% of the combined voting power of the then outstanding shares of Voting Stock of the entity acquiring such Voting Stock or assets of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Competitive Activity" means the Executive's participation, without the written consent of the Board of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise engages in substantial and direct competition with the Company if such enterprise's sales of any product or service competitive with any product or service of the Company amounted to 10% of such enterprise's net sales for its most recently completed fiscal year and if the Company's net sales of said product or service amounted to 10% of the Company's net sales for its most recently completed fiscal year. "Competitive Activity" shall not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise. (f) "Director" means a member of the Board. (g) "Ordinary Shares" means the ordinary shares, par value $0.01 per share, of Holdings. Page 3 of 26 (h) "Subsidiary" means an entity in which Holdings directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (i) "Total Cash Compensation" means the sum of the (i) highest annual Base Salary in effect during the Term; and (ii) highest annual Incentive Bonus (as set forth in Section 6(b)) earned during the prior three (3) fiscal years. (j) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. Employment. The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed with the Company for the Term, upon the terms and conditions herein set forth. 3. Term. The term of employment under this Agreement (the "Initial Term") shall commence on December 1, 2004 ("Commencement Date") and subject to earlier termination pursuant to Section 7, expire on the second anniversary of the Commencement Date; provided, however, that commencing on the first anniversary of the Commencement Date and each succeeding anniversary date, this Agreement will automatically be renewed for successive one-year periods (the "Additional Term"), subject to earlier termination pursuant to Section 7, unless either party provides written notice of non-renewal to the other pursuant to Section 14 at least ninety (90) days prior to the end of the Initial Term or any Additional Term. The Initial Term and any Additional Term shall be referred to under this Agreement as the "Term"; provided, however, that if a Change in Control occurs during the Term (as determined without regard to this clause), then the Term shall include the period ending on the second anniversary of the first occurrence of a Change in Control. 4. Positions and Duties. (a) During the Term, Executive will serve in the position of Executive Vice President - Chief Information Officer of the Company, or such other position as may be agreed upon by the Company and the Executive, and will have such duties, functions, responsibilities and authority as are (i) reasonably assigned to him by the President of Holdings, consistent with Executive's position as the Company's Executive Vice President -Chief Information Officer or (ii) assigned to his office in the Company's Charter. Executive will report directly to the President of Holdings. (b) During the Term, Executive will be the Company's full-time employee and, except as may otherwise be approved in advance in writing by the Page 4 of 26 Board of the Company, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, Executive will devote substantially all of his business time and attention to the performance of his duties to the Company. Notwithstanding the foregoing, Executive may (i) subject to the approval of the Board of the Company, serve as a director of a company, provided such service does not constitute a Competitive Activity, (ii) serve as an officer, director or otherwise participate in purely educational, welfare, social, religious, charitable and civic organizations, (iii) serve as an officer, director or trustee of, or otherwise participate in, any organizations and activities with respect to which Executive's participation was disclosed to the Company in writing prior to the date hereof and (iv) manage personal and family investments. 5. Place of Performance. In connection with his employment during the Term, unless otherwise agreed by Executive, Executive will be based at the Company's principal executive offices in Charlotte, North Carolina; provided, however, that Executive agrees and acknowledges that in view of the nature of Company's business operations, Executive may be required in the performance of his duties to undertake substantial travel on behalf of the Company. 6. Compensation and Related Matters. As compensation and consideration for the performance by Executive of his obligations pursuant to this Agreement, Executive shall be entitled to the following: (a) Base Salary. During the Term, the Company shall pay Executive an annual base salary ("Base Salary") of US $275,000, payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. The Company agrees to review such compensation not less frequently than annually during the Term. Once increased, the Base Salary may not be decreased. The Base Salary as increased from time to time shall be referred to herein as "Base Salary". (b) Incentive Bonus. For 2005 and each calendar year that begins during the Term, the Company shall pay a cash bonus to Executive based upon pre-established performance goals established by the Company (the "Incentive Bonus"). Any Incentive Bonus shall be payable at the times and in the manner consistent with the Company's policies regarding compensation of executive employees. Page 5 of 26 (c) Guaranteed Bonus. For the calendar year ending on December 31, 2004, Executive shall receive a guaranteed minimum bonus equal to $100,000 (the "Guaranteed Bonus") payable in February 2004. (d) Executive Benefits. During the Term, the Company will make available to Executive and his eligible dependents, participation in all Company-sponsored employee benefit plans including all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate, including any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, disability, salary continuation, and any other deferred compensation, incentive compensation, group and/or executive life, health, medical/hospital or other insurance, expense reimbursement or other employee benefit policies, plans, programs or arrangements, including without limitation financial counseling services or any equivalent successor policies, plans, programs or arrangements that may now exist or be adopted hereafter by the Company. (e) Expenses. The Company will promptly reimburse Executive for all reasonable business expenses Executive incurs in order to perform his duties to the Company under this Agreement in a manner commensurate with Executive's position and level of responsibility with the Company, and in accordance with the Company's policy regarding substantiation of expenses. (f) Vacation and Holidays. Executive shall be entitled to four (4) weeks of paid vacation per annum, in accordance with the Company's vacation policy. (g) Indemnification. The Executive shall be offered an opportunity to enter into Holdings' Indemnification Agreement substantially in the form attached hereto as Exhibit A effective as of the Commencement Date. (h) Relocation Expenses. The Company shall reimburse the Executive for his reasonable relocation costs to Charlotte, North Carolina in accordance with the Company's Relocation Policy. Reasonable relocation costs are not to exceed $75,000. (i) Initial Equity Compensation Grant. The Company shall grant Executive an option (the "Option") to purchase 6,700 Ordinary Shares of Holdings. Additionally, the Company shall grant Executive 3,400 restricted shares (the "Restricted Shares") of Holdings. Any grant to Executive under the 2004 Equity Incentive Compensation Plan shall be subject to the terms and Page 6 of 26 conditions of the plan as well as the performance requirements expressly adopted by the Holdings' Board and/or Compensation Committee. A copy of the 2004 Equity Incentive Compensation Plan is attached hereto as Exhibit B. 7. Termination. (a) Termination by the Company with Cause. The Company shall have the right to terminate Executive's employment at any time with Cause. For purposes of this Agreement, "Cause" shall mean: (i) habitual drug or alcohol use which impairs Executive's ability to perform his or her duties hereunder; (ii) Executive's conviction during the Term by a court of competent jurisdiction, or a pleading of "no contest" or guilty to an arrestable criminal offense resulting in the imposition of a custodial sentence; (iii) Executive's engaging in fraud, embezzlement or any other illegal conduct with respect to the Company or Holdings, which acts are materially harmful to, either financially, or to the business reputation of the Company or Holdings; (iv) Executive's willful breach of Section 10 hereof; (v) Executive's continued failure or refusal to perform his duties hereunder (other than such failure caused by Executive's Disability); or (vi) Executive otherwise breaches any material provision of this Agreement. No act or failure to act on the part of Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company and Holdings. (b) Death. In the event Executive dies during the Term, his employment shall automatically terminate effective on the date of his death, such termination shall not be deemed to be a breach of this Agreement, and the Company shall pay or provide to the Executive's beneficiaries or estate, as appropriate, as soon as practicable after the Executive's death, the amounts and benefits provided for in Section 8(d). (c) Disability. In the event Executive shall suffer from a mental or physical disability which shall have prevented him from performing his material duties hereunder for a period of at least one-hundred eighty (180) non-consecutive days within any 365 day period, the Company shall have the right to terminate Executive's employment for "Disability," such termination to be effective upon the giving of notice thereof to the Executive in accordance with Section 7(g) hereof, such termination shall not be deemed to be a breach of this Agreement, and the Company shall provide to the Executive the amounts and benefits provided for in Page 7 of 26 Section 8(d). Executive's employment hereunder shall terminate effective on the 30th day after receipt of such notice by Executive (the "Disability Effective Date"); provided that Executive shall not have returned to full-time performance of his duties hereunder within thirty (30) days following receipt of such notice. (d) Good Reason. (i) Executive may terminate his employment with the Company for "Good Reason" and such termination shall not be deemed to be a breach of this Agreement. Executive shall have Good Reason if Executive has knowledge that one of the events described in Section 7(d)(ii) has occurred without Executive's written consent and (A) if the event is not curable, Executive gives a Notice of Termination to the Company pursuant to Section 7(g) within sixty (60) days after having knowledge of the event, or (B) if the event is curable, (I) Executive gives written notice to the Company thereof in accordance with Section 14 within sixty (60) days after having knowledge of the event, (II) such event has not been cured within a reasonable period after notice, but in all events within thirty (30) days after the Executive gives notice of the event to the Company, and (III) Executive gives a Notice of Termination to the Company in accordance with Section 7(g) within thirty (30) days after the expiration of the Company's 30-day cure period. (ii) For purposes of this Agreement, "Good Reason" shall mean (A) prior to a Change in Control, (I) a failure by the Company to comply with any material provision of this Agreement; (II) the liquidation, dissolution, merger, consolidation or reorganization of the Company or all of its business and/or assets, unless the successor(s) assume all duties and obligations of the Company pursuant to Section 13(a); or (III) upon the provision of notice by the Company under Section 3 of non-renewal of the Agreement, and (B) on or after a Change in Control, (I) any of the events set forth in Section 7(d)(ii)(A); (II) any material and adverse change to Executive's duties or authority which are inconsistent with his title and position set forth herein; (III) a diminution of Executive's title or position; (IV) the relocation of Executive's office; (V) a reduction in Executive's Base Salary; or (VI) a material reduction of Executive's benefits provided pursuant to Section 6 other than a reduction permitted under terms and conditions of the applicable Company policy or benefit plan. Page 8 of 26 (e) Without Good Reason. Executive may voluntarily terminate his employment with the Company without Good Reason by giving written notice to the Company as provided in Section 7(g). Such notice must be provided to the Company at least thirty (30) days prior to such termination. Such termination shall not be deemed to be a breach of this Agreement. (f) Without Cause. This Company shall have the right to terminate Executive's employment hereunder without Cause by providing written notice to Executive as provided in Section 7(g), and such termination shall not be deemed to be a breach of this Agreement. "Without Cause" shall mean for any reason other than Cause, death or Disability, as provided in Sections 7(a), 7(b) and 7(c). (g) Notice of Termination. Any termination of Executive's employment by the Company pursuant to Section 7(a), 7(c) or 7(f), or by Executive pursuant to Section 7(d) or 7(e), shall be communicated by a Notice of Termination to the other party hereto in accordance with this Section 7(g) and Section 14. For purposes of this Agreement, a "Notice of Termination" means a written notice that (A) indicates the specific termination provision in this Agreement relied upon, (B) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (C) if the Date of Termination (as defined in Section 7(h)) is other than the date of receipt of such notice, specifies the Date of Termination. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or Company's rights hereunder. (h) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein (but not more than thirty (30) days thereafter), as the case may be (although such Date of Termination shall retroactively cease to apply if the circumstances providing the basis of termination for Cause or Good Reason are cured in accordance with Section 7(a) or 7(d) of this Agreement, as the case may be), (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date set forth in the Notice of Termination (iii) if Page 9 of 26 Executive's employment is terminated by Executive without Good Reason, the Date of Termination shall be the date set forth in the Notice of Termination, but no sooner than thirty (30) days after such Notice of Termination is received by the Company and (iv) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of the Executive's death or the Disability Effective Date, as the case may be. 8. Compensation upon Termination. If the Company or Executive terminates the Executive's employment during the Term, the Company shall pay to the Executive the amount(s) set forth below in a lump sum in cash upon the later of (i) five (5) business days after the Date of Termination or date of expiration of this Agreement, as the case may be, (ii) the effective date of a release (if a release is required by this Section 8) or (iii) at the Executive's option, a date later than the dates specified in clauses (i) and (ii). (a) Compensation upon Termination for Cause or Without Good Reason. In the event of termination of Executive's employment by the Company for Cause or by the Executive without Good Reason, or by reason of expiration of the Term (if applicable), the Company shall pay the Executive his accrued, but unpaid Base Salary, accrued vacation pay and unpaid business expenses through the Date of Termination (the "Compensation Payments"), and the Executive shall be entitled to no other compensation, except as otherwise due to the Executive under applicable law. The Executive shall not be entitled to the payment of any bonus or other incentive compensation for any portion of the fiscal year in which such termination occurs. (b) Compensation upon Termination by the Company Without Cause or upon Termination by the Executive for Good Reason. Subject to Section 8(c), in the event of the termination of the Executive's employment by the Company without Cause or upon termination of the Executive's employment by the Executive for Good Reason, the Company shall pay the Executive the Compensation Payments. In addition, conditioned upon receipt of the Executive's release of claims substantially in the form attached hereto as Exhibit C, subject to such changes as may be required to preserve the intent thereof for changes in applicable law, the Company shall pay or provide to the Executive (i) as severance pay, an amount equal to the sum of the Total Cash Compensation that Executive would have received during the remaining Term of the Agreement, such amount to be calculated from the date the Executive's employment was terminated to the date that is the first anniversary of the Commencement Date (the "Severance Calculation Period"), (ii) earned, but unpaid Page 10 of 26 Incentive Bonus for the year of termination, as determined in the good faith opinion of the Company based upon the relative achievement of performance targets through the Date of Termination (the "Termination Bonus"), and (iii) the welfare benefits set forth in Section 8(f). Notwithstanding the foregoing provisions of this Section 8(b), (x) where the Severance Calculation Period is for twelve (12) calendar months or less, the Company shall pay the Executive under Section 8(b)(i) an amount equal to the sum of one (1) full year's Total Cash Compensation, (y) upon termination by the Executive for Good Reason due to Section 7(d)(ii)(A)(III) (Company's notice of non-renewal of the Agreement), the Company shall pay the Executive under Section 8(b)(i) an amount not less than one (1) full year's Total Cash Compensation, and (z) any right of the Executive to receive termination payments and benefits under Section 8(b) shall be forfeited to the extent of any amounts payable or benefits to be provided after a material breach of any covenant set forth in Section 10. (c) Compensation upon Termination in Connection with a Change in Control of the Company. If, within the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the second anniversary of such occurrence of a Change in Control or, if earlier, until the Executive's death, the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, then the provisions of Section 8(b) shall be applicable. For purposes of the preceding sentence, if a Change in Control occurs and not more than one-hundred twenty (120) days prior to the date on which the Change in Control occurs, the Executive's employment is terminated by the Company without Cause, such termination of employment shall be deemed a termination of employment after a Change in Control if such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control. (d) Compensation upon Death or Disability. In the event of the Executive's death or the termination of employment due to Disability, the Company shall pay to the Executive (or beneficiaries, or estate, as the case may be) an amount equal to the sum of (i) the Compensation Payments and (ii) the Termination Bonus. Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provision of any agreements, plans or programs of the Company. Page 11 of 26 (e) Set-Off, Counterclaim or Late Payment. There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement. Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount or value thereof at an annualized rate of interest equal to the "prime rate" as set forth from time to time during the relevant period in The Wall Street Journal "Money Rates" column, plus four (4)%. Such interest shall be payable as it accrues on demand. Any change in such prime rate shall be effective on and as of the date of such change. (f) Welfare Benefits. If the Executive becomes entitled to the benefits provided by Section 8(b) or 8(c), then in addition to such benefits, for a period following the Date of Termination equal to the greater of the remaining Term or twelve (12) months (the "Continuation Period"), the Company shall arrange to provide the Executive with health insurance, life insurance, and other medical benefits substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Date of Termination (or, if greater, immediately prior to the reduction, termination, or denial described in Section 7(d)(ii)(B)(VI), if applicable). If and to the extent that any benefit described in this Section 8(f) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such benefits along with, in the case of any benefit described in this Section 8(f) that is subject to tax because it is not or cannot be paid or provided under any such policy, plan, program or arrangement of the Company, an additional amount such that after payment by the Executive, or his dependents or beneficiaries, as the case may be, of all taxes so imposed, the recipient retains an amount equal to such taxes. Notwithstanding the foregoing, or any other provision of the Agreement, for purposes of determining the period of continuation coverage to which the Executive or any of his dependents is entitled pursuant to Section 4980B of the Code under the Company's medical, dental and other group health plans, or successor plans, the Executive's "qualifying event" will be the termination of the Continuation Period and the Executive will be considered to have remained actively employed on a full-time basis through that date. (g) Scope and Nonduplication. The provision or payment of termination benefits under this Section 8 shall not affect any rights the Executive may have pursuant to any agreement, plan, policy, program or arrangement of Page 12 of 26 the Company providing employee benefits, which rights shall be governed by the terms thereof or by the release described in Section 8; provided, however, that to the extent, and only to the extent, a payment or benefit that is paid or provided under this Section 8 would also be paid or provided under the terms of any applicable plan, program, or arrangement, including, without limitation, any severance program, such applicable plan, program, agreement or arrangement shall be deemed to have been satisfied by the payment made or benefit provided under this Agreement. (h) Mitigation. In the event of the termination of the Executive by the Company without Cause, or by the Executive with Good Reason, the Executive shall not be required to mitigate damages by seeking other employment or otherwise as a condition to receiving termination payments or benefits under this Agreement. No amounts earned by the Executive after the Executive's termination by the Company without Cause or by the Executive with Good Reason, whether from self-employment, as a common law employee, or otherwise, shall reduce the amount of any payment or benefit under any provision of this Agreement. Notwithstanding the foregoing, the Executive's coverage under the Company's group medical insurance as provided in Section 8(f) shall be reduced to the extent comparable welfare benefits are actually received by the Executive as soon as the Executive becomes covered under any group medical plan made available by another employer. The Executive shall report to the Company any such coverage actually received by the Executive. (i) Resignations. Except to the extent requested by the Company, upon any termination of the Executive's employment with the Company, the Executive shall immediately resign all positions and directorships with the Company, Holdings and each of their subsidiaries and affiliates. (j) Reimbursement of Guaranteed Bonus and Relocation Expenses. If the Executive terminates this Agreement without Good Reason, the Executive shall reimburse to the Company a pro rata share of the guaranteed bonus and relocation expense according to the following schedule: (i) Prior to the expiration of six (6) months from December 1, 2004, the Executive shall reimburse 50% of the guaranteed bonus and relocation expense to the Company; and (ii) Prior to the expiration of twelve (12) months from December 1, 2004, the Executive shall reimburse 25% of the guaranteed bonus and relocation expense to the Company. Page 13 of 26 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment (other than the Gross-Up payments provided for in this Section 9) or distribution by the Company, Holdings or any of their affiliates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code by reason of being considered "contingent on a change in ownership or control" of the Company or Holdings, within the meaning of Section 280G of the Code or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"); provided; however, that no Gross-up Payment shall be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. For purposes of determining the amount of the Gross-Up Payment, the Executive will be considered to pay (x) federal income taxes at the highest rate in effect in the year in which the Gross-Up Payment will be made and (y) state and local income taxes at the highest rate in effect in the state or locality in which the Gross-Up Payment would be subject to state or local tax, net of the maximum reduction in federal income tax that could be obtained from deduction of such state and local taxes. (b) Subject to the provisions of Section 9(f), all determinations required to be made under this Section 9, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Executive and the Page 14 of 26 amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within thirty (30) calendar days after the Date of Termination, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay the required Gross-Up Payment to the Executive within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to any material benefit or amount (or portion thereof), it shall, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 9(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Executive within five (5) business days after receipt of such determination and calculations. (c) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, record and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and-otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 9(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Executive. (d) The federal, state and local income or other tax returns filed by the Executive shall be prepared and filed on a consistent basis with the Page 15 of 26 determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive shall report and make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive shall within five (5) business days pay to the Company the amount of such reduction. (e) The fees and expenses of Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 9(b) shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within five (5) business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. (f) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than thirty (30) business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notified the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with Page 16 of 26 respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income or other tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 9(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 9(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(f), the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's Page 17 of 26 complying with the requirements of Section 9(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(f), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 9. (h) Notwithstanding any provision of this Agreement to the contrary, but giving effect to any redetermination of the amount of Gross-Up payments otherwise required by this Section 9, if (i) but for this sentence, the Company would be obligated to make a Gross-Up Payment to the Executive and (ii) the aggregate "present value" of the "parachute payments" to be paid or provided to the Executive under this Agreement or otherwise does not exceed three times the Executive's "base amount" by more than $50,000, then the payments and benefits to be paid or provided under this Agreement will be reduced (or repaid to the Company, if previously paid or provided) to the minimum extent necessary so that no portion of any payment or benefit to the Executive, as so reduced or repaid, constitutes an "excess parachute payment." For purposes of this Section 9(h), the terms "excess parachute payment," "present value," "parachute payment," and "base amount" will have the meanings assigned to them by Section 280G of the Code. The determination of whether any reduction in or repayment of such payments or benefits to be provided under this Agreement is required pursuant to this Section 9(h) will be made at the expense of the Company, if requested by the Executive or the Company, by the Accounting Firm. Appropriate adjustments shall be made to amounts previously paid to Executive, or to amounts not paid pursuant to this Section 9(h), as the case may be, to reflect properly a subsequent determination that the Executive owes more or less Excise Tax than the amount previously determined to be due. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced or repaid pursuant to this Section 9(h), the Executive shall be entitled to designate the payments and/or benefits to be so reduced or repaid in order to give effect to this Section 9(h). The Company shall provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails Page 18 of 26 to make such designation within 10 business days prior to the Date of Termination or other due date, the Company may effect such reduction or repayment in any manner it deems appropriate. 10. Competitive Activity; Confidentiality; Non-solicitation. (a) Executive acknowledges that during the course of his employment with the Company the Executive will learn business information valuable to the Company and will form substantial business relationships with the Company's clients. To protect the Company's legitimate business interests in preserving its valuable confidential business information and client relationships, the Executive shall not without the prior written consent of the Company, which consent shall not be unreasonably withheld, (i) engage in any Competitive Activity during the Term and (ii) if the Executive shall have received or shall be receiving benefits under Section 8(b) or 8(c), engage in any Competitive Activity for a period ending on the first anniversary of the earlier of the Date of Termination or the date of expiration of this Agreement. (b) During the Term, and in consideration for the Executive's agreement to enter into this Agreement, the Company agrees that it will disclose or cause to be disclosed to Executive its Confidential or Proprietary Information (as defined in this Section 10(b)) to the extent necessary for Executive to carry out his obligations to the Company. The Executive hereby acknowledges the Company has a legitimate business interest in protecting its Confidential or Proprietary Information and hereby covenants and agrees that he will not without the prior written consent of the Company, during the Term or thereafter (i) disclose to any person not employed by the Company, or use in connection with engaging in competition with the Company, any Confidential or Proprietary Information of the Company or (ii) remove, copy or retain in his possession any Company files or records. For purposes of this Agreement, the term "Confidential or Proprietary Information" will include all information of any nature and in any form that is owned by the Company or by Holdings and that is not publicly available (other than by Executive's breach of this Section 10(b)) or generally known to persons engaged in businesses similar or related to those of the Company or Holdings. Confidential or Proprietary Information will include, without limitation, the Company's and Holdings' financial matters, customers, employees, industry contracts, strategic business plans, product development (or other proprietary product data), marketing plans, and all other secrets and all other information of a confidential or proprietary nature. Confidential or Proprietary Information shall not be deemed to have become public for purposes of this Agreement where it has been Page 19 of 26 disclosed or made public by or through anyone acting in violation of a contractual, ethical, or legal responsibility to maintain its confidentiality. The foregoing obligations imposed by this Section 10(b) shall not apply (x) during the Term, in the course of the business of and for the benefit of the Company or Holdings, (y) if such Confidential or Proprietary Information will have become, through no fault of the Executive, generally known to the public or (z) if the Executive is required by law to make disclosure (after giving the Company notice and an opportunity to contest such requirement). (c) The Executive hereby covenants and agrees that during the Term and for one (1) year after the Date of Termination Executive will not, without the prior written consent of the Company, which consent shall not unreasonably be withheld, on behalf of Executive or on behalf of any person, firm or company, directly or indirectly, attempt to influence, persuade or induce, or assist any other person in so persuading or inducing, any employee of the Company or Holdings to give up employment or a business relationship with the Company or Holdings, and the Executive shall not directly or indirectly solicit or hire employees of the Company or Holdings for employment with any other employer. (d) The Executive agrees that on or before the Date of Termination the Executive shall return all Company property, including without limitation all credit, identification and similar cards, keys and documents, books, records and office equipment. The Executive agrees that he shall abide by, through the Date of Termination, the Company's and Holdings' policies and procedures for worldwide business conduct. (e) Executive and the Company agree that the covenants contained in this Section 10 are reasonable under the circumstances, and further agree that if in the opinion of any court of competent jurisdiction any such covenant is not reasonable in any respect, such court will have the right, power and authority to excise or modify any provision or provisions of such covenants as to the court will appear not reasonable and to enforce the remainder of the covenants as so amended. Executive acknowledges and agrees that the remedy at law available to the Company for breach of any of his obligations under this Section 10 would be inadequate and that damages flowing from such a breach may not readily be susceptible to being measured in monetary terms. Accordingly, Executive acknowledges, consents and agrees that, in addition to any other rights or remedies that the Company may have at law, in equity or under this Agreement, upon adequate proof of his violation of any such provision of this Agreement, the Company will be entitled to immediate injunctive Page 20 of 26 relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage. (f) Representations of the Executive. The Executive represents and warrants to the Company that: (i) (A) There are no restrictions, agreements or understandings whatsoever to which the Executive is a party that would prevent or make unlawful the Executive's execution of this Agreement or the Executive's employment under this Agreement, or that is or would be inconsistent, or in conflict with this Agreement or the Executive's employment under this Agreement, or would prevent, limit or impair in any way the performance by the Executive of the obligations under this Agreement; and (B) the Executive has disclosed to the Company all restraints, confidentiality commitments or other employment restrictions that the Executive has with any other employer, person or entity. (ii) Upon and after the Executive's termination or cessation of employment with the Company, and until such time as no obligations of the Executive to the Company hereunder exist, the Executive: (A) shall provide a complete copy of this Agreement to any prospective employer or other person, entity or association in a competing business with whom or which the Executive proposes to be employed, affiliated, engaged, associated or to establish any business or remunerative relationship prior to the commencement thereof, provided that Executive shall first cause the compensation amounts hereunder to be deleted or not disclosed; and (B) shall notify the Company of the name and address of any such person, entity or association prior to the Executive's employment, affiliation, engagement, association or the establishment of any business or remunerative relationship. 11. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all applicable taxes that the Company is required to withhold pursuant to any applicable law, regulation or ruling. 12. Dispute Resolution. Any dispute between the parties under this Agreement shall be resolved (except as provided below) through informal arbitration by an arbitrator selected under the rules of the American Arbitration Association for arbitration of employment disputes Page 21 of 26 (located in Charlotte, North Carolina) and the arbitration shall be conducted in that location under the rules of said Association. Each party shall be entitled to present evidence and argument to the arbitrator. The arbitrator shall have the right only to interpret and apply the provisions of this Agreement and may not change any of its provisions, except as expressly provided in Section 16 and only in the event the Company has not brought an action in a court of competent jurisdiction to enforce the covenants in Section 10. The arbitrator shall permit reasonable pre-hearing discovery of facts, to the extent necessary to establish a claim or a defense to a claim, subject to supervision by the arbitrator. The determination of the arbitrator shall be conclusive and binding upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof. The arbitrator shall give written notice to the parties stating the arbitrator's determination, and shall furnish to each party a signed copy of such determination. The expenses of arbitration shall be borne equally by the Company and the Executive or as the arbitrator equitably determines consistent with the application of state or federal law; provided, however, that the Executive's share of such expenses shall not exceed the maximum permitted by law and shall be paid by the Company if the arbitrator determines that the Company has acted substantially without merit. Any arbitration or action pursuant to this Section 12 shall be governed by and construed in accordance with the substantive laws of the State of North Carolina and, where applicable, federal law, without giving effect to the principles of conflict of laws of such State. Notwithstanding the foregoing, the Company shall not be required to seek or participate in arbitration regarding any actual or threatened breach of the Executive's covenants in Section 10, but may pursue its remedies, including injunctive relief, for such breach in a court of competent jurisdiction in Charlotte, North Carolina, or in the sole discretion of the Company, in a court of competent jurisdiction where the Executive has committed or is threatening to commit a breach of the Executive's covenants, and no arbitrator may make any ruling inconsistent with the findings or rulings of such court. 13. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such Page 22 of 26 successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 13(a) and 13(b). Without limiting the generality or effect of the foregoing, Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 13(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 14. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five (5) business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three (3) business days after having been sent by an internationally recognized overnight courier service, addressed to the Company (to the attention of the Chief Executive Officer of the Company) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 15. Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of North Carolina and federal law, without giving effect to the principles of conflict of laws, except as expressly provided herein. In the event the Company exercises its discretion under Section 10(e) to bring an action to enforce the covenants contained in Section 10 in a court of competent jurisdiction where the Executive has breached or threatened to breach such covenants, and in no other event, the parties agree that the Page 23 of 26 court may apply the law of the jurisdiction in which such action is pending in order to enforce the covenants to the fullest extent permissible. 16. Validity. Any provision of this Agreement that is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective, to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal or unenforceable in any other jurisdiction. If any covenant in Section 10 should be deemed invalid, illegal or unenforceable because its time, geographical area, or restricted activity, is considered excessive, such covenant shall be modified to the minimum extent necessary to render the modified covenant valid, legal and enforceable. 17. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. The headings used in this Agreement are intended for convenience or reference only and shall not in any manner amplify, limit, modify or otherwise be used in the construction or interpretation of any provision of this Agreement. References to Sections are references to Sections of this Agreement. Any reference in this Agreement to a provision of a statute, rule or regulation shall also include any successor thereto. 18. Survival. Notwithstanding any provision of this Agreement to the contrary, the parties' respective rights and obligations under Sections 8, 9, 10, 11, 12 and 13(b) will survive any termination or expiration of this Agreement or the termination of the Executive's employment for any reason whatsoever. 19. Beneficiaries. The Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Company written notice thereof in accordance with Section 14. In the event of the Executive's death or a judicial determination of the Page 24 of 26 Executive's incompetence, reference in this Agreement to the "Executive" shall be deemed, where appropriate, to the Executive's beneficiary, estate or other legal representative. 20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 21. Entire Agreement. The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the Executive's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceedings to vary the terms of this Agreement. Page 25 of 26 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above. /s/ Kenneth R. Stott ------------------------------------- Kenneth R. Stott SCOTTISH HOLDINGS, INC. By: /s/ Paul Goldean ---------------------------------- Name: Paul Goldean Title: General Counsel Page 26 of 26 EX-10.44 6 ex10-44.txt CREDIT AGREEMENT ================================================================================ Published CUSIP Number: 81013DAA4 CREDIT AGREEMENT Dated as of December 29, 2004 Among SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD., SCOTTISH RE (DUBLIN) LIMITED, SCOTTISH RE (U.S.), INC., and SCOTTISH RE LIMITED as Borrowers, BEAR STEARNS CORPORATE LENDING, INC. and WACHOVIA BANK, NATIONAL ASSOCIATION as Co-Syndication Agents, BANK OF AMERICA, N.A., as Administrative Agent and L/C Issuer, and The Other Lenders Party Hereto BANC OF AMERICA SECURITIES LLC, as Sole Lead Arranger and Sole Book Manager ================================================================================ Table of Contents Page ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS.................................1 1.01 Defined Terms....................................................1 1.02 Other Interpretive Provisions...................................22 1.03 Accounting Terms................................................23 1.04 Rounding........................................................23 1.05 Times of Day....................................................23 1.06 Letter of Credit Amounts........................................23 ARTICLE II. THE COMMITMENTS AND CREDIT EXTENSIONS...........................23 2.01 Loans...........................................................23 2.02 Borrowings, Conversions and Continuations of Loans..............24 2.03 Letters of Credit...............................................25 2.04 Prepayments.....................................................33 2.05 Termination or Reduction of Commitments.........................33 2.06 Repayment of Loans..............................................34 2.07 Interest........................................................34 2.08 Fees............................................................35 2.09 Computation of Interest and Fees................................36 2.10 Evidence of Debt................................................36 2.11 Payments Generally; Administrative Agent's Clawback.............36 2.12 Sharing of Payments by Lenders..................................38 2.13 Several Obligations of Borrowers; SALIC as Agent of Borrowers...39 2.14 Increase in Commitments.........................................39 ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY..........................40 3.01 Taxes...........................................................40 3.02 Illegality......................................................43 3.03 Inability to Determine Rates....................................43 3.04 Increased Costs; Reserves on Eurodollar Rate Loans..............43 3.05 Compensation for Losses.........................................45 3.06 Mitigation Obligations; Replacement of Lenders..................46 3.07 Survival........................................................46 ARTICLE IV. CONDITIONS PRECEDENT TO CREDIT EXTENSIONS.......................46 4.01 Conditions of Closing Date......................................46 4.02 Conditions to all Credit Extensions.............................48 ARTICLE V. REPRESENTATIONS AND WARRANTIES..................................49 5.01 Existence, Qualification and Power; Compliance with Laws........49 5.02 Authorization; No Contravention.................................49 -i- TABLE OF CONTENTS (continued) Page 5.03 Governmental Authorization; Other Consents......................49 5.04 Binding Effect..................................................49 5.05 Financial Statements; No Material Adverse Effect................49 5.06 Litigation......................................................50 5.07 No Default......................................................50 5.08 Ownership of Property; Liens....................................51 5.09 Environmental Compliance........................................51 5.10 Insurance.......................................................51 5.11 Taxes...........................................................51 5.12 ERISA and Foreign Benefit Plan Compliance.......................51 5.13 Subsidiaries....................................................52 5.14 Margin Regulations; Investment Company Act; Public Utility Holding Company Act.............................................52 5.15 Disclosure......................................................53 5.16 Compliance with Laws............................................53 5.17 Representations as to Foreign Obligors..........................53 ARTICLE VI. AFFIRMATIVE COVENANTS...........................................54 6.01 Financial Statements............................................54 6.02 Certificates; Other Information.................................55 6.03 Notices.........................................................58 6.04 Payment of Obligations..........................................58 6.05 Preservation of Existence, Etc..................................58 6.06 Maintenance of Properties.......................................59 6.07 Maintenance of Insurance........................................59 6.08 Compliance with Laws............................................59 6.09 Books and Records...............................................59 6.10 Inspection Rights...............................................59 6.11 Use of Proceeds.................................................59 6.12 Approvals and Authorizations....................................60 ARTICLE VII. NEGATIVE COVENANTS..............................................60 7.01 Liens...........................................................60 7.02 Investments.....................................................61 7.03 Indebtedness....................................................62 7.04 Fundamental Changes.............................................63 7.05 Dispositions....................................................63 7.06 Restricted Payments.............................................64 7.07 Change in Nature of Business....................................64 7.08 Transactions with Affiliates....................................64 7.09 Burdensome Agreements...........................................65 7.10 Use of Proceeds.................................................65 -ii- TABLE OF CONTENTS (continued) Page 7.11 Financial Covenants.............................................65 7.12 Restrictions On Negative Pledge Agreements......................66 7.13 Acquisitions; ING Acquisition...................................66 ARTICLE VIII. EVENTS OF DEFAULT AND REMEDIES..................................67 8.01 Events of Default...............................................67 8.02 Remedies Upon Event of Default..................................69 8.03 Application of Funds............................................70 ARTICLE IX. AGENT...........................................................71 9.01 Appointment and Authority.......................................71 9.02 Rights as a Lender..............................................71 9.03 Exculpatory Provisions..........................................71 9.04 Reliance by Administrative Agent................................72 9.05 Delegation of Duties............................................73 9.06 Resignation of Administrative Agent.............................73 9.07 Non-Reliance on Administrative Agent and Other Lenders..........74 9.08 No Other Duties, Etc............................................74 9.09 Administrative Agent May File Proofs of Claim...................74 ARTICLE X. SALIC GUARANTEE.................................................75 10.01 Unconditional Guarantee.........................................75 10.02 Guarantee Absolute..............................................75 10.03 Waivers.........................................................76 10.04 Subrogation.....................................................76 10.05 Survival........................................................77 ARTICLE XI. MISCELLANEOUS...................................................77 11.01 Amendments, Etc.................................................77 11.02 Notices; Effectiveness; Electronic Communication................78 11.03 No Waiver; Cumulative Remedies..................................79 11.04 Expenses; Indemnity; Damage Waiver..............................80 11.05 Payments Set Aside..............................................81 11.06 Successors and Assigns..........................................82 11.07 Treatment of Certain Information; Confidentiality...............85 11.08 Right of Setoff.................................................85 11.09 Interest Rate Limitation........................................86 11.10 Counterparts; Integration; Effectiveness........................86 11.11 Survival of Representations and Warranties......................86 11.12 Severability....................................................87 -iii- TABLE OF CONTENTS (continued) Page 11.13 Replacement of Lenders..........................................87 11.14 Governing Law; Jurisdiction; Etc................................87 11.15 Waiver of Jury Trial............................................89 11.16 USA PATRIOT Act Notice..........................................89 11.17 Judgment Currency...............................................89 11.18 ENTIRE AGREEMENT................................................90 -iv- SCHEDULES 1.01 Existing Letters of Credit 1.02 Applicable Percentage for Eligible Investments 2.01 Commitments and Applicable Percentages 5.13 Subsidiaries 7.01 Existing Liens 7.03 Existing Indebtedness 11.02 Administrative Agent's Office; Certain Addresses for Notices EXHIBITS Form of A Loan Notice B Note C Compliance Certificate D Assignment and Assumption E Opinion Matters -v- CREDIT AGREEMENT This CREDIT AGREEMENT ("Agreement") is entered into as of December 29, 2004, among SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD., a Cayman Islands exempted company with limited liability ("SALIC"), SCOTTISH RE (DUBLIN) LIMITED, a limited company incorporated and existing under the laws of Ireland ("Scottish Dublin"), SCOTTISH RE LIMITED, a company organized under the laws of England and Wales ("Scottish UK"), SCOTTISH RE (U.S.), INC., a Delaware corporation ("Scottish US"), each lender from time to time party hereto (collectively, the "Lenders" and individually, a "Lender"), and BANK OF AMERICA, N.A., as Administrative Agent, and L/C Issuer. The Borrowers have requested that the Lenders provide a revolving credit facility, and the Lenders are willing to do so on the terms and conditions set forth herein. In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS 1.01 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below: "Administrative Agent" means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent. "Administrative Agent's Office" means the Administrative Agent's address and, as appropriate, account as set forth on Schedule 11.02 or such other address or account as the Administrative Agent may from time to time notify to SALIC and the Lenders. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Aggregate Commitments" means the Commitments of all the Lenders. "Agreement" means this Credit Agreement. "Alternative Reserve Agreements" means funding agreements, collateral borrowing arrangements and other capital market solutions entered into by the Parent or its Subsidiaries to meet the regulatory or operational reserve requirements of an Insurance Subsidiary. "Applicable Percentage" means with respect to any Lender at any time, the percentage (carried out to the ninth decimal place) of the Aggregate Commitments represented by such Lender's Commitment at such time. If the commitment of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02 or if the Aggregate Commitments have expired, then the Applicable Percentage of each Lender shall be determined based on the Applicable Percentage of such Lender most recently in effect, giving effect to any subsequent assignments. The initial Applicable Percentage of each Lender is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable. "Applicable Rate" means, from time to time, the following percentages per annum, based upon the Parent Debt Rating as set forth below:
Applicable Rate - ----------------------------------------------------------------------------------------------------------------------- Pricing Level Parent Debt Ratings Facility Fee Eurodollar Rate Base Rate Utilization Letter of S&P/Moody's Fee Credit Fee - -------------- --------------------- ---------------- ----------------- --------------- --------------- --------------- 1 > A-/A3 0.100% 0.400% 0.000% 0.125% 0.400% - 2 > BBB+/Baa1 0.125% 0.625% 0.000% 0.125% 0.625% - 3 > BBB/Baa2 0.175% 0.825% 0.000% 0.125% 0.825% - 4 > BBB-/Baa3 0.225% 1.025% 0.000% 0.125% 1.025% - 5 < BBB-/Baa3 0.300% 1.450% 0.000% 0.250% 1.450% or no rating
"Parent Debt Rating" means, as of any date of determination, the rating as determined by either S&P or Moody's (collectively, the "Parent Debt Ratings") of the Parent's non-credit-enhanced, senior unsecured long-term debt; provided that if a Parent Debt Rating is issued by each of the foregoing rating agencies, then the higher of such Parent Debt Ratings shall apply (with the Parent Debt Rating for Pricing Level 1 being the highest and the Parent Debt Rating for Pricing Level 5 being the lowest), unless there is a split in Parent Debt Ratings of more than one level, in which case the Pricing Level that is one Pricing Level below the higher Parent Debt Rating shall apply. Initially, the Applicable Rate shall be determined based upon the Parent Debt Rating specified in the certificate delivered pursuant to Section 4.01(a)(vii). Thereafter, each change in the Applicable Rate resulting from a publicly announced change in the Parent Debt Rating shall be effective, in the case of an upgrade, during the period commencing on the date of delivery by SALIC to the Administrative Agent of notice thereof pursuant to Section 6.03(e) and ending on the date immediately preceding the effective date of the next such change and, in the case of a downgrade, during the period commencing on the date of the public announcement thereof and ending on the date immediately preceding the effective date of the next such change. "Applicable Foreign Obligor Documents" has the meaning specified in Section 5.17(a). "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. 2 "Arranger" means Banc of America Securities LLC, in its capacity as sole lead arranger and sole book manager. "Asset Backed Security" means any fixed-income instrument that entitles the holder of, or beneficial owner under, the instrument to the whole or any part of the rights or entitlements of a holder of a receivable or other asset and any other rights or entitlements in respect of a pool of receivables or other assets or any money payable by obligors under those receivables or other assets (whether or not the money is payable to the holder of, or beneficial owner under, the instrument on the same terms and conditions as under the receivables or other assets) in relation to receivables or other assets; provided however, such receivables or assets shall be limited to automobile loans, credit card receivables and home equity loans and such other Asset-Backed Security assets as may be acceptable to the Administrative Agent. "Assignment and Assumption" means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 11.06(b), and accepted by the Administrative Agent, in substantially the form of Exhibit D or any other form approved by the Administrative Agent. "Attributable Indebtedness" means, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease. "Audited Annual Statements" means the Statutory Statements of Scottish US and its Subsidiaries for the fiscal year ended December 31, 2003. "Audited Financial Statements" means each of (a) with respect to the Parent, the audited consolidated balance sheet of the Parent and its Subsidiaries for the fiscal year ended December 31, 2003 and the related consolidated statements of income or operations, shareholders' equity and cash flows for such fiscal year of the Parent and its Subsidiaries, including the notes thereto, (b) with respect to SALIC, the audited consolidated balance sheet of SALIC and its Subsidiaries for the fiscal year ended December 31, 2003, and the related consolidated statements of income or operations, shareholders' equity and cash flows for such fiscal year of SALIC and its Subsidiaries, including the notes thereto, (c) with respect to Scottish Dublin, the audited consolidated balance sheet of Scottish Dublin and its Subsidiaries for the fiscal year ended December 31, 2003 and the related consolidated statements of income or operations, shareholders' equity and cash flows for such fiscal year of Scottish Dublin and its Subsidiaries, including the notes thereto, and (d) with respect to Scottish UK, the audited consolidated balance sheet of Scottish UK and its Subsidiaries for the fiscal year ended December 31, 2003 and the related consolidated statements of income or operations, shareholders' equity and cash flows for such fiscal year of Scottish UK and its Subsidiaries, including the notes thereto. "Availability Period" means the period from and including the Closing Date to the earliest of (a) the Commitment Termination Date, (b) the date of termination of the Aggregate Commitments pursuant to Section 2.05, and (c) the date of termination of the commitment of 3 each Lender to make Loans and of the obligation of the L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02. "Bank of America" means Bank of America, N.A. and its successors. "Base Rate" means for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its "prime rate." The "prime rate" is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "Borrower" and "Borrowers" means SALIC, Scottish Dublin, Scottish UK and Scottish US. "Borrowing" means a borrowing consisting of simultaneous Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Lenders pursuant to Section 2.01. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Administrative Agent's Office is located or the State of New York and, if such day relates to any Eurodollar Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market. "Cash Collateralize" has the meaning specified in Section 2.03(g). "Change in Law" means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority. "Change of Control" means an event or series of events by which: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have "beneficial ownership" of all securities that such person or group has the right to acquire (such right, an "option right"), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 51% or more of the equity securities of the Parent entitled to vote 4 for members of the board of directors or equivalent governing body of the Parent on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); (b) during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Parent cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); (c) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation thereof, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Parent, or control over the equity securities of the Parent entitled to vote for members of the board of directors or equivalent governing body of the Parent on a fully-diluted basis (and taking into account all such securities that such Person or group has the right to acquire pursuant to any option right) representing 51% or more of the combined voting power of such securities; or (d) (i) the Parent fails to own, directly or indirectly, free and clear of all Liens, 100% of the Equity Interests of any Borrower, (ii) SALIC fails to own directly or indirectly, free and clear of all Liens, 100% of the Equity Interests of Scottish US and Scottish Dublin, or (iii) after issuance of the ING Reinsurance Agreements, Scottish US fails to own, directly or indirectly, free and clear of all Liens, 100% of the Equity Interests of Newco. "Closing Date" means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 11.01. "Code" means the Internal Revenue Code of 1986. "Commitment" means, as to each Lender, its obligation to (a) make Loans to the Borrowers pursuant to Section 2.01 and (b) purchase participations in L/C Obligations, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 2.01 or in the Assignment and Assumption pursuant to 5 which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement. "Commitment Termination Date" means December 28, 2005. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Consolidated Net Income" means, for any period, (a) for the Parent and its Subsidiaries on a consolidated basis, the net income of the Parent and its Subsidiaries (excluding extraordinary gains but including extraordinary losses) for that period, and (b) for SALIC and its Subsidiaries on a consolidated basis, the net income of SALIC and its Subsidiaries (excluding extraordinary gains but including extraordinary losses) for that period, in each case calculated in accordance with GAAP. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Corporate Securities" means commercial paper, Asset Backed Securities and other obligations of a corporation for borrowed money evidenced by bonds, debentures, notes, loan agreements or other similar instruments. "Credit Extension" means each of the following: (a) a Borrowing and (b) an L/C Credit Extension. "Debtor Relief Laws" means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally. "Default" means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default. "Default Rate" means (a) when used with respect to Obligations other than Letter of Credit Fees, an interest rate equal to (i) the Base Rate plus (ii) the Applicable Rate, if any, applicable to Base Rate Loans plus (iii) 2% per annum; provided, however, that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Rate) otherwise applicable to such Loan plus 2% per annum, and (b) when used with respect to Letter of Credit Fees, a rate equal to the Applicable Rate plus 2% per annum. 6 "Defaulting Lender" means any Lender that (a) has failed to fund any portion of the Loans, participations in L/C Obligations required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding. "Disposition" or "Dispose" means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith. "Dollar" and "$" mean lawful money of the United States. "Eligible Assignee" means (a) a Lender; (b) an Affiliate of a Lender; (c) an Approved Fund; and (d) any other Person (other than a natural person) approved by (i) the Administrative Agent and the L/C Issuer, and (ii) unless an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, "Eligible Assignee" shall not include the Parent or any of the Parent's Affiliates or Subsidiaries. "Eligible Investments" mean Government Debt, Corporate Securities and Asset-Backed Securities which are (a) rated by S&P or Moody's, (b) owned by SALIC and (c) not subject to any Lien. "Environmental Laws" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of SALIC, any other Borrower or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "Equity Interests" means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or 7 options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with SALIC within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by SALIC or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by SALIC or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon SALIC or any ERISA Affiliate. "Eurodollar Rate" means for any Interest Period with respect to a Eurodollar Rate Loan, the rate per annum equal to the British Bankers Association LIBOR Rate ("BBA LIBOR"), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such rate is not available at such time for any reason, then the "Eurodollar Rate" for such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by Bank of America and with a term equivalent to such Interest Period would be offered by Bank of America's London branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. "Eurodollar Rate Loan" means a Loan that bears interest at a rate based on the Eurodollar Rate. "Event of Default" has the meaning specified in Section 8.01. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender, the L/C Issuer or any other recipient of any payment to be made by or on account of any obligation of any Borrower hereunder, (a) taxes imposed on or measured by its overall net income (however 8 denominated), and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable Lending Office is located, (b) any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction in which such Borrower is located and (c) except as provided in the following sentence, in the case of a Foreign Lender (other than an assignee pursuant to a request by SALIC under Section 11.13), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party hereto (or designates a new Lending Office) or is attributable to such Foreign Lender's failure or inability (other than as a result of a Change in Law) to comply with Section 3.01(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new Lending Office (or assignment), to receive additional amounts from the applicable Borrower with respect to such withholding tax pursuant to Section 3.01(a). Notwithstanding anything to the contrary contained in this definition, "Excluded Taxes" shall not include any withholding tax imposed at any time on payments made by or on behalf of a Foreign Obligor to any Lender hereunder or under any other Loan Document, provided that such Lender shall have complied with the last paragraph of Section 3.01(e). "Existing Comerica Bank Credit Agreement" means the Credit Agreement dated as of September 30, 2002 among SALIC, Scottish Dublin, Scottish UK and Comerica Bank. "Existing Fleet Credit Agreements" means collectively, (i) the Credit Agreement (Unsecured Facility) dated as of October 27, 2003 by and among SALIC, Scottish Dublin and Fleet National Bank and (ii) the Amended and Restated Credit Agreement (Secured Facility) dated as of October 27, 2003 by and among SALIC, Scottish Dublin and Fleet National Bank. "Existing Letters of Credit" means the Letters of Credit issued under the Existing Comerica Credit Agreement and listed on Schedule 1.01 hereto. "Fair Market Value" shall mean (a) with respect to any publicly-traded security (other than those set forth in clause (b)), the closing price for such security on the largest exchange on which such security is traded (or if not traded on an exchange, then the average of the closing bid and ask prices quoted over-the-counter) on the date of the determination (as such prices are recognized in The Wall Street Journal or if not so reported, in any nationally recognized financial journal or newspaper), (b) with respect to Government Debt, the amount thereof, and (c) with respect to any other Eligible Investment (other than those set forth in clauses (a) and (b)), the price for the such Eligible Investment on the date of calculation obtained from a generally recognized source approved by the Administrative Agent or the most recent bid quotation from such approved source (or, if no generally recognized source exists as to any particular Eligible Investment, any other source specified by SALIC to which the Administrative Agent does not reasonably object). "Federal Funds Rate" means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such 9 transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent. "Fee Letter" means the letter agreement, dated September 8, 2004, among SALIC, the Administrative Agent and the Arranger. "Foreign Benefit Plan" means any employee benefit plan, pension plan or welfare plan not subject to ERISA which is maintained or contributed to for the benefit of the employees of a Foreign Obligor or its Subsidiaries which, under applicable law, (a) is required to be funded through a trust or similar funding vehicle or (b) creates or could result in a Lien on any property of such Foreign Obligor or any of its Subsidiaries. "Foreign Lender" means, with respect to any Borrower, any Lender that is organized under the laws of a jurisdiction other than that in which such Borrower is resident for tax purposes. For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "Foreign Obligor" means any Borrower that is incorporated or organized under the laws of a jurisdiction other than the United States, a State thereof or the District of Columbia. "FRB" means the Board of Governors of the Federal Reserve System of the United States. "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "GAAP" means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied without giving effect to FAS 115 or DIG-B36 to include unrealized gains and losses; provided, however, that (a) with respect to financial statements provided by Scottish Dublin, GAAP shall mean the accounting principles set forth in the European Community Regulations of 1996, and (b) with respect to the financial statements provided by Scottish UK, GAAP shall mean generally accepted accounting principles in the United Kingdom. "Government Debt" means negotiable Indebtedness issued or guaranteed by the United States Government or any agency thereof. "Governmental Authority" means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, 10 legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank). "Guarantee" means, as to any Person, any (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien); provided, however, that obligations of the Parent or any of its Subsidiaries under Primary Policies, Reinsurance Agreements, Retrocession Agreements or Other Insurance Products which are entered into in the ordinary course of business (including security posted to secure obligations thereunder) shall not be deemed to be Guarantees of such Person for the purposes of this Agreement. The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The term "Guarantee" as a verb has a corresponding meaning. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Indebtedness" means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial) bankers' acceptances, bank guaranties, surety bonds and similar instruments; 11 (c) net obligations of such Person under any Swap Contract; (d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business; (e) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (f) capital leases and Synthetic Lease Obligations; (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and (h) all Guarantees of such Person in respect of any of the foregoing. For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any capital lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date. Indebtedness shall not include the obligations of the Parent or any of its Insurance Subsidiaries under Primary Policies, Reinsurance Agreements, Retrocession Agreements or Other Insurance Products which are entered into in the ordinary course of business (including security posted to secure obligations thereunder). "Indemnified Taxes" means Taxes other than Excluded Taxes. "Indemnitees" has the meaning specified in Section 11.04(b). "ING Acquisition" means the proposed transaction whereby Scottish US and a Newco reinsure the In-Force Individual Life Reinsurance Business of ING America Insurance Holdings, Inc., SLD and SLDI pursuant to the ING Asset Purchase Agreement. "ING Asset Purchase Agreement" means the Asset Purchase Agreement dated as of October 17, 2004 by and among SLD, SLDI, the Parent, Scottish US and Newco, with such amendments thereto as have been approved by the Required Lenders. "ING Reinsurance Agreements" means the SLD Coinsurance Agreement, the SLD Coinsurance/Modified Coinsurance Agreement, SLDI Coinsurance Agreement, the SLDI Funds Withheld Coinsurance Agreement, the SLDI Coinsurance/Modified Coinsurance Agreement, (as such terms are defined in the ING Asset Purchase Agreement) substantially in the form of the drafts dated December 17, 2004. 12 "Insurance Subsidiaries" means each Borrower and any Subsidiary of a Borrower which is licensed by any Governmental Authority to engage in the insurance or reinsurance business. "Interest Payment Date" means, (a) as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan, the Commitment Termination Date and, if the Term-Out Option has been exercised, the Maturity Date; and (b) as to any Base Rate Loan the last Business Day of each March, June, September and December commencing on the last Business Day in March, 2005, the Commitment Termination Date and, if the Term-Out Option has been exercised, the Maturity Date. "Interest Period" means, as to each Eurodollar Rate Loan, the period commencing on the date such Eurodollar Rate Loan is disbursed or converted to or continued as a Eurodollar Rate Loan and ending on the date one, two or three months thereafter, as selected by the applicable Borrower in its Loan Notice; provided that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period shall extend beyond the Commitment Termination Date or, if the Term-Out Option has been exercised, the Maturity Date. "Investment" means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of capital stock or other securities of another Person, (b) a loan, advance or capital contribution to, Guarantee or assumption of debt of, or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person and any arrangement pursuant to which the investor Guarantees Indebtedness of such other Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute a business unit. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment. "Investment Policies" means the Investment Policies of SALIC as in effect on the Closing Date with such revisions thereto as are approved by the Board of Directors of the Parent from time to time. "IRS" means the United States Internal Revenue Service. "ISP" means, with respect to any Letter of Credit, the "International Standby Practices 1998" published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance). 13 "Issuer Documents" means with respect to any Letter of Credit, the Letter Credit Application, and any other document, agreement and instrument entered into by the L/C Issuer and the applicable Borrower or in favor of an L/C Issuer and relating to any such Letter of Credit. "Keep Well Agreements" means (a) the Net Worth Maintenance Agreement between the Parent, SALIC and Scottish Dublin dated as of January 1, 2002, (b) the Net Worth Maintenance Agreement restated as of February 1, 2002 among SALIC and Scottish US, (c) the Guarantee dated as of January 1, 2002 among the Parent, SALIC and Scottish UK, (d) from and after the date the ING Reinsurance Agreements are issued, the Newco Keep Well Agreement and the Scottish Life Keep Well Agreement and (e) similar net worth maintenance agreements entered into by the Parent or any of its subsidiaries in favor of a wholly-owned Insurance Subsidiary which are required by the Governmental Authority regulating such Insurance Subsidiary provided such agreements are no more onerous than the Keep Well Agreement described in clause (b) above. "Laws" means, collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law. "L/C Advance" means, with respect to each Lender, such Lender's funding of its participation in any L/C Borrowing in accordance with its Applicable Percentage. "L/C Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on the date when made or refinanced as a Borrowing. "L/C Credit Extension" means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the increase of the amount thereof. "L/C Issuer" means (a) with respect to the Existing Letters of Credit, Comerica Bank and (b) with respect to all other Letters of Credit issued hereunder, Bank of America in its capacity as issuer of Letters of Credit hereunder, or any successor issuer of Letters of Credit hereunder. "L/C Obligations" means, as at any date of determination, the aggregate amount available to be drawn under all outstanding Letters of Credit plus the aggregate of all Unreimbursed Amounts, including all L/C Borrowings. For purposes of computing the amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06. For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be "outstanding" in the amount so remaining available to be drawn. "Lender" has the meaning specified in the introductory paragraph hereto. 14 "Lending Office" means, as to any Lender, the office or offices of such Lender described as such in such Lender's Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify SALIC and the Administrative Agent. "Letter of Credit" means any standby letter of credit issued hereunder and shall include the Existing Letters of Credit. "Letter of Credit Application" means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by the L/C Issuer. "Letter of Credit Fee" has the meaning specified in Section 2.03(i). "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing). "Loan" means an extension of credit by a Lender to a Borrower under Article II in the form of a Loan. "Loan" has the meaning specified in Section 2.01. "Loan Documents" means this Agreement, each Note, each Issuer Document and the Fee Letter. "Loan Notice" means a notice of (a) a Borrowing, (b) a conversion of Loans from one Type to the other, or (c) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a), which, if in writing, shall be substantially in the form of Exhibit A. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects of (i) any Borrower or (ii) SALIC and its Subsidiaries taken as a whole; (b) a material impairment of the ability of any Borrower to perform its obligations under any Loan Document to which it is a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Borrower of any Loan Document to which it is a party. "Material Subsidiaries" means each Borrower, Scottish Life, Newco, each other Subsidiary of SALIC whose consolidated assets or revenues exceed 5% of the consolidated assets of SALIC and its Subsidiaries for the most recent fiscal quarter for which financial statements have been delivered pursuant to Section 6.01(a) or (b), and any Subsidiary of Scottish UK whose consolidated assets or consolidated revenues exceed 5% of the consolidated assets of Scottish UK and its Subsidiaries for the most recent fiscal quarter for which financial statements have been delivered pursuant to Section 6.01(a) or (b). 15 "Maturity Date" means the date which is the first anniversary of the Commitment Termination Date. "Moody's" means Moody's Investors Service, Inc. and any successor thereto. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which SALIC or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions. "Newco" means Scottish Re (Bermuda) Limited, a company formed under the laws of Bermuda. "Newco Keep Well Agreement" means the Newco Keepwell (as defined in the ING Asset Purchase Agreement) between SALIC and Newco substantially in the form attached to the ING Asset Purchase Agreement. "Note" means a promissory note made by a Borrower in favor of a Lender evidencing Loans made by such Lender to such Borrower, substantially in the form of Exhibit B. "Obligations" means all advances to, and debts, liabilities, obligations, covenants and duties of, any Borrower arising under any Loan Document or otherwise with respect to any Loan or Letter of Credit, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Borrower or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding. "Organization Documents" means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity. "Other Insurance Products" means guaranteed investment contracts and secured and unsecured funding agreements which are not Alternative Reserve Agreements. "Other Taxes" means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document. 16 "Outstanding Amount" means (i) with respect to Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Loans occurring on such date; and (ii) with respect to any L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements by the Borrower of Unreimbursed Amounts. "Parent" means Scottish Re Group Limited, a Cayman Islands exempted company (f/k/a Scottish Annuity & Life Holdings, Ltd.). "Parent Consolidated Indebtedness" means, as of any date of determination, for the Parent and its Subsidiaries on a consolidated basis, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, (b) all purchase money Indebtedness, (c) all direct obligations arising under letters of credit (including standby and commercial) which have been drawn but not reimbursed by the Person for whose account such Letter of Credit was issued, bankers' acceptances, bank guaranties, surety bonds and similar instruments, (d) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business), (e) Attributable Indebtedness in respect of capital leases and Synthetic Lease Obligations and Swap Termination Value, (f) without duplication, all Guarantees with respect to outstanding Indebtedness of the types specified in clauses (a) through (e) above of Persons other than its Subsidiaries, and (g) all Indebtedness of the types referred to in clauses (a) through (f) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Parent or one of its Subsidiaries is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the Parent or such Subsidiary; provided, however, the obligations of the Parent or any of its Subsidiaries under the Keep Well Agreements shall be excluded for purposes of calculating Parent Consolidated Indebtedness. "Parent Debt Rating" has the meaning specified in the definition of "Applicable Rate." "Parent Debt to Capitalization Ratio" means the ratio of (a) Parent Consolidated Indebtedness to (b) the sum of Parent Consolidated Indebtedness plus Parent Net Worth. "Parent Net Worth" means the Shareholders Equity of the Parent calculated in accordance with all GAAP as adjusted pursuant to Section 7.11(b)(iii). "Participant" has the meaning specified in Section 11.06(d). "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by SALIC or any ERISA Affiliate or to which SALIC or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple 17 employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) established by SALIC or, with respect to any such plan that is subject to Section 412 of the Code or Title IV of ERISA, any ERISA Affiliate. "Primary Policies" means any insurance policies issued by an Insurance Subsidiary. "Register" has the meaning specified in Section 11.06(c). Reinsurance Agreements means any agreement, contract, treaty, certificate or other arrangement whereby the Parent or any of its Insurance Subsidiaries agrees to assume from or reinsure an insurer or reinsurer for all or part of the liability of such insurer or reinsurer under a policy or policies of insurance issued by such insurer or reinsurer. "Related Parties" means, with respect to any Person, such Person's Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Person's Affiliates. "Retrocession Agreements" means any agreement, treaty, certificate or other arrangement whereby any Insurance Subsidiary cedes to another insurer all or part of such Insurance Subsidiary's liability under a policy or policies of insurance reinsured by such Insurance Subsidiary. "Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30 day notice period has been waived. "Request for Credit Extension" means (a) with respect to a Borrowing, conversion or continuation of Loans, a Loan Notice and (b) with respect to an L/C Credit Extension, a Letter of Credit Application. "Required Lenders" means, as of any date of determination, Lenders having more than 50% of the Aggregate Commitments or, if the commitment of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02, Lenders holding in the aggregate more than 50% of the Total Outstandings (with the aggregate amount of each Lender's risk participation and funded participation in L/C Obligations being deemed "held" by such Lender for purposes of this definition); provided that the Commitment of, and the portion of the Total Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders. "Responsible Officer" means (a) with respect to SALIC, the chief executive officer, president, chief financial officer, or executive vice president of SALIC and (b) with respect to Scottish US and Scottish UK, chief executive officer, the president, or the chief financial officer 18 or vice president, and (c) with respect to Scottish Dublin any director, manager or authorized officer (as appointed by the board of directors of Scottish Dublin). Any document delivered hereunder that is signed by a Responsible Officer of a Borrower shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Borrower and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Borrower. "Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any capital stock or other Equity Interest of a Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such capital stock or other Equity Interest, or on account of any return of capital to such Person's stockholders, partners or members (or the equivalent Person thereof). "SALIC" is defined in the preamble. "SALIC Consolidated Indebtedness" means, as of any date of determination, for the SALIC and its Subsidiaries on a consolidated basis, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, (b) all purchase money Indebtedness, (c) all direct obligations arising under letters of credit (including standby and commercial) which have been drawn but not reimbursed by the Person for whose account such Letter of Credit was issued, bankers' acceptances, bank guaranties, surety bonds and similar instruments, (d) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business), (e) Attributable Indebtedness in respect of capital leases and Synthetic Lease Obligations and Swap Termination Value, (f) without duplication, all Guarantees with respect to outstanding Indebtedness of the types specified in clauses (a) through (e) above of Persons other than its Subsidiaries, and (g) all Indebtedness of the types referred to in clauses (a) through (f) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the SALIC or one of its Subsidiaries is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the SALIC or such Subsidiary; provided, however, the obligations of the SALIC or any of its Subsidiaries under the Keep Well Agreements shall be excluded for purposes of calculating SALIC Consolidated Indebtedness. "SALIC Debt to Capitalization Ratio" means the ratio of (a) SALIC Consolidated Indebtedness to (b) the sum of SALIC Consolidated Indebtedness plus SALIC Net Worth. "SALIC Net Worth" means the Shareholders Equity of SALIC calculated in accordance with GAAP. "SAP" means the statutory accounting practices prescribed or permitted by the Department of Insurance or other similar Governmental Authority in such Insurance Subsidiary's domicile for the preparation of annual statements and other financial reports by insurance companies of the same type as such Insurance Subsidiary. 19 "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. and any successor thereto. "Scottish Dublin" is defined in the preamble. "Scottish Life" means Scottish Re Life Corporation, a Missouri corporation. "Scottish Life Keep Well Agreement" means the Net Worth Maintenance Agreement to be entered into between SALIC and Scottish Life pursuant to the ING Asset Purchase Agreement substantially in the form of the draft dated December 21, 2004. "Scottish UK" is defined in the preamble and was formerly known as World-Wide Reassurance Company Limited. "Scottish US" is defined in the preamble. "Scottish US Net Worth" means as of any date of determination, the consolidated shareholder's equity of Scottish US and its Subsidiaries as of that date determined in accordance with SAP. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Shareholders' Equity" means, as to any Person as of any date of determination, the consolidated shareholders' equity of such Person and its Subsidiaries as of that date determined in accordance with GAAP. "SLD" means Security Life of Denver Insurance Company, a Colorado insurance company. "SLDI" means Security Life of Denver International Limited, a Bermuda insurance company. "Statutory Statements" means, as to any Insurance Subsidiary, the annual or quarterly financial statements of such Person as required to be filed with the Department of Insurance (or similar Governmental Authority) of such Person's domicile, together with all exhibits or schedules filed therewith prepared in conformity with SAP. "Subsidiary" of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. "Swap Contract" means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or 20 bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a "Master Agreement"), including any such obligations or liabilities under any Master Agreement. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender). "Synthetic Lease Obligation" means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). "Taxes" means all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto. "Term-Out Date" shall mean the date the Term-Out Option is exercised. "Term-Out Option" shall have the meaning assigned to such term in Section 2.01(b). "Threshold Amount" means $10,000,000. "Total Outstandings" means the aggregate Outstanding Amount of all Loans and all L/C Obligations. "Type" means, with respect to a Loan, its character as a Base Rate Loan or a Eurodollar Rate Loan. "Unencumbered Asset Value" means, with respect to any type of Eligible Investments, the product of (i) the percentage on Schedule 1.02 set forth opposite such type of Eligible Investment and (ii) the Fair Market Value of such Eligible Investment at such time of determination; provided, that to the extent any Eligible Investments from the same issuer or any 21 other issuer and its Affiliates (other than the Government Debt) would constitute more than ten percent (10% ) of the aggregate Unencumbered Asset Value of the Eligible Investments, that amount in excess of ten percent (10%) shall be valued at zero. "Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." mean the United States of America. "Unreimbursed Amount" has the meaning specified in Section 2.03(c)(i). 1.02 Other Interpretive Provisions. With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document: (a) The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." The word "will" shall be construed to have the same meaning and effect as the word "shall." Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document (including any Organization Document) shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference herein to any Person shall be construed to include such Person's successors and assigns, (iii) the words "herein," "hereof" and "hereunder," and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear, (v) any reference to any law shall include all statutory and regulatory provisions consolidating, amending replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. (b) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including;" the words "to" and "until" each mean "to but excluding;" and the word "through" means "to and including." (c) Section headings herein and in the other Loan Documents are included for convenience of reference only and shall not affect the interpretation of this Agreement or any other Loan Document. 22 1.03 Accounting Terms. (a) Generally. All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein. (b) Changes in GAAP. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either SALIC or the Required Lenders shall so request, the Administrative Agent, the Lenders and SALIC shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Lenders); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (ii) SALIC shall provide to the Administrative Agent and the Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. 1.04 Rounding. Any financial ratios required to be maintained pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number). 1.05 Times of Day. Unless otherwise specified, all references herein to times of day shall be references to Eastern time (daylight or standard, as applicable). 1.06 Letter of Credit Amounts. Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided, however, that with respect to any Letter of Credit that, by its terms or the terms of any Issuer Document related thereto, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time. ARTICLE II. THE COMMITMENTS AND CREDIT EXTENSIONS 2.01 Loans. (a) Subject to the terms and conditions set forth herein, each Lender severally agrees to make loans (each such loan, a "Loan") to the Borrowers from time to time, on any Business Day during the Availability Period, in an aggregate amount not to exceed at any time outstanding the amount of such Lender's Commitment; provided, however, that after giving effect to any Borrowing, (i) the Total Outstandings shall not exceed the Aggregate Commitments, and (ii) the aggregate Outstanding Amount of the Loans of any Lender, plus such Lender's Applicable 23 Percentage of the Outstanding Amount of all L/C Obligations, shall not exceed such Lender's Commitment. Within the limits of each Lender's Commitment, and subject to the other terms and conditions hereof, the Borrowers may borrow under this Section 2.01, prepay under Section 2.04, and reborrow under this Section 2.01. Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein. (b) Each Borrower shall have the right to request that repayment of its Loans outstanding on the Commitment Termination Date be extended to the Maturity Date (the "Term-Out Option") by giving the Administrative Agent written notice of such election not less than five (5) Business Days prior to the Commitment Termination Date. The Administrative Agent shall promptly forward such request to the Lenders. Provided that (x) no Default has occurred and is continuing and (y) the conditions of Section 4.02 are satisfied, upon such request by a Borrower, and payment of the fee referred to in Section 2.08(c), the payment date of such Borrower's Loans outstanding on the Commitment Termination Date (the "Term-Out Date") shall be extended to the Maturity Date and the Administrative Agent shall advise the Borrowers and the Lenders of such Maturity Date. Any Loans repaid after the Term-Out Date may not be reborrowed. 2.02 Borrowings, Conversions and Continuations of Loans. (a) Each Borrowing, each conversion of Loans from one Type to the other, and each continuation of Eurodollar Rate Loans shall be made upon a Borrower's irrevocable notice to the Administrative Agent, which may be given by telephone. Each such notice must be received by the Administrative Agent not later than 11:00 a.m. (i) three Business Days prior to the requested date of any Borrowing of, conversion to or continuation of Eurodollar Rate Loans or of any conversion of Eurodollar Rate Loans to Base Rate Loans, and (ii) on the requested date of any Borrowing of Base Rate Loans. Each telephonic notice by a Borrower pursuant to this Section 2.02(a) must be confirmed promptly by delivery to the Administrative Agent of a written Loan Notice, appropriately completed and signed by a Responsible Officer of such Borrower. Each Borrowing of, conversion to or continuation of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Except as provided in Sections 2.03(c), each Borrowing of or conversion to Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof. Each Loan Notice (whether telephonic or written) shall specify (i) whether such Borrower is requesting a Borrowing, a conversion of Loans from one Type to the other, or a continuation of Eurodollar Rate Loans, (ii) the requested date of the Borrowing, conversion or continuation, as the case may be (which shall be a Business Day), (iii) the principal amount of Loans to be borrowed, converted or continued, (iv) the Type of Loans to be borrowed or to which existing Loans are to be converted, and (v) if applicable, the duration of the Interest Period with respect thereto. If a Borrower fails to specify a Type of Loan in a Loan Notice or if a Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Loans shall be made as, or converted to, Base Rate Loans. Any such automatic conversion to Base Rate Loans shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Rate Loans. If a Borrower requests a Borrowing of, conversion to, or continuation of Eurodollar Rate Loans in any such Loan Notice, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month. 24 (b) Following receipt of a Loan Notice, the Administrative Agent shall promptly notify each Lender of the amount of its Applicable Percentage of the applicable Loans, and if no timely notice of a conversion or continuation is provided by the applicable Borrower, the Administrative Agent shall notify each Lender of the details of any automatic conversion to Base Rate Loans described in the preceding subsection. In the case of a Borrowing, each Lender shall make the amount of its Loan available to the Administrative Agent in immediately available funds at the Administrative Agent's Office not later than 1:00 p.m. on the Business Day specified in the applicable Loan Notice. Upon satisfaction of the applicable conditions set forth in Section 4.02 (and, if such Borrowing is the initial Credit Extension, Section 4.01), the Administrative Agent shall make all funds so received available to such Borrower in like funds as received by the Administrative Agent either by (i) crediting the account of such Borrower on the books of Bank of America with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by such Borrower; provided, however, that if, on the date the Loan Notice with respect to such Borrowing is given by a Borrower, there are L/C Borrowings outstanding with respect to such Borrower, then the proceeds of such Borrowing, first, shall be applied to the payment in full of any such L/C Borrowings, and second, shall be made available to such Borrower as provided above. (c) Except as otherwise provided herein, a Eurodollar Rate Loan may be continued or converted only on the last day of an Interest Period for such Eurodollar Rate Loan. During the existence of a Default, no Loans may be requested as, converted to or continued as Eurodollar Rate Loans without the consent of the Required Lenders. (d) The Administrative Agent shall promptly notify the applicable Borrower and the Lenders of the interest rate applicable to any Interest Period for Eurodollar Rate Loans upon determination of such interest rate. At any time that Base Rate Loans are outstanding, the Administrative Agent shall notify the Borrowers and the Lenders of any change in Bank of America's prime rate used in determining the Base Rate promptly following the public announcement of such change. (e) After giving effect to all Borrowings, all conversions of Loans from one Type to the other, and all continuations of Loans as the same Type, there shall not be more than ten Interest Periods in effect with respect to Loans. 2.03 Letters of Credit. (a) The Letter of Credit Commitment. (i) Subject to the terms and conditions set forth herein, (A) the L/C Issuer agrees, in reliance upon the agreements of the Lenders set forth in this Section 2.03, (1) from time to time on any Business Day during the Availability Period, to issue Letters of Credit for the account of SALIC, Scottish UK and Scottish US, and to amend Letters of Credit previously issued by it, in accordance with subsection (b) below, and (2) to honor drawings under the Letters of Credit (for purposes of this Section 2.03, "Borrowers" shall mean SALIC, Scottish US and Scottish UK collectively and a "Borrower" shall be any one of them); and (B) the Lenders severally agree to participate in Letters of Credit 25 issued for the account of the Borrowers and any drawings thereunder; provided that after giving effect to any L/C Credit Extension with respect to any Letter of Credit, (x) the Total Outstandings shall not exceed the Aggregate Commitments and (y) the aggregate Outstanding Amount of the Loans of any Lender, plus such Lender's Applicable Percentage of the Outstanding Amount of all L/C Obligations shall not exceed such Lender's Commitment. Each request by a Borrower for the issuance or amendment of a Letter of Credit shall be deemed to be a representation by such Borrower that the L/C Credit Extension so requested complies with the conditions set forth in the proviso to the preceding sentence. Within the foregoing limits, and subject to the terms and conditions hereof, the Borrowers' ability to obtain Letters of Credit shall be fully revolving, and accordingly the Borrowers may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit that have expired or that have been drawn upon and reimbursed. All Existing Letters of Credit shall be deemed to have been issued pursuant hereto, and from and after the Closing Date shall be subject to and governed by the terms and conditions hereof. In no event shall Scottish Dublin be entitled to request Letters of Credit to be issued. (ii) The L/C Issuer shall not issue any Letter of Credit, if: (A) the expiry date of such requested Letter of Credit would occur more than twelve months after the date of issuance, unless the Lenders have approved such expiry date; or (iii) The L/C Issuer shall not be under any obligation to issue any Letter of Credit if: (A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the L/C Issuer from issuing such Letter of Credit, or any Law applicable to the L/C Issuer or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the L/C Issuer shall prohibit, or request that the L/C Issuer refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the L/C Issuer with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the L/C Issuer is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the L/C Issuer any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the L/C Issuer in good faith deems material to it; (B) the issuance of such Letter of Credit would violate one or more policies of the L/C Issuer; (C) except as otherwise agreed by the Administrative Agent and the L/C Issuer, such Letter of Credit is in an initial stated amount less than $50,000; (D) such Letter of Credit is to be denominated in a currency other than Dollars; 26 (E) such Letter of Credit contains any provisions for automatic reinstatement of the stated amount after any drawing thereunder; or (F) a default of any Lender's obligations to fund under Section 2.03(c) exists or any Lender is at such time a Defaulting Lender hereunder, unless the L/C Issuer has entered into satisfactory arrangements with SALIC or such Lender to eliminate the L/C Issuer's risk with respect to such Lender. (iv) The L/C Issuer shall not amend any Letter of Credit if the L/C Issuer would not be permitted at such time to issue such Letter of Credit in its amended form under the terms hereof. (v) The L/C Issuer shall be under no obligation to amend any Letter of Credit if (A) the L/C Issuer would have no obligation at such time to issue such Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of such Letter of Credit does not accept the proposed amendment to such Letter of Credit. (vi) The L/C Issuer shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and the L/C Issuer shall have all of the benefits and immunities (A) provided to the Administrative Agent in Article IX with respect to any acts taken or omissions suffered by the L/C Issuer in connection with Letters of Credit issued by it or proposed to be issued by it and Issuer Documents pertaining to such Letters of Credit as fully as if the term "Administrative Agent" as used in Article IX included the L/C Issuer with respect to such acts or omissions, and (B) as additionally provided herein with respect to the L/C Issuer. (b) Procedures for Issuance and Amendment of Letters of Credit. (i) Each Letter of Credit shall be issued or amended, as the case may be, upon the request of a Borrower delivered to the L/C Issuer (with a copy to the Administrative Agent) in the form of a Letter of Credit Application, appropriately completed and signed by a Responsible Officer of the applicable Borrower. Such Letter of Credit Application must be received by the L/C Issuer and the Administrative Agent not later than 11:00 a.m. at least two Business Days prior to the proposed issuance date or date of amendment, as the case may be; or in each case such later date and time as the Administrative Agent and the L/C Issuer may agree in a particular instance in their sole discretion. In the case of a request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer: (A) the proposed issuance date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder; and (G) such other matters as the L/C Issuer may require. In the case of a request for an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer (A) the Letter of Credit to be amended; (B) the proposed date of amendment thereof (which shall be a Business Day); (C) the nature of the proposed 27 amendment; and (D) such other matters as the L/C Issuer may require. Additionally, the applicable Borrower shall furnish to the L/C Issuer and the Administrative Agent such other documents and information pertaining to such requested Letter of Credit issuance or amendment, including any Issuer Documents, as the L/C Issuer or the Administrative Agent may require. (ii) Promptly after receipt of any Letter of Credit Application, the L/C Issuer will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received a copy of such Letter of Credit Application from the applicable Borrower and, if not, the L/C Issuer will provide the Administrative Agent with a copy thereof. Unless the L/C Issuer has received written notice from any Lender, the Administrative Agent or any Borrower, at least one Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit, that one or more applicable conditions contained in Article IV shall not then be satisfied, then, subject to the terms and conditions hereof, the L/C Issuer shall, on the requested date, issue a Letter of Credit for the account of such Borrower or enter into the applicable amendment, as the case may be, in each case in accordance with the L/C Issuer's usual and customary business practices. Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the L/C Issuer a risk participation in such Letter of Credit in an amount equal to the product of such Lender's Applicable Percentage times the amount of such Letter of Credit. (iii) Promptly after its delivery of any Letter of Credit (or any amendment thereto) to an advising bank with respect to such Letter of Credit or to the beneficiary of such Letter of Credit, the L/C Issuer will also deliver to the applicable Borrower and the Administrative Agent a true and complete copy of such Letter of Credit or amendment. The Administrative Agent shall provide notice to the Lenders within a reasonable time after any change to the L/C Obligations. (c) Drawings and Reimbursements; Funding of Participations. (i) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the L/C Issuer shall notify the applicable Borrower and the Administrative Agent thereof. Not later than 11:00 a.m. on the date of any payment by the L/C Issuer under a Letter of Credit (each such date, an "Honor Date"), the applicable Borrower shall reimburse the L/C Issuer through the Administrative Agent in an amount equal to the amount of such drawing. If the applicable Borrower fails to so reimburse the L/C Issuer by such time, the Administrative Agent shall promptly notify each Lender of the Honor Date, the amount of the unreimbursed drawing (the "Unreimbursed Amount"), and the amount of such Lender's Applicable Percentage thereof. In such event, the applicable Borrower shall be deemed to have requested a Borrowing of Base Rate Loans to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, without regard to the minimum and multiples specified in Section 2.02 for the principal amount of Base Rate Loans, but subject to the amount of the unutilized portion of the Aggregate Commitments and the conditions set forth in Section 4.02 (other than the delivery of a Loan Notice). Any notice given by the L/C 28 Issuer or the Administrative Agent pursuant to this Section 2.03(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (ii) Each Lender shall upon any notice pursuant to Section 2.03(c)(i) make funds available to the Administrative Agent for the account of the L/C Issuer at the Administrative Agent's Office in an amount equal to its Applicable Percentage of the Unreimbursed Amount not later than 1:00 p.m. on the Business Day specified in such notice by the Administrative Agent, whereupon, subject to the provisions of Section 2.03(c)(iii), each Lender that so makes funds available shall be deemed to have made a Base Rate Loan to the applicable Borrower in such amount. The Administrative Agent shall remit the funds so received to the L/C Issuer. (iii) With respect to any Unreimbursed Amount that is not fully refinanced by a Borrowing of Base Rate Loans because the conditions set forth in Section 4.02 cannot be satisfied or for any other reason, the applicable Borrower shall be deemed to have incurred from the L/C Issuer an L/C Borrowing in the amount of the Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the Default Rate. In such event, each Lender's payment to the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(ii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.03. (iv) Until each Lender funds its Loan or L/C Advance pursuant to this Section 2.03(c) to reimburse the L/C Issuer for any amount drawn under any Letter of Credit, interest in respect of such Lender's Applicable Percentage of such amount shall be solely for the account of the L/C Issuer. (v) Each Lender's obligation to make Loans or L/C Advances to reimburse the L/C Issuer for amounts drawn under Letters of Credit, as contemplated by this Section 2.03(c), shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the L/C Issuer, SALIC, the applicable Borrower or, any Subsidiary thereof or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided, however, that each Lender's obligation to make Loans pursuant to this Section 2.03(c) is subject to the conditions set forth in Section 4.02 (other than delivery of a Loan Notice). No such making of an L/C Advance shall relieve or otherwise impair the obligation of the applicable Borrower to reimburse the L/C Issuer for the amount of any payment made by the L/C Issuer under any Letter of Credit, together with interest as provided herein. (vi) If any Lender fails to make available to the Administrative Agent for the account of the L/C Issuer any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.03(c) by the time specified in Section 2.03(c)(ii), 29 the L/C Issuer shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the L/C Issuer at a rate per annum equal to the Federal Funds Rate from time to time in effect. A certificate of the L/C Issuer submitted to any Lender (through the Administrative Agent) with respect to any amounts owing under this clause (vi) shall be conclusive absent manifest error. (d) Repayment of Participations. (i) At any time after the L/C Issuer has made a payment under any Letter of Credit and has received from any Lender such Lender's L/C Advance in respect of such payment in accordance with Section 2.03(c), if the Administrative Agent receives for the account of the L/C Issuer any payment in respect of the related Unreimbursed Amount or interest thereon (whether directly from a Borrower or otherwise, including proceeds of Cash Collateral applied thereto by the Administrative Agent), the Administrative Agent will distribute to such Lender its Applicable Percentage thereof (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's L/C Advance was outstanding) and in the same funds as those received by the Administrative Agent. (ii) If any payment received by the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(i) is required to be returned under any of the circumstances described in Section 11.05 (including pursuant to any settlement entered into by the L/C Issuer in its discretion), each Lender shall pay to the Administrative Agent for the account of the L/C Issuer its Applicable Percentage thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Lender, at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders under this clause shall survive the payment in full of the Obligations and the termination of this Agreement. (e) Obligations Absolute. The obligation of the applicable Borrower to reimburse the L/C Issuer for each drawing under each Letter of Credit issued for such Borrower's account and to repay each related L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following: (i) any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other Loan Document; (ii) the existence of any claim, counterclaim, setoff, defense or other right that any Borrower or any of its Subsidiaries may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the L/C Issuer or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction; 30 (iii) any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit; (iv) any payment by the L/C Issuer under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the L/C Issuer under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law; or (v) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Borrower or any of its Subsidiaries. The applicable Borrower shall promptly examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with such Borrower's instructions or other irregularity, such Borrower will immediately notify the L/C Issuer. The applicable Borrower shall be conclusively deemed to have waived any such claim against the L/C Issuer and its correspondents unless such notice is given as aforesaid. (f) Role of L/C Issuer. Each Lender and each Borrower agrees that, in paying any drawing under a Letter of Credit, the L/C Issuer shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. None of the L/C Issuer, the Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the L/C Issuer shall be liable to any Lender for (i) any action taken or omitted in connection herewith at the request or with the approval of the Lenders or the Required Lenders, as applicable; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Issuer Document. Each Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit issued for its account; provided, however, that this assumption is not intended to, and shall not, preclude such Borrower's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. None of the L/C Issuer, the Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the L/C Issuer shall be liable or responsible for any of the matters described in clauses (i) through (v) of Section 2.03(e); provided, however, that anything in such clauses to the contrary notwithstanding, the applicable Borrower may have a claim against the L/C Issuer, and the L/C Issuer may be liable to the applicable Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the applicable Borrower which the applicable Borrower proves were caused by the L/C Issuer's willful misconduct or gross negligence or the L/C Issuer's willful failure to pay under any Letter 31 of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing, the L/C Issuer may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and the L/C Issuer shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. (g) Cash Collateral. Upon the request of the Administrative Agent, if the L/C Issuer has honored any full or partial drawing request under any Letter of Credit and such drawing has resulted in an L/C Borrowing, the applicable Borrower shall, immediately Cash Collateralize the then Outstanding Amount of all such Borrower's L/C Obligations. Sections 2.04 and 8.02(c) set forth certain additional requirements to deliver Cash Collateral hereunder. For purposes of this Section 2.03, Section 2.04 and Section 8.02(c), "Cash Collateralize" means to pledge and deposit with or deliver to the Administrative Agent, for the benefit of the L/C Issuer and the Lenders, as collateral for the L/C Obligations of the applicable Borrower, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Administrative Agent and the L/C Issuer (which documents are hereby consented to by the Lenders). Derivatives of such term have corresponding meanings. Each Borrower hereby grants to the Administrative Agent, for the benefit of the L/C Issuer and the Lenders, a security interest in all such cash, deposit accounts and all balances therein of such Borrower and all proceeds of the foregoing. Cash Collateral shall be maintained in blocked, non-interest bearing deposit accounts at Bank of America. (h) Applicability of ISP. Unless otherwise expressly agreed by the L/C Issuer and SALIC when a Letter of Credit is issued (including any such agreement applicable to an Existing Letter of Credit), the rules of the ISP shall apply to each Letter of Credit. (i) Letter of Credit Fees. Each Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Applicable Percentage, a Letter of Credit fee (the "Letter of Credit Fee") for each Letter of Credit issued for the account of such Borrower equal to the Applicable Rate times of the daily amount available to be drawn under such Letter of Credit. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06. Letter of Credit Fees shall be (i) computed on a quarterly basis in arrears and (ii) due and payable on the first Business Day after the end of each March, June, September and December, commencing on the first Business Day after the end of March 2005 and thereafter commencing with the first such date to occur after the issuance of such Letter of Credit and on the date the last Letter of Credit expires. If there is any change in the Applicable Rate during any quarter, the daily amount available to be drawn under each Letter of Credit shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. Notwithstanding anything to the contrary contained herein, upon the request of the Required Lenders, while any Event of Default exists, all Letter of Credit Fees shall accrue at the Default Rate. 32 (j) Fronting Fee and Documentary and Processing Charges Payable to L/C Issuer. Each Borrower shall pay directly to each L/C Issuer for its own account, a fronting fee with respect to each Letter of Credit issued for the account of such Borrower, at the rate per annum agreed to between SALIC and such L/C Issuer, computed on the daily amount available to be drawn under such Letter of Credit on a quarterly basis in arrears, and due and payable on the first Business Day after the end of each March, June, September and December, commencing with the first such date to occur after the issuance of such Letter of Credit and on the date the last Letter of Credit expires. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06. In addition, each Borrower shall pay directly to each L/C Issuer for its own account, the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of such L/C Issuer relating to letters of credit issued for the account of such Borrower as from time to time in effect. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable. (k) Conflict with Issuer Documents. In the event of any conflict between the terms hereof and the terms of any Issuer Document, the terms hereof shall control. 2.04 Prepayments. (a) Each Borrower may, upon notice from such Borrower to the Administrative Agent, at any time or from time to time voluntarily prepay its Loans in whole or in part without premium or penalty; provided that (i) such notice must be received by the Administrative Agent not later than 11:00 a.m. (A) three Business Days prior to any date of prepayment of Eurodollar Rate Loans, and (B) on the date of prepayment of Base Rate Loans; (ii) any prepayment of Eurodollar Rate Loans shall be in a principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof; and (iii) any prepayment of Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof or, in each case, if less, the entire principal amount thereof then outstanding. Each such notice shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid and, if Eurodollar Loans are to be prepaid, the Interest Period(s) of such Loans. The Administrative Agent will promptly notify each Lender of its receipt of each such notice, and of the amount of such Lender's Applicable Percentage of such prepayment. If such notice is given by a Borrower, the applicable Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of a Eurodollar Rate Loan shall be accompanied by all accrued interest on the amount prepaid, together with any additional amounts required pursuant to Section 3.05. Each such prepayment shall be applied to the Loans of the Lenders in accordance with their respective Applicable Percentages. (b) If for any reason the Total Outstandings at any time exceed the Aggregate Commitments then in effect, the Borrowers shall immediately prepay Loans and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided, however, that the Borrowers shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.04(c) unless after the prepayment in full of the Loans the Total Outstandings exceed the Aggregate Commitments then in effect. 2.05 Termination or Reduction of Commitments. SALIC may, upon notice to the Administrative Agent, terminate the Aggregate Commitments, or from time to time permanently reduce the Aggregate Commitments; provided that (i) any such notice shall be received by the 33 Administrative Agent not later than 11:00 a.m. five Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $10,000,000 or any whole multiple of $1,000,000 in excess thereof, and (iii) SALIC shall not terminate or reduce the Aggregate Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the Total Outstandings would exceed the Aggregate Commitments. The Administrative Agent will promptly notify the Lenders of any such notice of termination or reduction of the Aggregate Commitments. Any reduction of the Aggregate Commitments shall be applied to the Commitment of each Lender pro rata according to its Applicable Percentage. All fees accrued until the effective date of any termination of the Aggregate Commitments shall be paid on the effective date of such termination. 2.06 Repayment of Loans. Each Borrower shall repay to the Lenders on the Commitment Termination Date the aggregate principal amount of Loans made to such Borrower outstanding on such date unless such Borrower has requested the Term-Out Option and the conditions thereto satisfied. If the Term-Out Option has been requested and the conditions thereto satisfied, each Borrower exercising its Term-Out Option shall repay to the Lenders on the Maturity Date the aggregate principal amount of its Loans outstanding on such date. 2.07 Interest. (a) Subject to the provisions of subsection (b) below, (i) each Eurodollar Rate Loan shall bear interest on the outstanding principal amount thereof for each Interest Period at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Rate; and (ii) each Base Rate Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate. (b) (i) If any amount of principal of any Loan is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws. (ii) If any amount (other than principal of any Loan) payable by a Borrower under any Loan Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, then upon the request of the Required Lenders, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws. (iii) Upon the request of the Required Lenders, while any Event of Default exists, the Borrowers shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws. (iv) Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand. (c) Interest on each Loan shall be due and payable in arrears on each Interest Payment Date applicable thereto and at such other times as may be specified herein. Interest 34 hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law. 2.08 Fees. In addition to certain fees described in subsections (i) and (j) of Section 2.03: (a) Facility Fee. SALIC shall pay to the Administrative Agent for the account of each Lender in accordance with its Applicable Percentage, a facility fee equal to the Applicable Rate times the actual daily amount of the Aggregate Commitments (or, if the Aggregate Commitments have terminated, on the Outstanding Amount of all Loans and L/C Obligations), regardless of usage. The facility fee shall accrue at all times during the Availability Period (and thereafter so long as any Loans or L/C Obligations remain outstanding), including at any time during which one or more of the conditions in Article IV is not met, and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing on the last Business Day of March, 2005, and on the Commitment Termination Date or, if the Term-Out Option has been exercised, the Maturity Date (and, if applicable, thereafter on demand). The facility fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Rate during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. (b) Utilization Fee. SALIC shall pay to the Administrative Agent for the account of each Lender in accordance with its Applicable Percentage, a utilization fee equal to the Applicable Rate times the Total Outstandings on each day that the Total Outstandings exceed 50% of the actual daily amount of the Aggregate Commitments then in effect (or, if terminated, in effect immediately prior to such termination). The utilization fee shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing on the last Business Day of March, 2005, and on the Commitment Termination Date or, if the Term-Out Option has been exercised, the Maturity Date (and, if applicable, thereafter on demand). The utilization fee shall be calculated quarterly in arrears and if there is any change in the Applicable Rate during any quarter, the daily amount shall be computed and multiplied by the Applicable Rate for each period during which such Applicable Rate was in effect. The utilization fee shall accrue at all times, including at any time during which one or more of the conditions in Article IV is not met. (c) Term-Out Fee. In the event a Borrower exercises its Term-Out Option, such Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Applicable Percentage, a fee equal to 0.15% of the principal amount of the Loans as to which such Borrower has exercised its Term-Out Option. (d) Other Fees. (i) SALIC shall pay to the Arranger and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Fee Letter. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever. 35 (ii) SALIC shall pay to the Lenders such upfront fees as shall have been separately agreed upon in writing in the amounts and at the times so specified. Such upfront fees shall be fully earned when paid and shall not be refundable for any reason whatsoever. 2.09 Computation of Interest and Fees. All computations of interest for Base Rate Loans when the Base Rate is determined by Bank of America's "prime rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year). Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall, subject to Section 2.11(a), bear interest for one day. Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error. 2.10 Evidence of Debt. (a) The Credit Extensions made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Credit Extensions made by the Lenders to the Borrowers and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrowers hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender to a Borrower made through the Administrative Agent, such Borrower shall execute and deliver to such Lender (through the Administrative Agent) a Note, which shall evidence such Lender's Loans to such Borrower in addition to such accounts or records. Each Lender may attach schedules to a Note and endorse thereon the date, Type (if applicable), amount, currency and maturity of its Loans and payments with respect thereto. (b) In addition to the accounts and records referred to in subsection (a), each Lender and the Administrative Agent shall maintain in accordance with its usual practice accounts or records evidencing the purchases and sales by such Lender of participations in Letters of Credit. In the event of any conflict between the accounts and records maintained by the Administrative Agent and the accounts and records of any Lender in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. 2.11 Payments Generally; Administrative Agent's Clawback. (a) General. All payments to be made by the Borrowers shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrowers hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the applicable Administrative Agent's Office in immediately available funds not later than 2:00 p.m. on the date specified herein. The Administrative Agent will promptly distribute to each Lender its Applicable Percentage (or other applicable share as provided herein) of such payment in like funds as 36 received by wire transfer to such Lender's Lending Office. All payments received by the Administrative Agent after 2:00 p.m. shall in each case be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment to be made by any Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be. (b) (i) Funding by Lenders; Presumption by Administrative Agent. Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Section 2.02 and may, in reliance upon such assumption, make available to the applicable Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the applicable Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount in immediately available funds with interest thereon, for each day from and including the date such amount is made available to the applicable Borrower to but excluding the date of payment to the Administrative Agent, at (A) in the case of a payment to be made by such Lender, the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and (B) in the case of a payment to be made by the applicable Borrower, the interest rate applicable to Base Rate Loans. If the applicable Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the applicable Borrower the amount of such interest paid by the applicable Borrower for such period. If such Lender pays its share of the applicable Borrowing to the Administrative Agent, then the amount so paid shall constitute such Lender's Loan included in such Borrowing. Any payment by the applicable Borrower shall be without prejudice to any claim the applicable Borrower may have against a Lender that shall have failed to make such payment to the Administrative Agent. (ii) Payments by Borrowers; Presumptions by Administrative Agent. Unless the Administrative Agent shall have received notice from a Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the L/C Issuer hereunder that such Borrower will not make such payment, the Administrative Agent may assume that such Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the L/C Issuer, as the case may be, the amount due. In such event, if such Borrower has not in fact made such payment, then each of the Lenders or the L/C Issuer, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or the L/C Issuer, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Rate. A notice of the Administrative Agent to any Lender or Borrower with respect to any amount owing under this subsection (b) shall be conclusive, absent manifest error. 37 (c) Failure to Satisfy Conditions Precedent. If any Lender makes available to the Administrative Agent funds for any Loan to be made by such Lender to any Borrower as provided in the foregoing provisions of this Article II, and such funds are not made available to such Borrower by the Administrative Agent because the conditions to the applicable Credit Extension set forth in Article IV are not satisfied or waived in accordance with the terms hereof, the Administrative Agent shall promptly return such funds (in like funds as received from such Lender) to such Lender, without interest. (d) Obligations of Lenders Several. The obligations of the Lenders hereunder to make Loans, to fund participations in Letters of Credit and to make payments pursuant to Section 11.04(c) are several and not joint. The failure of any Lender to make any Loan, to fund any such participation or to make any payment under Section 11.04(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan, to purchase its participation or to make its payment under Section 11.04(c). (e) Funding Source. Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner. 2.12 Sharing of Payments by Lenders. If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Loans made by it, or the participations in L/C Obligations held by it resulting in such Lender's receiving payment of a proportion of the aggregate amount of such Loans or participations and accrued interest thereon greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans and subparticipations in L/C Obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that: (i) if any such participations or subparticipations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations or subparticipations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and (ii) the provisions of this Section shall not be construed to apply to (x) any payment made by a Borrower pursuant to and in accordance with the express terms of this Agreement or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or subparticipations in L/C Obligations to any assignee or participant, other than to a Borrower or any Subsidiary thereof (as to which the provisions of this Section shall apply). Each Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing 38 arrangements may exercise against such Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Borrower in the amount of such participation. 2.13 Several Obligations of Borrowers; SALIC as Agent of Borrowers. (a) The Obligations of Scottish US, Scottish UK and Scottish Dublin shall be several in nature. In no event shall Scottish Dublin be liable to the LC Issuer or the Lenders for any Obligations with respect to any Letters of Credit. (b) Each of Scottish UK, Scottish Dublin and Scottish US hereby irrevocably appoints SALIC as its agent for all purposes relevant to this Agreement and each of the other Loan Documents, including (i) the giving and receipt of notices, and (ii) the execution and delivery of all documents, instruments and certificates contemplated herein and all modifications hereto. Any acknowledgment, consent, direction, certification or other action which might otherwise be valid or effective only if given or taken by all Borrowers, or by each Borrower acting singly, shall be valid and effective if given or taken only by SALIC, whether or not any such other Borrower joins therein. Any notice, demand, consent, acknowledgement, direction, certification or other communication delivered to SALIC in accordance with the terms of this Agreement shall be deemed to have been delivered to each other Borrower. 2.14 Increase in Commitments. (a) Request for Increase. Provided there exists no Default, upon notice to the Administrative Agent (which shall promptly notify the Lenders), SALIC may on a one-time basis, request an increase in the Aggregate Commitments by an amount not exceeding $25,000,000; provided that any such request for an increase shall be in a minimum amount of $5,000,000. At the time of sending such notice, SALIC (in consultation with the Administrative Agent) shall specify the time period within which each Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Lenders). (b) Lender Elections to Increase. Each Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Commitment and, if so, whether by an amount equal to, greater than, or less than its Applicable Percentage of such requested increase. Any Lender not responding within such time period shall be deemed to have declined to increase its Commitment. (c) Notification by Administrative Agent; Additional Lenders. The Administrative Agent shall notify SALIC and each Lender of the Lenders' responses to each request made hereunder. To achieve the full amount of a requested increase and subject to the approval of the Administrative Agent and the L/C Issuer (which approvals shall not be unreasonably withheld), SALIC may also invite additional Eligible Assignees to become Lenders pursuant to a joinder agreement in form and substance satisfactory to the Administrative Agent and its counsel. (d) Effective Date and Allocations. If the Aggregate Commitments are increased in accordance with this Section, the Administrative Agent and SALIC shall determine the effective date (the "Increase Effective Date") and the final allocation of such increase. The 39 Administrative Agent shall promptly notify SALIC and the Lenders of the final allocation of such increase and the Increase Effective Date. (e) Conditions to Effectiveness of Increase. As a condition precedent to such increase, SALIC shall deliver to the Administrative Agent a certificate of each Borrower dated as of the Increase Effective Date (in sufficient copies for each Lender) signed by a Responsible Officer of such Borrower (i) certifying and attaching the resolutions adopted by such Borrower approving or consenting to such increase, and (ii) in the case of SALIC, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article V and the other Loan Documents are true and correct on and as of the Extension Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Section 2.14, the representations and warranties contained in subsections (a) and (b) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01, and (B) no Default exists. The Borrowers shall prepay any Loans outstanding on the Increase Effective Date (and pay any additional amounts required pursuant to Section 3.05) to the extent necessary to keep the outstanding Loans ratable with any revised Applicable Percentages arising from any nonratable increase in the Commitments under this Section. (f) Conflicting Provisions. This Section shall supersede any provisions in Sections 2.12 or 11.01 to the contrary. ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 Taxes. (a) Payments Free of Taxes. Any and all payments by or on account of any obligation of the respective Borrowers hereunder or under any other Loan Document shall be made free and clear of and without reduction or withholding for any Indemnified Taxes or Other Taxes, provided that if the applicable Borrower shall be required by applicable law to deduct any Indemnified Taxes (including any Other Taxes) from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or L/C Issuer, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall timely pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) Payment of Other Taxes by the Borrowers. Without limiting the provisions of subsection (a) above, each Borrower shall timely pay any Other Taxes attributable to such Borrower's Obligations to the relevant Governmental Authority in accordance with applicable law. (c) Indemnification by the Borrowers. Each Borrower shall indemnify the Administrative Agent, each Lender and the L/C Issuer, within 10 days after demand therefor, for 40 the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent, such Lender or the L/C Issuer, as the case may be, with respect to such Borrower's Obligations and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to a Borrower by a Lender or the L/C Issuer (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender or the L/C Issuer, shall be conclusive absent manifest error. (d) Evidence of Payments. As soon as practicable after any payment of Indemnified Taxes or Other Taxes by any Borrower to a Governmental Authority with respect to such Borrower's Obligations, such Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Status of Lenders. Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which a Borrower is resident for tax purposes, or any treaty to which such jurisdiction is a party, with respect to payments hereunder or under any other Loan Document shall deliver to SALIC (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by SALIC or the Administrative Agent, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if requested by SALIC or the Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by SALIC or the Administrative Agent as will enable SALIC or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Without limiting the generality of the foregoing, in the event that a Borrower is resident for tax purposes in the United States, any Foreign Lender shall deliver to SALIC and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of SALIC or the Administrative Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable: (i) duly completed copies of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party, (ii) duly completed copies of Internal Revenue Service Form W-8ECI, (iii) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Code, (x) a certificate to the effect that such Foreign Lender is not (A) a "bank" within the meaning of section 881(c)(3)(A) of the Code, (B) a "10 percent shareholder" of the applicable Borrower within the meaning of 41 section 881(c)(3)(B) of the Code, or (C) a "controlled foreign corporation" described in section 881(c)(3)(C) of the Code and (y) duly completed copies of Internal Revenue Service Form W-8BEN, or (iv) any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in United States Federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable law to permit SALIC to determine the withholding or deduction required to be made. Without limiting the obligations of the Lenders set forth above regarding delivery of certain forms and documents to establish each Lender's status for U.S. withholding tax purposes, each Lender agrees promptly to deliver to the Administrative Agent or SALIC, as the Administrative Agent or SALIC shall reasonably request, on or prior to the Closing Date, and in a timely fashion thereafter, such other documents and forms required by any relevant taxing authorities under the Laws of any other jurisdiction, duly executed and completed by such Lender, as are required under such Laws to confirm such Lender's entitlement to any available exemption from, or reduction of, applicable withholding taxes in respect of all payments to be made to such Lender outside of the U.S. by the Borrowers pursuant to this Agreement or otherwise to establish such Lender's status for withholding tax purposes in such other jurisdiction. Each Lender shall promptly (i) notify the Administrative Agent of any change in circumstances which would modify or render invalid any such claimed exemption or reduction, and (ii) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any requirement of applicable Laws of any such jurisdiction that any Borrower make any deduction or withholding for taxes from amounts payable to such Lender. Additionally, each of the Borrowers shall promptly deliver to the Administrative Agent or any Lender, as the Administrative Agent or such Lender shall reasonably request, on or prior to the Closing Date, and in a timely fashion thereafter, such documents and forms required by any relevant taxing authorities under the Laws of any jurisdiction, duly executed and completed by such Borrower, as are required to be furnished by such Lender or the Administrative Agent under such Laws in connection with any payment by the Administrative Agent or any Lender of Taxes or Other Taxes, or otherwise in connection with the Loan Documents, with respect to such jurisdiction. (f) Treatment of Certain Refunds. If the Administrative Agent, any Lender or the L/C Issuer determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by any Borrower or with respect to which any Borrower has paid additional amounts pursuant to this Section, it shall pay to such Borrower an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by such Borrower under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent, such Lender or the L/C Issuer, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that each Borrower, upon the request of the Administrative Agent, such Lender or the L/C Issuer, agrees to repay the amount paid over to such Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent, such Lender or the L/C Issuer in the event the Administrative Agent, such Lender or the L/C Issuer is required to repay such 42 refund to such Governmental Authority. This subsection shall not be construed to require the Administrative Agent, any Lender or the L/C Issuer to make available its tax returns (or any other information relating to its taxes that it deems confidential) to any Borrower or any other Person. 3.02 Illegality. If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Eurodollar Rate Loans, or to determine or charge interest rates based upon the Eurodollar Rate, or any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by such Lender to SALIC through the Administrative Agent, any obligation of such Lender to make or continue Eurodollar Rate Loans or to convert Base Rate Loans to Eurodollar Rate Loans, shall be suspended until such Lender notifies the Administrative Agent and SALIC that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrowers shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or convert all such Eurodollar Rate Loans of such Lender to Base Rate Loans, either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Loans. Upon any such prepayment or conversion, the Borrowers shall also pay accrued interest on the amount so prepaid or converted. 3.03 Inability to Determine Rates. If the Required Lenders determine that for any reason in connection with any request for a Eurodollar Rate Loan or a conversion to or continuation thereof that (a) Dollar deposits are not being offered to banks in the London interbank market for the applicable amount and Interest Period of such Eurodollar Rate Loan, (b) adequate and reasonable means do not exist for determining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or (c) the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Eurodollar Rate Loan, the Administrative Agent will promptly so notify SALIC and each Lender. Thereafter, the obligation of the Lenders to make or maintain Eurodollar Rate Loans shall be suspended until the Administrative Agent (upon the instruction of the Required Lenders) revokes such notice. Upon receipt of such notice, SALIC may revoke any pending request for a Borrowing of, conversion to or continuation of Eurodollar Rate Loans or, failing that, will be deemed to have converted such request into a request for a Borrowing of Base Rate Loans in the amount specified therein. 3.04 Increased Costs; Reserves on Eurodollar Rate Loans. (a) Increased Costs Generally. If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement contemplated by Section 3.04(e)) or the L/C Issuer; 43 (ii) subject any Lender or the L/C Issuer to any tax of any kind whatsoever with respect to this Agreement, any Letter of Credit, any participation in a Letter of Credit or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender or the L/C Issuer in respect thereof (except for Indemnified Taxes or Other Taxes covered by Section 3.01 and the imposition of, or any change in the rate of, any Excluded Tax payable by such Lender or the L/C Issuer); or (iii) impose on any Lender or the L/C Issuer or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan), or to increase the cost to such Lender or the L/C Issuer of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by such Lender or the L/C Issuer hereunder (whether of principal, interest or any other amount) then, upon request of such Lender or the L/C Issuer, SALIC will pay (or cause the applicable Borrower to pay) to such Lender or the L/C Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the L/C Issuer, as the case may be, for such additional costs incurred or reduction suffered. (b) Capital Requirements. If any Lender or the L/C Issuer determines that any Change in Law affecting such Lender or the L/C Issuer or any Lending Office of such Lender or such Lender's or the L/C Issuer's holding company, if any, regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the L/C Issuer's capital or on the capital of such Lender's or the L/C Issuer's holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the L/C Issuer, to a level below that which such Lender or the L/C Issuer or such Lender's or the L/C Issuer's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the L/C Issuer's policies and the policies of such Lender's or the L/C Issuer's holding company with respect to capital adequacy), then from time to time SALIC will pay (or cause the applicable Borrower to pay) to such Lender or the L/C Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the L/C Issuer or such Lender's or the L/C Issuer's holding company for any such reduction suffered. (c) Certificates for Reimbursement. A certificate of a Lender or the L/C Issuer setting forth the amount or amounts necessary to compensate such Lender or the L/C Issuer or its holding company, as the case may be, as specified in subsection (a) or (b) of this Section and delivered to SALIC shall be conclusive absent manifest error. SALIC shall pay (or cause the applicable Borrower to pay) such Lender or the L/C Issuer, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Delay in Requests. Failure or delay on the part of any Lender or the L/C Issuer to demand compensation pursuant to the foregoing provisions of this Section shall not constitute a waiver of such Lender's or the L/C Issuer's right to demand such compensation, provided that no 44 Borrower shall be required to compensate a Lender or the L/C Issuer pursuant to the foregoing provisions of this Section for any increased costs incurred or reductions suffered more than nine months prior to the date that such Lender or the L/C Issuer, as the case may be, notifies SALIC of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the L/C Issuer's intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof). (e) Reserves on Eurodollar Rate Loans. Each Borrower shall pay to each Lender, as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurodollar funds or deposits (currently known as "Eurodollar liabilities"), additional interest on the unpaid principal amount of each Eurodollar Rate Loan of such Borrower equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive), which shall be due and payable on each date on which interest is payable on such Loan, provided such Borrower shall have received at least 10 days' prior notice (with a copy to the Administrative Agent) of such additional interest from such Lender. If a Lender fails to give notice 10 days prior to the relevant Interest Payment Date, such additional interest shall be due and payable 10 days from receipt of such notice. 3.05 Compensation for Losses. Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, each Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of: (a) any continuation, conversion, payment or prepayment of any Loan to such Borrower other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); (b) any failure by such Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, continue or convert any Loan other than a Base Rate Loan on the date or in the amount notified by such Borrower; or (c) any assignment of a Eurodollar Rate Loan on a day other than the last day of the Interest Period therefor as a result of a request by such Borrower pursuant to Section 11.13; including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. The applicable Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing. For purposes of calculating amounts payable by a Borrower to the Lenders under this Section 3.05, each Lender shall be deemed to have funded each Eurodollar Rate Loan made by it at the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the London interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan was in fact so funded. 45 3.06 Mitigation Obligations; Replacement of Lenders. (a) Designation of a Different Lending Office. If any Lender requests compensation under Section 3.04, or any Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01, or if any Lender gives a notice pursuant to Section 3.02, then such Lender shall use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.01 or 3.04, as the case may be, in the future, or eliminate the need for the notice pursuant to Section 3.02, as applicable, and (ii) in each case, would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. SALIC hereby agrees to pay (or to cause the applicable Borrower to pay) all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) Replacement of Lenders. If any Lender requests compensation under Section 3.04, or if any Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01, SALIC may replace such Lender in accordance with Section 11.13. 3.07 Survival. All of the Borrowers' obligations under this Article III shall survive termination of the Aggregate Commitments and repayment of all other Obligations hereunder. ARTICLE IV. CONDITIONS PRECEDENT TO CREDIT EXTENSIONS 4.01 Conditions of Closing Date. The occurrence of the Closing Date is subject to satisfaction of the following conditions precedent: (a) The Administrative Agent's receipt of the following, each of which shall be originals or telecopies (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the signing Borrower, each dated the Closing Date (or, in the case of certificates of governmental officials, a recent date before the Closing Date) and each in form and substance satisfactory to the Administrative Agent and each of the Lenders: (i) executed counterparts of this Agreement, sufficient in number for distribution to the Administrative Agent, each Lender and each Borrower; (ii) Notes executed by the Borrowers in favor of each Lender requesting Notes and, if such Notes are issued by Scottish Dublin, evidence that the stamp tax with respect thereto has been paid; (iii) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Borrower as the Administrative Agent may require evidencing the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents to which such Borrower is a party; 46 (iv) such documents and certifications as the Administrative Agent may reasonably require to evidence that each Borrower is duly incorporated or organized or formed, and that each Borrower is validly existing, in good standing (if such concept is applicable) and qualified to engage in business in each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; (v) a favorable opinion of (i) LeBoeuf, Lamb, Greene & MacRae, U.S. and English counsel to the Borrowers (ii) Maples and Calder, Cayman Islands counsel to SALIC, and (iii) William Fry, Irish counsel to Scottish Dublin, in each case, addressed to the Administrative Agent and each Lender, as to the matters in Exhibit E and such other matters concerning the Borrowers and the Loan Documents as the Required Lenders may reasonably request; (vi) a certificate of a Responsible Officer of each Borrower either (A) attaching copies of all consents, licenses and approvals required in connection with the execution, delivery and performance by such Borrower and the validity against such Borrower of the Loan Documents to which it is a party, and such consents, licenses and approvals shall be in full force and effect, or (B) stating that no such consents, licenses or approvals are so required; (vii) a certificate signed by a Responsible Officer of SALIC certifying (A) that the conditions specified in Sections 4.02(a) and (b) have been satisfied (B) that there has been no event or circumstance since the date of the Audited Financial Statements that has had or could be reasonably expected to have, either individually or in the aggregate, a Material Adverse Effect; and (C) the current Parent Debt Rating; (viii) a duly completed Compliance Certificate as of the last day of the fiscal quarter of SALIC most recently ended prior to the Closing Date, signed by a Responsible Officer of SALIC; (ix) evidence that the Existing Fleet Credit Agreements have been or concurrently with the Closing Date are being terminated and all Liens securing obligations under the Existing Fleet Credit Agreements have been or concurrently with the Closing Date are being released; (x) evidence that the Existing Comerica Credit Agreement has been or concurrently with the Closing Date is being terminated and all liens securing obligations under the Existing Comerica Credit Agreement have been or concurrently with the Closing Date are being released; (xi) A.M. Best Co. shall have affirmed the A- financial strength rating of SALIC, Scottish US and Scottish UK; (xii) A letter from the Process Agent agreeing to the terms of Section 11.14(d); and 47 (xiii) such other assurances, certificates, documents, consents or opinions as the Administrative Agent, the L/C Issuer or the Required Lenders reasonably may require. (b) Any fees required to be paid on or before the Closing Date shall have been paid. (c) Unless waived by the Administrative Agent, SALIC shall have paid all fees, charges and disbursements of counsel to the Administrative Agent to the extent invoiced prior to or on the Closing Date, plus such additional amounts of such fees, charges and disbursements as shall constitute its reasonable estimate of such fees, charges and disbursements incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude a final settling of accounts between SALIC and the Administrative Agent). (d) The ING Reinsurance Agreements shall be in form and substance satisfactory to the Lenders. Without limiting the generality of the provisions of Section 9.04, for purposes of determining compliance with the conditions specified in this Section 4.01, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto. 4.02 Conditions to all Credit Extensions. The obligation of each Lender to honor any Request for Credit Extension (other than a Loan Notice requesting only a conversion of Loans to the other Type, or a continuation of Eurodollar Rate Loans) is subject to the following conditions precedent: (a) The representations and warranties of (i) the Borrowers contained in Article V and (ii) each Borrower contained in each other Loan Document or in any document furnished at any time under or in connection herewith or therewith, shall be true and correct in all material respects on and as of the date of such Credit Extension, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, and except that for purposes of this Section 4.02, the representations and warranties contained in subsections (a) and (b) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01. (b) No Default shall exist, or would result from such proposed Credit Extension or the application of the proceeds thereof. (c) The Administrative Agent and, if applicable, the L/C Issuer shall have received a Request for Credit Extension in accordance with the requirements hereof. Each Request for Credit Extension (other than a Loan Notice requesting only a conversion of Loans to the other Type or a continuation of Eurodollar Rate Loans) submitted by a Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.02(a) and (b) have been satisfied on and as of the date of the applicable Credit Extension. 48 ARTICLE V. REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants (provided that Scottish Dublin, Scottish US and Scottish UK each represents and warrants solely with respect to itself and its respective Subsidiaries) to the Administrative Agent and the Lenders that. 5.01 Existence, Qualification and Power; Compliance with Laws. Each Borrower and each Subsidiary thereof (a) is duly incorporated or organized or formed, validly existing and in good standing (to the extent such concept is applicable) under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, (c) is duly qualified and is licensed and in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license, and (d) is in compliance with all Laws; except in each case referred to in clause (b)(i), (c) or (d), to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.02 Authorization; No Contravention. The execution, delivery and performance by each Borrower of each Loan Document to which such Person is party, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of such Person's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any Contractual Obligation to which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any Law. Each Borrower and each Subsidiary thereof is in compliance with all Contractual Obligations referred to in clause (b)(i), except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.03 Governmental Authorization; Other Consents. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Borrower of this Agreement or any other Loan Document except as set forth in Section 5.17. 5.04 Binding Effect. This Agreement has been, and each other Loan Document, when delivered hereunder, will have been, duly executed and delivered by each Borrower that is party thereto. This Agreement constitutes, and each other Loan Document when so delivered will constitute, a legal, valid and binding obligation of such Borrower, enforceable against each Borrower that is party thereto in accordance with its terms. 5.05 Financial Statements; No Material Adverse Effect. (a) The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted 49 therein; (ii) fairly present the financial condition of the applicable Person and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the applicable Person and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness. (b) The Audited Annual Statements (i) were prepared in accordance with SAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Scottish US and its Subsidiaries as of the date thereof and the results of operation for the period covered thereby in accordance with SAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (iii) show all material indebtedness and other liabilities, direct or contingent, of Scottish US and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness. (c) Except as disclosed to the Lenders in the memo dated December 27, 2004, the unaudited Financial Statements of each of the Parent and its Subsidiaries, SALIC and its Subsidiaries, Scottish Dublin and its Subsidiaries, and Scottish UK and its Subsidiaries, dated September 30, 2004 (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly present the financial condition of such Person and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments. (d) Since the date of the Audited Financial Statements, and the Audited Annual Statements there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect. (e) The consolidated forecasted balance sheet and statements of income of Parent and its Subsidiaries after giving effect to ING Acquisition delivered to the Lenders represented, at the time of delivery, SALIC's best estimate of its future financial performance after giving effect to such transaction. 5.06 Litigation. There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of any Borrower after due and diligent investigation, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, by or against the Borrowers or any of their respective Subsidiaries or against any of their properties or revenues that (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby, or (b) either individually or in the aggregate, if determined adversely, could reasonably be expected to have a Material Adverse Effect. 5.07 No Default. None of the Borrowers nor any their respective Subsidiaries is in default under or with respect to any Contractual Obligation that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document. 50 5.08 Ownership of Property; Liens. Each of the Borrowers and each of its respective Subsidiaries has good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The property of each Borrower and each of its respective Subsidiaries is subject to no Liens, other than Liens permitted by Section 7.01. 5.09 Environmental Compliance. Each of the Borrowers and its respective Subsidiaries conduct in the ordinary course of business a review of the effect of existing Environmental Laws and claims alleging potential liability or responsibility for violation of any Environmental Law on their respective businesses, operations and properties, and as a result thereof no Borrower could reasonably conclude that such Environmental Laws and claims could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.10 Insurance. The properties of each Borrower and its respective Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Borrowers, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the applicable Borrower or the applicable Subsidiary operates. 5.11 Taxes. Each of the Borrowers and its respective Subsidiaries have filed all Federal, state and other material tax returns and reports required to be filed, and have paid all Federal, state and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against any Borrower or any of its respective Subsidiaries that would, if made, have a Material Adverse Effect. None of the Borrowers nor any of their respective Subsidiaries is party to any tax sharing agreement. 5.12 ERISA and Foreign Benefit Plan Compliance. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state Laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of SALIC, nothing has occurred which would prevent, or cause the loss of, such qualification. SALIC and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of SALIC, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that could reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect. 51 (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither SALIC nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither SALIC nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither SALIC nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA. (d) With respect to any Foreign Benefit Plan, (i) each Foreign Benefit Plan is in compliance in all material respects with applicable Law except to the extent set forth in subparagraph (ii), (ii) the aggregate of the accumulated benefit obligations under all Foreign Benefit Plans does not exceed the current fair market value of the assets held in the trust or similar funding vehicles for such Foreign Benefit Plans in an amount in excess of the Threshold Amount, and (iii) reasonable reserves have been established in accordance with prudent business practice or where required by ordinary accounting practices in the jurisdiction in which such Foreign Benefit Plan is maintained. There are no material actions, suits or claims (other than routine claims for benefits) pending, or the knowledge of SALIC, threatened against it or any of the Borrowers or any of their respective Subsidiaries with respect to any Foreign Benefit Plan. 5.13 Subsidiaries. The subsidiaries of each Borrower are specifically disclosed in Schedule 5.13 as updated from time to time pursuant to Section 6.02(h) and correctly indicate which Subsidiaries are Insurance Subsidiaries. All of the outstanding Equity Interests in each Borrower and such Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Person and in the amounts specified on Schedule 5.13 free and clear of all Liens other than Liens permitted under Section 7.01. 5.14 Margin Regulations; Investment Company Act; Public Utility Holding Company Act. (a) No Borrower is engaged or will engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the FRB), or extending credit for the purpose of purchasing or carrying margin stock. Following the application of the proceeds of each Borrowing or drawing under each Letter of Credit, not more than 25% of the value of the assets (either of the applicable Borrower only or of such Borrower and its Subsidiaries on a consolidated basis) subject to the provisions of Section 7.01 or Section 7.05 or subject to any restriction contained in any agreement or instrument between any Borrower and any Lender or any Affiliate of any Lender relating to Indebtedness and within the scope of Section 8.01(e) will be margin stock. (b) None of the Borrowers, any Person Controlling the Borrowers or any Subsidiary (i) is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, or (ii) is or is required to be registered as an "investment company" under the Investment Company Act of 1940. 52 5.15 Disclosure. The Borrowers have disclosed to the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which any of the Borrowers or any of their respective Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. No report, financial statement, certificate or other information furnished (whether in writing or orally) by or on behalf of any Borrower to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or under any other Loan Document (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrowers represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. 5.16 Compliance with Laws. Each Borrower and each Subsidiary thereof is in compliance in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 5.17 Representations as to Foreign Obligors. Each Foreign Obligor represents and warrants to the Administrative Agent and the Lenders that: (a) Such Foreign Obligor is subject to civil and commercial Laws with respect to its obligations under this Agreement and the other Loan Documents to which it is a party (collectively as to such Foreign Obligor, the "Applicable Foreign Obligor Documents"), and the execution, delivery and performance by such Foreign Obligor of the Applicable Foreign Obligor Documents constitute and will constitute private and commercial acts and not public or governmental acts. Neither such Foreign Obligor nor any of its property has any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) under the laws of the jurisdiction in which such Foreign Obligor is organized and existing in respect of its obligations under the Applicable Foreign Obligor Documents. (b) The Applicable Foreign Obligor Documents are in proper legal form under the Laws of the jurisdiction in which such Foreign Obligor is organized and existing for the enforcement thereof against such Foreign Obligor under the Laws of such jurisdiction, and to ensure the legality, validity, enforceability, priority or admissibility in evidence of the Applicable Foreign Obligor Documents. It is not necessary to ensure the legality, validity, enforceability, priority or admissibility in evidence of the Applicable Foreign Obligor Documents that the Applicable Foreign Obligor Documents be filed, registered or recorded with, or executed or notarized before, any court or other authority in the jurisdiction in which such Foreign Obligor is organized and existing or that any registration charge or stamp or similar tax be paid on or in respect of the Applicable Foreign Obligor Documents or any other document, except for (i) any such filing, registration, recording, execution or notarization as has been made or is not required 53 to be made until the Applicable Foreign Obligor Document or any other document is sought to be enforced, (ii) any charge or tax as has been timely paid, and (iii) Cayman Islands stamp duty may be payable if an original Applicable Foreign Obligor Document is brought to or executed in the Cayman Islands. (c) There is no tax, levy, impost, duty, fee, assessment or other governmental charge, or any deduction or withholding, imposed by any Governmental Authority in or of the jurisdiction in which such Foreign Obligor is organized and existing either (i) on or by virtue of the execution or delivery of the Applicable Foreign Obligor Documents or (ii) on any payment to be made by such Foreign Obligor pursuant to the Applicable Foreign Obligor Documents, except (x) stamp tax payable with respect to any Note executed by Scottish Dublin and (y) stamp tax payable in the Cayman Islands if the relevant Applicable Foreign Obligor Documents are brought to or executed in the Cayman Islands. SALIC shall promptly pay any stamp tax which may be owed. The Credit Agreement and any other Applicable Foreign Obligor Documents were executed by SALIC outside the Cayman Islands. (d) The execution, delivery and performance of the Applicable Foreign Obligor Documents executed by such Foreign Obligor are, under applicable foreign exchange control regulations of the jurisdiction in which such Foreign Obligor is incorporated or organized and existing, not subject to any notification or authorization except (i) such as have been made or obtained or (ii) such as cannot be made or obtained until a later date (provided that any notification or authorization described in clause (ii) shall be made or obtained as soon as is reasonably practicable). ARTICLE VI. AFFIRMATIVE COVENANTS So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, the Borrowers shall, and shall (except in the case of the covenants set forth in Sections 6.01, 6.02, and 6.03) cause each of their respective Subsidiaries to (provided that Scottish Dublin, Scottish US and Scottish UK each covenants solely with respect to itself and its respective Subsidiaries): 6.01 Financial Statements. Deliver to the Administrative Agent and each Lender, in form and detail satisfactory to the Administrative Agent and the Required Lenders: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Parent, SALIC, Scottish UK and Scottish Dublin, the consolidated and consolidating balance sheet of such Person and its Subsidiaries as of the end of such fiscal year and the related consolidated and consolidating statements of income and consolidated statements of cash flow for such period, each setting forth in comparative form the figures for the previous comparable fiscal period, all in reasonable detail and prepared in accordance with GAAP, each of such consolidated statement shall be audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing reasonably acceptable to the Required Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any "going concern" or like 54 qualification or exception or any qualification or exception as to the scope of such audit and such consolidating statements to be certified by a Responsible Officer of SALIC or such Person to the effect that such statements are fairly stated in all material respects when considered in relation to the consolidated financial statements of such Person and its Subsidiaries; (b) as soon as available, but in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Parent, SALIC, Scottish UK and Scottish Dublin, an unaudited consolidated and consolidating balance sheet of such Person and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated and consolidating statements of income or operations, shareholders' equity and (with respect to the Parent only, cash flows) for such fiscal quarter, such consolidated statements to be certified by a Responsible Officer of SALIC or such Person as fairly presenting the financial condition, results of operations, shareholders' equity and cash flows of SALIC or such Person and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes and such consolidating statements to be certified by a Responsible Officer of such Person to the effect that such statements are fairly stated in all material respects when considered in relation to the consolidated financial statements of such Person and its Subsidiaries; and (c) promptly after the transmittal thereof to any Government Authority in its jurisdiction of organization (and with respect to SALIC, in the Cayman Islands and Bermuda), but only if and to the extent required to be provided to any Government Authority, any annual and quarterly Statutory Statements required to be delivered to or under such Government Authority by a Borrower or any Insurance Subsidiary thereof prepared in conformity with the requirements thereof. As to any information contained in materials furnished pursuant to Section 6.02(d), SALIC shall not be separately required to furnish such information under clause (a) or (b) above, but the foregoing shall not be in derogation of the obligation of SALIC to furnish the information and materials described in clauses (a) and (b) above at the times specified therein. 6.02 Certificates; Other Information. Deliver to the Administrative Agent and each Lender, in form and detail satisfactory to the Administrative Agent and the Required Lenders: (a) concurrently with the delivery of the financial statements referred to in Section 6.01(a), a certificate of its independent certified public accountants certifying such financial statements and stating that in making the examination necessary therefor no knowledge was obtained of any Default or, if any such Default shall exist, stating the nature and status of such event. (b) concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of SALIC. (c) promptly after any request by the Administrative Agent or any Lender, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of any Person required to provide 55 Financial Statements pursuant to Section 6.01(a) or (b) by independent accountants in connection with the accounts or books of such Person or any Subsidiary, or any audit of any of them. (d) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Parent, and copies of all annual, regular, periodic and special reports and registration statements which the Parent may file or be required to file with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to the Administrative Agent pursuant hereto. (e) promptly, and in any event within five Business Days after receipt thereof by the Parent or any Subsidiary thereof, copies of each notice or other correspondence received from the SEC (or comparable agency in any applicable non-U.S. jurisdiction) concerning any investigation or possible investigation or other inquiry by such agency regarding financial or other operational results of the Parent or any Subsidiary thereof. (f) promptly, such additional information regarding the business, financial or corporate affairs of the Parent, the Borrowers or any Subsidiary, or compliance with the terms of the Loan Documents, as the Administrative Agent or any Lender may from time to time reasonably request. (g) The following certificates and other information: (i) Within five (5) Business Days of receipt, a copy of any financial examination reports by a Governmental Authority with respect to a Borrower or any or its Insurance Subsidiaries relating to the insurance business of the such Person (when, and if, prepared); provided, a Borrower shall only be required to deliver any interim report hereunder at such time as such Borrower has knowledge that a final report will not be issued and delivered to the Administrative Agent within 90 days of any such interim report; (ii) Copies of all filings (other than ordinary course requalifications, nonmaterial tax and insurance rate and other ministerial regulatory filings) with Governmental Authorities by a Borrower or any of its Insurance Subsidiaries not later than five (5) Business Days after such filings are made, including, without limitation, filings which seek approval of Governmental Authorities with respect to transactions between such Borrower or such Insurance Subsidiary and its Affiliates; (iii) Within five (5) Business Days of such notice, notice of proposed or actual suspension, termination or revocation of any material license of any Borrower or any of its Insurance Subsidiaries by any Governmental Authority or of receipt of notice from any Governmental Authority notifying a Borrower or any of its Insurance Subsidiaries of a hearing relating to such a suspension, termination or revocation, including any request by a Governmental Authority which commits the Parent or any of its Subsidiaries to take, or refrain from taking, any action or which otherwise materially and adversely affects the authority of such Borrower or any such Insurance Subsidiary to conduct its business; 56 (iv) Within five (5) Business Days of such notice, notice of any pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews) by any Governmental Authority concerning the business, practices or operations of a Borrower or any of its Insurance Subsidiaries; and (v) Promptly, notice of any actual or, to the best of the applicable Borrower's knowledge, proposed material changes in the applicable laws governing the investment or dividend practices of such Borrower or any of its Insurance Subsidiaries. (h) Promptly upon formation or acquisition of any Subsidiary after the Closing Date with an initial capitalization of $1,000,000 or more or after the capital of a previously unreported Subsidiary is increased above $1,000,000, written notice of the name, purpose and capitalization of such Subsidiary and whether such Subsidiary is a Insurance Subsidiary. Documents required to be delivered pursuant to Section 6.01(a) or (b) or Section 6.02(d) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which SALIC posts such documents, or provides a link thereto on SALIC's website on the Internet at the website address listed on Schedule 11.02; or (ii) on which such documents are posted on SALIC's behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) SALIC shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests SALIC to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) SALIC shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. Notwithstanding anything contained herein, in every instance SALIC shall be required to provide paper copies of the Compliance Certificates required by Section 6.02(b) to the Administrative Agent. Except for such Compliance Certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by SALIC with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents. Each Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arranger will make available to the Lenders and the L/C Issuer materials and/or information provided by or on behalf of such Borrower hereunder including materials and/or information regarding the Parent (collectively, "Borrower Materials") by posting the Borrower Materials on IntraLinks or another similar electronic system (the "Platform") and (b) certain of the Lenders may be "public-side" Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to any Borrower or its securities) (each, a "Public Lender"). Each Borrower hereby agrees that (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked "PUBLIC" which, at a minimum, shall mean that the word "PUBLIC" shall appear prominently on the first page thereof; (x) by marking Borrower Materials "PUBLIC," the Borrowers shall be deemed to have authorized the Administrative Agent, the Arranger, the L/C Issuer and the Lenders to treat such Borrower 57 Materials as either publicly available information or not material information (although it may be sensitive and proprietary) with respect to the Borrowers or their respective securities for purposes of United States Federal and state securities laws; (y) all Borrower Materials marked "PUBLIC" are permitted to be made available through a portion of the Platform designated "Public Investor;" and (z) the Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are not marked "PUBLIC" as being suitable only for posting on a portion of the Platform not designated "Public Investor." 6.03 Notices. Promptly notify the Administrative Agent and each Lender after a Responsible Officer becomes aware thereof: (a) of the occurrence of any Default; (b) of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of a Borrower or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between a Borrower or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting a Borrower or any Subsidiary, including pursuant to any applicable Environmental Laws; (c) of the occurrence of any ERISA Event; (d) of any material change in accounting policies or financial reporting practices by the Parent, any Borrower or any Subsidiary; and (e) of any announcement by Moody's or S&P of any change or possible change in a Parent Debt Rating. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of SALIC setting forth details of the occurrence referred to therein and stating what action SALIC has taken and proposes to take with respect thereto. Each notice pursuant to Section 6.03(a) shall describe with particularity any and all provisions of this Agreement and any other Loan Document that have been breached. 6.04 Payment of Obligations. Pay and discharge as the same shall become due and payable, all its obligations and liabilities, including (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP are being maintained by such Borrower or such Subsidiary; (b) all lawful claims which, if unpaid, would by law become a Lien upon its property; and (c) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. 6.05 Preservation of Existence, Etc. (a) Preserve, renew and maintain in full force and effect its legal existence and good standing (to the extent such concept is applicable) under the Laws of the jurisdiction of its organization except in a transaction permitted by Section 7.04 or 7.05; (b) take all reasonable action to maintain all rights, privileges, permits, licenses and 58 franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (c) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. 6.06 Maintenance of Properties. (a) Maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good working order and condition, ordinary wear and tear excepted; and (b) make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect. 6.07 Maintenance of Insurance. Maintain with financially sound and reputable insurance companies not Affiliates of SALIC, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons. 6.08 Compliance with Laws. Comply in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its business or property, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted; or (b) the failure to comply therewith could not reasonably be expected to have a Material Adverse Effect. 6.09 Books and Records. (a) Maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP or SAP, as applicable, consistently applied shall be made of all financial transactions and matters involving the assets and business of such Person or such Subsidiary, as the case may be; and (b) maintain such books of record and account in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over such Person or such Subsidiary, as the case may be. 6.10 Inspection Rights. Permit representatives and independent contractors of the Administrative Agent and each Lender to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the applicable Borrower and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the applicable Borrower; provided, however, that when an Event of Default exists the Administrative Agent or any Lender (or any of their respective representatives or independent contractors) may do any of the foregoing at the expense of the applicable Borrower at any time during normal business hours and without advance notice. 6.11 Use of Proceeds. Use the proceeds of the Credit Extensions for working capital, capital expenditures and general corporate purposes not in contravention of any Law or of any Loan Document. 59 6.12 Approvals and Authorizations. Maintain all authorizations, consents, approvals and licenses from, exemptions of, and filings and registrations with, each Governmental Authority of the jurisdiction in which each Foreign Obligor is organized and existing, and all approvals and consents of each other Person in such jurisdiction, in each case that are required in connection with the Loan Documents. ARTICLE VII. NEGATIVE COVENANTS So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, the Borrowers shall not, and shall not permit any of its Material Subsidiaries to (provided that Scottish Dublin, Scottish US and Scottish UK each covenants solely with respect to itself and its respective Subsidiaries), directly or indirectly: 7.01 Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than the following: (a) Liens pursuant to any Loan Document; (b) Liens existing on the date hereof and listed on Schedule 7.01 and any renewals or extensions thereof, provided that (i) the property covered thereby is not changed, (ii) the amount secured or benefited thereby is not increased, (iii) the direct or any contingent obligor with respect thereto is not changed, and (iv) any renewal or extension of the obligations secured or benefited thereby is permitted by Section 7.03(b); (c) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP; (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person; (e) pledges or deposits in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation, other than any Lien imposed by ERISA; (f) deposits to secure the performance of bids, trade contracts and leases (other than Indebtedness), statutory obligations, surety bonds (other than bonds related to judgments or litigation), performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case 60 materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person; (h) Liens securing judgments for the payment of money not constituting an Event of Default under Section 8.01(h) or securing appeal or other surety bonds related to such judgments; (i) Liens securing Indebtedness permitted under Section 7.03(e); provided that (i) such Liens do not at any time encumber any property other than the property financed by such Indebtedness and (ii) the Indebtedness secured thereby does not exceed the cost or fair market value, whichever is lower, of the property being acquired on the date of acquisition; (j) Liens on cash, cash equivalents, portfolio securities or Swap Contracts of a Borrower and its Subsidiaries pursuant to trust or other security arrangements in connection with Reinsurance Agreements, Primary Policies, Retrocession Agreements or Other Insurance Products; (k) Liens granted by a Borrower and its Subsidiaries pursuant to trust or other security arrangements (including letter of credit facilities) in connection with Alternative Reserve Agreements; (l) Liens on cash, cash equivalents, portfolio securities or Swap Contracts of a Borrower and its Subsidiaries securing Indebtedness permitted under Section 7.03(g); and (m) Liens not otherwise permitted under this Section 7.01 securing Indebtedness or obligations under Foreign Benefit Plans provided the aggregate principal amount of such secured Indebtedness and obligations under Foreign Benefit Plans outstanding at any time does not exceed $10,000,000; provided, however, that, no Lien shall be permitted to exist on the Equity Interests of a Borrower or any of its Material Subsidiaries provided, further, however, Liens shall be permitted on the Equity Interests in special purpose entities established in connection with Alternative Reserve Agreements. 7.02 Investments. Make any Investments, except: (a) Investments held by such Borrower or such Subsidiary in accordance with the Investment Policies; (b) advances to officers, directors and employees of SALIC and Subsidiaries, for travel, entertainment, relocation and analogous ordinary business purposes; (c) Investments in any wholly-owned Subsidiary of the Parent; (d) Investments in Scottish Life to the extent such Investments are required pursuant to the Scottish Life Keep Well Agreement or otherwise required by the Governmental Authority regulating Scottish Life; 61 (e) Guarantees permitted by Section 7.03; (f) Investments in connection with Reinsurance Agreements Primary Policies, Retrocession Agreements or Other Insurance Products in the ordinary course of business and Investments in connection with Alternative Reserve Agreements; (g) Investments in connection with acquisitions permitted under Section 7.13; and (h) Investments consisting of extensions of credit in the nature of accounts receivable or notes receivable arising from the grant of trade credit in the ordinary course of business, and Investments received in satisfaction or partial satisfaction thereof from financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss. 7.03 Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness under the Loan Documents; (b) Indebtedness outstanding on the date hereof and listed on Schedule 7.03 and any refinancings, refundings, renewals or extensions thereof; provided that (i) the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to a reasonable premium or other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing and by an amount equal to any existing commitments unutilized thereunder and (ii) the terms relating to principal amount, amortization, maturity, collateral (if any) and subordination (if any), and other material terms taken as a whole, of any such refinancing, refunding, renewing or extending Indebtedness, and of any agreement entered into and of any instrument issued in connection therewith, are no less favorable in any material respect to the Borrowers or the Lenders than the terms of any agreement or instrument governing the Indebtedness being refinanced, refunded, renewed or extended and the interest rate applicable to any such refinancing, refunding, renewing or extending Indebtedness does not exceed the then applicable market interest rate; (c) Guarantees of a Borrower in respect of Indebtedness of its wholly-owned Subsidiaries or SALIC otherwise permitted hereunder; (d) obligations (contingent or otherwise) of a Borrower or any Subsidiary existing or arising under any Swap Contract, provided that (i) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments, investments, assets, or property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person, and not for purposes of speculation or taking a "market view;" and (ii) such Swap Contract does not contain any provision exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party; (e) Indebtedness in respect of capital leases, Synthetic Lease Obligations and purchase money obligations for fixed or capital assets within the limitations set forth in Section 7.01(i); provided, however, that the aggregate amount of all such Indebtedness at any one time outstanding shall not exceed $10,000,000; 62 (f) Indebtedness in connection with trust preferred securities; (g) Indebtedness for standby letters of credit issued to insurance or reinsurance cedants in the ordinary course of business; (h) Indebtedness for Alternative Reserve Agreements and letters of credit issued to collateralize Alternative Reserve Agreements; (i) Indebtedness pursuant to the Keep Well Agreements; and (j) Indebtedness not otherwise permitted under this Section 7.03 in an aggregate principal amount not to exceed $10,000,000 at any time outstanding; provided, however, that Newco shall not be permitted to incur any Indebtedness. 7.04 Fundamental Changes. Merge, dissolve, liquidate, consolidate with or into another Person, or Dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except that, so long as no Default exists or would result therefrom: (a) any Subsidiary of a Borrower may merge with (i) such Borrower or SALIC, provided that such Borrower or SALIC shall be the continuing or surviving Person, or (ii) any one or more other Subsidiaries of such Borrower, provided that when any wholly-owned Subsidiary is merging with another Subsidiary, the wholly-owned Subsidiary shall be the continuing or surviving Person; (b) any Subsidiary of a Borrower may Dispose of all or substantially all of its assets (upon voluntary liquidation or otherwise) to such Borrower or SALIC or to another Subsidiary of Borrower or SALIC; provided that if the transferor in such a transaction is a wholly-owned Subsidiary, then the transferee must either be SALIC or a wholly-owned Subsidiary; (c) the Equity Interests of any Subsidiary of any Borrower may be transferred to the Parent or another wholly-owned Subsidiary of the Parent; provided, however, that SALIC may not merge or consolidate with Scottish US or Newco or any other Person who is or becomes a Purchaser Subsidiary under the ING Purchase Agreement or any of their respective Subsidiaries. 7.05 Dispositions. Make any Disposition or enter into any agreement to make any Disposition, except: (a) Dispositions of obsolete or worn out property, whether now owned or hereafter acquired, in the ordinary course of business; (b) Dispositions of Investments (other than Equity Interests in the Borrowers or any of their Subsidiaries) in the ordinary course of business; 63 (c) Dispositions of equipment or real property to the extent that (i) such property is exchanged for credit against the purchase price of similar replacement property or (ii) the proceeds of such Disposition are reasonably promptly applied to the purchase price of such replacement property; (d) Dispositions of property by any Subsidiary to SALIC or to a wholly-owned Subsidiary of such Borrower or SALIC; (e) Dispositions permitted by Section 7.04; and (f) Disposition of property after the Closing Date provided the fair market value of all such property does not exceed $25,000,000; provided, however, that any Disposition pursuant to clauses (a) through (e) shall be for fair market value. 7.06 Restricted Payments. Declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, or issue or sell any Equity Interests, except that, so long as no Default shall have occurred and be continuing at the time of any action described below or would result therefrom: (a) each Subsidiary of a Borrower may make Restricted Payments to such Borrower and any other Person that owns an Equity Interest in such Subsidiary, ratably according to their respective holdings of the type of Equity Interest in respect of which such Restricted Payment is being made; (b) each Borrower and each of its Subsidiaries may declare and make dividend payments or other distributions payable solely in the common stock or other common Equity Interests of such Person; and (c) each Borrower and each of its Subsidiaries may issue Equity Interests in connection with Investments permitted under Sections 7.02(c) and (d). 7.07 Change in Nature of Business. Engage in any material line of business substantially different from those lines of business conducted by the Parent and its Subsidiaries on the date hereof or any business substantially related or incidental thereto or permit Newco to engage in any business other than the business acquired pursuant to the ING Asset Purchase Agreement and the ING Reinsurance Agreements to which it is a party. 7.08 Transactions with Affiliates. Enter into any transaction of any kind with any Affiliate of the Parent, whether or not in the ordinary course of business, other than on fair and reasonable terms substantially as favorable to such Borrower or such Subsidiary as would be obtainable by such Borrower or such Subsidiary at the time in a comparable arm's length transaction with a Person other than an Affiliate, provided that the foregoing restriction shall not apply to transactions between or among SALIC and any of its wholly-owned Subsidiaries or between and among any wholly-owned Subsidiaries. 64 7.09 Burdensome Agreements. Enter into any Contractual Obligation (other than this Agreement or any other Loan Document) that (a) limits the ability (i) of any Borrower or any of its Subsidiaries to make Restricted Payments to such Borrower or to otherwise transfer property to SALIC or any Subsidiary, (ii) of any Subsidiary to Guarantee the Indebtedness of SALIC or (iii) of SALIC or any Subsidiary to create, incur, assume or suffer to exist Liens on property of such Person; provided, however, that this clause (iii) shall not prohibit any negative pledge incurred or provided in favor of any holder of Indebtedness permitted under Section 7.03(e), (h) or (i) solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness; or (b) requires the grant of a Lien to secure an obligation of such Person if a Lien is granted to secure another obligation of such Person. 7.10 Use of Proceeds. Use the proceeds of any Credit Extension, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry margin stock (within the meaning of Regulation U of the FRB) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose. 7.11 Financial Covenants. (a) (i) SALIC Net Worth. Permit SALIC Net Worth at any time to be less than (i) prior to the last day of the fiscal quarter in which the ING Reinsurance Agreements are issued (the "Reset Quarter"), the sum of (x) $645,500,000, plus (y) an amount equal to 50% of the Consolidated Net Income of SALIC earned in each full fiscal quarter ending after September 30, 2004 (with no deduction for a net loss in any such fiscal quarter) plus (z) an amount equal to 50% of the aggregate increases in Shareholders' Equity of SALIC after the date hereof by reason of the issuance and sale of Equity Interests of SALIC including upon any conversion of debt securities of SALIC into such Equity Interests or other capital contributions and (ii) from and after the last day of the Reset Quarter, the sum of (x) greater of (A) $645,500,000 and (B) 80% of SALIC's Net Worth as of the end of the Reset Quarter plus (y) an amount equal to 50% of the Consolidated Net Income of SALIC earned in each full fiscal quarter ending after the Reset Quarter (with no deductions for a net loss in any such fiscal quarter) plus (z) an amount equal to 50% of the aggregate increases in Shareholder's Equity of SALIC after the Reset Quarter by reason of the issuance and sale of Equity Interest of SALIC including upon any conversion of debt securities of SALIC into such Equity Interest or other capital contributions. (ii) SALIC Debt to Capitalization Ratio. Permit the SALIC Debt to Capitalization Ratio to be more than 20%. (iii) Calculation of SALIC Financial Covenants. For purposes of calculating the SALIC Debt to Capitalization Ratio, Alternative Reserve Agreements shall not be treated as Indebtedness if neither S&P nor Moody's includes Indebtedness under such Alternative Reserve Agreement as financial leverage. (b) (i) Parent Net Worth. Permit Parent Net Worth at any time to be less than (i) prior to the last day of the Reset Quarter, the sum of (x) $564,800,000, plus (y) an 65 amount equal to 50% of the Consolidated Net Income of Parent earned in each full fiscal quarter ending after September 30, 2004 (with no deduction for a net loss in any such fiscal quarter) plus (z) an amount equal to 50% of the aggregate increases in Shareholders' Equity of Parent after the date hereof by reason of the issuance and sale of Equity Interests of Parent including upon any conversion of debt securities of Parent into such Equity Interests or other capital contributions and (ii) from and after the last day of the Reset Quarter, the sum of (x) the greater of (A) $564,800,000 and (B) 80% of Parent's as of the end of the Reset Quarter plus (y) an amount equal to 50% of the Consolidated Net Income of Parent earned in each full fiscal quarter ending after the fiscal quarter in which the ING Reinsurance Agreements are issued (with no deductions for a net loss in any such fiscal quarter) plus (z) an amount equal to 50% of the aggregate increases in Shareholder's Equity of Parent after the Reset Quarter by reason of the issuance and sale of Equity Interest of Parent including upon any conversion of debt securities of Parent into such Equity Interest or other capital contributions. (ii) Parent Debt to Capitalization Ratio. Permit the Parent Debt to Capitalization Ratio to be more than 30%. (iii) Calculation of Parent Financial Covenants. For purposes of calculating the Parent Net Worth and Parent Debt to Capitalization Ratio, 75% of the 5.875% Hybrid Capital Units issued by the Parent will be treated as equity and 25% will be treated as Parent Consolidated Indebtedness. Additional mezzanine equity issued by the Parent will be accorded the same treatment as given to such mezzanine equity by Moody's. For purposes of calculating the Parent Debt to Capitalization Ratio, Indebtedness under Alternative Reserve Agreements will be excluded if neither S&P nor Moody's includes Indebtedness under such Alternative Reserve Agreement as financial leverage. (c) Scottish US Net Worth. From and after the date the ING Reinsurance Agreements are issued, Scottish US shall at all times maintain the greater of (i) minimum capital and surplus (calculated in accordance with SAP) of $20,000,000 or (ii) the amount of capital and surplus necessary to prevent a Company Action Level Event from occurring under the risk based capital laws of Delaware. (d) Unencumbered Asset Reserve Ratio. Permit the ratio of (i) the Unencumbered Asset Value of SALIC to (ii) the Aggregate Commitments (or if the Aggregate Commitments have been terminated, the Total Outstandings) to be less than 1.2:1.0 at any time. 7.12 Restrictions On Negative Pledge Agreements. Enter into or permit any of its Subsidiaries to enter into or assume any agreement to which it is a party, other than this Agreement and any agreement required by applicable insurance regulations which places any restrictions upon the right of such Borrower or any of its Subsidiaries to sell, pledge or otherwise dispose of any material portion of its properties now owned or hereafter acquired other than as permitted under Section 7.01 (with respect to the property subject to such Lien). 7.13 Acquisitions; ING Acquisition. Consummate any acquisition or permit any Subsidiary to consummate any acquisition except: 66 (a) Scottish US and its Subsidiaries shall be permitted to consummate the ING Acquisition provided that: (i) such acquisition is consummated in accordance with the terms of the ING Asset Purchase Agreement without waiver of any of the conditions precedent; (ii) the ING Acquisition complies in all respects with all applicable Laws and all necessary approvals or consents of Governmental Authorities required for therefor have been duly obtained and continue to be in full force and effect; (iii) all of the representations and warranties of the Parent and its Subsidiaries and, to the best of SALIC's knowledge, the other parties to the ING Asset Purchase Agreement, contained in the ING Asset Purchase Agreement are true and correct in all material respects as of the date of such acquisition; (iv) no Default has occurred and is continuing or will result from the closing of the ING Acquisition and the issuance of the ING Reinsurance Agreements; (v) the representations and warranties contained in Article V of this Agreement are true and correct as of the date of and after giving effect to the ING Acquisition as though made on such date; (vi) (A) the Parent and its Subsidiaries shall have raised $230,000,000 (gross proceeds) from (x) the issuance of no more than $50,000,000 (gross proceeds) of trust preferred securities by a Subsidiary of SALIC on substantially the same terms as the previous trust preferred issuances of Scottish Holdings, Inc. and (y) $180,000,000 (gross proceeds) of equity and/or debt issuances by the Parent or one of its Subsidiaries (provided that none of the Borrowers or their Subsidiaries have any liability with respect to any such debt issuance); and (B) SALIC and/or its Subsidiaries shall have received capital contributions equal to at least $200,000,000 from such capital and debt issuances. (vii) The ING Reinsurance Agreements shall be substantially in the form of the drafts dated December 29, 2004; and (viii) The Administrative Agent has received a certificate from Scottish US and SALIC as to the matters set forth in clauses (i) through (vii) above. (b) Acquisitions other than the ING Acquisition provided the total consideration paid for such assets or the ceding commission transferred on a reinsurance transaction, as the case may be, in connection with any single acquisition does not exceed plus or minus $100,000,000. ARTICLE VIII. EVENTS OF DEFAULT AND REMEDIES 8.01 Events of Default. Any of the following shall constitute an Event of Default: (a) Non-Payment. Any Borrower fails to pay (i) when and as required to be paid herein, any amount of principal of any Loan or any L/C Obligation, or (ii) within three days after 67 the same becomes due, any interest on any Loan or on any L/C Obligation, or any fee due hereunder, or (iii) within five days after the same becomes due, any other amount payable hereunder or under any other Loan Document; or (b) Specific Covenants. Any Borrower fails to perform or observe any term, covenant or agreement contained in any of Section 6.01, 6.02, 6.03, 6.05, or 6.10, 6.11 or Article VII; (c) Other Defaults. Any Borrower fails to perform or observe any other covenant or agreement (not specified in subsection (a) or (b) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days; or (d) Representations and Warranties. Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of any Borrower herein, in any other Loan Document, or in any document delivered in connection herewith or therewith shall be incorrect or misleading in any material respect when made or deemed made; or (e) Cross-Default. (i) Any Borrower or any Subsidiary thereof (A) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness or Guarantee (other than Indebtedness hereunder and Indebtedness under Swap Contracts) having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than the Threshold Amount, or (B) fails to observe or perform any other agreement or condition relating to any such Indebtedness or Guarantee or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness or the beneficiary or beneficiaries of such Guarantee (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to be demanded or to become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity, or such Guarantee to become payable or cash collateral in respect thereof to be demanded; or (ii) there occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (A) any event of default under such Swap Contract as to which such Person is the Defaulting Party (as defined in such Swap Contract) or (B) any Termination Event (as so defined) under such Swap Contract as to which such Person is an Affected Party (as so defined) and, in either event, the Swap Termination Value owed by such Person as a result thereof is greater than the Threshold Amount; or (f) Insolvency Proceedings, Etc. Any Borrower or any of its Subsidiaries institutes or consents to the institution of any proceeding under any Debtor Relief Law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its 68 property is instituted without the consent of such Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or (g) Inability to Pay Debts; Attachment. (i) Any Borrower or any Subsidiary thereof becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 30 days after its issue or levy; or (h) Judgments. There is entered against any Borrower or any Subsidiary (i) a final judgment or order for the payment of money in an aggregate amount exceeding the Threshold Amount (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage), or (ii) any one or more non-monetary final judgments that have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor upon such judgment or order, or (B) there is a period of 10 consecutive days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or (i) ERISA, Foreign Benefit Plan. (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of SALIC under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold Amount, or (ii) SALIC or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the Threshold Amount or (iii) institution of any steps by a Foreign Obligor or any other Person to terminate a Foreign Benefit Plan if as a result of such termination, a Foreign Obligor or any of their respective Subsidiaries could be required to make a contribution to such Foreign Benefit Plan, or could incur a liability or obligation to such Foreign Benefit Plan, in excess of the Threshold Amount, or (iv) a contribution failure with respect to any Foreign Benefit Plan sufficient to give rise to a Lien under applicable Law occurs; or (j) Invalidity of Loan Documents. Any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or satisfaction in full of all the Obligations, ceases to be in full force and effect; or any Borrower or any other Person contests in any manner the validity or enforceability of any Loan Document; or any Borrower denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document; or (k) Change of Control. There occurs any Change of Control. 8.02 Remedies Upon Event of Default. If any Event of Default occurs and is continuing, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, take any or all of the following actions: 69 (a) declare the commitment of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions to be terminated, whereupon such commitments and obligation shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; (c) require that each Borrower Cash Collateralize its L/C Obligations (in an amount equal to the then Outstanding Amount thereof); and (d) exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents; provided, however, that upon the occurrence of an actual or deemed entry of an order for relief with respect to any Borrower under the Bankruptcy Code of the United States, the obligation of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, and the obligation of each Borrower to Cash Collateralize its L/C Obligations as aforesaid shall automatically become effective, in each case without further act of the Administrative Agent or any Lender. 8.03 Application of Funds. After the exercise of remedies provided for in Section 8.02 (or after the Loans have automatically become immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in the proviso to Section 8.02), any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order: First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and amounts payable under Article III) payable to the Administrative Agent in its capacity as such; Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders and the L/C Issuer (including fees, charges and disbursements of counsel to the respective Lenders and the L/C Issuer (including, without duplication, fees and time charges for attorneys who may be employees of any Lender or the L/C Issuer) and amounts payable under Article III), ratably among them in proportion to the amounts described in this clause Second payable to them; Third, to payment of that portion of the Obligations constituting accrued and unpaid interest on the Loans, L/C Borrowings and other Obligations, ratably among the Lenders and the L/C Issuer in proportion to the respective amounts described in this clause Third payable to them; 70 Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans and L/C Borrowings, ratably among the Lenders and the L/C Issuer in proportion to the respective amounts described in this clause Fourth held by them; Fifth, to the Administrative Agent for the account of the L/C Issuer, to Cash Collateralize that portion of L/C Obligations comprised of the aggregate undrawn amount of Letters of Credit; and Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the applicable Borrower or as otherwise required by Law. Subject to Section 2.03(c), amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fifth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations of the applicable Borrower, if any, in the order set forth above. ARTICLE IX. AGENT 9.01 Appointment and Authority. Each of the Lenders and the L/C Issuer hereby irrevocably appoints Bank of America to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Administrative Agent, the Lenders and the L/C Issuer, and no Borrower shall have rights as a third party beneficiary of any of such provisions. 9.02 Rights as a Lender. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrowers or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders. 9.03 Exculpatory Provisions. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Administrative Agent: (a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing; (b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated 71 hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law; and (c) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to any of the Borrowers or any of their respective Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 11.01 and 8.02) or (ii) in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Administrative Agent by SALIC, a Lender or the L/C Issuer. The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. 9.04 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan, or the issuance of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or the L/C Issuer, the Administrative Agent may presume that such condition is satisfactory to such Lender or the L/C Issuer unless the Administrative Agent shall have received notice to the contrary from such Lender or the L/C Issuer prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent may consult with legal counsel (who may be counsel for a Borrower), independent accountants and other experts selected by it, and shall not be liable for 72 any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. 9.05 Delegation of Duties. The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. 9.06 Resignation of Administrative Agent. The Administrative Agent may at any time give notice of its resignation to the Lenders, the L/C Issuer and SALIC. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with SALIC, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders and the L/C Issuer, appoint a successor Administrative Agent meeting the qualifications set forth above; provided that if the Administrative Agent shall notify SALIC and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders or the L/C Issuer under any of the Loan Documents, the retiring Administrative Agent shall continue to hold such collateral security until such time as a successor Administrative Agent is appointed) and (2) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender and the L/C Issuer directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section. Upon the acceptance of a successor's appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by SALIC to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between SALIC and such successor. After the retiring Administrative Agent's resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 11.04 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent. Any resignation by Bank of America as Administrative Agent pursuant to this Section shall also constitute its resignation as L/C Issuer. Upon the acceptance of a successor's appointment as Administrative Agent hereunder, (a) such successor shall succeed to and become 73 vested with all of the rights, powers, privileges and duties of the retiring L/C Issuer, (b) the retiring L/C Issuer shall be discharged from all of their respective duties and obligations hereunder or under the other Loan Documents, and (c) the successor L/C Issuer shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangement satisfactory to the retiring L/C Issuer to effectively assume the obligations of the retiring L/C Issuer with respect to such Letters of Credit. 9.07 Non-Reliance on Administrative Agent and Other Lenders. Each Lender and the L/C Issuer acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and the L/C Issuer also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder. 9.08 No Other Duties, Etc. Anything herein to the contrary notwithstanding, none of the Bookrunners, Arrangers or co-syndication agents listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent, a Lender or the L/C Issuer hereunder. 9.09 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Borrower, the Administrative Agent (irrespective of whether the principal of any Loan or L/C Obligation shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on any Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise (a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, L/C Obligations and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders, the L/C Issuer and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders, the L/C Issuer and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders, the L/C Issuer and the Administrative Agent under Sections 2.03(i) and (j), 2.08 and 11.04) allowed in such judicial proceeding; and (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and the L/C Issuer to make 74 such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders and the L/C Issuer, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.08 and 11.04. Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender or the L/C Issuer any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding. ARTICLE X. SALIC GUARANTEE 10.01 Unconditional Guarantee. For valuable consideration, receipt whereof is hereby acknowledged, and to induce the L/C Issuer and each Lender to make Credit Extensions to and on account of Scottish US, Scottish Dublin and Scottish UK (individually a "Guaranteed Borrower" and collectively the "Guaranteed Borrowers") and to induce the Administrative Agent to act hereunder, SALIC hereby unconditionally and irrevocably guarantees to each Lender, the L/C Issuer and the Administrative Agent the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all Obligations of the Guaranteed Borrowers, whether for principal, interest, fees, expenses, indemnification or otherwise, whether direct or indirect, absolute or contingent or now existing or hereafter arising (such Obligations being the "Guaranteed Obligations"). Without limiting the generality of the foregoing, SALIC's liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by any of the Guaranteed Borrowers to the Administrative Agent, the L/C Issuer or any Lender under this Agreement but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving such Guaranteed Borrower. This is a guarantee of payment and not of collection merely. 10.02 Guarantee Absolute. SALIC guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, regardless of any Law or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Lender or the Administrative Agent or the L/C Issuer with respect thereto. The Obligations of SALIC under this Article X are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against SALIC to enforce this Article X, irrespective of whether any action is brought against any of the Guaranteed Borrowers or whether any of the Guaranteed Borrowers is joined in any such action or actions. The liability of SALIC under this guarantee shall be irrevocable, absolute and unconditional irrespective of, and SALIC hereby irrevocably waives any defense it may now or hereafter have in any way relating to, any or all of the following: (a) any lack of validity or enforceability of this Agreement or any other agreement or instrument relating thereto; 75 (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from this Agreement; (c) any taking, exchange, release or non-perfection of any collateral or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; (d) any change, restructuring or termination of the corporate structure or existence of any of the Guaranteed Borrowers; or (e) any other circumstance (including, without limitation, any statute of limitations to the fullest extent permitted by applicable Law) which might otherwise constitute a defense available to, or a discharge of, SALIC, any of the Guaranteed Borrowers or a guarantor. This guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by any Lender, the L/C Issuer or the Administrative Agent upon the insolvency, bankruptcy or reorganization of any of the Guaranteed Borrowers or otherwise, all as though such payment had not been made. 10.03 Waivers. SALIC hereby expressly waives promptness, diligence, notice of acceptance, presentment, demand for payment, protest, any requirement that any right or power be exhausted or any action be taken against any of the Guaranteed Borrowers or against any other guarantor of all or any portion of the Guaranteed Obligations, and all other notices and demands whatsoever. (a) SALIC hereby waives any right to revoke this guaranty, and acknowledges that this guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future and regardless of whether the Guaranteed Obligations is reduced to zero at any time or from time to time. (b) SALIC acknowledges that it will receive substantial direct and indirect benefits from the financing arrangements contemplated herein and that the waivers set forth in this Article X are knowingly made in contemplation of such benefits. 10.04 Subrogation. SALIC will not exercise any rights that it may now or hereafter acquire against any of the Guaranteed Borrowers or any other insider guarantor that arise from the existence, payment, performance or enforcement of the Guaranteed Obligations under this Agreement, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of the Administrative Agent, the L/C Issuer or any other Lender against a Guaranteed Borrower or any other insider guarantor or any collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any of the Guaranteed Borrowers or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all of the Guaranteed Obligations and all other amounts payable under this guaranty shall have been paid in full in cash and the 76 Commitments shall have terminated. If any amount shall be paid to SALIC in violation of the preceding sentence at any time prior to the later of the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this guaranty and the termination of the Commitments, such amount shall be held in trust for the benefit of the Administrative Agent, the L/C Issuer and the Lenders and shall forthwith be paid to the Administrative Agent to be credited and applied to the Guaranteed Obligations and all other amounts payable under this guaranty, whether matured or unmatured, in accordance with the terms of this Agreement, or to be held as collateral for any Guaranteed Obligations or other amounts payable under this guaranty thereafter arising. SALIC acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by this Agreement and that the waiver set forth in this section is knowingly made in contemplation on such benefits. 10.05 Survival. This guaranty is a continuing guarantee and shall (a) remain in full force and effect until payment in full in cash of the Guaranteed Obligations and all other amounts payable under this guaranty and the termination of the Commitments and the expiration or cancellation of all Letters of Credit, (b) be binding upon SALIC, its successors and assigns, (c) inure to the benefit of and be enforceable by each Lender (including each assignee Lender pursuant to Section 11.06), the L/C Issuer and the Administrative Agent and their respective successors, transferees and assigns and (d) shall be reinstated if at any time any payment to a Lender, the L/C Issuer or the Administrative Agent hereunder is required to be restored by such Lender, the L/C Issuer or the Administrative Agent. Without limiting the generality of the foregoing clause (c), each Lender may assign or otherwise transfer its interest in any Loan to any other Person, and such other Person shall thereupon become vested with all the rights in respect thereof granted to such Lender herein or otherwise. ARTICLE XI. MISCELLANEOUS 11.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by SALIC or any other Borrower therefrom, shall be effective unless in writing signed by the Required Lenders and SALIC or the applicable Borrower, as the case may be, and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such amendment, waiver or consent shall: (a) waive any condition set forth in Section 4.01(a) without the written consent of each Lender; (b) extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02) without the written consent of such Lender; (c) postpone any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; 77 (d) reduce the principal of, or the rate of interest specified herein on, any Loan or L/C Borrowing, or (subject to clause (iii) of the second proviso to this Section 11.01) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; provided, however, that only the consent of the Required Lenders shall be necessary to amend the definition of "Default Rate" or to waive any obligation of any Borrower to pay interest or Letter of Credit Fees at the Default Rate; (e) change Section 2.12 or Section 8.03 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender; (f) change any provision of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; or (g) release SALIC from its obligations under Article X without the written consent of each Lender; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the L/C Issuer in addition to the Lenders required above, affect the rights or duties of the L/C Issuer under this Agreement or any Issuer Document relating to any Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; and (iii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender. 11.02 Notices; Effectiveness; Electronic Communication. (a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows: (i) if to the Borrowers, the Administrative Agent or the L/C Issuer, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 11.02; and (ii) if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire. Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have 78 been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b). (b) Electronic Communications. Notices and other communications to the Lenders and the L/C Issuer hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or the L/C Issuer pursuant to Article II if such Lender or the L/C Issuer, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrowers may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor. (c) Change of Address, Etc. Each of the Borrowers, the Administrative Agent and the L/C Issuer may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to SALIC, the Administrative Agent and the L/C Issuer. (d) Reliance by Administrative Agent, L/C Issuer and Lenders. The Administrative Agent, the L/C Issuer and the Lenders shall be entitled to rely and act upon any notices (including telephonic Loan Notices) purportedly given by or on behalf of any Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. Each Borrower shall indemnify the Administrative Agent, the L/C Issuer, each Lender and the Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of such Borrower. All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording. 11.03 No Waiver; Cumulative Remedies. No failure by any Lender or the Administrative Agent to exercise, and no delay by any such Person in exercising, any right, 79 remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 11.04 Expenses; Indemnity; Damage Waiver. (a) Costs and Expenses. SALIC shall pay all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent), in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated). Each Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the L/C Issuer in connection with the issuance, amendment, renewal or extension of any Letter of Credit issued for such Borrower's account or any demand for payment thereunder and (ii) all out-of-pocket expenses incurred by the Administrative Agent, any Lender or the L/C Issuer (including the fees, charges and disbursements of any counsel for the Administrative Agent, any Lender or the L/C Issuer), and, without duplication, all fees and time charges for attorneys who may be employees of the Administrative Agent, any Lender or the L/C Issuer, in connection with the enforcement or protection of its rights against such Borrower (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (B) in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. (b) Indemnification by Borrowers. Each Borrower shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender and the L/C Issuer, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee), and, without duplication, shall indemnify and hold harmless each Indemnitee from all fees and time charges and disbursements for attorneys who may be employees of any Indemnitee, incurred by any Indemnitee or asserted against any Indemnitee by any third party or by such Borrower arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby by such Borrower, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) any Loan made to or Letter of Credit issued for the account of such Borrower or the use or proposed use of the proceeds therefrom (including any refusal by the L/C Issuer to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by such Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to such Borrower or any of its Subsidiaries, or (iv) any actual or prospective 80 claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by such Borrower, and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (y) result from a claim brought by such Borrower against an Indemnitee for breach in bad faith of such Indemnitee's obligations hereunder or under any other Loan Document, if such Borrower has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction. (c) Reimbursement by Lenders. To the extent that any Borrower for any reason fails to indefeasibly pay any amount required under subsection (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), the L/C Issuer or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), the L/C Issuer or such Related Party, as the case may be, such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) or the L/C Issuer in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) or L/C Issuer in connection with such capacity. The obligations of the Lenders under this subsection (c) are subject to the provisions of Section 2.11(d). (d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable law, no Borrower shall assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof. No Indemnitee referred to in subsection (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby. (e) Payments. All amounts due under this Section shall be payable not later than ten Business Days after demand therefor. (f) Survival. The agreements in this Section shall survive the resignation of the Administrative Agent and the L/C Issuer, the replacement of any Lender, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all the other Obligations. 11.05 Payments Set Aside. To the extent that any payment by or on behalf of any Borrower is made to the Administrative Agent, the L/C Issuer or any Lender, or the Administrative Agent, the L/C Issuer or any Lender exercises its right of setoff, and such 81 payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent, the L/C Issuer or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender and the L/C Issuer severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to Federal Funds Rate from time to time in effect, in the applicable currency of such recovery or payment. The obligations of the Lenders and the L/C Issuer under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement. 11.06 Successors and Assigns. (a) Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Borrower may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the L/C Issuer and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Assignments by Lenders. Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans (including for purposes of this subsection (b), participations in L/C Obligations) at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender's Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than 82 $5,000,000 unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, SALIC otherwise consents (each such consent not to be unreasonably withheld or delayed); (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loans or the Commitment assigned; (iii) any assignment of a Commitment must be approved by the Administrative Agent and the L/C Issuer (such approval not to be unreasonably withheld or delayed) unless the Person that is the proposed assignee is itself a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); and (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500, and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.01, 3.04, 3.05, and 11.04 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, each Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section. (c) Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrowers, shall maintain at the Administrative Agent's Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by each of the Borrowers and the L/C Issuer at any reasonable time and from time to time upon reasonable prior notice. In addition, at any time that a request for a consent for a material or substantive change to the Loan Documents is pending, any Lender wishing to consult with other Lenders in connection therewith may request and receive from the Administrative Agent a copy of the Register. 83 (d) Participations. Any Lender may at any time, without the consent of, or notice to, any Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or SALIC or any of SALIC's Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender's participations in L/C Obligations) owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrowers, the Administrative Agent, the Lenders and the L/C Issuer shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 11.01 that affects such Participant. Subject to subsection (e) of this Section, each Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.01, 3.04 and 3.05 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 11.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.12 as though it were a Lender. (e) Limitation upon Participant Rights. A Participant shall not be entitled to receive any greater payment under Section 3.01 or 3.04 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with SALIC's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.01 unless SALIC is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrowers, to comply with Section 3.01(e) as though it were a Lender. (f) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note(s), if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. (g) Electronic Execution of Assignments. The words "execution," "signed," "signature," and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act. 84 (h) Resignation as L/C Issuer after Assignment. Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Commitment and Loans pursuant to subsection (b) above, Bank of America may, upon 30 days' notice to SALIC and the Lenders, resign as L/C Issuer. In the event of any such resignation as L/C Issuer, SALIC shall be entitled to appoint from among the Lenders a successor L/C Issuer hereunder; provided, however, that no failure by SALIC to appoint any such successor shall affect the resignation of Bank of America as L/C Issuer. If Bank of America resigns as L/C Issuer, it shall retain all the rights and obligations of the L/C Issuer hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as L/C Issuer and all L/C Obligations with respect thereto (including the right to require the Lenders to make Base Rate Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c)). 11.07 Treatment of Certain Information; Confidentiality. Each of the Administrative Agent, the Lenders and the L/C Issuer agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates' respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to a Borrower and its obligations, (g) with the consent of SALIC or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, the L/C Issuer or any of their respective Affiliates on a nonconfidential basis from a source other than a Borrower. For purposes of this Section, "Information" means all information received from a Borrower or any Subsidiary thereon relating to a Borrower or any Subsidiary thereof or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the L/C Issuer on a nonconfidential basis prior to disclosure by a Borrower or any Subsidiary thereof, provided that, in the case of information received from a Borrower or any Subsidiary thereof after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. 11.08 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender, the L/C Issuer and each of their respective Affiliates is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent, 85 to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender, the L/C Issuer or any such Affiliate to or for the credit or the account of any Borrower against any and all of the obligations of such Borrower now or hereafter existing under this Agreement or any other Loan Document to such Lender or the L/C Issuer, irrespective of whether or not such Lender or the L/C Issuer shall have made any demand under this Agreement or any other Loan Document and although such obligations of such Borrower may be contingent or unmatured or are owed to a branch or office of such Lender or the L/C Issuer different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Lender, the L/C Issuer and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender, the L/C Issuer or their respective Affiliates may have. Each Lender and the L/C Issuer agrees to notify SALIC and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. 11.09 Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the "Maximum Rate"). If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the applicable Borrower. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder. 11.10 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. 11.11 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the 86 Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Credit Extension, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding. 11.12 Severability. If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11.13 Replacement of Lenders. If any Lender requests compensation under Section 3.04, or if any Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01, or if any Lender is a Defaulting Lender or if any other circumstance exists hereunder that gives SALIC the right to replace a Lender as a party hereto, then SALIC may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 11.06), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that: (a) SALIC shall have paid to the Administrative Agent the assignment fee specified in Section 11.06(b); (b) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and L/C Advances, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 3.05) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the applicable Borrower (in the case of all other amounts); (c) in the case of any such assignment resulting from a claim for compensation under Section 3.04 or payments required to be made pursuant to Section 3.01, such assignment will result in a reduction in such compensation or payments thereafter; and (d) such assignment does not conflict with applicable Laws. A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling SALIC to require such assignment and delegation cease to apply. 11.14 Governing Law; Jurisdiction; Etc. (a) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 87 THE CHOICE OF GOVERNING LAW HAS BEEN MADE PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. (b) SUBMISSION TO JURISDICTION. EACH BORROWER IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK CITY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT, ANY LENDER OR THE L/C ISSUER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST ANY BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION. (c) WAIVER OF VENUE. EACH BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. (D) SERVICE OF PROCESS. ON OR PRIOR TO THE CLOSING DATE, THE BORROWER SHALL APPOINT CT CORPORATION SYSTEM (THE "PROCESS AGENT"), WITH AN OFFICE ON THE DATE HEREOF AT 111 EIGHTH AVENUE, NEW YORK, NY 10011, UNITED STATES, AS ITS AGENT TO RECEIVE ON ITS BEHALF AND ITS PROPERTY SERVICE OF THE SUMMONS AND COMPLAINTS AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING, PROVIDED THAT A COPY OF SUCH PROCESS IS ALSO MAILED IN THE MANNER PROVIDED IN SECTION 11.02. SUCH SERVICE MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO THE BORROWERS IN CARE OF THE PROCESS AGENT AT THE PROCESS AGENT'S ABOVE ADDRESS, AND EACH BORROWER HEREBY IRREVOCABLY AUTHORIZES AND DIRECTS THE PROCESS AGENT TO ACCEPT SUCH SERVICE ON ITS BEHALF. EACH PARTY HERETO ALSO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED 88 FOR NOTICES IN SECTION 11.02. NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW. 11.15 Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 11.16 USA PATRIOT Act Notice. Each Lender that is subject to the Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies the Borrowers, which information includes the name and address of each Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify such Borrower in accordance with the Act. 11.17 Judgment Currency. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of each Borrower in respect of any such sum due from it to the Administrative Agent or the Lenders hereunder or under the other Loan Documents shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "Agreement Currency"), be discharged only to the extent that on the Business Day following receipt by the Administrative Agent of any sum adjudged to be so due in the Judgment Currency, the Administrative Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Administrative Agent from any Borrower in the Agreement Currency, such Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Administrative Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Administrative Agent in such currency, the Administrative Agent agrees to return the amount of any excess to such Borrower (or to any other Person who may be entitled thereto under applicable law). 89 11.18 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. 90 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN) LTD. By: /s/ Elizabeth Murphy ----------------------------------- Name: Elizabeth Murphy --------------------------------- Title: CFO -------------------------------- SCOTTISH RE (DUBLIN) LIMITED By: /s/ Karina Lynch ----------------------------------- Name: Karina Lynch --------------------------------- Title: Manager -------------------------------- SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield ----------------------------------- Name: Oscar Scofield --------------------------------- Title: CEO/ President -------------------------------- SCOTTISH RE LIMITED By: /s/ David Huntley ----------------------------------- Name: David Huntley --------------------------------- Title: Chief Executive Officer -------------------------------- BANK OF AMERICA, N.A., as Administrative Agent, Lender and L/C Issuer By: /s/ Debra Basler ----------------------------------- Name: Debra Basler --------------------------------- Title: Senior Vice President -------------------------------- ABN AMRO BANK N.V. By: /s/ Neil R. Stein ----------------------------------- Name: Neil R. Stein --------------------------------- Title: Director -------------------------------- By: /s/ Michael DeMarco ----------------------------------- Name: Michael DeMarco --------------------------------- Title: Assistant Vice President -------------------------------- THE BANK OF NEW YORK By: /s/ Lizanne T. Eberle ----------------------------------- Name: Lizanne T. Eberle --------------------------------- Title: Vice President -------------------------------- BAYERISCHE HYPO UND VEREINSBANK AG, NEW YORK BRANCH By: /s/ William Orsini ----------------------------------- Name: William Orsini --------------------------------- Title: Managing Director HVB Group -------------------------------- By: /s/ Isabel Nunez ----------------------------------- Name: Isabel Nunez --------------------------------- Title: Director -------------------------------- BEAR STEARNS CORPORATE LENDING INC., as Lender and Co-Syndication Agent By: /s/ Victor Bulzacchelli ----------------------------------- Name: Victor Bulzacchelli --------------------------------- Title: Vice President -------------------------------- BNP PARIBAS By: /s/ Joshua Landau ----------------------------------- Name: Joshua Landau --------------------------------- Title: Vice President -------------------------------- By: /s/ Laurent Vanderzyppe ----------------------------------- Name: Laurent Vanderzyppe --------------------------------- Title: Director -------------------------------- COMERICA BANK By: /s/ Chatphet Saipetch ----------------------------------- Name: Chatphet Saipetch --------------------------------- Title: Assistant Vice President -------------------------------- COMMERZBANK AKTIENGESELLSCHAFT, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Arndt E. Bruns ----------------------------------- Name: Arndt E. Bruns --------------------------------- Title: Vice President -------------------------------- By: /s/ Maureen A. Carson ----------------------------------- Name: Maureen A. Carson --------------------------------- Title: Assistant Treasurer -------------------------------- HSBC BANK USA, NATIONAL ASSOCIATION By: /s/ David W. Nelson ----------------------------------- Name: David W. Nelson --------------------------------- Title: Managing Director -------------------------------- JPMORGAN CHASE BANK, N.A. By: /s/ Erin O'Rourke ----------------------------------- Name: Erin O'Rourke --------------------------------- Title: Vice President -------------------------------- UBS LOAN FINANCE LLC By: /s/ Barbara Ezell-McMichael ----------------------------------- Name: Barbara Ezell-McMichael --------------------------------- Title: Associate Director Banking Products Services US -------------------------------- By: /s/ Winslowe Ogbourne ----------------------------------- Name: Winslowe Ogbourne --------------------------------- Title: Associate Director Banking Products Services, US -------------------------------- WACHOVIA BANK, NATIONAL ASSOCIATION, as Lender and Co-Syndication Agent By: /s/ Karen Hanke ----------------------------------- Name: Karen Hanke --------------------------------- Title: Director -------------------------------- EX-10.45 7 ex10-45.txt ADMINISTRATIVE SERVICES AGREEMENT ADMINISTRATIVE SERVICES AGREEMENT between SECURITY LIFE OF DENVER INSURANCE COMPANY SECURITY LIFE OF DENVER INTERNATIONAL LIMITED (referred to collectively as the Companies) and SCOTTISH RE (U.S.), INC. (referred to as the Administrator) Dated as of December 31, 2004 TABLE OF CONTENTS ARTICLE I DEFINITIONS..........................................................2 1.01 Definitions..................................................2 ARTICLE II ADMINISTRATIVE SERVICES.............................................3 2.01 Appointment and Acceptance of Appointment....................3 2.02 Administrative Services......................................4 2.03 Legally Required Company Actions.............................6 2.04 Compensation.................................................7 2.05 Reserve Certification........................................7 2.06 Novations....................................................7 ARTICLE III BOOKS AND RECORDS; BANK ACCOUNTS...................................8 3.01 Transfer of Records..........................................8 3.02 Maintenance of Books and Records.............................8 3.03 Quarterly Accountings and Payments...........................8 3.04 Bank Accounts and Lockboxes..................................9 ARTICLE IV CAPACITY..........................................................10 4.01 Capacity....................................................10 ARTICLE V REGULATORY MATTERS..................................................10 5.01 Responsibilities of the Parties.............................10 ARTICLE VI DURATION...........................................................10 6.01 Duration....................................................10 6.02 Termination.................................................10 6.03 Survival....................................................12 ARTICLE VII INSURANCE.........................................................12 ii 7.01 Liability Insurance.........................................12 7.02 Fidelity Bond...............................................12 7.03 Qualifying Insurers.........................................12 ARTICLE VIII ARBITRATION......................................................12 8.01 Arbitration.................................................12 8.02 Arbitration Procedure.......................................13 ARTICLE IX INDEMNIFICATION....................................................14 9.01 Administrator's Obligation to Indemnify.....................14 9.02 Companies' Obligation to Indemnify..........................14 9.03 Certain Definitions and Procedures..........................14 ARTICLE X MISCELLANEOUS.......................................................15 10.01 Notices.....................................................15 10.02 Entire Agreement............................................16 10.03 Successors and Assigns......................................16 10.04 Captions....................................................16 10.05 Governing Law and Jurisdiction..............................16 10.06 No Third Party Beneficiaries................................17 10.07 Expenses....................................................17 10.08 Counterparts................................................17 10.09 Severability................................................17 10.10 Waiver of Jury Trial; Multiplied and Punitive Damages.......17 10.11 Equitable Rights............................................17 10.12 Confidentiality.............................................18 iii ADMINISTRATIVE SERVICES AGREEMENT THIS ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement") is made and entered into as of December 31, 2004 (the "Closing Date") by and between Security Life of Denver Insurance Company, a Colorado-domiciled stock life insurance company ("SLD"), Security Life of Denver International Limited, a Bermuda-domiciled life insurance company ("SLDI" and, together with SLD, the "Companies") and Scottish Re (U.S.), Inc., a Delaware-domiciled life insurance company (the "Administrator"). WHEREAS, the Companies, Scottish Re Group Limited, the Administrator and Scottish Re Life (Bermuda) Limited, a Bermuda insurance company ("Scottish Bermuda"), have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which the Administrator has agreed to reinsure and administer the individual life reinsurance business of the Companies; and WHEREAS, in accordance with the terms and conditions of the Asset Purchase Agreement, SLD and the Administrator have entered into an SLD Coinsurance Agreement and an SLD Coinsurance / Modified Coinsurance Agreement, and SLDI and Scottish Bermuda have entered into an SLDI Coinsurance Agreement, an SLDI Coinsurance / Modified Coinsurance Agreement, and an SLDI Coinsurance Funds Withheld Agreement, all of even date herewith and referred to herein collectively as the "Reinsurance Agreements," pursuant to which each Company, as ceding company, has ceded and transferred the Reinsured Liabilities under the Covered Insurance Contracts to the Administrator and Scottish Bermuda, respectively, as reinsurer, and the Administrator and Scottish Bermuda have reinsured and assumed such Reinsured Liabilities; and WHEREAS, the parties hereto have agreed, on the terms and conditions set forth herein, that the Administrator will perform certain administrative functions on behalf of the Companies with respect to the Administered Business (as defined below); and WHEREAS, pursuant to terms of the Transition Services Agreement, the Companies will provide various of such administrative functions to the Administrator for the Administered Business for the periods specified therein; and NOW, THEREFORE, in consideration of the mutual promises and undertakings contained herein and in the Asset Purchase Agreement and the Reinsurance Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Companies and the Administrator agree as follows: 1 ARTICLE I DEFINITIONS 1.01 Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. The following terms shall have the respective meanings set forth below throughout this Agreement: "Administered Business" means collectively the Business associated with the Covered Insurance Contracts and the business retroceded from the Administrator and Scottish Bermuda to SLD under the Industry Risks Retrocession Agreements. "Administrative Services" has the meaning set forth in Section 2.01. "Administrator" has the meaning set forth in the preamble. "Agreement" has the meaning set forth in the preamble. "Asset Purchase Agreement" has the meaning set forth in the preamble. "Books and Records" shall have the same meaning as in the Asset Purchase Agreement, but, under this Agreement, only as applicable to the Administered Business. "Closing Date" has the meaning set forth in the preamble. "Commissions" means all commissions, expenses allowances, benefit credits and other fees and compensation payable to Persons who marketed or produced the Administered Business and to ceding companies. "Confidential Information" shall have the meaning set forth in Section 10.12(a). "Corporate Services" has the meaning set forth in Section 2.01. "Covered Insurance Contracts" means all reinsurance agreements reinsured pursuant to the Reinsurance Agreements. "IIM" means collectively ING Investment Management LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of ING. "ING Treasury" means the ING Treasury Services, a department of ING North America Insurance Corporation, a wholly-owned subsidiary of ING. "Legally Required Company Actions" means any actions each Company is required by Applicable Law or Governmental Authorities to take without the Administrator acting on its 2 behalf, but only to the extent such actions are exclusively related to the Administered Business and relate to actions to be taken from and after the Closing Date. "Outbound Retrocession Contracts" means all reinsurance agreements under which each Company has retroceded to reinsurers (whether Affiliates or non-Affiliates) risks with respect to the Administered Business. "Premiums" means premiums, considerations, deposits and similar receipts with respect to the Administered Business. "Quarterly Accounting" shall mean a quarterly accounting with respect to the Administered Business prepared in accordance with SAP and delivered by the Administrator to each Company in accordance with the provisions of Section 3.03 hereof. "Reinsurance Agreements" has the meaning set forth in the preamble. "Reinsured Liabilities" means liabilities reinsured pursuant to the Reinsurance Agreements. "Scottish Bermuda" has the meaning set forth in the preamble. "SLD Asset Management Agreement" means the Asset Management Agreement dated as of the date hereof between SLD and the Administrator. "Termination Date" shall mean the date on which this Agreement is terminated in accordance with the terms and conditions of Article VI hereof. "Unauthorized Access" shall have the meaning set forth in Section 10.12(c). ARTICLE II ADMINISTRATIVE SERVICES 2.01 Appointment and Acceptance of Appointment. (a) Except as expressly provided herein or unless specifically required by Applicable Law, each Company hereby appoints the Administrator, for the period specified in Article VI hereof, to provide all services required to administer the Administered Business, including, without limitation, the administrative services specified in Section 2.02 (collectively, the "Administrative Services"), and the Administrator hereby accepts such appointment and agrees to perform such Administrative Services. For the avoidance of doubt, other than (i) those Administrative Services expressly provided for in this Agreement and (ii) any other administrative services to the extent such administrative services are required exclusively with respect to the Administered Business, Administrative Services do not include any services 3 related to maintaining the corporate identity or existence or regulatory compliance of the Companies or any successor entities (the "Corporate Services") (b) The parties shall cooperate fully in the transfer of responsibility for the performance of the Administrative Services from the Companies to the Administrator. All costs and expenses relating to such transfer shall be borne by the Administrator; provided, however, that no internal costs are to be allocated by either Company to the Administrator except pursuant to Section 2.03(b) of this Agreement and pursuant to the Transition Services Agreement. The Administrator agrees to send to all counterparties to the Covered Insurance Contracts a written notice, provided by the Administrator prior to the Closing and reasonably acceptable to the Companies, advising that the Administrator has been appointed by the Companies to provide the Administrative Services. The Administrator shall send such notice, by first class U.S. mail, at its own expense, promptly after receipt thereof but in no event more than thirty (30) calendar days after the Closing Date. (c) In order to assist and to more fully evidence the substitution of the Administrator in the place and stead of the Companies, each Company shall deliver to the Administrator a reasonable and appropriate power of attorney to permit the Administrator to perform its obligations hereunder. The power of attorney will include, without limitation, the power and authority to execute the Unexecuted Assumed Reinsurance Contracts and the Unexecuted Retroceded Reinsurance Contracts. Until such time as such powers of attorney are delivered to the Administrator, it is acknowledged and agreed that the Administrator is hereby granted full power and authority to execute the Unexecuted Assumed Reinsurance Contracts and the Unexecuted Retroceded Reinsurance Contracts. 2.02 Administrative Services. The Administrator agrees to perform all Administrative Services and is hereby authorized and licensed to do so on behalf of the Companies where appropriate. The Administrator shall perform the Administrative Services in a professional and timely manner and in conformance with applicable industry standards, the terms and conditions of the Administered Business and in substantial conformance with Applicable Law. The Administrator acknowledges that the performance of the material Administrative Services including, but not limited to, all reporting obligations to the Companies required by this Agreement, in a professional and timely manner is of critical importance to the Companies. Unless specifically provided for in this Agreement or the Transition Services Agreement, and except for Legally Required Company Actions, as between the parties, the Companies shall not be obligated to provide any services relating to the Administered Business, and the Administrator shall not be obligated to provide or be obligated for any costs of any Corporate Services. The Administrator shall not be liable for any failure to provide any Administrative Service due to the Companies' failure to deliver any Books and Records to the Administrator within a reasonable period of time after the Administrator's request for such Books and Records. The Administrative Services include, without limitation, the following: (a) collecting Premiums and other amounts due with respect to the Administered Business; 4 (b) (i) managing the investment assets supporting the Administered Business in accordance with the investment guidelines contained in Exhibit U attached to the Asset Purchase Agreement; (ii) monitoring the activities of the investment subadvisor (if any) under the SLD Asset Management Agreement, ensuring its compliance with the investment guidelines attached to the SLD Asset Management Agreement and replacing such investment subadvisor if necessary provided any such replacement shall be subject to SLD's consent (which consent shall not be unreasonably withheld); and (ii) providing IIM and ING Treasury with the information described on Schedule A (as may be amended from time to time) to permit IIM and ING Treasury to perform the services identified on Schedule A; (c) paying and administering claims under the Reinsurance Agreements (including, without limitation, any disputes or litigation with respect thereto or the payment of Commissions due thereunder), provided, that the Companies shall cooperate with the Administrator by making available any information necessary to respond to any such dispute or litigation on a timely basis; (d) providing to the Companies all information with respect to the Administered Business required in order for the Companies to timely make any required Tax filing; (e) except with respect to reports and data identified in Schedule A as being prepared by IIM, preparing all accounting and actuarial information (including GAAP information) related to the Administered Business that is necessary for the Companies to timely meet accounting or Tax requirements, including but not limited to preparation of quarterly and annual financial statement data necessary for inclusion in the Companies' statutory and GAAP financial statements and delivery of such data in a form usable by the Companies as more specifically set forth on Schedule B; (f) administering all Outbound Retrocession Contracts and Assigned Contracts including, without limitation, paying all reinsurance premiums and collecting all reinsurance recoverables due the ceding company under the Outbound Retrocession Contracts; (g) subject to the terms and conditions of Section 5.01 hereof, providing information and reasonable access to personnel with respect to, and reasonable cooperation with respect to the Companies' efforts to reply to all regulatory compliance matters to the extent such matters relate exclusively to the Administered Business (excluding any legal services); 5 (h) providing such subcertifications with respect to the Administered Business as may be required to enable the Companies to meet their requirements (or those of their parent companies) under the Sarbanes-Oxley Act of 2002 or any Applicable Law requiring the making of similar certifications (excluding any legal services or independent audit services); (i) consulting with the Companies and providing necessary cash flow testing with respect to the Administered Business retroceded on a modified coinsurance basis by SLD to SLDI and further retroceded to Scottish Bermuda pursuant to the SLDI Coinsurance / Modified Coinsurance Agreement; (j) providing a schedule to the Companies by May 1 of each year of its calculation of the net consideration under each Reinsurance Agreement for the preceding taxable year, in order to satisfy such Company's obligations under Section 6.01(d) of each Reinsurance Agreement; (k) funding the SLD and SLDI reinsurance disbursement accounts on a daily basis; and (l) processing and allocating experience refunds between the Business and any other business unit of the Companies. 2.03 Legally Required Company Actions. (a) To the extent the Administrator is made aware of any Legally Required Company Actions, the Administrator will give each Company notice of such Legally Required Company Action, including, without limitation, filings with insurance regulators, other Governmental Authorities and guaranty associations and filings of Tax returns with taxing authorities, which, in each case, relate to the Administered Business. Each Company agrees to act in good faith to utilize the Administrator to the greatest extent practicable to limit the expenses of such Company that the Administrator is required to reimburse under Section 2.03(b). Notwithstanding the foregoing, nothing in this Agreement requires the Administrator to provide legal advice to the Companies. In addition, no action taken by the Administrator pursuant to this Agreement shall constitute legal advice. 6 (b) The Administrator will, promptly upon either Company's request therefor, compensate such Company for the performance of any Legally Required Company Actions; provided, however, that there will be no charge for de minimis administrative functions such as the execution of documents and similar ministerial activities; provided further, however, that, to the extent such Legally Required Company Actions are performed by or on behalf of Affiliates other than the Companies or relate to any business other than the Administered Business, the Administrator shall only be required to compensate the Companies pursuant to this Section 2.03(b) for the pro rata portion of such Legally Required Company Actions relating to such performance by or on behalf of the Companies or relating exclusively to the Administered Business. The compensation and reimbursement referred to in this Section 2.03(b) shall be based on such Company's fully-allocated costs, including a proportionate share of corporate overhead, as detailed in invoices to the Administrator. 2.04 Compensation. (a) The Administrator agrees to perform the Administrative Services with respect to the Administered Business at its own expense and without any rights of reimbursement from the Companies, in consideration of the Companies having entered into the Asset Purchase Agreement, the Reinsurance Agreements and other Related Agreements and for other good and valuable consideration, the receipt of which is hereby acknowledged. (b) In consideration of IIM's and ING Treasury's providing of services to the Companies under Schedule A, the Administrator will reimburse IIM and ING Treasury for any fees or costs charged by any custodian for the investment assets to which such services relate. 2.05 Reserve Certification. (a) The Administrator shall provide SLD annually no later than January 31st of each year a certification of its appointed actuary certifying that the Reserves under the Reinsurance Agreements relating to SLD (including without limitation the so-called "XXX reserves") are calculated in accordance with SAP consistent with the applicable section 2.3 of each of the SLD Coinsurance Agreement and SLD Coinsurance / Modified Coinsurance Agreement. (b) The Administrator shall also provide SLDI annually no later than February 20th of each year an actuarial certification by its approved actuary that the Reserves, the DAC Asset and the Loss Reserve Redundancy calculated under Section 2.3 of each of the Reinsurance Agreements to which SLDI is a party are calculated in compliance with the BMA requirements. (c) The certifications required by this Section 2.05 shall be subject to any knowledge or other qualifications that the appointed actuary for SLD or SLDI, as the case may be, is permitted to take in the corresponding certification such actuary is required to submit to the relevant insurance regulatory authority. 2.06 Novations. To the extent the Administrator in its sole discretion elects to novate any of the Covered Insurance Contracts, at the request of the Administrator, each Company shall 7 use commercially reasonable efforts to cooperate with the Administrator to novate any of the Covered Insurance Contracts to the Administrator. Such novation shall completely release and extinguish such Company's liabilities under each such novated Covered Insurance Contract and each such novated Covered Insurance Contract shall not be deemed a part of the Administered Business following the effective date of the novation. ARTICLE III BOOKS AND RECORDS; BANK ACCOUNTS 3.01 Transfer of Records. Except as provided in the Bill of Sale and General Assignment, the Transition Services Agreement or the Technology Transfer and License Agreement, the Companies shall deliver the Books and Records to the Administrator on the Closing Date. The Books and Records and the books and records maintained by the Administrator in accordance with the terms of this Agreement shall be made available to each Company and its representatives in accordance with the Asset Purchase Agreement. 3.02 Maintenance of Books and Records. The Administrator shall maintain (including, without limitation, backing up its computer files, and maintaining facilities and procedures for safekeeping and retaining documents) books and records of all transactions pertaining to the Administered Business (i) in accordance with prudent standards of insurance record-keeping, the terms and conditions of the Administered Business and in substantial compliance with Applicable Law; and (ii) in a manner no less prudent than the manner in which such books and records are maintained by the Administrator in its other business. Upon any termination of this Agreement, the Books and Records and all books and records maintained at such time in accordance herewith by the Administrator pertaining to the Administered Business shall be delivered promptly to the Companies or such other person or entity as the Companies shall designate in writing; provided, however, that the Administrator may keep copies of such Books and Records for archival and regulatory purposes. 3.03 Quarterly Accountings and Payments. (a) Beginning with and after the first calendar quarter following the calendar quarter during which the Closing Date falls, the Administrator shall provide each Company with a Quarterly Accounting as of the end of each calendar quarter, no later than thirty (30) calendar days after the end of such quarter; provided, however, that the Administrator shall deliver the final Quarterly Accounting no later than thirty (30) calendar days after the date on which this Agreement terminates in accordance with Article VI hereof; provided, further, that in the event that subsequent data or calculations require revision of the final Quarterly Accounting, the required revision and any appropriate payments shall be made in cash by the parties five (5) Business Days after they mutually agree as to the appropriate revision. The Administrator shall provide such Quarterly Accounting in a format that is mutually acceptable to the Companies and the Administrator. 8 (b) If a Quarterly Accounting reflects a balance due to either Company, the amount(s) shown as due shall be paid by the Administrator, within five (5) Business Days of the delivery of the Quarterly Accounting. If (i) a Quarterly Accounting reflects a balance due to the Administrator from either Company and (ii) such Company does not object to the Quarterly Accounting within five (5) Business Days of its delivery, the amount(s) shown as due shall be paid by such Company to the Administrator within seven (7) Business Days after the date on which the Quarterly Accounting was delivered. Amounts due from either party pursuant to this Agreement shall be paid net of amounts due from the other party. 3.04 Bank Accounts and Lockboxes. (a) During the term of this Agreement, the Administrator shall ensure that all amounts collected from ceding companies and retrocessionaires with respect to the Administered Business are deposited in bank accounts and lockboxes owned by the Companies and not in any accounts or lockboxes owned by the Administrator. (b) Provided that a Triggering Event shall not have occurred and be continuing, SLD shall give the Administrator non-exclusive authority over the bank accounts and lockboxes of SLD used in the operation of the Administered Business. Upon the occurrence of any Triggering Event, SLD shall be entitled to revoke such authority. The Administrator shall, on a daily basis, transfer (i) amounts deposited in such bank accounts and lock boxes of SLD that are attributable to the Administered Business to Administrator's bank accounts and lockboxes, and (ii) amounts deposited in such bank accounts and lock boxes of SLD that are not attributable to the Administered Business to other bank accounts and lock boxes of SLD designated by SLD. For the avoidance of doubt, the Administrator shall not be responsible for any funds withdrawn by SLD from any bank account and lockbox owned by SLD. In the event SLD inappropriately withdraws and fails to pay over any such funds withdrawn from any bank account or lockbox owned by SLD, the Administrator shall be entitled to offset the amount thereof against any amounts due SLD through the Quarterly Accounting. (c) Provided that a Triggering Event shall not have occurred and be continuing, SLDI shall pay over to the Administrator on a daily basis all funds deposited in any SLDI bank account or lockbox that are attributable to the Administered Business. If SLDI establishes any bank accounts or lockboxes to be used exclusively for the Administered Business, SLDI shall give the Administer non-exclusive authority over such bank accounts and lockboxes, and upon the occurrence of any Triggering Event, SLDI shall be entitled to revoke such authority. For the avoidance of doubt, the Administrator shall not be responsible for any funds withdrawn by SLDI from any bank account and lockbox owned by SLDI. In the event SLDI inappropriately withdraws and fails to pay over any such funds withdrawn from any bank account or lockbox owned by SLDI, the Administrator shall be entitled to offset the amount thereof against any amounts due SLDI through the Quarterly Accounting. (d) The Administrator shall be permitted to utilize the Companies' names on check stock in making disbursements in accordance with this Agreement. 9 3.05 Disaster Recovery Plan. The Administrator shall at all times maintain security and disaster recovery procedures to protect data used by the Administrator to perform the Administrative Services as well as the Administrator's networks and systems utilized in connection with the services provided hereunder, all in accordance with commercially reasonable practices. ARTICLE IV CAPACITY 4.01 Capacity. The Administrator shall at all times maintain all necessary licenses, authorizations, permits and qualifications from Governmental Authorities under Applicable Laws that the Administrator is required to maintain in order to perform the Administrative Services in the manner required by this Agreement. ARTICLE V REGULATORY MATTERS 5.01 Responsibilities of the Parties. If the Companies or the Administrator receives notice of, or otherwise becomes aware of any inquiry, investigation, examination, audit or proceeding by Governmental Authorities, relating to the Administered Business, the Companies or the Administrator, as applicable, shall promptly notify the other party thereof, whereupon the parties shall cooperate in good faith to resolve such matter in a mutually satisfactory manner and shall act reasonably in light of the parties' respective interests in the matter at issue. Notwithstanding the immediately preceding sentence, neither the Administrator nor the Companies shall be relieved or discharged from any liability or obligation which it has incurred or assumed in connection with such matter under the terms of this Agreement or any of the Asset Purchase Agreement, the Reinsurance Agreements or other Related Agreements. ARTICLE VI DURATION 6.01 Duration. This Agreement shall commence on the date of its execution and, shall continue until it is terminated under Section 6.02. 6.02 Termination. (a) Subject to the provisions regarding survivability set forth in Section 6.03 hereof, this Agreement shall terminate: (i) at any time upon the mutual written consent of the parties hereto, which writing shall state the effective date of termination, and consistent with 10 Section 6.02(b) hereof, shall set forth in reasonable detail the procedures for transferring the Administrative Services to the Companies or the Companies' designee; (ii) automatically upon the termination of all of the Reinsurance Agreements in accordance with the terms thereof; or (iii) at the option of the Companies, upon written notice to the Administrator, on the occurrence of any of the following events: (A) Administrator becomes subject to dissolution, liquidation, conservation, rehabilitation, bankruptcy, statutory reorganization, receivership, compulsory composition, or similar proceedings in any jurisdiction, or if creditors of Administrator take over its management, or if Administrator otherwise enters into any arrangement with creditors, or makes an assignment for the benefit of creditors, or if any significant part of Administrator's undertakings or property is impounded or confiscated by action of any Governmental Authority; or (B) there is a material breach by the Administrator of any term or condition of this Agreement that is not cured by the Administrator within thirty (30) days of receipt of written notice from the Companies of such breach or act. (b) Following any termination of this Agreement (other than a termination resulting from the termination of all liabilities of the Companies under all Insurance Contracts in accordance with their respective terms), the Administrator shall cooperate fully with the Companies in effecting the prompt transfer of the Administrative Services and transfer of all books and records maintained by the Administrator pursuant to Section 3.02 hereof or other applicable provisions of the Asset Purchase Agreement or Related Agreements (or, where appropriate, copies thereof) to the Companies or the Companies' designee, so that the Companies or their designee will be able to perform the services required under this Agreement without interruption following any such termination. In addition following any such termination, the Administrator will cooperate with the Companies in connection with any regulatory or tax audits relating to any period during which the Administrator was providing services hereunder. (c) If this Agreement is terminated in connection with a recapture of the Covered Insurance Contracts pursuant to the Reinsurance Agreements by the Companies, the Administrator shall comply with Section 6(c) of the Technology Transfer and License Agreement. (d) Following any termination of this Agreement pursuant to Section 6.02(a)(iii), the Administrator shall reimburse the Companies for any out-of-pocket cost arising as a result of 11 such termination, including, without limitation, (i) the cost of transitioning the Administrative Services to a substitute provider or the Companies, (ii) any fees paid to any such substitute provider and (iii) any costs incurred by the Companies with respect to the Administrative Services after termination of this Agreement. 6.03 Survival. The provisions of Sections 3.02, 6.02(b), 6.02(c), 6.02(d), Article IX, Sections 10.01, 10.05, 10.07, 10.09, 10.10, 10.11 and 10.12 shall survive the termination of this Agreement. ARTICLE VII INSURANCE 7.01 Liability Insurance. The Administrator shall maintain errors and omissions liability coverages with limits and retention amounts in commercially prudent amounts consistent with industry standards, to cover any loss arising as a result of any real or alleged negligence, errors or omissions on the part of the Administrator's officers, agents or employees in any aspect of the performance of services under this Agreement. 7.02 Fidelity Bond. The Administrator shall maintain fidelity bond coverage in a bond amount and a retention amount that are commercially prudent and consistent with industry standards to cover any loss due to the misdeeds of the Administrator's officers, employees or agents in any respect of the performance of services under this Agreement. 7.03 Qualifying Insurers. The Administrator shall obtain the coverages specified in Sections 7.01 and 7.02 hereof from insurers having an A.M. Best Company rating of at least A-, a Standard & Poor's Corporation insurer financial strength rating of at least BBB+ and/or a Moody's Investors Services, Inc. claims-paying ability rating of at least Baa1. In the event that the ratings of an insurer which has issued one or more of the coverages specified in Sections 7.01 and 7.02 are downgraded so that such insurer would no longer qualify to issue such coverage under the provisions of the preceding sentence, the Administrator shall promptly obtain replacement coverage from another insurer that so qualifies. ARTICLE VIII ARBITRATION 8.01 Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLD Closing Statement and the assets to be transferred to the Administrator, the SLD Reserve Trust Account and the SLD Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC 12 tax, which shall be resolved in accordance with Article VI of each Reinsurance Agreement, or (iii) matters relating to whether a Triggering Event has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 8.02. (b) The parties intend this Section 8.01 to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 8.01(a), the other party may request the court specified in Section 10.05 to compel arbitration in accordance with the Federal Arbitration Act. 8.02 Arbitration Procedure. The Companies and the Administrator intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 8.01(a)) be resolved without resort to any litigation. Accordingly, the Companies and the Administrator agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Companies and the Administrator agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Commercial Arbitration Rules of the American Arbitration Association. The arbitration hearing will be before a panel of three disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of either Company or any of its Affiliates. The Companies and the Administrator will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either the Companies or the Administrator fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the American Arbitration Association will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including without limitation each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Companies or the 13 Administrator) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 10.05. In no event may the arbitrators award punitive or exemplary damages, except for the liable party's fraud, theft, embezzlement or other intentional acts or omissions of bad faith. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE IX INDEMNIFICATION 9.01 Administrator's Obligation to Indemnify. The Administrator hereby agrees to indemnify, defend and hold harmless each Company and its Affiliates and their respective directors, officers and employees (collectively, the "Company Indemnified Parties") from and against all Losses asserted against, imposed upon or incurred by any Company Indemnified Party arising from: (i) any breach or nonfulfillment by the Administrator of, or any failure by the Administrator to perform, any of the covenants, terms or conditions of, or any of its duties or obligations under, this Agreement except to the extent that such breach, nonfulfillment or failure is caused by the actions of any Company Indemnified Party; (ii) any third-party claims arising out of the administration of a Covered Insurance Contract, or (iii) any successful enforcement of this indemnity. For the avoidance of doubt, the Administrator will not indemnify any Company Indemnified Party for any Losses arising from any Corporate Services except to the extent that any such Loss is caused by the actions of any Administrator Indemnified Parties. 9.02 Companies' Obligation to Indemnify. Each Company hereby agrees to severally and not jointly indemnify, defend and hold harmless the Administrator and its Affiliates and their respective directors, officers and employees (collectively, the "Administrator Indemnified Parties") from and against all Losses asserted against, imposed upon or incurred by any Administrator Indemnified Party arising from: (i) any breach or nonfulfillment by such Company of, or any failure by such Company to perform, any of the covenants, terms or conditions of, or any of its duties or obligations under, this Agreement except to the extent that such breach, nonfulfillment or failure is caused by the actions of any Administrator Indemnified Party; or (ii) any successful enforcement of this indemnity. 9.03 Certain Definitions and Procedures. In the event either the Administrator or the Companies shall have a claim for indemnity against the other party under the terms of this Agreement with respect to a third-party claim, the parties shall follow the procedures set forth in Section 10.3 of the Asset Purchase Agreement. The parties hereto shall follow the procedures set forth in Article VIII hereof with respect to any other claims for indemnity hereunder. 14 ARTICLE X MISCELLANEOUS 10.01 Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified mail, postage prepaid, by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: To Companies: Security Life of Denver Insurance Company Security Life of Denver International Limited Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 15 To Administrator: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel With a copy to: Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, L.L.P 125 W. 55th Street New York, NY 10019 10.02 Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements and the Confidentiality Agreement, and other documents delivered pursuant hereto, constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them with respect thereto. 10.03 Successors and Assigns. The rights and obligations of the parties under this Agreement shall not be subject to assignment. The terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by and against the successors of the parties hereto. The Administrator may not subcontract the performance of the Administrator hereunder to any subcontractor that is not an Affiliate of the Administrator without the Companies' prior written approval, such approval not to be unreasonably withheld or delayed; provided however, the Administrator (i) shall remain primarily responsible under this Agreement for any and all obligations with respect to such subcontracted administrative services as are undertaken by such subcontractor and (ii) shall be responsible for compliance by any such subcontractor with the terms and conditions of this Agreement and for any acts or omissions of such subcontractor, 10.04 Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 10.05 Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in Colorado, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by U.S. registered mail addressed to such party in accordance with Section 10.01 hereof shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any 16 objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. 10.06 No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 10.07 Expenses. Except as otherwise provided herein, the parties hereto shall each bear their respective expenses incurred in connection with the negotiation, preparation, execution, and performance of this Agreement and the Related Agreements and the transactions contemplated hereby and thereby, including, without limitation, all fees and expenses of Representatives. 10.08 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. 10.09 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. 10.10 Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any first party action filed by the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby, except for the liable party's fraud, theft, embezzlement or other intentional acts or omissions of bad faith. 10.11 Equitable Rights. The Administrator acknowledges and agrees that money damages would not be a sufficient remedy for any failure of the Administrator to provide the 17 services required hereunder in compliance with the terms of this Agreement and that the Companies shall be entitled to seek equitable relief, including, without limitation, injunction and specific performance, as a remedy for such non-performance or such breach by the Administrator and that the Administrator shall not oppose the granting of such equitable relief, unless such non-performance or breach was caused primarily by the act or omission of the Companies. Such remedy shall not be deemed to be the exclusive remedy for breach of this Agreement, but shall be in addition to the other remedies available to a party under this Agreement. 10.12 Confidentiality. (a) Confidential Information. Each party hereto shall use at least the same standard of care in the protection of Confidential Information of the other party as it uses to protect its own confidential or proprietary information; provided that such Confidential Information shall be protected in at least a reasonable manner. For purposes of this Agreement, "Confidential Information" includes all confidential or proprietary information and documentation of any party hereto, including the terms of this Agreement, including with respect to each party, all of its software (including source code and object code), documentation, data, its customer data, software and confidential information of third parties as to which such party owes a duty of confidentiality, financial information, information relating to the other party's planned or existing computer systems, systems architecture, computer hardware, methods of processing and operational methods, sales, profits, organizational restructuring, new business initiatives, proprietary and confidential information that describes the other party's insurance and financial products (including actuarial calculations, product designs, and how such products are administered and managed), proprietary and confidential information that describes the other party's product strategies or tax interpretations or tax positions or the treatment of any item, all reports, exhibits, and other documentation prepared by any of its Affiliates. Each party hereto shall use the Confidential Information of the other party only in connection with the purposes of this Agreement and shall make such Confidential Information available only to its employees, permitted subcontractors or agents having a "need to know" with respect to such purpose. Each party hereto shall advise its respective employees, permitted subcontractors and agents with access to any Confidential Information of such party's obligations under this Agreement. The obligations in this Section 10.12 will not restrict disclosure by a party pursuant to Applicable Law, or by order or request of any Government Authority, subject to Section 10.12(b) hereof. Confidential Information of a party will not be afforded the protection of this Section if such Confidential Information was (A) developed by the other party independently as shown by its written business records regularly kept, (B) rightfully obtained by the other party without restriction from a third party, (C) publicly available other than through the fault or negligence of the other party, or (D) rightfully in the possession of the other party and not subject to any duty of confidentiality as of the date of this Agreement. (b) Compulsory Disclosure. If any party is requested or required to disclose Confidential Information of the other pursuant to any judicial or administrative process, then such receiving party shall promptly notify the other party to this Agreement in writing of such request or requirement. The party whose Confidential Information is requested or required to be 18 disclosed shall either (i) promptly seek protective relief from such disclosure obligation or (ii) direct the receiving party to comply with such request or requirement. The party in receipt of Confidential Information of the other party shall cooperate with efforts of the other party to maintain the confidentiality of such information or to resist compulsory disclosure thereof, but any costs incurred by the receiving party shall be reimbursed by the other party, except for costs of the receiving party's employees. If, after a reasonable opportunity to seek protective relief, such relief is not obtained by the party whose Confidential Information is subject to discovery or disclosure, or if such party fails to obtain such relief, the receiving party may disclose such portion of such Confidential Information that such party reasonably believes, on the basis of advice of such party's counsel, such party is legally obligated to disclose. (c) Unauthorized Acts. Each party hereto shall (i) notify the other party promptly of any unauthorized possession, use, or knowledge of any Confidential Information by any person which shall become known to it, any attempt by any person to gain possession of Confidential Information without authorization or any attempt to use or acquire knowledge of any Confidential Information without authorization (collectively, "Unauthorized Access"), (ii) promptly furnish to the other party full details of the Unauthorized Access and use reasonable efforts to assist the other party in investigating or preventing the reoccurrence of any Unauthorized Access, (iii) cooperate with the other party in any litigation and investigation against third parties deemed necessary by such party to protect its proprietary rights, and (iv) promptly take all steps necessary to prevent a reoccurrence of any such Unauthorized Access. (d) Injunction. Each party hereto agrees that the breach by the other party of its obligations under this Section would cause significant and irreparable harm to the aggrieved party, which may be difficult to measure with certainty or to compensate through money damages. Each party hereto acknowledges that the aggrieved party shall be entitled, without proof of irreparable harm and without waiving any other right or remedy available to it, to such injunctive and equitable relief as may be deemed proper by a court of competent jurisdiction. 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective December 31, 2004. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis --------------------------------------------------------- Name: Mark Tullis Title: President SECURITY LIFE OF DENVER INTERNATIONAL LIMITED By: /s/ David Pendergrass --------------------------------------------------------- Name: David Pendergrass Title: Vice President SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield --------------------------------------------------------- Name: Oscar Scofield Title: CEO/ President 20 Schedule A Investment Accounting Services for Security Life Funds Withheld/Modco General Account Assets With respect to the Security Life of Denver Insurance Company ("Security Life") general account assets (the "SLD Re Assets") that support Security Life's funds withheld and modified coinsurance arrangements (the "SLD Portfolios") with Security Life of Denver International Limited ("SLDI"), Security Life has arranged for ING Investment Management LLC ("IIM") to provide investment accounting services and coordinate certain treasury and cash management functions through Treasury Services at ING North America Insurance Corporation ("ING Treasury"). The following lists the investment accounting services to be provided by IIM and reports, processes and other administrative functions required from Scottish Re (U.S.), Inc. ("Scottish Re") or its agents to enable IIM to provide such services. Also listed are certain ING Treasury processes and protocols, and Scottish Re's responsibilities related thereto. I. The SLD Re Assets will be custodied at The Bank of New York ("BONY"). IIM will download cash transactions directly from BONY electronic feeds and post securities-related transactions to IIM's electronic tracking and reporting systems (the "IIM Systems") on a daily basis. A daily cash reconciliation will be performed to ensure that the cash reported by BONY has properly posted on the IIM Systems. For instances where the income projection per the IIM Systems varies from the amount received from BONY by greater than $1.00, IIM will research the exception and resolve prior to posting. Any unresolved exceptions will be forwarded to Scottish Re for final resolution. II. Trades entered into by Scottish Re, or its designated investment advisor for the SLD Portfolios (the "Subadviser"), will be reported to IIM and entered into the IIM Systems by IIM for purposes of financial reporting on the SLD Re Assets.1 On each trade date for trades placed that day, Scottish Re or the Subadviser will provide to IIM (a) electronic files containing transaction data that will be uploaded into the IIM Systems, (b) electronic files containing the Security Master data for securities that have not been previously purchased for the SLD Portfolios, (c) for all MBS/ABS securities transactions, electronic files (e.g., Bloomberg) containing principal and interest cash flows with respect to each such transaction to support the monthly effective yield computations required under U.S. Statutory, U.S. GAAP and International Accounting Standards, and (d) faxed copies of trade tickets. Verification of the accuracy and veracity of the data included in the files and trade tickets delivered to IIM will be the responsibility of Scottish Re and the Subadviser. The Subadviser will be responsible for the settlement of trades with the broker and custodian. Settlement will be against cash in the custody account holding the SLD Re Assets. Movement of cash into or out of the custody account, including for purposes of trade settlements, shall be at the direction of ING Treasury and will be subject to the conditions identified, in part, under Section XI. below. - -------------------------------- 1 Currently Security Life is on "first-in first-out" (by lot) basis for sales under all bases of accounting, and all of Security Life's assets are classified as "available for sale". Scottish Re will be notified if Security Life elects to change this method. 21 III. Trade errors and breaches of the investment guidelines for the SLD Portfolios (the "Investment Guidelines") will be the responsibility of Scottish Re and the Subadviser. Scottish Re and the Subadviser will inform IIM of all errors and Investment Guideline breaches within 24 hours of any such discovery. This reporting shall be in addition to any other reporting requirements mandated by Security Life in its investment advisory agreement with Scottish Re. IV. IIM will carry out month-end processing as of the last business day of each month following the practices and protocols utilized for other portfolios of Security Life. Such practices and protocols include, for example, (a) month-end updates of accrued interest and amortization of premium/discount, (b) recalculation of yields prior to each month-end processing, and (c) on the third business day following each month end, determination of final pricing of the SLD Re Assets, using the valuation hierarchy IIM applies to all assets of Security Life, and the closure of all ledgers for the SLD Portfolios. V. IIM will post on a daily basis to the ING Americas accounting systems general ledger for Security Life, the SLD Portfolios' general ledger entries generated by the IIM Systems. The extract will be for statutory basis, Dutch GAAP, and U.S. GAAP amounts (IAS will replace Dutch GAAP in 2005). VI. Each month end, IIM will produce all parts of Schedule D, Schedule DA and Schedule B on a statutory basis for the SLD Portfolios, to be included as part of the Security Life legal entity schedules. VII. IIM will upload NAIC prices and designations for the SLD Re Assets. IIM will be responsible for filing necessary documentation with the NAIC SVO for unrated securities. VIII. Each month/quarter, IIM will provide Scottish Re a report comparing current month/quarter book yield and income to the prior month/quarter book yield and income for the SLD Portfolios within a time period mutually agreed upon by IIM and Scottish Re in good faith following each month end. By the 8th business day following each month end, IIM will also provide to Scottish Re a detailed holding list of the SLD Portfolios with content and format mutually agreed upon by IIM and Scottish Re in a commercially reasonable manner. IX. IIM will prepare monthly reconciliations of the due to/due from broker accounts, custodian par amounts, and custodian cash accounts and provide them to Scottish Re by the fifth business day following each month end. X. All holdings in the SLD Portfolios will be subject to the quarterly impairment review processes and procedures (under all bases of accounting) utilized by IIM for other portfolios of Security Life. IIM shall consult with Scottish Re regarding all impairment decisions. XI. Treasury related processes and protocols 1. Deposits for the Security Life reinsurance business received at the existing Security Life bank account, if any, will be identified by ING Treasury and wired to Scottish Re's depository account. 2. Disbursement activity for contract related payments such as retro. premium and commission 22 reimbursements, retrocession claim recoveries and assumed claim payments will continue to be fed from the Sage System to the ING disbursement system. ING Treasury and Scottish Re will coordinate, and redirect as necessary, the disbursement processes. It is the responsibility of Scottish Re to fund the Security Life reinsurance disbursement account on a daily basis. For the avoidance of doubt, Scottish Re shall pay for any overdrafts for failure to fund such disbursement account and shall be responsible for any custodian fees and the disbursement account bank fees hereunder. 3. ING Treasury will be notified by Scottish Re, or the Subadviser, of all SLD Re investment transactions settling at The Bank of New York. Cash shortfalls (due to over purchases or failed trades) will be funded by ING Treasury access to a Security Life line of credit or cash held in Security Life's money market account. Scottish Re will reimburse Security Life within one (1) business day of such use of the Security Life lines of credit and will pay interest on any amounts so used equal to the Federal Funds rate, in effect on the date immediately preceding the overdraft, plus 1.0%. Cash shortfalls in excess of available Security Life line of credit will be funded by Scottish Re no later than 5:00pm ET on the day the shortfall occurs. Excess cash will be retained in the custody account and swept into a money market account selected by Scottish Re and reasonably acceptable to ING Treasury. 4. Custody bank fees related to or arising from the SLD Portfolios will continue to be direct debited to the Bank of New York account and posted to the Security Life general ledger by IIM. 23 EX-10.46 8 ex10-46.txt COINSURANCE AGREEMENT ================================================================================ COINSURANCE AGREEMENT between SECURITY LIFE OF DENVER INSURANCE COMPANY (referred to as the Company) and SCOTTISH RE (U.S.), INC. (referred to as the Reinsurer) Effective Date: December 31, 2004 ================================================================================ TABLE OF CONTENTS Page ARTICLE I DEFINITIONS................................................1 Section 1.1. Definitions................................................1 ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED................4 Section 2.1. Coinsurance................................................4 Section 2.2. Reinsurance Coverage.......................................4 Section 2.3. Reserves...................................................4 Section 2.4. Insurance Contract and Reserve Assumption Changes..........5 ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION.............5 Section 3.1. Payments by the Company....................................5 Section 3.2. Delayed Payments...........................................6 Section 3.3. Offset and Recoupment Rights...............................6 Section 3.4. Administration.............................................6 Section 3.5 Certain Reports............................................6 ARTICLE IV REINSURANCE CREDIT; SECURITY...............................7 Section 4.1. Licenses...................................................7 Section 4.2. Security...................................................7 Section 4.3. SLD Reserve Trust Agreement................................7 Section 4.4. Investment of Trust Assets.................................8 Section 4.5. Deposit of Assets..........................................8 Section 4.6. Adjustment of Security and Withdrawals.....................8 Section 4.7. Withdrawals by the Company.................................8 Section 4.8. Assets in Trust of the Company.............................9 Section 4.9. Compliance by the Company..................................9 Section 4.10. Reports....................................................9 ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS................9 Section 5.1. Oversights.................................................9 Section 5.2. Cooperation...............................................10 Section 5.3. Regulatory Matters........................................10 ARTICLE VI DAC TAX...................................................10 Section 6.1. Election..................................................10 ARTICLE VII ARBITRATION...............................................12 Section 7.1. Arbitration...............................................12 Section 7.2. Arbitration Procedure.....................................12 i ARTICLE VIII INSOLVENCY................................................13 Section 8.1. Insolvency of the Company.................................13 ARTICLE IX DURATION; RECAPTURE.......................................13 Section 9.1. Duration..................................................13 Section 9.2. Survival..................................................14 Section 9.3. Recapture.................................................14 Section 9.4. Recapture Payments........................................14 ARTICLE X INDEMNIFICATION...........................................14 Section 10.1. Reinsurer's Obligation to Indemnify.......................14 Section 10.2. Company's Obligation to Indemnify.........................15 Section 10.3. Certain Definitions and Procedures........................15 ARTICLE XI MISCELLANEOUS.............................................15 Section 11.1. Notices...................................................15 Section 11.2. Entire Agreement..........................................16 Section 11.3. Captions..................................................16 Section 11.4. Governing Law and Jurisdiction............................16 Section 11.5. No Third Party Beneficiaries..............................16 Section 11.6. Expenses..................................................17 Section 11.7. Counterparts..............................................17 Section 11.8. Severability..............................................17 Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages.....17 Section 11.10. Treatment of Confidential Information.....................17 Section 11.11. Assignment................................................18 Section 11.12. Service of Process........................................18 ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS.................18 Section 12.1. Representations, Warranties, and Covenants of the Reinsurer.................................................18 ii COINSURANCE AGREEMENT THIS COINSURANCE AGREEMENT (the "Agreement"), is made and entered into as of December 31, 2004 (the "Effective Date") by and between Security Life of Denver Insurance Company, a Colorado-domiciled life insurance company (the "Company") and Scottish Re (U.S.), Inc., a Delaware-domiciled life insurance company (the "Reinsurer"). WHEREAS, the Company, Security Life of Denver International Limited, a Bermuda insurance company ("SLDI" and, together with the Company, the "Sellers"), and Scottish Re Group Limited ("Purchaser"), the indirect parent corporation of Reinsurer, Newco and the Reinsurer, have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which the Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; WHEREAS, as contemplated by the Asset Purchase Agreement, the Company wishes to retrocede to the Reinsurer, and the Reinsurer wishes to indemnity reinsure, on a one-hundred percent (100%) coinsurance basis, the Covered Insurance Contracts (as hereinafter defined); and WHEREAS, the Company wishes the Reinsurer to perform, or cause the performance of, certain administrative functions on behalf of the Company with respect to the Covered Insurance Contracts, and the Company and the Reinsurer have entered into an Administrative Services Agreement of even date herewith (the "Administrative Services Agreement") pursuant to which the Reinsurer shall provide, or cause the provision of, such administrative services; NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Reinsurer agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. The following terms shall have the respective meanings set forth below throughout this Agreement: "Administrative Services Agreement" has the meaning set forth in the preamble. "Affiliated Reinsurer" has the meaning set forth in the definition of "Triggering Event". "Agreement" has the meaning set forth in the preamble. "Asset Purchase Agreement" has the meaning set forth in the preamble. "Commissioner" means the Insurance Commissioner of the State of Colorado. "Company" has the meaning set forth in the preamble. "Company Indemnified Parties" has the meaning set forth in Section 10.1 of this Agreement. "Confidential Information" means all documents and information concerning one party, any of its Affiliates, the Reinsured Liabilities or the Covered Insurance Contracts, including any information relating to any person insured directly or indirectly under the Covered Insurance Contracts, furnished to the other party or such other party's Affiliates or representatives in connection with this Agreement or the transactions contemplated hereby, except that Confidential Information shall not include information which: (a) at the time of disclosure or thereafter is generally available to and known by the public other than by way of a wrongful disclosure by a party hereto or by any representative of a party hereto; (b) was available on a nonconfidential basis from a source other than the parties hereto or their representatives, provided that such source is not and was not bound by a confidentiality agreement with a party hereto; or (c) was independently developed without violating any obligations under this Agreement and without the use of any Confidential Information. "Confidentiality Agreement" means that certain confidentiality agreement dated May 4, 2004 by and between ING and Purchaser. "Covered Insurance Contracts" means (i) all Insurance Contracts that are reinsurance agreements under which the reinsurance is assumed by the Company, other than on a coinsurance funds withheld basis, modified coinsurance basis or coinsurance/modified coinsurance basis, as listed on Schedule 1.1(a); and (ii) all Post-Closing Insurance Contracts. The parties agree to update Schedule 1.1(a) from time to time to reflect Covered Insurance Contracts entered into in accordance with the terms of this Agreement or discovered after the Effective Date. "Effective Date" means the effective date shown in the preamble of this Agreement. "Eligible Assets" has the meaning set forth in Section 4.4 of this Agreement. "Independent Accountant" has the meaning set forth in 6.1(f) of this Agreement. "Post-Closing Insurance Contracts" has the meaning set forth in Section 2.2 of this Agreement. "Premiums" means premiums, considerations, deposits and similar receipts with respect to the Covered Insurance Contracts. "Recapture Date" has the meaning set forth in Section 9.3 of this Agreement. "Reinsurer" has the meaning set forth in the preamble. "Reinsurer Indemnified Parties" has the meaning set forth in Section 10.2 of this Agreement. "Required Balance" has the meaning set forth in Section 4.3 of this Agreement. "Reserves" means the aggregate amount of reserves and other liabilities with respect to the Covered Insurance Contracts that would be appropriately includable in line items 1, 2, 3, 4.1, 4.2, 5, 6.1, 6.2, 6.3, 7, 8, 9.1, 9.2, 9.3, 10, 11, 12, 13, 14 (excluding any Excluded Tax Liability), 17, 18, 19, 24.2, 24.3, 24.6, 24.7, 25.02 and 25.03 except OPEB of the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement. "SAP" means the statutory accounting practices prescribed or permitted by the insurance department of the State of Colorado. "Scottish Annuity & Life" means Scottish Annuity & Life Insurance Company (Cayman) Ltd., a company organized under the laws of the Cayman Islands. "Scottish Re Group" means Scottish Re Group Limited, a holding company organized under the laws of the Cayman Islands. "Triggering Event" means any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Reinsurer or any Affiliate of Reinsurer that at the time in question is reinsuring any of the Business (an "Affiliated Reinsurer"), Scottish Annuity & Life or Scottish Re Group; (ii) the risk based capital (under applicable Delaware Insurance Law requirements), calculated quarterly, of the Reinsurer or any Affiliated Reinsurer domiciled in the United States falls below 125% of the Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.5 of this Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Schedule 1.1(b)), calculated quarterly, of consolidated Scottish Re Group or consolidated Scottish Annuity & Life falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.5 of this Agreement that would reflect such deficiency; (iv) there has been a material breach of any Reinsurance Agreement by the Reinsurer or an Affiliated Reinsurer, including, without limitation, failure to fund any trust as required, and such breach has not been cured within 30 days after notice; or (v) there has been a termination or amendment to any keepwell agreement described in Section 5.26 of the Asset Purchase Agreement without the Company's prior written consent, which consent shall not be unreasonably withheld. "Termination Date" means the date on which this Agreement is terminated in accordance with the terms and conditions of Article IX hereof. "UCC" means the New York Uniform Commercial Code. ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED Section 2.1. Coinsurance. (a) Subject to the terms and conditions of this Agreement, the Company hereby cedes on a coinsurance basis to the Reinsurer as of the Effective Date, and the Reinsurer hereby accepts and agrees to assume and indemnity reinsure on a coinsurance basis as of the Effective Date, one hundred percent (100%) of all Reinsured Liabilities arising under or relating to the Covered Insurance Contracts. This Agreement is an agreement for indemnity reinsurance solely between the Company and the Reinsurer and shall not create any legal relationship whatsoever between the Reinsurer and any Person other than the Company. The reinsurance effected under this Agreement shall be maintained in force, without reduction, unless such reinsurance is terminated or reduced as provided herein. (b) On and after the Effective Date, the Reinsurer will have the responsibility for paying to or on behalf of the Company, as and when due, all Reinsured Liabilities arising under or attributable to the Covered Insurance Contracts. Section 2.2. Reinsurance Coverage. In no event shall the reinsurance provided hereunder with respect to a particular Covered Insurance Contract be in force and binding unless such Covered Insurance Contract is in force and binding as of the Effective Date; provided, however, that the Covered Insurance Contracts reinsured hereunder shall include (a) all lapsed or surrendered insurance contracts subject to the reinsurance hereunder, that are Covered Insurance Contracts reinstated in accordance with their terms on and after the Effective Date; (b) all final Insurance Contracts that were under negotiation or otherwise in process on the Effective Date and that are entered into by the Company at the request of the Reinsurer, during the period commencing on the Effective Date and ending on the 120th day following the Effective Date (the "Post-Closing Insurance Contracts"); and (c) all Unexecuted Assumed Reinsurance Contracts of the Company other than on a coinsurance funds withheld basis, modified coinsurance basis or coinsurance/modified coinsurance basis. Upon the reinstatement of any lapsed or surrendered Covered Insurance Contract, or the execution of any Post-Closing Insurance Contract, such reinstated Covered Insurance Contract or Post-Closing Insurance Contract shall be automatically reinsured hereunder, when, and to the extent that, the Company is liable under such reinstated Covered Insurance Contract or Post-Closing Insurance Contract. Section 2.3. Reserves. On and after the Effective Date, the Reinsurer shall establish and maintain as a liability on its statutory financial statements, Reserves for the Covered Insurance Contracts ceded hereunder, calculated consistent with (a) the reserve requirements, SAP and actuarial principles applicable to the Company under Colorado Law; and (b) otherwise in accordance with any valuation bases and methods of determining Reserves that may be provided in the Covered Insurance Contracts. The Reinsurer shall provide the Company, no later than forty-five (45) calendar days after the end of each calendar year, with copies of all actuarial opinions and actuarial memoranda and all reserve evaluations pertaining to the Reserves for the Covered Insurance Contracts, including, without limitation, any actuarial opinions and reserve evaluations performed by independent actuaries, auditors or other outside consultants. The Company agrees that the Reserves that it establishes and maintains on its statutory financial statements filed with the State of Colorado with respect to the Covered Insurance Contracts shall be consistent with the Reserves established by the Reinsurer; provided, however, that the Company may, at its own cost at any time, upon reasonable notice to the Reinsurer following the Effective Date, examine the Books and Records, and any other books and records that would have been included in the Books and Records had they been in existence on the Effective Date, maintained by the Reinsurer in accordance with the terms of this Agreement, and review the Reinsurer's reserve procedures. If as a result of such examination the Company believes that the Reserves are not consistent with the requirements of clauses (a) and (b) of the first sentence of this Section 2.3 in all material respects, the Reinsurer shall, at the Company's request and expense, obtain and deliver to the Company an actuarial opinion as to the adequacy of the Reserves for the Covered Insurance Contracts, produced by an independent actuary reasonably acceptable to the Company. In the event that the actuarial opinion so rendered reasonably indicates a material inadequacy in the Reserves for the Covered Insurance Contracts or in the Reinsurer's reserve procedures, the Reinsurer shall promptly adjust the amount of the Reserves for the Covered Insurance Contracts and implement appropriate changes to its reserve procedures so as to avoid inadequacies in future periods; provided, however, the Reinsurer shall have the right to contest the findings of such actuarial opinion in accordance with the provisions of Article VII. Section 2.4. Insurance Contract and Reserve Assumption Changes. The Company shall not change (a) the terms and conditions of any Covered Insurance Contracts or (b) the assumptions and methods used to establish the Reserves attributable to the Covered Insurance Contracts, except as required by Applicable Law, and the Company shall notify the Reinsurer promptly upon becoming aware of the requirement to effect any such change and provide the Reinsurer the opportunity to contest such requirement. ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION Section 3.1. Payments by the Company. (a) As consideration for the Reinsurer's agreement to provide reinsurance pursuant to the Reinsurance Agreements between the Company and the Reinsurer, the Company is transferring, on the Effective Date, to the Reinsurer, the SLD Reserve Trust Account and the SLD Security Trust Account, as appropriate, as an initial reinsurance premium, the Transferred Statutory Assets, Investment Assets and cash having a value determined in accordance with Section 2.4(c) of the Asset Purchase Agreement. (b) The Reinsurer shall be entitled, as additional reinsurance premium, to immediate payment of amounts equal to Premiums received by the Company on and after the Effective Date that are attributable to the Covered Insurance Contracts; provided, however, that following the occurrence of a Triggering Event, the Company shall be entitled to retain such amounts as funds withheld under this Agreement, provided further, however, that such funds may be used by the Company as set forth in Section 4.7 of this Agreement, and any amount remaining upon termination of this Agreement pursuant to Section 9.1, other than as a result of a recapture, shall be paid to the Reinsurer. Any funds withheld pursuant to this Section 3.1(b) shall be credited against the Required Balance. For the avoidance of doubt, the parties acknowledge and agree that the Company retains all right, title and interest to all Premiums and other amounts received with respect to the Covered Insurance Contracts, subject to its contractual obligations under this Agreement to pay corresponding amounts over to the Reinsurer. (c) To the extent that the Company recovers amounts from any third party relating to the Business attributable to the Covered Insurance Contracts (including, without limitation, Premiums in arrears from a policyholder or ceding company with respect to a reinstated Covered Insurance Contract, litigation recoveries, premium and reinsurance recoverables), the Company shall, immediately upon receipt of any such amounts, transfer such amounts to the Reinsurer and provide the Reinsurer with any pertinent information that the Company may have relating thereto. Section 3.2. Delayed Payments. If there is a delayed settlement of any payment due hereunder, interest will accrue on such payment at the 180-Day Treasury Rate then in effect until settlement is made. For purposes of this Section 3.2, a payment will be considered overdue, and such interest will begin to accrue, on the first day immediately following the date such payment is due. For greater clarity, (i) a payment shall be deemed to be due hereunder on the last date on which such payment may be timely made under the applicable provision, and (ii) interest will not accrue on any payment due the Reinsurer hereunder unless the delayed settlement thereof was caused by the Company. Section 3.3. Offset and Recoupment Rights. Any debits or credits incurred on and after the Effective Date in favor of or against either the Company or Reinsurer with respect to this Agreement or any other reinsurance agreements or trust agreements that constitute Related Agreements or otherwise are deemed mutual debits or credits, as the case may be, shall be set off and recouped, and only the net balance shall be allowed or paid. This Section 3.3 shall apply notwithstanding the existence of any insolvency, rehabilitation, conservatorship or comparable proceeding by or against the Company or the Reinsurer. Section 3.4. Administration. The Reinsurer will administer, or cause the administration of, the Covered Insurance Contracts and provide quarterly accountings with respect thereto to the Company in accordance with the Administrative Services Agreement. All reports, remittances and payments due to or from a party hereto shall be made in accordance with the procedures set forth in the Administrative Services Agreement. Section 3.5 Certain Reports. (a) Not later than sixty (60) calendar days after the end of each calendar year, and forty-five (45) days after the end of any calendar quarter other than the quarter ending on December 31, the Reinsurer shall provide to the Company a calculation of (x) the risk based capital of the Reinsurer and each other entity identified in Clause (ii) of the definition of the Triggering Event, and (y) the capital adequacy ratio calculated as set forth on Schedule 1.1(b) of the entities identified in Clause (iii) of the definition of Triggering Event. Each such calculation shall include reasonable supporting detail. (b) The Reinsurer shall also provide written notice of the occurrence of any Triggering Event within two (2) Business Days after its occurrence. The Company may, at its own expense, review Reinsurer's or an Affiliated Reinsurer's books and records to the extent reasonably necessary to confirm the calculations provided by Reinsurer pursuant to this Section 3.5(a). In addition, Reinsurer shall cooperate fully with the Company and promptly respond to the Company's reasonable inquiries from time to time concerning the determination of whether a Triggering Event has occurred. ARTICLE IV REINSURANCE CREDIT; SECURITY Section 4.1. Licenses. At all times during the term of this Agreement, the Reinsurer shall hold and maintain all licenses and authorizations required under Applicable Law or otherwise take all action that may be necessary (i) so that the Company shall receive full reserve credits for reinsurance ceded under this Agreement in the statutory financial statement filed with the Commissioner, and in statutory financial statements required to be filed with regulatory authority(ies) in such other jurisdictions in which the Company must file such statements, and (ii) to perform its obligations hereunder. Section 4.2. Security. In accordance with the Asset Purchase Agreement, the Reinsurer, as grantor, is creating the SLD Reserve Trust Account with a trustee approved by the Company, naming the Company as sole beneficiary thereof. The SLD Reserve Trust Account shall initially be funded with Investment Assets and cash transferred from the Company. In accordance with the SLD Reserve Trust Agreement, the Reinsurer hereby pledges the assets in the SLD Trust Account, including its residual interest therein, to perfect a first priority security interest in favor of the Company under Article 9 of the UCC. During the term of the SLD Reserve Trust Agreement, the Reinsurer shall not, and shall direct that the trustee shall not, grant or cause to be created in favor of any third person any security interest whatsoever in any of the assets in the SLD Trust Accounts or in the residual interest therein. Section 4.3. SLD Reserve Trust Agreement. The trustee shall hold assets in the SLD Reserve Trust Account pursuant to the terms of the SLD Reserve Trust Agreement. The SLD Reserve Trust Account shall be established and maintained in compliance with all requirements of Colorado Insurance Laws and Regulations or any successor provision and all other applicable laws governing the Company's right to take financial statement credit for reinsurance under this Agreement. The parties hereto acknowledge and agree that the provisions of this Article IV are intended to provide the Company with such credit. In the event that the Company is not permitted to take such credit for reinsurance because any provision of this Agreement is determined not to comply with Colorado Insurance Laws and Regulations or other Applicable Law, the parties hereto agree to reasonably cooperate to amend this Agreement to provide such credit. The fair market value of assets in the SLD Reserve Trust Account shall be not less than the amount required (determined pursuant to SAP) in order for the Company to receive full statutory reserve credit for the retrocession of the Insurance Contracts which the Company has ceded hereunder and on a coinsurance basis under the other Reinsurance Agreements between the Company and the Reinsurer (the "Required Balance"). Section 4.4. Investment of Trust Assets. The assets held in the SLD Reserve Trust Account shall be valued at their fair market value as of the date as of which such assets are required to be valued. The assets that may be held in the SLD Reserve Trust Account (the "Eligible Assets") shall consist of cash, certificates of deposit issued by a U.S. bank and payable in U.S. dollars and investments of the type permitted by Colorado Insurance Law; provided, that (i) each such investment that is a security is issued by an institution that is not the Reinsurer, the Company or an Affiliate of either party, and (ii) such investments comply with the requirements specified by the Eligible Asset Guidelines as set forth on Schedule 4.4. Section 4.5. Deposit of Assets. Prior to depositing assets in the SLD Reserve Trust Account, Reinsurer will execute assignments or endorsements in blank, or transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the direction of the Company, may whenever necessary negotiate these assets without the consent or signature from the Reinsurer or any other entity. Section 4.6. Adjustment of Security and Withdrawals. The Reinsurer shall maintain Eligible Assets in the SLD Reserve Trust Account with an aggregate fair market value at least equal the Required Balance. The amount of assets held in the SLD Reserve Trust Account shall be adjusted following the end of each calendar quarter. (a) If the aggregate fair market value of the Eligible Assets held in the SLD Reserve Trust Account at the end of any calendar quarter is less than the Required Balance, the Reinsurer shall, no later than 15 calendar days following delivery of the reserve report included in the quarterly report provided pursuant to the Administrative Services Agreement, transfer additional Eligible Assets to the SLD Reserve Trust Account so that the aggregate fair market value of the Eligible Assets held in the SLD Reserve Trust Account is not less than the Required Balance. (b) If the aggregate fair market value of the Eligible Assets in the SLD Reserve Trust Account at the end of any calendar quarter exceeds 102% of the Required Balance, then the Reinsurer shall have the right to seek approval (which shall not be unreasonably or arbitrarily withheld) from the Company to withdraw the excess. For the purposes of the foregoing sentence, in the event that a Triggering Event has occurred, the parties acknowledge and agree that it shall not be unreasonable for the Company to withhold its consent to any such withdrawal. Section 4.7. Withdrawals by the Company. The Company may withdraw the assets held in the SLD Reserve Trust Account at any time and from time to time, notwithstanding any other provisions of this Agreement, and assets withdrawn from such SLD Reserve Trust Account shall be utilized and applied by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company), without diminution because of insolvency on the part of the Company or the Reinsurer; provided however, that following any such withdrawal the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) may only apply such assets for one or more of the following purposes: (a) to pay, or reimburse the Company for payment of, Premiums received by Reinsurer hereunder which are to be returned to policyholders or ceding companies because of cancellations of Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; (b) to pay, or reimburse the Company for payment of, surrenders, benefits, losses or other amounts payable pursuant to the provisions of the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; and (c) to fund an account with the Company in an amount no less than the deduction, for reinsurance ceded, from the Company's liabilities for the reserves to be maintained with respect to the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis. Section 4.8. Assets in Trust of the Company. Any assets deposited into an account of the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) pursuant to Section 4.7(c), and any interest or other earnings thereon shall be held by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) in trust for the benefit of the Reinsurer, subject to the Company's right to apply such assets to amounts due and payable by the Reinsurer to the Company under this Agreement, and shall at all times be maintained, separate and apart from any assets of the Company, for the sole purpose of funding the payments and reimbursements described in Sections 4.7(a) through (c), inclusive, of this Article IV. Section 4.9. Compliance by the Company. The Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) shall ensure that any assets held in trust pursuant to Section 4.7(c) comply with the provisions of Sections 4.4, 4.7(a) and 4.7(b) in accordance with its fiduciary obligations as trustee with respect to such amounts. Section 4.10. Reports. At the Company's request, the Reinsurer shall provide the Company with its annual and quarterly statutory financial statements filed with state insurance regulators and a copy of its audited statutory financial statements along with the audit report thereon. ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS Section 5.1. Oversights. Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery, and provided, further, that the party making such error or omission or responsible for such delay shall be responsible for any additional liability which attaches as a result. If (a) the failure of either party to comply with any provision of this Agreement is unintentional or the result of a misunderstanding or oversight and (b) such failure to comply is promptly rectified, both parties shall be restored as closely as possible to the positions they would have occupied if no error or oversight had occurred. Section 5.2. Cooperation. Each party hereto shall cooperate fully with the other in all reasonable respects in order to accomplish the objectives of this Agreement. Section 5.3. Regulatory Matters. If the Company or the Reinsurer receives notice of, or otherwise becomes aware of, any regulatory inquiry, investigation or proceeding relating to the Covered Insurance Contracts, the Company or the Reinsurer, as applicable, shall promptly notify the other party thereof, whereupon the parties shall cooperate in good faith and use their respective commercially reasonable efforts to resolve such matter in a mutually satisfactory manner, in light of all the relevant business, regulatory and legal facts and circumstances. ARTICLE VI DAC TAX Section 6.1. Election. (a) All uncapitalized terms used herein shall have the meanings set forth in the regulations under Section 848 of the Code. (b) Each of the Company and the Reinsurer acknowledges that it is subject to taxation under Subchapter L of the Code and hereby makes the election contemplated by Section 1.848-2(g)(8) of the Treasury Regulations with respect to this Agreement. Each of the Company and the Reinsurer (i) agrees that such election is effective for the taxable year of each party that includes the Effective Date and for all subsequent years during which this Agreement remains in effect and (ii) warrants that it will take no action to revoke the election. (c) Pursuant to Section 1.848-2(g)(8) of the Treasury Regulations, each of the Company and the Reinsurer hereby agrees (i) to attach a schedule to its federal income tax return for its first taxable year ending on or after the Effective Date that identifies this Agreement as a reinsurance agreement for which the joint election under Section 1.848-2(g)(8) has been made, (ii) that the party with net positive consideration for this Agreement for each taxable year will capitalize its specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Code, and (iii) to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. The Reinsurer shall prepare and execute duplicate copies of the schedule described in the preceding sentence as soon as practicable after the Effective Date and submit them to the Company for execution. The Company shall execute the copies and return one of them to the Reinsurer within thirty (30) calendar days of the receipt of such copies. (d) The Company shall submit a schedule to the Reinsurer by May 1 of each year of its calculation of the net consideration under this Agreement for the preceding taxable year. This schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Company stating that the Company shall report such net consideration in its federal income tax return for the preceding taxable year. (e) The Reinsurer may contest such calculation by providing an alternative calculation to the Company in writing within thirty (30) calendar days after the date on which the Reinsurer receives the Company's calculation. If the Reinsurer does not so notify the Company, the Reinsurer shall report the net consideration under this Agreement as determined by the Company in the Reinsurer's federal income tax return for the preceding taxable year. (f) If Reinsurer contests the Company's calculation of the net consideration under this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount of net consideration within thirty (30) calendar days after the date on which the Reinsurer submits its alternative calculation. If Reinsurer and the Company reach an agreement as to the amount of net consideration under this Agreement, each party shall report such amount in its federal income tax return for the preceding taxable year. If, during such period, Reinsurer and the Company are unable to reach an agreement, they shall promptly thereafter cause Deloitte & Touche USA LLP (the "Independent Accountants") to promptly review (which review shall commence no later than five (5) calendar days after the selection of the Independent Accountants) this Agreement and the calculations of Reinsurer and the Company for the purpose of calculating the net consideration under this Agreement. In making such calculation, the Independent Accountants shall consider only those items or amounts in the Company's calculation as to which the Reinsurer has disagreed. The Independent Accountants shall deliver to Reinsurer and the Company, as promptly as practicable (but no later than thirty (30) calendar days after the commencement of their review), a report setting forth such calculation, which calculation shall result in a net consideration between the amount thereof shown in the Company's calculation delivered pursuant to Section 6.1(d) and the amount thereof shown in Reinsurer's calculation delivered pursuant to Section 6.1(e). Such report shall be final and binding upon Reinsurer and the Company. The fees, costs and expenses of the Independent Accountants shall be borne (i) by the Company if the difference between the net consideration as calculated by the Independent Accountants and the Company's calculation delivered pursuant to Section 6.1(d) is greater than the difference between the net consideration as calculated by the Independent Accountants and Reinsurer's calculation delivered pursuant to Section 6.1(e), (ii) by the Reinsurer if the first such difference is less than the second such difference, and (iii) otherwise equally by Reinsurer and the Company. ARTICLE VII ARBITRATION Section 7.1. Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLD Closing Statement and the assets to be transferred to the Reinsurer, the SLD Reserve Trust Account and the SLD Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC tax, which shall be resolved in accordance with Article VI hereof, or (iii) matters relating to whether a Triggering Event has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 7.2. (b) The parties intend this Section 7.1 to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 7.1(a), the other party may request the court specified in Section 11.5 to compel arbitration in accordance with the Federal Arbitration Act. Section 7.2. Arbitration Procedure. The Company and Reinsurer intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 7.1(a)) be resolved without resort to any litigation. Accordingly, the Company and Reinsurer agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Company and Reinsurer agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Supplementary Rules for the Resolution of Intra-Industry U.S. Reinsurance and Insurance Disputes of the American Arbitration Association. The arbitration hearing will be before a panel of three disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of the Company or any of its Affiliates. The Company and Reinsurer will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either the Company or Reinsurer fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the American Arbitration Association will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including without limitation each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Company or Reinsurer) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 11.4. No such award or judgment will bear interest except as provided in Section 3.2. In no event may the arbitrators award punitive or exemplary damages. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE VIII INSOLVENCY Section 8.1. Insolvency of the Company. In the event of the insolvency of the Company, all coinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the Reinsurer directly to the Company or to its statutory liquidator, receiver or statutory successor on the basis of the liability of the Company under the Covered Insurance Contracts without diminution because of the insolvency of the Company. It is understood, however, that in the event of the insolvency of the Company, the liquidator, receiver or statutory successor of the Company shall give written notice of the pendency of a claim against the Company on a Covered Insurance Contract within a reasonable period of time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. It is further understood that the expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. ARTICLE IX DURATION; RECAPTURE Section 9.1. Duration. This Agreement shall continue in force until such time as (i) the Company's liability with respect to all Covered Insurance Contracts reinsured hereunder is terminated in accordance with their respective terms, or the Company has elected to recapture the reinsurance of Covered Insurance Contracts following the occurrence of a Triggering Event, and (ii) the Company has received payments which discharge such liability in full in accordance with the provisions of this Agreement. In no event shall the interpretation of this Section 9.1 imply any unilateral right of the Reinsurer to terminate this Agreement; provided, however, that in the event that the Company fails to timely pay any material amount due the Reinsurer hereunder, and such amount remains unpaid for thirty (30) days, the Reinsurer shall have the right to terminate reinsurance hereunder provided, however, that the Reinsurer shall have provided to the Colorado Insurance Commissioner ninety (90) calendar days written notice prior to such termination. In such case, the provisions of Section 9.3 shall apply as if the Termination Date were a Recapture Date and the Reinsurer shall be relieved of all liability under this Agreement to make future payments to the Company. Section 9.2. Survival. Notwithstanding the other provisions of this Article IX, the terms and conditions of Articles I, VI and X and the provisions of Sections 11.1, 11.4, 11.6, 11.9 and 11.10 shall remain in full force and effect after the Termination Date. Section 9.3. Recapture. Upon the occurrence of a Triggering Event, the Company shall have the right to recapture all, and not less than all, of the reinsurance ceded under this Agreement, by providing the Reinsurer with written notice of its intent to effect recapture. Recapture of the Covered Insurance Contracts shall be effective on the tenth (10th) day following the day on which the Company has provided the Reinsurer with such notice (the "Recapture Date"). Section 9.4. Recapture Payments. On the Recapture Date, the Company shall be entitled to withdraw the Required Balance from the SLD Reserve Trust as consideration for assumption by the Company of the Reinsured Liabilities under the recaptured Covered Insurance Contracts. In the event that the fair market value of the assets in the SLD Reserve Trust exceeds the Required Balance, the Company shall also be permitted to withdraw such assets if, and only to the extent that, the fair market value of the assets in the SLD Security Trust Account is less than the amount required by Exhibit A to the SLD Security Trust Agreement on the Recapture Date. In addition, the Company shall be entitled to withdraw the remaining balance in the SLD Security Trust Account less any amounts owed to the Reinsurer under this Agreement as of the Recapture Date. ARTICLE X INDEMNIFICATION Section 10.1. Reinsurer's Obligation to Indemnify. The Reinsurer hereby agrees to indemnify, defend and hold harmless the Company and its Affiliates and their respective directors, officers and employees (collectively, the "Company Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Company to the extent arising from (i) any breach of the representations, warranties, and covenants of the Reinsurer contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee, agent, representative, successor, or permitted assign of the Company or any of its Affiliates, unless such person is acting at the direction or request of the Reinsurer, and (ii) any successful enforcement of this indemnity. Section 10.2. Company's Obligation to Indemnify. The Company hereby agrees to indemnify, defend and hold harmless the Reinsurer and its Affiliates and their respective directors, officers and employees (collectively, the "Reinsurer Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Reinsurer to the extent arising from (i) any breach of the representations, warranties and covenants of the Company contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee (other than in such employee's capacity as an employee of the Company), agent, representative, successor, or permitted assign of the Reinsurer or any of its Affiliates, and (ii) any successful enforcement of this indemnity. Section 10.3. Certain Definitions and Procedures. In the event either the Reinsurer or the Company shall have a claim for indemnity against the other party under the terms of this Agreement, the parties shall follow the procedures set forth in Article X of the Asset Purchase Agreement. ARTICLE XI MISCELLANEOUS Section 11.1. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified, postage prepaid, or by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: To Company: Security Life of Denver Insurance Company Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 To Reinsurer: Scottish Re (U.S), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel With a copy to: Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP 125 W. 55th Street New York, NY 10019 Section 11.2. Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements and the Confidentiality Agreement, and other documents delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements understanding negotiations, discussions, whether oral or written, of the parties and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein. Section 11.3. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 11.4. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in Colorado, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by U.S. registered mail addressed to such party shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. Section 11.5. No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. Section 11.6. Expenses. Except as otherwise provided herein, the parties hereto shall each bear their respective expenses incurred in connection with the negotiation, preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of counsel, actuaries and other representatives. Section 11.7. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. Section 11.8. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any first party action filed by the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby. Section 11.10. Treatment of Confidential Information. (a) The parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated by this Agreement, the parties will keep confidential and will not use or disclose the other party's Confidential Information and the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority. (b) The confidentiality obligations contained in this Agreement or in any other agreement between the parties hereto, as they relate to the reinsurance hereunder, shall not apply to the federal tax structure or federal tax treatment of this Agreement and each party hereto may disclose to any and all persons, without limitation of any kind, the federal tax structure and federal tax treatment of this Agreement; provided, that such disclosure may not be made until the earliest of (x) the date of the public announcement of discussions relating to this Agreement, (y) the date of the public announcement of this Agreement, or (z) the date of the execution of this Agreement. The preceding sentence is intended to cause this Agreement to be treated as not having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. Subject to the provision with respect to disclosure in the first sentence of this subsection (b), each party hereto acknowledges that it has no proprietary or exclusive rights to the federal tax structure of this Agreement or any federal tax matter or federal tax idea related to this Agreement. Section 11.11. Assignment. No party hereto may assign this Agreement or any of its obligations hereunder without the prior written consent of the other parties; provided, however, that this Agreement shall inure to the benefit of and bind those who, by operation of law, become successors to the parties, including, without limitation, any liquidator, rehabilitator, receiver or conservator and any successor, merged or consolidated entity. The Reinsurer shall be entitled to assign its administrative duties hereunder without the prior written consent of the Company, unless the person or entity to whom such duties are to be assigned is not, at the time of such assignment, a subsidiary of the Reinsurer, in which event the Reinsurer shall obtain the prior written consent of the Company, such consent not to be unreasonably withheld. Section 11.12. Service of Process. The Reinsurer hereby designates The Corporation Trust Company as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company. The Company hereby designates the Commissioner as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Reinsurer. ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS Section 12.1. Representations, Warranties, and Covenants of the Reinsurer. For purposes of perfecting the security interest in the SLD Reserve Trust Account and the SLD Security Trust Account, the Reinsurer hereby represents and warrants to the Company, and covenants for the benefit of the Company, as follows: (a) The Reinsurer is (and, for the past five years, has been) a stock insurance company organized under the laws of Delaware. From October 1999 to January 2000, the chief executive office of the Reinsurer within the meaning of section 9-307 of the UCC was located in Aurora, Colorado and thereafter the chief executive office of the Reinsurer, within the meaning of section 9-307 of the UCC, has been (and, immediately following the date hereof, will be) located in Charlotte, North Carolina. The Reinsurer shall not change its jurisdiction of organization or its chief executive office (within the meaning of section 9-307 of the UCC), except upon thirty (30) calendar days' prior written notice to the Company. In the event that the Reinsurer changes its jurisdiction of organization or the location of its chief executive office, it will only change to a jurisdiction of organization or change the location of its chief executive office to a jurisdiction in the United States. The Reinsurer's true corporate name, as reflected in its organization documents of record in the State of Delaware, is (and, for the past five years, has been) that set forth in the preamble hereto. (b) The Reinsurer owns and will own its interest in the assets in the SLD Reserve Trust Account and the SLD Security Trust Account free and clear of any security interest in, or lien or adverse claim on, such assets. From and after the date hereof, the Reinsurer will not authorize the filing of any other financing statement with respect to any asset in the SLD Reserve Trust Account or the SLD Security Trust Account, nor authorize the granting of "control" (as defined in the UCC) over any of such asset to any Person other than the Company. From and after the date hereof, the Reinsurer will not grant any further security interest in, or lien on, the assets in the SLD Reserve Trust Account or the SLD Security Trust Account. (c) The Reinsurer will do, execute or otherwise authenticate, acknowledge and deliver, or cause to be done, executed or otherwise authenticated, acknowledged and delivered, such instruments of transfer or other records, and take such other steps or actions, as the Company may reasonably deem necessary to create, perfect or preserve the security interest granted to the Company by Section 4.2 hereof and under the SLD Security Trust Agreement or to ensure that such security interest remains prior to any and all other security interests, liens or other interests of any other Person; and the Reinsurer hereby authorizes the Company, in the Reinsurer's name or otherwise, to take, or cause to be taken, any of the foregoing steps or actions upon any failure by the Reinsurer to comply with any written request of the Company in respect of any matter subject to this Section 12.1(c). [The rest of this page intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective December 31, 2004. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis -------------------------------------- Name: Mark Tullis Title: President SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield -------------------------------------- Name: Oscar Scofield Title: CEO/ President EX-10.47 9 ex10-47.txt COINSURANCE/MODIFIED COINSURANCE AGREEMENT ================================================================================ COINSURANCE/MODIFIED COINSURANCE AGREEMENT between SECURITY LIFE OF DENVER INSURANCE COMPANY (referred to as the Company) and SCOTTISH RE (U.S.), INC. (referred to as the Reinsurer) Effective Date: December 31, 2004 ================================================================================ TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.............................................1 Section 1.1. Definitions.............................................1 ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED.............4 Section 2.1. Coinsurance/Modified Coinsurance........................4 Section 2.2. Reinsurance Coverage....................................4 Section 2.3. Reserves................................................4 Section 2.4. Insurance Contract and Reserve Assumption Changes.......5 ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION..........5 Section 3.1. Payments by the Company.................................5 Section 3.2. Settlement..............................................6 Section 3.3. Delayed Payments........................................6 Section 3.4. Offset and Recoupment Rights............................6 Section 3.5. Administration..........................................7 Section 3.6 Certain Reports.........................................7 ARTICLE IV REINSURANCE CREDIT; SECURITY............................7 Section 4.1. Licenses................................................7 Section 4.2. Security................................................7 Section 4.3. SLD Reserve Trust Agreement.............................8 Section 4.4. Investment of Trust Assets..............................8 Section 4.5. Deposit of Assets.......................................8 Section 4.6. Adjustment of Security and Withdrawals..................8 Section 4.7. Withdrawals by the Company..............................9 Section 4.8. Assets in Trust of the Company..........................9 Section 4.9. Compliance by the Company...............................9 Section 4.10. Reports................................................10 ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS............10 Section 5.1. Oversights.............................................10 Section 5.2. Cooperation............................................10 Section 5.3. Regulatory Matters.....................................10 ARTICLE VI DAC TAX................................................10 Section 6.1. Election...............................................10 ARTICLE VII ARBITRATION............................................12 Section 7.1. Arbitration............................................12 Section 7.2. Arbitration Procedure..................................12 ARTICLE VIII INSOLVENCY.............................................13 Section 8.1. Insolvency of the Company..............................13 i ARTICLE IX DURATION; RECAPTURE....................................14 Section 9.1. Duration...............................................14 Section 9.2. Survival...............................................14 Section 9.3. Recapture..............................................14 Section 9.4. Recapture Payments.....................................14 ARTICLE X INDEMNIFICATION........................................15 Section 10.1. Reinsurer's Obligation to Indemnify....................15 Section 10.2. Company's Obligation to Indemnify......................15 Section 10.3. Certain Definitions and Procedures.....................15 ARTICLE XI MISCELLANEOUS..........................................15 Section 11.1. Notices................................................15 Section 11.2. Entire Agreement.......................................16 Section 11.3. Captions...............................................16 Section 11.4. Governing Law and Jurisdiction.........................16 Section 11.5. No Third Party Beneficiaries...........................17 Section 11.6. Expenses...............................................17 Section 11.7. Counterparts...........................................17 Section 11.8. Severability...........................................17 Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages..17 Section 11.10. Treatment of Confidential Information..................18 Section 11.11. Assignment.............................................18 Section 11.12. Service of Process.....................................18 ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS..............19 Section 12.1. Representations, Warranties, and Covenants of the Reinsurer..............................................19 ii COINSURANCE/MODIFIED COINSURANCE AGREEMENT THIS COINSURANCE/MODIFIED COINSURANCE AGREEMENT (the "Agreement"), is made and entered into as of December 31, 2004 (the "Effective Date") by and between Security Life of Denver Insurance Company, a Colorado-domiciled life insurance company (the "Company") and Scottish Re (U.S.), Inc., a Delaware-domiciled life insurance company (the "Reinsurer"). WHEREAS, the Company, Security Life of Denver International Limited, a Bermuda insurance company ("SLDI" and, together with the Company, the "Sellers"), and Scottish Re Group Limited ("Purchaser"), the indirect parent corporation of Reinsurer, Newco and the Reinsurer, have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which the Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; WHEREAS, as contemplated by the Asset Purchase Agreement, the Company wishes to retrocede to the Reinsurer, and the Reinsurer wishes to indemnity reinsure, on a one-hundred percent (100%) coinsurance/modified coinsurance basis, the Covered Insurance Contracts (as hereinafter defined); and WHEREAS, the Company wishes the Reinsurer to perform, or cause the performance of, certain administrative functions on behalf of the Company with respect to the Covered Insurance Contracts, and the Company and the Reinsurer have entered into an Administrative Services Agreement of even date herewith (the "Administrative Services Agreement") pursuant to which the Reinsurer shall provide, or cause the provision of, such administrative services; NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Reinsurer agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. The following terms shall have the respective meanings set forth below throughout this Agreement: "Administrative Services Agreement" has the meaning set forth in the preamble. "Affiliated Reinsurer" has the meaning set forth in the definition of "Triggering Event". "Agreement" has the meaning set forth in the preamble. "Asset Purchase Agreement" has the meaning set forth in the preamble. "Commissioner" means the Insurance Commissioner of the State of Colorado. "Company" has the meaning set forth in the preamble. "Company Indemnified Parties" has the meaning set forth in Section 10.1 of this Agreement. "Confidential Information" means all documents and information concerning one party, any of its Affiliates, the Reinsured Liabilities or the Covered Insurance Contracts, including any information relating to any person insured directly or indirectly under the Covered Insurance Contracts, furnished to the other party or such other party's Affiliates or representatives in connection with this Agreement or the transactions contemplated hereby, except that Confidential Information shall not include information which: (a) at the time of disclosure or thereafter is generally available to and known by the public other than by way of a wrongful disclosure by a party hereto or by any representative of a party hereto; (b) was available on a nonconfidential basis from a source other than the parties hereto or their representatives, provided that such source is not and was not bound by a confidentiality agreement with a party hereto; or (c) was independently developed without violating any obligations under this Agreement and without the use of any Confidential Information. "Confidentiality Agreement" means that certain confidentiality agreement dated May 4, 2004 by and between ING and Purchaser. "Covered Insurance Contracts" means (i) all Insurance Contracts that are reinsurance agreements under which the reinsurance is assumed by the Company on a coinsurance/modified coinsurance basis or on a modified coinsurance basis, as listed on Schedule 1.1(a); and (ii) all Post-Closing Insurance Contracts. The parties agree to update Schedule 1.1(a) from time to time to reflect Covered Insurance Contracts entered into in accordance with the terms of this Agreement or discovered after the Effective Date. "Effective Date" means the effective date shown in the preamble of this Agreement. "Eligible Assets" has the meaning set forth in Section 4.4 of this Agreement. "Excess Amount" has the meaning set forth in Section 9.4 of this Agreement. "Independent Accountant" has the meaning set forth in 6.1(f) of this Agreement. "Post-Closing Insurance Contracts" has the meaning set forth in Section 2.2 of this Agreement. "Premiums" means premiums, considerations, deposits and similar receipts with respect to the Covered Insurance Contracts. "Recapture Date" has the meaning set forth in Section 9.3 of this Agreement. "Reinsurer" has the meaning set forth in the preamble. 2 "Reinsurer Indemnified Parties" has the meaning set forth in Section 10.2 of this Agreement. "Required Balance" has the meaning set forth in Section 4.3 of this Agreement. "Reserves" means the aggregate amount of reserves required to be maintained by the Company with respect to the Covered Insurance Contracts in accordance with SAP. "SAP" means the statutory accounting practices prescribed or permitted by the insurance department of the State of Colorado. "Scottish Annuity & Life" means Scottish Annuity & Life Insurance Company (Cayman) Ltd., a company organized under the laws of the Cayman Islands. "Scottish Re Group" means Scottish Re Group Limited, a holding company organized under the laws of the Cayman Islands. "Shortfall Amount" has the meaning set forth in Section 9.4 of this Agreement. "Triggering Event" means any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Reinsurer or any Affiliate of Reinsurer that at the time in question is reinsuring any of the Business (an "Affiliated Reinsurer"), Scottish Annuity & Life or Scottish Re Group; (ii) the risk based capital (under applicable Delaware Insurance Law requirements), calculated quarterly, of the Reinsurer or any Affiliated Reinsurer domiciled in the United States falls below 125% of the Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.5 of this Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Schedule 1.1(b)), calculated quarterly, of consolidated Scottish Re Group or consolidated Scottish Annuity & Life falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.6 of this Agreement that would reflect such deficiency; (iv) there has been a material breach of any Reinsurance Agreement by the Reinsurer or an Affiliated Reinsurer, including, without limitation, failure to fund any trust as required, and such breach has not been cured within 30 days after notice; or (v) there has been a termination or amendment to any keepwell agreement described in Section 5.26 of the Asset Purchase Agreement without the Company's prior written consent, which consent shall not be unreasonably withheld. 3 "Termination Date" means the date on which this Agreement is terminated in accordance with the terms and conditions of Article IX hereof. "UCC" means the New York Uniform Commercial Code. ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED Section 2.1. Coinsurance/Modified Coinsurance. (a) Subject to the terms and conditions of this Agreement, the Company hereby cedes on a coinsurance/modified coinsurance basis to the Reinsurer as of the Effective Date, and the Reinsurer hereby accepts and agrees to assume and indemnity reinsure on a coinsurance/modified coinsurance basis as of the Effective Date, one hundred percent (100%) of all Reinsured Liabilities arising under or relating to the Covered Insurance Contracts. This Agreement is an agreement for indemnity reinsurance solely between the Company and the Reinsurer and shall not create any legal relationship whatsoever between the Reinsurer and any Person other than the Company. The reinsurance effected under this Agreement shall be maintained in force, without reduction, unless such reinsurance is terminated or reduced as provided herein. (b) On and after the Effective Date, the Reinsurer will have the responsibility for paying to or on behalf of the Company, as and when due, all Reinsured Liabilities arising under or attributable to the Covered Insurance Contracts. Section 2.2. Reinsurance Coverage. In no event shall the reinsurance provided hereunder with respect to a particular Covered Insurance Contract be in force and binding unless such Covered Insurance Contract is in force and binding as of the Effective Date; provided, however, that the Covered Insurance Contracts reinsured hereunder shall include (a) all lapsed or surrendered insurance contracts subject to the reinsurance hereunder, that are Covered Insurance Contracts reinstated in accordance with their terms on and after the Effective Date; (b) all final Insurance Contracts that are on a modified coinsurance or coinsurance/modified coinsurance basis and were under negotiation or otherwise in process on the Effective Date and that are entered into by the Company at the request of the Reinsurer, during the period commencing on the Effective Date and ending on the 120th day following the Effective Date (the "Post-Closing Insurance Contracts"); and (c) all Unexecuted Assumed Reinsurance Contracts of the Company on a modified coinsurance or coinsurance/modified coinsurance basis. Upon the reinstatement of any lapsed or surrendered Covered Insurance Contract, or the execution of any Post-Closing Insurance Contract, such reinstated Covered Insurance Contract or Post-Closing Insurance Contract shall be automatically reinsured hereunder, when, and to the extent that, the Company is liable under such reinstated Covered Insurance Contract or Post-Closing Insurance Contract. Section 2.3. Reserves. On and after the Effective Date, the Reinsurer shall establish and maintain as a liability on its statutory financial statements, Reserves for the Covered Insurance Contracts ceded hereunder, calculated consistent with (a) the reserve requirements, SAP and actuarial principles applicable to the Company under Colorado Law; and 4 (b) otherwise in accordance with any valuation bases and methods of determining Reserves that may be provided in the Covered Insurance Contracts. The Reinsurer shall provide the Company, no later than forty-five (45) calendar days after the end of each calendar year, with copies of all actuarial opinions and actuarial memoranda and all reserve evaluations pertaining to the Reserves for the Covered Insurance Contracts, including, without limitation, any actuarial opinions and reserve evaluations performed by independent actuaries, auditors or other outside consultants. The Company agrees that the Reserves that it establishes and maintains on its statutory financial statements filed with the State of Colorado with respect to the Covered Insurance Contracts shall be consistent with the Reserves established by the Reinsurer; provided, however, that the Company may, at its own cost at any time, upon reasonable notice to the Reinsurer following the Effective Date, examine the Books and Records, and any other books and records that would have been included in the Books and Records had they been in existence on the Effective Date, maintained by the Reinsurer in accordance with the terms of this Agreement, and review the Reinsurer's reserve procedures. If as a result of such examination the Company believes that the Reserves are not consistent with the requirements of clauses (a) and (b) of the first sentence of this Section 2.3 in all material respects, the Reinsurer shall, at the Company's request and expense, obtain and deliver to the Company an actuarial opinion as to the adequacy of the Reserves for the Covered Insurance Contracts, produced by an independent actuary reasonably acceptable to the Company. In the event that the actuarial opinion so rendered reasonably indicates a material inadequacy in the Reserves for the Covered Insurance Contracts or in the Reinsurer's reserve procedures, the Reinsurer shall promptly adjust the amount of the Reserves for the Covered Insurance Contracts and implement appropriate changes to its reserve procedures so as to avoid inadequacies in future periods; provided, however, the Reinsurer shall have the right to contest the findings of such actuarial opinion in accordance with the provisions of Article VII. Section 2.4. Insurance Contract and Reserve Assumption Changes. The Company shall not change (a) the terms and conditions of any Covered Insurance Contracts or (b) the assumptions and methods used to establish the Reserves attributable to the Covered Insurance Contracts, except as required by Applicable Law, and the Company shall notify the Reinsurer promptly upon becoming aware of the requirement to effect any such change and provide the Reinsurer the opportunity to contest such requirement. ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION Section 3.1. Payments by the Company. (a) As consideration for the Reinsurer's agreement to provide reinsurance pursuant to the Reinsurance Agreements between the Company and the Reinsurer, the Company is transferring, on the Effective Date, to the Reinsurer, the SLD Reserve Trust Account and the SLD Security Trust Account, as appropriate, as an initial reinsurance premium, the Transferred Statutory Assets, Investment Assets and cash having a value determined in accordance with Section 2.4(c) of the Asset Purchase Agreement. (b) The Reinsurer shall be entitled prior to the Recapture Date, as additional reinsurance premium, to payment of amounts equal to Premiums received by the Company on 5 and after the Effective Date that are attributable to the Covered Insurance Contracts; provided, however, that following the occurrence of a Triggering Event, the Company shall be entitled to retain such amounts as funds withheld under this Agreement, provided further, however, that such funds may be used by the Company as set forth in Section 4.7 of this Agreement, and any amount remaining upon termination of this Agreement pursuant to Section 9.1, other than as a result of a recapture, shall be paid to the Reinsurer. Any funds withheld pursuant to this Section 3.1(b) shall be credited against the Required Balance. For the avoidance of doubt, the parties acknowledge and agree that the Company retains all right, title and interest to all Premiums and other amounts received with respect to the Covered Insurance Contracts, subject to its contractual obligations under this Agreement to pay corresponding amounts over to the Reinsurer in accordance with Section 3.2 hereof. (c) To the extent that the Company recovers amounts from any third party relating to the Business attributable to the Covered Insurance Contracts (including, without limitation, Premiums in arrears from a policyholder or ceding company with respect to a reinstated Covered Insurance Contract, litigation recoveries, premium and reinsurance recoverables), the Company shall transfer such amounts to the Reinsurer and provide the Reinsurer with any pertinent information that the Company may have relating thereto in accordance with Section 3.2 hereof. Section 3.2. Settlement. During the term of this Agreement, a settlement amount between the Company and the Reinsurer as of the last day of any relevant accounting period shall be calculated according to the terms of the Covered Insurance Contracts as if the Reinsurer was in the Company's position under each Covered Insurance Contract and the Company was in the ceding company's position under each such Covered Insurance Contract. In connection with the quarterly accounting pursuant to the Administrative Services Agreement, (i) the Company will pay to the Reinsurer any net amounts the Company receives from the ceding companies under the Covered Insurance Contracts, including without limitation any modified coinsurance reserve adjustment, and (ii) the Reinsurer will pay to the Company any net amount the Company is obligated to pay to the ceding companies under the Covered Insurance Contracts, including without limitation any modified coinsurance reserve adjustment. Section 3.3. Delayed Payments. If there is a delayed settlement of any payment due hereunder, interest will accrue on such payment at the 180-Day Treasury Rate then in effect until settlement is made. For purposes of this Section 3.3, a payment will be considered overdue, and such interest will begin to accrue, on the first day immediately following the date such payment is due. For greater clarity, (i) a payment shall be deemed to be due hereunder on the last date on which such payment may be timely made under the applicable provision, and (ii) interest will not accrue on any payment due the Reinsurer hereunder unless the delayed settlement thereof was caused by the Company. Section 3.4. Offset and Recoupment Rights. Any debits or credits incurred on and after the Effective Date in favor of or against either the Company or Reinsurer with respect to this Agreement or any other reinsurance agreements or trust agreements that constitute Related Agreements or otherwise are deemed mutual debits or credits, as the case may be, shall be set off and recouped, and only the net balance shall be allowed or paid. This Section 3.4 shall 6 apply notwithstanding the existence of any insolvency, rehabilitation, conservatorship or comparable proceeding by or against the Company or the Reinsurer. Section 3.5. Administration. The Reinsurer will administer, or cause the administration of, the Covered Insurance Contracts and provide quarterly accountings with respect thereto to the Company in accordance with the Administrative Services Agreement. All reports, remittances and payments due to or from a party hereto shall be made in accordance with the procedures set forth in the Administrative Services Agreement. Section 3.6 Certain Reports. (a) Not later than sixty (60) calendar days after the end of each calendar year, and forty-five (45) days after the end of any calendar quarter other than the quarter ending on December 31, the Reinsurer shall provide to the Company a calculation of (x) the risk based capital of the Reinsurer and each other entity identified in Clause (ii) of the definition of the Triggering Event, and (y) the capital adequacy ratio calculated as set forth on Schedule 1.1(b) of the entities identified in Clause (iii) of the definition of Triggering Event. Each such calculation shall include reasonable supporting detail. (b) The Reinsurer shall also provide written notice of the occurrence of any Triggering Event within two (2) Business Days after its occurrence. The Company may, at its own expense, review Reinsurer's or an Affiliated Reinsurer's books and records to the extent reasonably necessary to confirm the calculations provided by Reinsurer pursuant to this Section 3.6(a). In addition, Reinsurer shall cooperate fully with the Company and promptly respond to the Company's reasonable inquiries from time to time concerning the determination of whether a Triggering Event has occurred. ARTICLE IV REINSURANCE CREDIT; SECURITY Section 4.1. Licenses. At all times during the term of this Agreement, the Reinsurer shall hold and maintain all licenses and authorizations required under Applicable Law or otherwise take all action that may be necessary (i) so that the Company shall receive full reserve credits for reinsurance ceded on a coinsurance basis under this Agreement in the statutory financial statement filed with the Commissioner, and in statutory financial statements required to be filed with regulatory authority(ies) in such other jurisdictions in which the Company must file such statements, and (ii) to perform its obligations hereunder. Section 4.2. Security. In accordance with the Asset Purchase Agreement, the Reinsurer, as grantor, is creating the SLD Reserve Trust Account with a trustee approved by the Company, naming the Company as sole beneficiary thereof. The SLD Reserve Trust Account shall initially be funded with Investment Assets and cash transferred from the Company. In accordance with the SLD Reserve Trust Agreement, the Reinsurer hereby pledges the assets in the SLD Trust Account, including its residual interest therein, to perfect a first priority security interest in favor of the Company under Article 9 of the UCC. During the term of the SLD Reserve Trust Agreement, the Reinsurer shall not, and shall direct that the trustee shall not, grant or cause to be created in favor of any third person any security interest whatsoever in any of the assets in the SLD Trust Accounts or in the residual interest therein. 7 Section 4.3. SLD Reserve Trust Agreement. The trustee shall hold assets in the SLD Reserve Trust Account pursuant to the terms of the SLD Reserve Trust Agreement. The SLD Reserve Trust Account shall be established and maintained in compliance with all requirements of Colorado Insurance Laws and Regulations or any successor provision and all other applicable laws governing the Company's right to take financial statement credit for reinsurance under this Agreement. The parties hereto acknowledge and agree that the provisions of this Article IV are intended to provide the Company with such credit. In the event that the Company is not permitted to take such credit for reinsurance because any provision of this Agreement is determined not to comply with Colorado Insurance Laws and Regulations or other Applicable Law, the parties hereto agree to reasonably cooperate to amend this Agreement to provide such credit. The fair market value of assets in the SLD Reserve Trust Account shall be not less than the amount required (determined pursuant to SAP) in order for the Company to receive full statutory reserve credit for the retrocession of the Insurance Contracts which the Company has ceded hereunder and on a coinsurance basis under the other Reinsurance Agreements between the Company and the Reinsurer (the "Required Balance"). Section 4.4. Investment of Trust Assets. The assets held in the SLD Reserve Trust Account shall be valued at their fair market value as of the date as of which such assets are required to be valued. The assets that may be held in the SLD Reserve Trust Account (the "Eligible Assets") shall consist of cash, certificates of deposit issued by a U.S. bank and payable in U.S. dollars and investments of the type permitted by Colorado Insurance Law; provided, that (i) each such investment that is a security is issued by an institution that is not the Reinsurer, the Company or an Affiliate of either party, and (ii) such investments comply with the requirements specified by the Eligible Asset Guidelines as set forth on Schedule 4.4. Section 4.5. Deposit of Assets. Prior to depositing assets in the SLD Reserve Trust Account, Reinsurer will execute assignments or endorsements in blank, or transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the direction of the Company, may whenever necessary negotiate these assets without the consent or signature from the Reinsurer or any other entity. Section 4.6. Adjustment of Security and Withdrawals. The Reinsurer shall maintain Eligible Assets in the SLD Reserve Trust Account with an aggregate fair market value at least equal the Required Balance. The amount of assets held in the SLD Reserve Trust Account shall be adjusted following the end of each calendar quarter. (a) If the aggregate fair market value of the Eligible Assets held in the SLD Reserve Trust Account at the end of any calendar quarter is less than the Required Balance, the Reinsurer shall, no later than 15 calendar days following delivery of the reserve report included in the quarterly report provided pursuant to the Administrative Services Agreement, transfer additional Eligible Assets to the SLD Reserve Trust Account so that the aggregate fair market value of the Eligible Assets held in the SLD Reserve Trust Account is not less than the Required Balance. (b) If the aggregate fair market value of the Eligible Assets in the SLD Reserve Trust Account at the end of any calendar quarter exceeds 102% of the Required Balance, then the Reinsurer shall have the right to seek approval (which shall not be 8 unreasonably or arbitrarily withheld) from the Company to withdraw the excess. For the purposes of the foregoing sentence, in the event that a Triggering Event has occurred, the parties acknowledge and agree that it shall not be unreasonable for the Company to withhold its consent to any such withdrawal. Section 4.7. Withdrawals by the Company. The Company may withdraw the assets held in the SLD Reserve Trust Account at any time and from time to time, notwithstanding any other provisions of this Agreement, and assets withdrawn from such SLD Reserve Trust Account shall be utilized and applied by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company), without diminution because of insolvency on the part of the Company or the Reinsurer; provided however, that following any such withdrawal the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) may only apply such assets for one or more of the following purposes: (a) to pay, or reimburse the Company for payment of, Premiums received by Reinsurer hereunder which are to be returned to policyholders or ceding companies because of cancellations of Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; (b) to pay, or reimburse the Company for payment of, surrenders, benefits, losses or other amounts payable pursuant to the provisions of the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; and (c) to fund an account with the Company in an amount no less than the deduction, for reinsurance ceded, from the Company's liabilities for the reserves to be maintained with respect to the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis. Section 4.8. Assets in Trust of the Company. Any assets deposited into an account of the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) pursuant to Section 4.7(c), and any interest or other earnings thereon shall be held by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) in trust for the benefit of the Reinsurer, subject to the Company's right to apply such assets to amounts due and payable by the Reinsurer to the Company under this Agreement, and shall at all times be maintained, separate and apart from any assets of the Company, for the sole purpose of funding the payments and reimbursements described in Sections 4.7(a) through (c), inclusive, of this Article IV. Section 4.9. Compliance by the Company. The Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, 9 receiver or conservator of the Company) shall ensure that any assets held in trust pursuant to Section 4.7(c) comply with the provisions of Sections 4.4, 4.7(a) and 4.7(b) in accordance with its fiduciary obligations as trustee with respect to such amounts. Section 4.10. Reports. At the Company's request, the Reinsurer shall provide the Company with its annual and quarterly statutory financial statements filed with state insurance regulators and a copy of its audited statutory financial statements along with the audit report thereon. ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS Section 5.1. Oversights. Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery, and provided, further, that the party making such error or omission or responsible for such delay shall be responsible for any additional liability which attaches as a result. If (a) the failure of either party to comply with any provision of this Agreement is unintentional or the result of a misunderstanding or oversight and (b) such failure to comply is promptly rectified, both parties shall be restored as closely as possible to the positions they would have occupied if no error or oversight had occurred. Section 5.2. Cooperation. Each party hereto shall cooperate fully with the other in all reasonable respects in order to accomplish the objectives of this Agreement. Section 5.3. Regulatory Matters. If the Company or the Reinsurer receives notice of, or otherwise becomes aware of, any regulatory inquiry, investigation or proceeding relating to the Covered Insurance Contracts, the Company or the Reinsurer, as applicable, shall promptly notify the other party thereof, whereupon the parties shall cooperate in good faith and use their respective commercially reasonable efforts to resolve such matter in a mutually satisfactory manner, in light of all the relevant business, regulatory and legal facts and circumstances. ARTICLE VI DAC TAX Section 6.1. Election. (a) All uncapitalized terms used herein shall have the meanings set forth in the regulations under Section 848 of the Code. (b) Each of the Company and the Reinsurer acknowledges that it is subject to taxation under Subchapter L of the Code and hereby makes the election contemplated by Section 1.848-2(g)(8) of the Treasury Regulations with respect to this Agreement. Each of the Company and the Reinsurer (i) agrees that such election is effective for the taxable year of each party that includes the Effective Date and for all subsequent years during which this Agreement remains in effect and (ii) warrants that it will take no action to revoke the election. 10 (c) Pursuant to Section 1.848-2(g)(8) of the Treasury Regulations, each of the Company and the Reinsurer hereby agrees (i) to attach a schedule to its federal income tax return for its first taxable year ending on or after the Effective Date that identifies this Agreement as a reinsurance agreement for which the joint election under Section 1.848-2(g)(8) has been made, (ii) that the party with net positive consideration for this Agreement for each taxable year will capitalize its specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Code, and (iii) to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. The Reinsurer shall prepare and execute duplicate copies of the schedule described in the preceding sentence as soon as practicable after the Effective Date and submit them to the Company for execution. The Company shall execute the copies and return one of them to the Reinsurer within thirty (30) calendar days of the receipt of such copies. (d) The Company shall submit a schedule to the Reinsurer by May 1 of each year of its calculation of the net consideration under this Agreement for the preceding taxable year. This schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Company stating that the Company shall report such net consideration in its federal income tax return for the preceding taxable year. (e) The Reinsurer may contest such calculation by providing an alternative calculation to the Company in writing within thirty (30) calendar days after the date on which the Reinsurer receives the Company's calculation. If the Reinsurer does not so notify the Company, the Reinsurer shall report the net consideration under this Agreement as determined by the Company in the Reinsurer's federal income tax return for the preceding taxable year. (f) If Reinsurer contests the Company's calculation of the net consideration under this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount of net consideration within thirty (30) calendar days after the date on which the Reinsurer submits its alternative calculation. If Reinsurer and the Company reach an agreement as to the amount of net consideration under this Agreement, each party shall report such amount in its federal income tax return for the preceding taxable year. If, during such period, Reinsurer and the Company are unable to reach an agreement, they shall promptly thereafter cause Deloitte & Touche USA LLP (the "Independent Accountants") to promptly review (which review shall commence no later than five (5) calendar days after the selection of the Independent Accountants) this Agreement and the calculations of Reinsurer and the Company for the purpose of calculating the net consideration under this Agreement. In making such calculation, the Independent Accountants shall consider only those items or amounts in the Company's calculation as to which the Reinsurer has disagreed. The Independent Accountants shall deliver to Reinsurer and the Company, as promptly as practicable (but no later than thirty (30) calendar days after the commencement of their review), a report setting forth such calculation, which calculation shall result in a net consideration between the amount thereof shown in the Company's calculation delivered pursuant to Section 6.1(d) and the amount thereof shown in Reinsurer's calculation delivered pursuant to Section 6.1(e). Such report shall be final and binding upon Reinsurer and the 11 Company. The fees, costs and expenses of the Independent Accountants shall be borne (i) by the Company if the difference between the net consideration as calculated by the Independent Accountants and the Company's calculation delivered pursuant to Section 6.1(d) is greater than the difference between the net consideration as calculated by the Independent Accountants and Reinsurer's calculation delivered pursuant to Section 6.1(e), (ii) by the Reinsurer if the first such difference is less than the second such difference, and (iii) otherwise equally by Reinsurer and the Company. ARTICLE VII ARBITRATION Section 7.1. Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLD Closing Statement and the assets to be transferred to the Reinsurer, the SLD Reserve Trust Account and the SLD Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC tax, which shall be resolved in accordance with Article VI hereof, or (iii) matters relating to whether a Triggering Event has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 7.2. (b) The parties intend this Section 7.1 to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 7.1(a), the other party may request the court specified in Section 11.5 to compel arbitration in accordance with the Federal Arbitration Act. Section 7.2. Arbitration Procedure. The Company and Reinsurer intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 7.1(a)) be resolved without resort to any litigation. Accordingly, the Company and Reinsurer agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Company and Reinsurer agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Supplementary Rules for the Resolution of Intra-Industry U.S. Reinsurance and Insurance Disputes of the American Arbitration Association. The arbitration hearing will be before a panel of three disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former 12 employee of the Company or any of its Affiliates. The Company and Reinsurer will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either the Company or Reinsurer fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the American Arbitration Association will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including without limitation each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Company or Reinsurer) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 11.4. No such award or judgment will bear interest except as provided in Section 3.2. In no event may the arbitrators award punitive or exemplary damages. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE VIII INSOLVENCY Section 8.1. Insolvency of the Company. In the event of the insolvency of the Company, all coinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the Reinsurer directly to the Company or to its statutory liquidator, receiver or statutory successor on the basis of the liability of the Company under the Covered Insurance Contracts without diminution because of the insolvency of the Company. It is understood, however, that in the event of the insolvency of the Company, the liquidator, receiver or statutory successor of the Company shall give written notice of the pendency of a claim against the Company on a Covered Insurance Contract within a reasonable period of time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. It is further understood that the expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. 13 ARTICLE IX DURATION; RECAPTURE Section 9.1. Duration. This Agreement shall continue in force until such time as (i) the Company's liability with respect to all Covered Insurance Contracts reinsured hereunder is terminated in accordance with their respective terms, or the Company has elected to recapture the reinsurance of Covered Insurance Contracts following the occurrence of a Triggering Event, and (ii) the Company has received payments which discharge such liability in full in accordance with the provisions of this Agreement. In no event shall the interpretation of this Section 9.1 imply any unilateral right of the Reinsurer to terminate this Agreement; provided, however, that in the event that the Company fails to timely pay any material amount due the Reinsurer hereunder, and such amount remains unpaid for thirty (30) days, the Reinsurer shall have the right to terminate reinsurance hereunder provided, however, that the Reinsurer shall have provided to the Colorado Insurance Commissioner ninety (90) calendar days written notice prior to such termination. In such case, the provisions of Section 9.3 shall apply as if the Termination Date were a Recapture Date and the Reinsurer shall be relieved of all liability under this Agreement to make future payments to the Company. Section 9.2. Survival. Notwithstanding the other provisions of this Article IX, the terms and conditions of Articles I, VI and X and the provisions of Sections 11.1, 11.4, 11.6, 11.9 and 11.10 shall remain in full force and effect after the Termination Date. Section 9.3. Recapture. Upon the occurrence of a Triggering Event, the Company shall have the right to recapture all, and not less than all, of the reinsurance ceded under this Agreement, by providing the Reinsurer with written notice of its intent to effect recapture. Recapture of the Covered Insurance Contracts shall be effective on the tenth (10th) day following the day on which the Company has provided the Reinsurer with such notice (the "Recapture Date"). Section 9.4. Recapture Payments. On the Recapture Date, the Company shall be entitled to withdraw an amount equal to a portion of the Required Balance attributable to the Covered Insurance Contracts reinsured hereunder from the SLD Reserve Trust as consideration for assumption by the Company of the Reinsured Liabilities under the recaptured Covered Insurance Contracts. In the event that the fair market value of the assets in the SLD Reserve Trust exceeds the Required Balance (the "Excess Amount"), and the fair market value of the assets in the SLD Security Trust Account is less than the amount required by Exhibit A to the SLD Security Trust Agreement on the Recapture Date (the "Shortfall Amount"), the Company shall also be permitted to withdraw such Excess Amount equal to the pro-rata portion of the Shortfall Amount attributable to the Covered Insurance Contracts reinsured hereunder. In addition, the Company shall be entitled to withdraw a portion of the remaining balance in the SLD Security Trust Account attributable to the Covered Insurance Contracts reinsured hereunder less any amounts owed to the Reinsurer under this Agreement as of the Recapture Date. 14 ARTICLE X INDEMNIFICATION Section 10.1. Reinsurer's Obligation to Indemnify. The Reinsurer hereby agrees to indemnify, defend and hold harmless the Company and its Affiliates and their respective directors, officers and employees (collectively, the "Company Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Company to the extent arising from (i) any breach of the representations, warranties, and covenants of the Reinsurer contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee, agent, representative, successor, or permitted assign of the Company or any of its Affiliates, unless such person is acting at the direction or request of the Reinsurer, and (ii) any successful enforcement of this indemnity. Section 10.2. Company's Obligation to Indemnify. The Company hereby agrees to indemnify, defend and hold harmless the Reinsurer and its Affiliates and their respective directors, officers and employees (collectively, the "Reinsurer Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Reinsurer to the extent arising from (i) any breach of the representations, warranties and covenants of the Company contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee (other than in such employee's capacity as an employee of the Company), agent, representative, successor, or permitted assign of the Reinsurer or any of its Affiliates, and (ii) any successful enforcement of this indemnity. Section 10.3. Certain Definitions and Procedures. In the event either the Reinsurer or the Company shall have a claim for indemnity against the other party under the terms of this Agreement, the parties shall follow the procedures set forth in Article X of the Asset Purchase Agreement. ARTICLE XI MISCELLANEOUS Section 11.1. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified, postage prepaid, or by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: 15 To Company: Security Life of Denver Insurance Company Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 To Reinsurer: Scottish Re (U.S), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel With a copy to: Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP 125 W. 55th Street New York, NY 10019 Section 11.2. Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements and the Confidentiality Agreement, and other documents delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements understanding negotiations, discussions, whether oral or written, of the parties and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein. Section 11.3. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 11.4. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado applicable to 16 contracts entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in Colorado, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by U.S. registered mail addressed to such party shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. Section 11.5. No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. Section 11.6. Expenses. Except as otherwise provided herein, the parties hereto shall each bear their respective expenses incurred in connection with the negotiation, preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of counsel, actuaries and other representatives. Section 11.7. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. Section 11.8. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any first party action filed by the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either 17 pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby. Section 11.10. Treatment of Confidential Information. (a) The parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated by this Agreement, the parties will keep confidential and will not use or disclose the other party's Confidential Information and the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority. (b) The confidentiality obligations contained in this Agreement or in any other agreement between the parties hereto, as they relate to the reinsurance hereunder, shall not apply to the federal tax structure or federal tax treatment of this Agreement and each party hereto may disclose to any and all persons, without limitation of any kind, the federal tax structure and federal tax treatment of this Agreement; provided, that such disclosure may not be made until the earliest of (x) the date of the public announcement of discussions relating to this Agreement, (y) the date of the public announcement of this Agreement, or (z) the date of the execution of this Agreement. The preceding sentence is intended to cause this Agreement to be treated as not having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. Subject to the provision with respect to disclosure in the first sentence of this subsection (b), each party hereto acknowledges that it has no proprietary or exclusive rights to the federal tax structure of this Agreement or any federal tax matter or federal tax idea related to this Agreement. Section 11.11. Assignment. No party hereto may assign this Agreement or any of its obligations hereunder without the prior written consent of the other parties; provided, however, that this Agreement shall inure to the benefit of and bind those who, by operation of law, become successors to the parties, including, without limitation, any liquidator, rehabilitator, receiver or conservator and any successor, merged or consolidated entity. The Reinsurer shall be entitled to assign its administrative duties hereunder without the prior written consent of the Company, unless the person or entity to whom such duties are to be assigned is not, at the time of such assignment, a subsidiary of the Reinsurer, in which event the Reinsurer shall obtain the prior written consent of the Company, such consent not to be unreasonably withheld. Section 11.12. Service of Process. The Reinsurer hereby designates The Corporation Trust Company as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company. The Company hereby designates the Commissioner as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Reinsurer. 18 ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS Section 12.1. Representations, Warranties, and Covenants of the Reinsurer. For purposes of perfecting the security interest in the SLD Reserve Trust Account and the SLD Security Trust Account, the Reinsurer hereby represents and warrants to the Company, and covenants for the benefit of the Company, as follows: (a) The Reinsurer is (and, for the past five years, has been) a stock insurance company organized under the laws of Delaware. From October 1999 to January 2000, the chief executive office of the Reinsurer within the meaning of section 9-307 of the UCC was located in Aurora, Colorado and thereafter the chief executive office of the Reinsurer, within the meaning of section 9-307 of the UCC, has been (and, immediately following the date hereof, will be) located in Charlotte, North Carolina. The Reinsurer shall not change its jurisdiction of organization or its chief executive office (within the meaning of section 9-307 of the UCC), except upon thirty (30) calendar days' prior written notice to the Company. In the event that the Reinsurer changes its jurisdiction of organization or the location of its chief executive office, it will only change to a jurisdiction of organization or change the location of its chief executive office to a jurisdiction in the United States. The Reinsurer's true corporate name, as reflected in its organization documents of record in the State of Delaware, is (and, for the past five years, has been) that set forth in the preamble hereto. (b) The Reinsurer owns and will own its interest in the assets in the SLD Reserve Trust Account and the SLD Security Trust Account free and clear of any security interest in, or lien or adverse claim on, such assets. From and after the date hereof, the Reinsurer will not authorize the filing of any other financing statement with respect to any asset in the SLD Reserve Trust Account or the SLD Security Trust Account, nor authorize the granting of "control" (as defined in the UCC) over any of such asset to any Person other than the Company. From and after the date hereof, the Reinsurer will not grant any further security interest in, or lien on, the assets in the SLD Reserve Trust Account or the SLD Security Trust Account. (c) The Reinsurer will do, execute or otherwise authenticate, acknowledge and deliver, or cause to be done, executed or otherwise authenticated, acknowledged and delivered, such instruments of transfer or other records, and take such other steps or actions, as the Company may reasonably deem necessary to create, perfect or preserve the security interest granted to the Company by Section 4.2 hereof and under the SLD Security Trust Agreement or to ensure that such security interest remains prior to any and all other security interests, liens or other interests of any other Person; and the Reinsurer hereby authorizes the Company, in the Reinsurer's name or otherwise, to take, or cause to be taken, any of the foregoing steps or actions upon any failure by the Reinsurer to comply with any written request of the Company in respect of any matter subject to this Section 12.1(c). [The rest of this page intentionally left blank.] 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective December 31, 2004. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis -------------------------------------- Name: Mark Tullis Title: President SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield -------------------------------------- Name: Oscar Scofield Title: CEO/ President 20 EX-10.48 10 ex10-48.txt RETROCESSION AGREEMENT RETROCESSION AGREEMENT (the "Agreement") between SCOTTISH RE (U.S.), INC. Charlotte, North Carolina (the "Reinsurer") and SECURITY LIFE OF DENVER INSURANCE COMPANY (the "Retrocessionaire") This Agreement is effective December 31, 2004 TABLE OF CONTENTS ARTICLE I SCOPE OF REINSURANCE................................................1 ARTICLE II LIABILITY..........................................................3 ARTICLE III PREMIUMS..........................................................3 ARTICLE IV RESERVES...........................................................4 ARTICLE V REDUCTIONS, TERMINATION AND OTHER RETROCESSIONAL COVERAGE...........4 ARTICLE VI CLAIMS.............................................................5 ARTICLE VII RECAPTURE.........................................................6 ARTICLE VIII GENERAL PROVISIONS...............................................6 ARTICLE IX TERMINAL ACCOUNTING AND SETTLEMENT.................................9 ARTICLE X CONFIDENTIALITY....................................................10 ARTICLE XI INSOLVENCY........................................................11 ARTICLE XII ARBITRATION......................................................11 ARTICLE XIII DAC TAX.........................................................13 ARTICLE XIV DURATION.........................................................14 ARTICLE XV EXECUTION.........................................................15 Schedule A Covered Individuals Schedule B Reinsurance Premiums, Reporting and Settlement Procedures THIS RETROCESSION AGREEMENT (this "Agreement"), is made and entered into as of December 31, 2004 (the "Effective Date") by and between Security Life of Denver Insurance Company, a Colorado-domiciled life insurance company (the "Retrocessionaire") and Scottish Re (U.S.), Inc., a Delaware-domiciled life insurance company (the "Reinsurer"). WHEREAS, the Retrocessionaire, Security Life of Denver International Limited, a Bermuda insurance company ("SLDI" and, together with the Retrocessionaire, the "Sellers"), and Scottish Re Group Limited (the "Purchaser"), the indirect parent corporation of the Reinsurer, Newco and the Reinsurer, have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which the Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; and WHEREAS, as contemplated by the Asset Purchase Agreement, the Reinsurer and the Retrocessionaire have entered into a Coinsurance Agreement, and a Coinsurance/Modified Coinsurance Agreement, each dated December 31, 2004 (the "Reinsurance Agreements"), for the reinsurance on a 100% indemnity reinsurance basis of the Insurance Contracts described therein (collectively, the "Covered Insurance Contracts"); and WHEREAS, as further contemplated by the Asset Purchase Agreement, the Reinsurer wishes to retrocede to the Retrocessionaire, and the Retrocessionaire wishes to reinsure, on a yearly renewable term basis, a portion of the mortality risks with respect to the individuals identified on Schedule A attached hereto, as finalized in accordance with Section 1.2(b) (the "Covered Individuals") under the Covered Insurance Contracts; NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Retrocessionaire and the Reinsurer agree as follows: ARTICLE I SCOPE OF REINSURANCE 1.1. Policies Reinsured. As of the Effective Date, the Retrocessionaire hereby indemnifies the Reinsurer, according to the terms and conditions of this Agreement, for the Excess Mortality Risks (as defined below). 1.2. Coverage and Exclusions. (a) Only "Excess Mortality Risk" (as defined in the following sentence) with respect to any Covered Individual is reinsured under this Agreement. "Excess Mortality Risk" means death benefits payable by the Reinsurer with respect to any Covered Individual which (i) are ceded to the Reinsurer by the Retrocessionaire under a Covered Insurance Contract and (ii) together with other risks retained by the Reinsurer with respect to such Covered Individual prior to the Effective Date under other reinsurance agreements would cause the amount of the Reinsurer's retained risk with respect to such Covered Individual to exceed $2,000,000 (the "Reinsurer Net Retention"). In calculating whether any risk with respect to any Covered Individual constitutes an Excess Mortality Risk, the parties 1 shall take into consideration retrocessions of risk to third parties (by either the Reinsurer or the Retrocessionaire), which shall be taken into account for this purpose without regard to actual collection. For example, a policy insuring the life of a Covered Individual that pays a death benefit of $5,000,000 will only be deemed to have Excess Mortality Risk of $1,000,000 if $2,000,000 of the risk under that policy has already been retroceded (by either the Reinsurer or the Retrocessionaire) to a third party. (b) The parties agree that no later than June 30, 2005, they will, using the complete data shown on the Sage System at that time, mutually identify in good faith the individuals that would have been included on Schedule A if all data with respect to cessions to and retrocessions by the Retrocessionaire through the Effective Date had been input into the Sage System as of the Effective Date. An individual will be included on Schedule A only if (i) there is Excess Mortality Risk with respect to such individual and (ii) there is no capacity for additional risk in the retrocession market with respect to such individual. Any dispute as to whether there is no capacity in the retrocession market with respect to a particular individual will be resolved by determining whether, at the time in question, the capacity in the retrocession market for additional risk with respect to such individual is comparable as a practical matter to the capacity in the retrocession market for additional risk on the individuals identified on Schedule A as of the Effective Date. The Reinsurer shall provide to the Retrocessionaire reasonable documentation demonstrating the absence of such retrocessional capacity with respect to any individual the Reinsurer believes should be included on the revised Schedule A. Any individuals included on the revised Schedule A pursuant to this Section 1.2(b) will thereafter be deemed Covered Individuals for all purposes of this Agreement, and any individuals not included on the revised Schedule A pursuant to this Section 1.2(b) will thereafter not be deemed Covered Individuals without regard to whether they were included on Schedule A on the Effective Date. For the avoidance of doubt, it is acknowledged and understood that if an individual for whom there would be Excess Mortality Risk had such individual been determined to be a Covered Individual dies after the Closing Date, and prior to the time of such individual's death the parties have not made a final determination as to whether such individual is a Covered Individual pursuant to the first sentence of this clause (b), such individual will be deemed to be a Covered Individual includable on Schedule A. 1.3. Plan of Reinsurance. Reinsurance under this Agreement shall be on a yearly-renewable term basis. 1.4. No Third Party Beneficiary. This Agreement is an indemnity reinsurance agreement solely between the Retrocessionaire and the Reinsurer, and the performance of the obligations of each party under this Agreement shall be rendered solely to the other party. In no instance shall anyone other than the Retrocessionaire or the Reinsurer have any rights under this Agreement. 2 ARTICLE II LIABILITY 2.1. Liability. The liability of the Retrocessionaire for the Excess Mortality Risks reinsured hereunder shall commence simultaneously with that of the Reinsurer, but in no event prior to the Effective Date of this Agreement. The reinsurance under this Agreement with respect to any Covered Individual shall remain in force without reduction as long as the liability of the Reinsurer with respect to such Covered Individual under the Covered Insurance Contracts remains in force without reduction, unless the reinsurance provided herein is terminated, reduced or recaptured as provided herein. The Retrocessionaire's liability on any business reinsured hereunder shall terminate simultaneously with that of the Reinsurer. ARTICLE III PREMIUMS 3.1. Premiums. Reinsurance premiums for coverage under this Agreement are shown in Schedule B. The Retrocessionaire shall be entitled to change such premiums no more frequently than annually by providing written notice of such change to the Reinsurer not later than sixty (60) calendar days prior to the end of any calendar year, with the specified changes to be effective as of January 1 of the following year. Any increase in such premiums shall not be in a percentage greater than the percentage increase in the market rates for similar retrocessions (taking into account the nature of the underlying risks, the level of the risk being retroceded, and any other factors appropriate to ensure reasonable comparability) since the time that the then-effective premiums became effective (a "Permitted Increase"). Any dispute as to whether any increase in premiums constitutes a Permitted Increase shall be referred to a mutually agreeable actuarial consulting firm, but the increases shall be effective and shall be paid by the Reinsurer unless and until such actuarial consulting firm determines that the increase did not constitute a Permitted Increase, in which case the parties shall make appropriate retroactive adjustments to reflect an increase deemed by the actuarial consulting firm to be a Permitted Increase and shall apply that Permitted Increase thereafter. 3.2. Payment of Premiums. Reinsurance premiums are payable in accordance with the settlement procedures specified in Schedule B. 3.3. Delayed Payment. All amounts due and payable by the Reinsurer to the Retrocessionaire under this Agreement shall be paid in accordance with the settlement procedures specified in Schedule B. Net reinsurance premiums or net death benefits which remain unpaid for more than thirty (30) days from the remit date set forth in Schedule B will incur interest from the end of the reporting period. Interest will be calculated using the 13-week Treasury Bill rate reported in the "Money Rates" section of the Wall Street Journal for the last business day of the month of that reporting period 3 3.4. Failure to Pay Premiums. The payment of reinsurance premiums is a condition precedent to the liability of the Retrocessionaire for reinsurance covered under this Agreement. In the event that reinsurance premiums are not paid within forty-five (45) days of the remit date, the Retrocessionaire will have the right to terminate the reinsurance hereunder. If the Retrocessionaire elects to exercise its right of termination, it will give the Reinsurer thirty (30) days notice of its intention to terminate said reinsurance. Such notice will be sent by certified mail. If all reinsurance premiums in arrears, including any which may become in arrears during the thirty (30) day period and any interest thereon, are not paid before the expiration of said period, the Retrocessionaire will be relieved of all liability under this Agreement as of the last date on which premiums have been paid. This Agreement may be reinstated within sixty (60) days of the date of the termination, and upon payment of all reinsurance premiums in arrears including any interest accrued thereon. ARTICLE IV RESERVES 4.1. Reserve Credit. The parties intend that the Reinsurer will receive statutory reserve credit in the State of Delaware and in all the states in which the Reinsurer must file its statutory financial statements for the insurance risks ceded to the Retrocessionaire. The Retrocessionaire agrees that it will take commercially reasonable steps to provide the Reinsurer with the basis upon which to take such credit, including, if necessary, establishing a trust account for this purpose. ARTICLE V REDUCTIONS, TERMINATION AND OTHER RETROCESSIONAL COVERAGE 5.1. Reductions and Terminations. In the event of the reduction or termination of the amount of the risk covered by the Covered Insurance Contracts with respect to any Covered Individual, the Reinsurer will reduce or terminate the reinsurance on that life, effective on the same date. The Retrocessionaire will refund any unearned reinsurance premiums with respect to such reduction or termination. 5.2. Other Retrocessional Coverage. On and after the Effective Date, the Reinsurer agrees to use commercially reasonable efforts to obtain retrocessional coverage on the Excess Mortality Risk to be effective as of the Effective Date, or as soon as reasonably possible thereafter, from third party reinsurers at rates and terms that are, within the reasonable discretion of the Reinsurer, commercially reasonable. 4 ARTICLE VI CLAIMS 6.1. Claims. Claims covered under this Agreement include only death benefits payable with respect to Excess Mortality Risks. The Retrocessionaire will accept the decision of the Reinsurer on payment of a claim with respect to any Covered Individual under a Covered Insurance Contract; provided that the Reinsurer shall adjudicate such claim in good faith. 6.2. Notice. The Reinsurer will provide the Retrocessionaire with a summary of claims received with respect to the Covered Individuals under the Covered Insurance Contracts no less frequently than on a quarterly basis. 6.3. Proofs of Loss. Upon request, the Reinsurer will promptly provide to the Retrocessionaire the proper claim proofs, including a copy of the proof of payment by the Reinsurer and a copy of the insured's death certificate. For contested claims, the Reinsurer will also send to the Retrocessionaire, upon request, a copy of all underwriting papers and investigation reports. 6.4. Liability. The Reinsurer's contractual liability for claims on policies reinsured under this Agreement is binding on the Retrocessionaire; provided, however, for contested claims, the Reinsurer will consult with the Retrocessionaire. The total reinsurance recoverable by the Reinsurer from all retrocessionaires will not exceed the Reinsurer's total liability with respect to the Covered Individuals. The maximum reinsurance death benefit payable to the Reinsurer under this Agreement with respect to any Covered Individual is the Excess Mortality Risk specifically reinsured with the Retrocessionaire. The Retrocessionaire will also pay its proportionate share of interest payable by the Reinsurer with respect to death benefits. 6.5. Settlement. The Retrocessionaire will pay the reinsured death benefits in a single sum in accordance with the settlement procedures set forth in Schedule B. 6.6. Misrepresentation or Suicide. If the Reinsurer is obligated to return premiums as a result of misrepresentation or suicide of any Covered Individual under a Covered Insurance Contract, the Retrocessionaire will refund to the Reinsurer all reinsurance premiums received with respect to such Covered Individual in lieu of any other form of reinsurance benefit payable under this Agreement. 6.7. Misstatement. In the event of an increase in the amount of the Reinsurer's liability with respect to any Covered Individual under a Covered Insurance Contract due to a misstatement of age or sex, the Retrocessionaire's liability will increase automatically. Reinsurance premiums will be adjusted from the inception of the policy, and any difference will be settled without interest. 6.8. Reinsurance Conditions. The reinsurance provided hereunder is subject to the same limitations and conditions as the terms and limitations in the Covered Insurance Contracts except as otherwise provided herein. 5 6.9. Extra-Contractual Damages. The Retrocessionaire will not participate in Punitive or Compensatory Damages or Statutory Penalties that are awarded or imposed with respect to any Covered Individual under a Covered Insurance Contract. For purposes of this Article the following definitions will apply: "Compensatory Damages" are those amounts awarded to compensate for the actual damages sustained, and are not awarded as a penalty, nor fixed in amount by statute; "Punitive Damages" are those damages awarded as a penalty, the amount of which is neither governed nor fixed by statute; "Statutory Penalties" are those amounts awarded as a penalty, but are fixed in amount by statute. ARTICLE VII RECAPTURE 7.1. Recapture. Upon sixty (60) days advance written notice to the Retrocessionaire, the Reinsurer may recapture liabilities ceded under this Agreement. If the Reinsurer increases the Reinsurer Net Retention, the Excess Mortality Risks reinsured under this Agreement will be correspondingly reduced. The Reinsurer will effectuate the recapture required by the preceding sentence prior to recapturing any risk ceded to any other retrocessionaire with respect to the Covered Individuals. ARTICLE VIII GENERAL PROVISIONS 8.1. Currency. All payments under this Agreement will be made in United States currency. All amounts expressed in this Agreement and in any reports produced by either the Reinsurer or the Retrocessionaire will be expressed in United States currency. 8.2. Any debits or credits incurred on and after the Effective Date in favor of or against either the Reinsurer or Retrocessionaire with respect to this Agreement or any other reinsurance agreements or trust agreements that constitute Related Agreements (as such term is defined in the Asset Purchase Agreement) or otherwise are deemed mutual debits or credits, as the case may be, and shall be set off and recouped, and only the net balance shall be allowed or paid. This Section 8.2 shall apply notwithstanding the existence of any insolvency, rehabilitation, conservatorship or comparable proceeding by or against the Reinsurer or the Retrocessionaire. 8.3. Premium Tax. The Retrocessionaire will not reimburse the Reinsurer for premium taxes. 8.4. Consent to Jurisdiction. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in Delaware, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by U.S. registered mail 6 addressed to such party shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. 8.5. Errors and Oversights. Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery, and provided, further, that the party making such error or omission or responsible for such delay shall be responsible for any additional liability which attaches as a result. If (a) the failure of either party to comply with any provision of this Agreement is unintentional or the result of a misunderstanding or oversight and (b) such failure to comply is promptly rectified, both parties shall be restored as closely as possible to the positions they would have occupied if no error or oversight had occurred. 8.6. Inspection of Records. Upon reasonable notice, the Reinsurer or the Retrocessionaire (or their respective duly authorized representatives) may, at the expense of the requesting party, inspect the original papers and any and all other books or documents relating to or affecting reinsurance under this Agreement during normal business hours at the home office of the other. 8.7. Amendments; Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements (as such term is defined in the Asset Purchase Agreement and that certain confidentiality agreement dated May 4, 2004 by and between ING America Insurance Holdings, Inc. and Scottish Re Group Limited and other documents delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements understanding negotiations, discussions, whether oral or written, of the parties and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein. 8.8. Assignment. This Agreement may not be assigned by either party without the written consent of the other. This Agreement is binding on the parties and their respective successors and permitted assignees. 8.9. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified, postage prepaid, or by overnight courier with written confirmation of delivery. Any such 7 notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: if to the Retrocessionaire: Security Life of Denver Insurance Company Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 with a copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 if to the Reinsurer: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel with a copy to: Scottish Re Group Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: General Counsel and a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10005 Attention: Stephen G. Rooney 8 Either party hereto may change the names or addresses where notice is to be given by providing notice to the other party of such change in accordance with this Section 8.9. 8.10. Governing Law and Construction. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. This Agreement is a freely negotiated contract between the Reinsurer and the Retrocessionaire and will not be construed against either party because such party drafted this Agreement. 8.11. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. 8.12. Captions and Schedules. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. The schedules attached hereto are a part of this Agreement. 8.13. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. ARTICLE IX TERMINAL ACCOUNTING AND SETTLEMENT 9.1. Terminal Accounting. In the event that all of the reinsurance under this Agreement is terminated, a terminal accounting and settlement shall take place. 9.2. Date of Termination. The effective date of termination shall be the end of the accounting period in which termination is effective. The terminal accounting date shall be the effective date of termination or such other date as shall be mutually agreed to in writing. 9.3. Settlement. The terminal accounting and settlement shall consist of the settlements as provided in Schedule B, computed as of the terminal accounting date. 9 If the calculation of the terminal accounting and settlement produces an amount due the Reinsurer, such amount shall be paid by the Retrocessionaire to the Reinsurer. If the calculation of the terminal accounting and settlement produces an amount due the Retrocessionaire, such amount shall be paid by the Reinsurer to the Retrocessionaire. 9.4. Supplementary Accounting and Settlement. In the event that, subsequent to the terminal accounting and settlement as above provided, a change is made with respect to any amount taken into account pursuant to Schedule B, a supplementary accounting shall take place. Any amount owed to the Reinsurer or from the Reinsurer by reason of such supplementary accounting shall be paid promptly upon the completion thereof. ARTICLE X CONFIDENTIALITY The parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated by this Agreement, the parties will keep confidential and will not use or disclose the other party's Confidential Information and the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority. The confidentiality obligations contained in this Agreement or in any other agreement between the parties hereto, as they relate to the reinsurance hereunder, shall not apply to the federal tax structure or federal tax treatment of this Agreement and each party hereto may disclose to any and all persons, without limitation of any kind, the federal tax structure and federal tax treatment of this Agreement; provided, that such disclosure may not be made until the earliest of (x) the date of the public announcement of discussions relating to this Agreement, (y) the date of the public announcement of this Agreement, or (z) the date of the execution of this Agreement. The preceding sentence is intended to cause this Agreement to be treated as not having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. Subject to the provision with respect to disclosure in the first sentence of this subsection (b), each party hereto acknowledges that it has no proprietary or exclusive rights to the federal tax structure of this Agreement or any federal tax matter or federal tax idea related to this Agreement. For purposes of this Article X, "Confidential Information" shall mean all documents and information concerning one party, any of its Affiliates, the Excess Mortality Risks, the Covered Individuals or the Covered Insurance Contracts, including any information relating to any person insured directly or indirectly under the Covered Insurance Contracts, furnished to the other party or such other party's Affiliates or representatives in connection with this Agreement or the transactions contemplated hereby, except that Confidential Information shall not include information which: (a) at the time of 10 disclosure or thereafter is generally available to and known by the public other than by way of a wrongful disclosure by a party hereto or by any representative of a party hereto; (b) was available on a nonconfidential basis from a source other than the parties hereto or their representatives, provided that such source is not and was not bound by a confidentiality agreement with a party hereto; or (c) was independently developed without violating any obligations under this Agreement and without the use of any Confidential Information. ARTICLE XI INSOLVENCY 11.1. Insolvency of the Reinsurer. In the event of the insolvency of the Reinsurer, all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the Retrocessionaire directly to the Reinsurer or to its statutory liquidator, receiver or statutory successor on the basis of the liability of the Reinsurer with respect to the Covered Individuals under the Covered Insurance Contracts without diminution because of the insolvency of the Reinsurer. It is understood, however, that in the event of the insolvency of the Reinsurer, the liquidator, receiver or statutory successor of the Reinsurer shall give written notice of the pendency of a claim against the Reinsurer with respect to a Covered Individual under a Covered Insurance Contract within a reasonable period of time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the Retrocessionaire may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Reinsurer or its liquidator, receiver or statutory successor. It is further understood that the expense thus incurred by the Retrocessionaire shall be chargeable, subject to court approval, against the Reinsurer as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reinsurer solely as a result of the defense undertaken by the Retrocessionaire. 11.2. Insolvency of the Retrocessionaire. In the event of the insolvency of the Retrocessionaire, the Reinsurer may, upon giving thirty (30) days written notice to the Retrocessionaire, its liquidator, receiver or statutory successor, recapture all of the business reinsured under this Agreement. ARTICLE XII ARBITRATION 12.1. Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLD Closing Statement and the assets to be transferred to the Reinsurer, the SLD Reserve Trust Account and the SLD Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in 11 accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC tax, which shall be resolved in accordance with Article XIII hereof, or (iii) matters relating to whether a Triggering Event (as defined in each Reinsurance Agreement) has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 12.2. (b) The parties intend this Section 12.1 to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 7.01(a), the other party may request the court specified in Section 8.4 to compel arbitration in accordance with the Federal Arbitration Act. 12.2. Arbitration Procedure. (a) The Reinsurer and Retrocessionaire intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 12.1(a)) be resolved without resort to any litigation. Accordingly, the Reinsurer and Retrocessionaire agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Reinsurer and Retrocessionaire agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Commercial Arbitration Rules of the American Arbitration Association. (b) The arbitration hearing will be before a panel of three disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of the Reinsurer or any of its Affiliates. The Reinsurer and Retrocessionaire will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. (c) If either the Reinsurer or Retrocessionaire fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the American Arbitration Association will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. (d) The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including without limitation each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Reinsurer or 12 Retrocessionaire) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 8.4. No such award or judgment will bear interest except as provided in Section 3.3. In no event may the arbitrators award punitive or exemplary damages. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE XIII DAC TAX 13.1. Election. (a) All uncapitalized terms used herein shall have the meanings set forth in the regulations under Section 848 of the Code. (b) Each of the Reinsurer and the Retrocessionaire acknowledges that it is subject to taxation under Subchapter L of the Code and hereby makes the election contemplated by Section 1.848-2(g)(8) of the Treasury Regulations with respect to this Agreement. Each of the Reinsurer and the Retrocessionaire (i) agrees that such election is effective for the taxable year of each party that includes the Effective Date and for all subsequent years during which this Agreement remains in effect and (ii) warrants that it will take no action to revoke the election. (c) Pursuant to Section 1.848-2(g)(8) of the Treasury Regulations, each of the Reinsurer and the Retrocessionaire hereby agrees (i) to attach a schedule to its federal income tax return for its first taxable year ending on or after the Effective Date that identifies this Agreement as a reinsurance agreement for which the joint election under Section 1.848-2(g)(8) has been made, (ii) that the party with net positive consideration for this Agreement for each taxable year will capitalize its specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Code, and (iii) to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. The Retrocessionaire shall prepare and execute duplicate copies of the schedule described in the preceding sentence as soon as practicable after the Effective Date and submit them to the Reinsurer for execution. The Reinsurer shall execute the copies and return one of them to the Retrocessionaire within thirty (30) calendar days of the receipt of such copies. (d) The Reinsurer shall submit a schedule to the Retrocessionaire by May 1 of each year of its calculation of the net consideration under this Agreement for the preceding taxable year. This schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Reinsurer stating that the Reinsurer shall report such net consideration in its federal income tax return for the preceding taxable year. (e) The Retrocessionaire may contest such calculation by providing an alternative calculation to the Reinsurer in writing within thirty (30) calendar days after the date on which the Retrocessionaire receives the Reinsurer's calculation. If the Retrocessionaire does not so notify the Reinsurer, the Retrocessionaire shall report the net consideration under this 13 Agreement as determined by the Reinsurer in the Retrocessionaire's federal income tax return for the preceding taxable year. (f) If Retrocessionaire contests the Reinsurer's calculation of the net consideration under this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount of net consideration within thirty (30) calendar days after the date on which the Retrocessionaire submits its alternative calculation. If Retrocessionaire and the Reinsurer reach an agreement as to the amount of net consideration under this Agreement, each party shall report such amount in its federal income tax return for the preceding taxable year. If, during such period, Retrocessionaire and the Reinsurer are unable to reach an agreement, they shall promptly thereafter cause Deloitte & Touche USA LLP (the "Independent Accountants") to promptly review (which review shall commence no later than five (5) calendar days after the selection of the Independent Accountants) this Agreement and the calculations of Retrocessionaire and the Reinsurer for the purpose of calculating the net consideration under this Agreement. In making such calculation, the Independent Accountants shall consider only those items or amounts in the Reinsurer's calculation as to which the Retrocessionaire has disagreed. The Independent Accountants shall deliver to Retrocessionaire and the Reinsurer, as promptly as practicable (but no later than thirty (30) calendar days after the commencement of their review), a report setting forth such calculation, which calculation shall result in a net consideration between the amount thereof shown in the Reinsurer's calculation delivered pursuant to Section 13.1(d) and the amount thereof shown in Retrocessionaire's calculation delivered pursuant to Section 13.1(e). Such report shall be final and binding upon Retrocessionaire and the Reinsurer. The fees, costs and expenses of the Independent Accountants shall be borne (i) by the Reinsurer if the difference between the net consideration as calculated by the Independent Accountants and the Reinsurer's calculation delivered pursuant to Section 13.1(d) is greater than the difference between the net consideration as calculated by the Independent Accountants and Retrocessionaire's calculation delivered pursuant to Section 13.1(e), (ii) by the Retrocessionaire if the first such difference is less than the second such difference, and (iii) otherwise equally by Retrocessionaire and the Reinsurer. ARTICLE XIV DURATION 14.1. Duration. Except as otherwise provided herein, this Agreement shall be unlimited in duration. The obligations of the Retrocessionaire under this Agreement shall terminate at such time as there is no Excess Mortality Risk on a Covered Individual (taking into account the then current Reinsurer Net Retention), and all amount due the parties hereunder have been settled. 14.2. Survival. Notwithstanding the other provision of this Article, the terms and conditions of Articles VI, VIII, X and XII shall remain in full force and effect after the termination of this Agreement. 14 ARTICLE XV EXECUTION IN WITNESS OF THE ABOVE, this Agreement is signed in duplicate on the dates indicated to be effective as of December 31, 2004. SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield -------------------------------------------- Title: CEO/ President -------------------------------------------- Date: December 31, 2004 -------------------------------------------- SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis -------------------------------------------- Title: Mark Tullis, President -------------------------------------------- Date: December 31, 2004 -------------------------------------------- 15 EX-10.49 11 ex10-49.txt RETROCESSION AGREEMENT RETROCESSION AGREEMENT (the "Agreement") between SCOTTISH RE LIFE (BERMUDA) LIMITED Bermuda (the "Reinsurer") and SECURITY LIFE OF DENVER INSURANCE COMPANY (the "Retrocessionaire") This Agreement is effective December 31, 2004 TABLE OF CONTENTS ARTICLE I SCOPE OF REINSURANCE................................................1 ARTICLE II LIABILITY..........................................................3 ARTICLE III PREMIUMS..........................................................3 ARTICLE IV RESERVES...........................................................4 ARTICLE V REDUCTIONS, TERMINATION AND OTHER RETROCESSIONAL COVERAGE...........4 ARTICLE VI CLAIMS.............................................................4 ARTICLE VII RECAPTURE.........................................................6 ARTICLE VIII GENERAL PROVISIONS...............................................6 ARTICLE IX TERMINAL ACCOUNTING AND SETTLEMENT.................................9 ARTICLE X CONFIDENTIALITY....................................................10 ARTICLE XI INSOLVENCY........................................................11 ARTICLE XII ARBITRATION......................................................11 ARTICLE XIII DAC TAX.........................................................13 ARTICLE XIV DURATION.........................................................14 ARTICLE XV EXECUTION.........................................................15 Schedule A Covered Individuals Schedule B Reinsurance Premiums, Reporting and Settlement Procedures THIS RETROCESSION AGREEMENT (this "Agreement"), is made and entered into as of December 31, 2004 (the "Effective Date") by and between Security Life of Denver Insurance Company, a Colorado-domiciled life insurance company (the "Retrocessionaire") and Scottish Re Life (Bermuda) Limited, a Bermuda-domiciled life insurance company (the "Reinsurer"). WHEREAS, the Retrocessionaire, Security Life of Denver International Limited, a Bermuda insurance company ("SLDI" and, together with the Retrocessionaire, the "Sellers"), and Scottish Re Group Limited (the "Purchaser"), the indirect parent corporation of the Reinsurer, Scottish Re (U.S.), Inc. and the Reinsurer, have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which the Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; and WHEREAS, as contemplated by the Asset Purchase Agreement, the Reinsurer and SLDI have entered into a Coinsurance Agreement, a Coinsurance/Modified Coinsurance Agreement, and a Coinsurance Funds Withheld Agreement, each dated December 31, 2004 (the "Reinsurance Agreements"), for the reinsurance on a 100% indemnity reinsurance basis of the Insurance Contracts described therein (collectively, the "Covered Insurance Contracts"); and WHEREAS, as further contemplated by the Asset Purchase Agreement, the Reinsurer wishes to retrocede to the Retrocessionaire, and the Retrocessionaire wishes to reinsure, on a yearly renewable term basis, a portion of the mortality risks with respect to the individuals identified on Schedule A attached hereto, as finalized in accordance with Section 1.2(b) (the "Covered Individuals") under the Covered Insurance Contracts; NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Retrocessionaire and the Reinsurer agree as follows: ARTICLE I SCOPE OF REINSURANCE 1.1. Policies Reinsured. As of the Effective Date, the Retrocessionaire hereby indemnifies the Reinsurer, according to the terms and conditions of this Agreement, for the Excess Mortality Risks (as defined below). 1.2. Coverage and Exclusions. (a) Only "Excess Mortality Risk" (as defined in the following sentence) with respect to any Covered Individual is reinsured under this Agreement. "Excess Mortality Risk" means death benefits payable by the Reinsurer with respect to any Covered Individual which (i) are ceded to the Reinsurer by SLDI under a Covered Insurance Contract and (ii) together with other risks retained by the Reinsurer with respect to such Covered Individual prior to the Effective Date under other reinsurance agreements would cause the amount of the Reinsurer's retained risk with respect to such Covered Individual to exceed $2,000,000 (the "Reinsurer Net Retention"). In calculating whether any risk with respect to any Covered Individual constitutes an Excess Mortality Risk, the parties 1 shall take into consideration retrocessions of risk to third parties (by either the Reinsurer or SLDI), which shall be taken into account for this purpose without regard to actual collection. For example, a policy insuring the life of a Covered Individual that pays a death benefit of $5,000,000 will only be deemed to have Excess Mortality Risk of $1,000,000 if $2,000,000 of the risk under that policy has already been retroceded (by either the Reinsurer or SLDI) to a third party. (b) The parties agree that no later than June 30, 2005, they will, using the complete data shown on the Sage System at that time, mutually identify in good faith the individuals that would have been included on Schedule A if all data with respect to cessions to and retrocessions by SLDI through the Effective Date had been input into the Sage System as of the Effective Date. An individual will be included on Schedule A only if (i) there is Excess Mortality Risk with respect to such individual and (ii) there is no capacity for additional risk in the retrocession market with respect to such individual. Any dispute as to whether there is no capacity in the retrocession market with respect to a particular individual will be resolved by determining whether, at the time in question, the capacity in the retrocession market for additional risk with respect to such individual is comparable as a practical matter to the capacity in the retrocession market for additional risk on the individuals identified on Schedule A as of the Effective Date. The Reinsurer shall provide to the Retrocessionaire reasonable documentation demonstrating the absence of such retrocessional capacity with respect to any individual the Reinsurer believes should be included on the revised Schedule A. Any individuals included on the revised Schedule A pursuant to this Section 1.2(b) will thereafter be deemed Covered Individuals for all purposes of this Agreement, and any individuals not included on the revised Schedule A pursuant to this Section 1.2(b) will thereafter not be deemed Covered Individuals without regard to whether they were included on Schedule A on the Effective Date. For the avoidance of doubt, it is acknowledged and understood that if an individual for whom there would be Excess Mortality Risk had such individual been determined to be a Covered Individual dies after the Closing Date, and prior to the time of such individual's death the parties have not made a final determination as to whether such individual is a Covered Individual pursuant to the first sentence of this clause (b), such individual will be deemed to be a Covered Individual includable on Schedule A. 1.3. Plan of Reinsurance. Reinsurance under this Agreement shall be on a yearly-renewable term basis. 1.4. No Third Party Beneficiary. This Agreement is an indemnity reinsurance agreement solely between the Retrocessionaire and the Reinsurer, and the performance of the obligations of each party under this Agreement shall be rendered solely to the other party. In no instance shall anyone other than the Retrocessionaire or the Reinsurer have any rights under this Agreement. 2 ARTICLE II LIABILITY 2.1. Liability. The liability of the Retrocessionaire for the Excess Mortality Risks reinsured hereunder shall commence simultaneously with that of the Reinsurer, but in no event prior to the Effective Date of this Agreement. The reinsurance under this Agreement with respect to any Covered Individual shall remain in force without reduction as long as the liability of the Reinsurer with respect to such Covered Individual under the Covered Insurance Contracts remains in force without reduction, unless the reinsurance provided herein is terminated, reduced or recaptured as provided herein. The Retrocessionaire's liability on any business reinsured hereunder shall terminate simultaneously with that of the Reinsurer. ARTICLE III PREMIUMS 3.1. Premiums. Reinsurance premiums for coverage under this Agreement are shown in Schedule B. The Retrocessionaire shall be entitled to change such premiums no more frequently than annually by providing written notice of such change to the Reinsurer not later than sixty (60) calendar days prior to the end of any calendar year, with the specified changes to be effective as of January 1 of the following year. Any increase in such premiums shall not be in a percentage greater than the percentage increase in the market rates for similar retrocessions (taking into account the nature of the underlying risks, the level of the risk being retroceded, and any other factors appropriate to ensure reasonable comparability) since the time that the then-effective premiums became effective (a "Permitted Increase"). Any dispute as to whether any increase in premiums constitutes a Permitted Increase shall be referred to a mutually agreeable actuarial consulting firm, but the increases shall be effective and shall be paid by the Reinsurer unless and until such actuarial consulting firm determines that the increase did not constitute a Permitted Increase, in which case the parties shall make appropriate retroactive adjustments to reflect an increase deemed by the actuarial consulting firm to be a Permitted Increase and shall apply that Permitted Increase thereafter. 3.2. Payment of Premiums. Reinsurance premiums are payable in accordance with the settlement procedures specified in Schedule B. 3.3. Delayed Payment. All amounts due and payable by the Reinsurer to the Retrocessionaire under this Agreement shall be paid in accordance with the settlement procedures specified in Schedule B. Net reinsurance premiums or net death benefits which remain unpaid for more than thirty (30) days from the remit date set forth in Schedule B will incur interest from the end of the reporting period. Interest will be calculated using the 13-week Treasury Bill rate reported in the "Money Rates" section of the Wall Street Journal for the last business day of the month of that reporting period 3 3.4. Failure to Pay Premiums. The payment of reinsurance premiums is a condition precedent to the liability of the Retrocessionaire for reinsurance covered under this Agreement. In the event that reinsurance premiums are not paid within forty-five (45) days of the remit date, the Retrocessionaire will have the right to terminate the reinsurance hereunder. If the Retrocessionaire elects to exercise its right of termination, it will give the Reinsurer thirty (30) days notice of its intention to terminate said reinsurance. Such notice will be sent by certified mail. If all reinsurance premiums in arrears, including any which may become in arrears during the thirty (30) day period and any interest thereon, are not paid before the expiration of said period, the Retrocessionaire will be relieved of all liability under this Agreement as of the last date on which premiums have been paid. This Agreement may be reinstated within sixty (60) days of the date of the termination, and upon payment of all reinsurance premiums in arrears including any interest accrued thereon. ARTICLE IV RESERVES 4.1. Reserve Credit. The parties intend that the Reinsurer will receive any required statutory reserve credit in Bermuda for the insurance risks ceded to the Retrocessionaire. The Retrocessionaire agrees that it will take commercially reasonable steps to provide the Reinsurer with the basis upon which to take such credit (if any), including, if necessary, establishing a trust account for this purpose. ARTICLE V REDUCTIONS, TERMINATION AND OTHER RETROCESSIONAL COVERAGE 5.1. Reductions and Terminations. In the event of the reduction or termination of the amount of the risk covered by the Covered Insurance Contracts with respect to any Covered Individual, the Reinsurer will reduce or terminate the reinsurance on that life, effective on the same date. The Retrocessionaire will refund any unearned reinsurance premiums with respect to such reduction or termination. 5.2. Other Retrocessional Coverage. On and after the Effective Date, the Reinsurer agrees to use commercially reasonable efforts to obtain retrocessional coverage on the Excess Mortality Risk to be effective as of the Effective Date, or as soon as reasonably possible thereafter, from third party reinsurers at rates and terms that are, within the reasonable discretion of the Reinsurer, commercially reasonable. ARTICLE VI CLAIMS 6.1. Claims. Claims covered under this Agreement include only death benefits payable with respect to Excess Mortality Risks. The Retrocessionaire will accept the decision of the 4 Reinsurer on payment of a claim with respect to any Covered Individual under a Covered Insurance Contract; provided that the Reinsurer shall adjudicate such claim in good faith. 6.2. Notice. The Reinsurer will provide the Retrocessionaire with a summary of claims received with respect to the Covered Individuals under the Covered Insurance Contracts no less frequently than on a quarterly basis. 6.3. Proofs of Loss. Upon request, the Reinsurer will promptly provide to the Retrocessionaire the proper claim proofs, including a copy of the proof of payment by the Reinsurer and a copy of the insured's death certificate. For contested claims, the Reinsurer will also send to the Retrocessionaire, upon request, a copy of all underwriting papers and investigation reports. 6.4. Liability. The Reinsurer's contractual liability for claims on policies reinsured under this Agreement is binding on the Retrocessionaire; provided, however, for contested claims, the Reinsurer will consult with the Retrocessionaire. The total reinsurance recoverable by the Reinsurer from all retrocessionaires will not exceed the Reinsurer's total liability with respect to the Covered Individuals. The maximum reinsurance death benefit payable to the Reinsurer under this Agreement with respect to any Covered Individual is the Excess Mortality Risk specifically reinsured with the Retrocessionaire. The Retrocessionaire will also pay its proportionate share of interest payable by the Reinsurer with respect to death benefits. 6.5. Settlement. The Retrocessionaire will pay the reinsured death benefits in a single sum in accordance with the settlement procedures set forth in Schedule B. 6.6. Misrepresentation or Suicide. If the Reinsurer is obligated to return premiums as a result of misrepresentation or suicide of any Covered Individual under a Covered Insurance Contract, the Retrocessionaire will refund to the Reinsurer all reinsurance premiums received with respect to such Covered Individual in lieu of any other form of reinsurance benefit payable under this Agreement. 6.7. Misstatement. In the event of an increase in the amount of the Reinsurer's liability with respect to any Covered Individual under a Covered Insurance Contract due to a misstatement of age or sex, the Retrocessionaire's liability will increase automatically. Reinsurance premiums will be adjusted from the inception of the policy, and any difference will be settled without interest. 6.8. Reinsurance Conditions. The reinsurance provided hereunder is subject to the same limitations and conditions as the terms and limitations in the Covered Insurance Contracts except as otherwise provided herein. 6.9. Extra-Contractual Damages. The Retrocessionaire will not participate in Punitive or Compensatory Damages or Statutory Penalties that are awarded or imposed with respect to any Covered Individual under a Covered Insurance Contract. For purposes of this Article the following definitions will apply: 5 "Compensatory Damages" are those amounts awarded to compensate for the actual damages sustained, and are not awarded as a penalty, nor fixed in amount by statute; "Punitive Damages" are those damages awarded as a penalty, the amount of which is neither governed nor fixed by statute; "Statutory Penalties" are those amounts awarded as a penalty, but are fixed in amount by statute. ARTICLE VII RECAPTURE 7.1. Recapture. Upon sixty (60) days advance written notice to the Retrocessionaire, the Reinsurer may recapture liabilities ceded under this Agreement. If the Reinsurer increases the Reinsurer Net Retention, the Excess Mortality Risks reinsured under this Agreement will be correspondingly reduced. The Reinsurer will effectuate the recapture required by the preceding sentence prior to recapturing any risk ceded to any other retrocessionaire with respect to the Covered Individuals. ARTICLE VIII GENERAL PROVISIONS 8.1. Currency. All payments under this Agreement will be made in United States currency. All amounts expressed in this Agreement and in any reports produced by either the Reinsurer or the Retrocessionaire will be expressed in United States currency. 8.2. Any debits or credits incurred on and after the Effective Date in favor of or against either the Reinsurer or Retrocessionaire with respect to this Agreement or any other reinsurance agreements or trust agreements that constitute Related Agreements (as such term is defined in the Asset Purchase Agreement) or otherwise are deemed mutual debits or credits, as the case may be, and shall be set off and recouped, and only the net balance shall be allowed or paid. This Section 8.2 shall apply notwithstanding the existence of any insolvency, rehabilitation, conservatorship or comparable proceeding by or against the Reinsurer or the Retrocessionaire. 8.3. Premium Tax. The Retrocessionaire will not reimburse the Reinsurer for premium taxes. 8.4. Consent to Jurisdiction. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in Delaware, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by U.S. registered mail addressed to such party shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in 6 any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. 8.5. Errors and Oversights. Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery, and provided, further, that the party making such error or omission or responsible for such delay shall be responsible for any additional liability which attaches as a result. If (a) the failure of either party to comply with any provision of this Agreement is unintentional or the result of a misunderstanding or oversight and (b) such failure to comply is promptly rectified, both parties shall be restored as closely as possible to the positions they would have occupied if no error or oversight had occurred. 8.6. Inspection of Records. Upon reasonable notice, the Reinsurer or the Retrocessionaire (or their respective duly authorized representatives) may, at the expense of the requesting party, inspect the original papers and any and all other books or documents relating to or affecting reinsurance under this Agreement during normal business hours at the home office of the other. 8.7. Amendments; Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements (as such term is defined in the Asset Purchase Agreement and that certain confidentiality agreement dated May 4, 2004 by and between ING America Insurance Holdings, Inc. and Scottish Re Group Limited and other documents delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements understanding negotiations, discussions, whether oral or written, of the parties and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein. 8.8. Assignment. This Agreement may not be assigned by either party without the written consent of the other. This Agreement is binding on the parties and their respective successors and permitted assignees. 8.9. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified, postage prepaid, or by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: if to the Retrocessionaire: 7 Security Life of Denver Insurance Company Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 with a copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 if to the Reinsurer: Scottish Re Life (Bermuda) Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: General Counsel with a copy to: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel and a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10005 Attention: Stephen G. Rooney Either party hereto may change the names or addresses where notice is to be given by providing notice to the other party of such change in accordance with this Section 8.9. 8 8.10. Governing Law and Construction. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. This Agreement is a freely negotiated contract between the Reinsurer and the Retrocessionaire and will not be construed against either party because such party drafted this Agreement. 8.11. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. 8.12. Captions and Schedules. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. The schedules attached hereto are a part of this Agreement. 8.13. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. ARTICLE IX TERMINAL ACCOUNTING AND SETTLEMENT 9.1. Terminal Accounting. In the event that all of the reinsurance under this Agreement is terminated, a terminal accounting and settlement shall take place. 9.2. Date of Termination. The effective date of termination shall be the end of the accounting period in which termination is effective. The terminal accounting date shall be the effective date of termination or such other date as shall be mutually agreed to in writing. 9.3. Settlement. The terminal accounting and settlement shall consist of the settlements as provided in Schedule B, computed as of the terminal accounting date. If the calculation of the terminal accounting and settlement produces an amount due the Reinsurer, such amount shall be paid by the Retrocessionaire to the Reinsurer. 9 If the calculation of the terminal accounting and settlement produces an amount due the Retrocessionaire, such amount shall be paid by the Reinsurer to the Retrocessionaire. 9.4. Supplementary Accounting and Settlement. In the event that, subsequent to the terminal accounting and settlement as above provided, a change is made with respect to any amount taken into account pursuant to Schedule B, a supplementary accounting shall take place. Any amount owed to the Reinsurer or from the Reinsurer by reason of such supplementary accounting shall be paid promptly upon the completion thereof. ARTICLE X CONFIDENTIALITY The parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated by this Agreement, the parties will keep confidential and will not use or disclose the other party's Confidential Information and the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority. The confidentiality obligations contained in this Agreement or in any other agreement between the parties hereto, as they relate to the reinsurance hereunder, shall not apply to the federal tax structure or federal tax treatment of this Agreement and each party hereto may disclose to any and all persons, without limitation of any kind, the federal tax structure and federal tax treatment of this Agreement; provided, that such disclosure may not be made until the earliest of (x) the date of the public announcement of discussions relating to this Agreement, (y) the date of the public announcement of this Agreement, or (z) the date of the execution of this Agreement. The preceding sentence is intended to cause this Agreement to be treated as not having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. Subject to the provision with respect to disclosure in the first sentence of this subsection (b), each party hereto acknowledges that it has no proprietary or exclusive rights to the federal tax structure of this Agreement or any federal tax matter or federal tax idea related to this Agreement. For purposes of this Article X, "Confidential Information" shall mean all documents and information concerning one party, any of its Affiliates, the Excess Mortality Risks, the Covered Individuals or the Covered Insurance Contracts, including any information relating to any person insured directly or indirectly under the Covered Insurance Contracts, furnished to the other party or such other party's Affiliates or representatives in connection with this Agreement or the transactions contemplated hereby, except that Confidential Information shall not include information which: (a) at the time of disclosure or thereafter is generally available to and known by the public other than by way of a wrongful disclosure by a party hereto or by any representative of a party hereto; (b) was available on a nonconfidential basis from a source other than the parties hereto or 10 their representatives, provided that such source is not and was not bound by a confidentiality agreement with a party hereto; or (c) was independently developed without violating any obligations under this Agreement and without the use of any Confidential Information. ARTICLE XI INSOLVENCY 11.1. Insolvency of the Reinsurer. In the event of the insolvency of the Reinsurer, all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the Retrocessionaire directly to the Reinsurer or to its statutory liquidator, receiver or statutory successor on the basis of the liability of the Reinsurer with respect to the Covered Individuals under the Covered Insurance Contracts without diminution because of the insolvency of the Reinsurer. It is understood, however, that in the event of the insolvency of the Reinsurer, the liquidator, receiver or statutory successor of the Reinsurer shall give written notice of the pendency of a claim against the Reinsurer with respect to a Covered Individual under a Covered Insurance Contract within a reasonable period of time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the Retrocessionaire may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Reinsurer or its liquidator, receiver or statutory successor. It is further understood that the expense thus incurred by the Retrocessionaire shall be chargeable, subject to court approval, against the Reinsurer as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reinsurer solely as a result of the defense undertaken by the Retrocessionaire. 11.2. Insolvency of the Retrocessionaire. In the event of the insolvency of the Retrocessionaire, the Reinsurer may, upon giving thirty (30) days written notice to the Retrocessionaire, its liquidator, receiver or statutory successor, recapture all of the business reinsured under this Agreement. ARTICLE XII ARBITRATION 12.1. Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLDI Closing Statement and the assets to be transferred to the Reinsurer, the SLDI Reserve Trust Account and the SLDI Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC tax, which shall be resolved in accordance with Article XIII hereof, or (iii) matters relating to whether a 11 Triggering Event (as defined in each Reinsurance Agreement) has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 12.2. (b) The parties intend this Section 12.1 to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 7.01(a), the other party may request the court specified in Section 8.4 to compel arbitration in accordance with the Federal Arbitration Act. 12.2. Arbitration Procedure. (a) The Reinsurer and Retrocessionaire intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 12.1(a)) be resolved without resort to any litigation. Accordingly, the Reinsurer and Retrocessionaire agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Reinsurer and Retrocessionaire agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Commercial Arbitration Rules of the American Arbitration Association. (b) The arbitration hearing will be before a panel of three disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of the Reinsurer or any of its Affiliates. The Reinsurer and Retrocessionaire will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. (c) If either the Reinsurer or Retrocessionaire fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the American Arbitration Association will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. (d) The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including without limitation each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Reinsurer or Retrocessionaire) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 8.4. No such award or judgment will bear 12 interest except as provided in Section 3.3. In no event may the arbitrators award punitive or exemplary damages. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE XIII DAC TAX 13.1. Election. (a) All uncapitalized terms used herein shall have the meanings set forth in the regulations under Section 848 of the Code. (b) Each of the Reinsurer and the Retrocessionaire acknowledges that it is subject to taxation under Subchapter L of the Code and hereby makes the election contemplated by Section 1.848-2(g)(8) of the Treasury Regulations with respect to this Agreement. Each of the Reinsurer and the Retrocessionaire (i) agrees that such election is effective for the taxable year of each party that includes the Effective Date and for all subsequent years during which this Agreement remains in effect and (ii) warrants that it will take no action to revoke the election. (c) Pursuant to Section 1.848-2(g)(8) of the Treasury Regulations, each of the Reinsurer and the Retrocessionaire hereby agrees (i) to attach a schedule to its federal income tax return for its first taxable year ending on or after the Effective Date that identifies this Agreement as a reinsurance agreement for which the joint election under Section 1.848-2(g)(8) has been made, (ii) that the party with net positive consideration for this Agreement for each taxable year will capitalize its specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Code, and (iii) to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. The Retrocessionaire shall prepare and execute duplicate copies of the schedule described in the preceding sentence as soon as practicable after the Effective Date and submit them to the Reinsurer for execution. The Reinsurer shall execute the copies and return one of them to the Retrocessionaire within thirty (30) calendar days of the receipt of such copies. (d) The Reinsurer shall submit a schedule to the Retrocessionaire by May 1 of each year of its calculation of the net consideration under this Agreement for the preceding taxable year. This schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Reinsurer stating that the Reinsurer shall report such net consideration in its federal income tax return for the preceding taxable year. (e) The Retrocessionaire may contest such calculation by providing an alternative calculation to the Reinsurer in writing within thirty (30) calendar days after the date on which the Retrocessionaire receives the Reinsurer's calculation. If the Retrocessionaire does not so notify the Reinsurer, the Retrocessionaire shall report the net consideration under this Agreement as determined by the Reinsurer in the Retrocessionaire's federal income tax return for the preceding taxable year. 13 (f) If Retrocessionaire contests the Reinsurer's calculation of the net consideration under this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount of net consideration within thirty (30) calendar days after the date on which the Retrocessionaire submits its alternative calculation. If Retrocessionaire and the Reinsurer reach an agreement as to the amount of net consideration under this Agreement, each party shall report such amount in its federal income tax return for the preceding taxable year. If, during such period, Retrocessionaire and the Reinsurer are unable to reach an agreement, they shall promptly thereafter cause Deloitte & Touche USA LLP (the "Independent Accountants") to promptly review (which review shall commence no later than five (5) calendar days after the selection of the Independent Accountants) this Agreement and the calculations of Retrocessionaire and the Reinsurer for the purpose of calculating the net consideration under this Agreement. In making such calculation, the Independent Accountants shall consider only those items or amounts in the Reinsurer's calculation as to which the Retrocessionaire has disagreed. The Independent Accountants shall deliver to Retrocessionaire and the Reinsurer, as promptly as practicable (but no later than thirty (30) calendar days after the commencement of their review), a report setting forth such calculation, which calculation shall result in a net consideration between the amount thereof shown in the Reinsurer's calculation delivered pursuant to Section 13.1(d) and the amount thereof shown in Retrocessionaire's calculation delivered pursuant to Section 13.1(e). Such report shall be final and binding upon Retrocessionaire and the Reinsurer. The fees, costs and expenses of the Independent Accountants shall be borne (i) by the Reinsurer if the difference between the net consideration as calculated by the Independent Accountants and the Reinsurer's calculation delivered pursuant to Section 13.1(d) is greater than the difference between the net consideration as calculated by the Independent Accountants and Retrocessionaire's calculation delivered pursuant to Section 13.1(e), (ii) by the Retrocessionaire if the first such difference is less than the second such difference, and (iii) otherwise equally by Retrocessionaire and the Reinsurer. ARTICLE XIV DURATION 14.1. Duration. Except as otherwise provided herein, this Agreement shall be unlimited in duration. The obligations of the Retrocessionaire under this Agreement shall terminate at such time as there is no Excess Mortality Risk on a Covered Individual (taking into account the then current Reinsurer Net Retention), and all amount due the parties hereunder have been settled. 14.2. Survival. Notwithstanding the other provision of this Article, the terms and conditions of Articles VI, VIII, X and XII shall remain in full force and effect after the termination of this Agreement. 14 ARTICLE XV EXECUTION IN WITNESS OF THE ABOVE, this Agreement is signed in duplicate on the dates indicated to be effective as of December 31, 2004. SCOTTISH RE LIFE (BERMUDA) LIMITED By: /s/ Elizabeth Murphy -------------------------------------- Title: CFO ------------------------------------ Date: December 31, 2004 ------------------------------------- SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis -------------------------------------- Title: Mark Tullis, President ------------------------------------ Date: December 31, 2004 ------------------------------------- 15 EX-10.50 12 ex10-50.txt RESERVE TRUST AGREEMENT RESERVE TRUST AGREEMENT Dated as of December 31, 2004 Scottish Re (U.S.), Inc., as Grantor and SECURITY LIFE OF DENVER INSURANCE COMPANY as Beneficiary and THE BANK OF NEW YORK as Trustee and THE BANK OF NEW YORK as Securities Intermediary TABLE OF CONTENTS Page Section 1. Deposit of Assets to the Reserve Trust Account...................1 Section 2. Withdrawal of Assets from the Reserve Trust Account..............4 Section 3. Procedure for Withdrawals of Assets; Certain Covenants...........5 Section 4. Redemption, Investment and Substitution of Assets................5 Section 5. The Income Account...............................................6 Section 6. Right to Vote Assets.............................................6 Section 7. Additional Rights and Duties of the Trustee......................7 Section 8. The Trustee's Compensation, Expenses and Indemnification........10 Section 9. Resignation of the Trustee......................................11 Section 10. Termination of the Reserve Trust Account........................12 Section 11. Definitions.....................................................12 Section 12. Governing Law...................................................14 Section 13. Successors and Assigns..........................................14 Section 14. Severability....................................................14 Section 15. Entire Agreement................................................15 Section 16. Amendments......................................................15 Section 17. Notices, etc....................................................15 Section 18. Headings........................................................17 Section 19. Counterparts....................................................17 EXHIBITS A - Investment Guidelines RESERVE TRUST AGREEMENT THIS RESERVE TRUST AGREEMENT, dated as of December 31, 2004 (this "Agreement"), by and among Scottish Re (U.S.), Inc., a Delaware-domiciled life insurance company (hereinafter the "Grantor"), Security Life of Denver Insurance Company, a Colorado-domiciled life insurance company (such insurer and its successors by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator thereof, being hereinafter referred to as the "Beneficiary"), The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as trustee, being referred to as the "Trustee"), and The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as securities intermediary, being referred to as the "Securities Intermediary"). RECITALS WHEREAS, the Grantor desires to establish with the Trustee a trust account (the "Reserve Trust Account") and transfer to the Trustee for deposit in the Reserve Trust Account cash and other Assets (as hereinafter defined) to be made subject to this Agreement in order to secure payments of certain amounts at any time and from time to time owing by Grantor to the Beneficiary; and WHEREAS, the Trustee has agreed to act as Trustee hereunder and, in accordance with the terms hereof, to hold cash or other Assets in trust in the Reserve Trust Account on the terms herein set forth; and WHEREAS, this Agreement is made for the sole use and benefit of the Beneficiary and for the purpose of setting forth the duties and powers of the Trustee with respect to the Trust Account. NOW, THEREFORE, for and in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Deposit of Assets to the Reserve Trust Account. (a) Concurrently with the execution and delivery of this Agreement, the Grantor hereby establishes a Reserve Trust Account, and the Trustee hereby accepts the Reserve Trust Account herein created and declared upon the terms provided herein and shall administer the Reserve Trust Account as Trustee, and with respect to the security interest granted in Section 1(f) hereof, as secured party for the exclusive use and benefit of the Beneficiary. The Grantor shall establish and the Trustee shall maintain the Reserve Trust Account as a securities account at The Bank of New York as Securities Intermediary with regard to the Reserve Trust Account. The Trustee shall be the entitlement holder with respect to the Reserve Trust Account. The Reserve Trust Account is established for the exclusive use and benefit of the Beneficiary and shall be subject to withdrawal by the Beneficiary at any time, as provided herein. The Trustee and its lawfully appointed successors are authorized and shall have power to receive such cash and Eligible Assets as the Grantor transfers to or vest in the Trustee or places under the Trustee's possession and control, and to hold, invest, reinvest, manage and dispose of the same for the uses and purposes and in the manner and according to the provisions hereinafter set forth. All such trusteed Eligible Assets at all times shall be maintained as a trust account, separate and distinct from all other assets of the Trustee, and shall be continuously maintained by the Trustee. (b) The Grantor shall transfer to the Trustee, for deposit to the Reserve Trust Account cash (United States legal tender) and Eligible Assets as it may from time to time be required to deposit by this Agreement or otherwise (all such Eligible Assets actually received in the Reserve Trust Account and proceeds thereof as well as amounts transferred under Sections 3 and 4 and reinvestments thereof are "Assets"). (c) The Grantor hereby represents, warrants and covenants (i) that any Assets transferred by the Grantor to the Trustee for deposit to the Reserve Trust Account will be in such form that the Beneficiary and the Trustee, upon written direction by the Beneficiary, may freely and unconditionally negotiate any such Assets without notice to the Grantor or consent or signature from the Grantor to any Person; and (ii) that all Assets transferred by the Grantor to the Trustee for deposit to the Reserve Trust Account will consist only of Eligible Assets. Prior to depositing Eligible Assets into the Reserve Trust Account, the Grantor shall, as necessary, execute any assignments, endorsements in blank or such other documents required to transfer legal title of Eligible Assets requiring such to the Trustee. (d) All Assets in the Reserve Trust Account shall be valued at their current fair market value in U.S. dollars as determined by the Trustee in its sole discretion exercised in a reasonable manner as described below. Within ten (10) Business Days after the end of each month the Trustee shall send to the Beneficiary and the Grantor a written report regarding the valuation of the Assets at the end of such month (the "Valuation Report"). Each Valuation Report shall include a fair market value valuation of all Assets in the Trust Account in accordance with the asset prices provided by the market makers or such other appropriate independent sources of valuation as recommended in writing to the Trustee by the Grantor's investment manager or, in their absence, by an independent nationally recognized pricing service to which the Trustee subscribes in the normal conduct of its business (e.g., Interactive Data, Merrill Lynch, Bloomberg, Lehman Brothers, etc.). Subject to the Trustee's own negligence, lack of good faith or willful misconduct, the Trustee shall not be liable for incorrect fair market value of Assets caused by the use of inaccurate or erroneous prices provided by such pricing services or sources. If the price is not available as set forth above, the Trustee can obtain the price by retaining, at the expense of the Grantor and pursuant to the written recommendation of the Grantor's investment manager, a major independent securities valuation firm to appraise the value of such Assets. If the Grantor or the Beneficiary 2 disputes the fair market value of the Assets in the Security Trust Account as set forth in the Valuation Report, then within ten (10) Business Days following receipt of the Valuation Report, the Grantor or the Beneficiary, as the case may be, will notify the other party of its dispute regarding the valuation (the "Valuation Dispute Notice"). The Valuation Dispute Notice shall contain sufficient information to support the disputing party's valuation. The Trustee shall not be a party to any dispute between the Grantor and Beneficiary relating to the valuation of Assets set forth in the Valuation Report, but shall be provided with a copy of any Valuation Dispute Notice delivered by the Grantor or Beneficiary under this provision. The non-disputing party has five (5) Business Days from the receipt of the Valuation Dispute Notice to agree with the disputing party's valuation or provide its own reasonable valuation of the specific Assets in dispute (the "Asset Response"). During no more than four (4) Business Days after the Asset Response, the parties to the dispute will continue to work to resolve the disagreement, failing which they shall disclose to each other their final and last best proposal ("Proposal" as hereinafter defined) no later than the end of such four (4) Business Day period. For purposes hereof, a "Proposal" of a party to the dispute shall consist of the valuation correction and related information supporting the valuation correction. If no resolution of disagreements is reached on or prior to the Business Day following such four (4) Business Days, the parties to the dispute will on such next following Business Day submit their final and last best Proposal (previously disclosed to the other party as provided above) to arbitration by a major independent securities valuation firm, the identity of which shall be mutually agreed, and the parties to the dispute will abide by the result of such arbitration, which arbitration process shall require the arbitrator to select one of the two final and last best Proposals and to render its opinion regarding the reasonableness of the parties' actions for purposes of the next sentence. The cost of such arbitration shall be borne by the party who delivered the Valuation Dispute Notice if it rejects a reasonable Asset Response and otherwise the cost shall be shared equally by the Beneficiary and Grantor. To the extent feasible, and at the joint written direction of the Grantor and the Beneficiary, the Trustee shall adopt the valuation methodology underlying the valuation adopted in arbitration or agreed to by the Beneficiary and the Grantor. Pending resolution of any dispute with respect to valuation of Assets, the Grantor and Beneficiary will continue to follow the requirements of this Agreement based on the Trustee's Valuation Report as submitted. Upon resolution of any dispute regarding the valuation, the Trustee will take the action hereunder that it would otherwise have been required to take, if any. (e) All Assets held within the Trust Account shall consist only of cash and Eligible Assets and shall be invested in accordance with the investment guidelines attached hereto at Exhibit A (the "Investment Guidelines"). (f) The Grantor hereby grants to the Trustee, as agent of and as secured party for the exclusive benefit of the Beneficiary, a security interest in the Grantor's right, title and interest in and to the Reserve Trust Account and the Assets. The Trustee, as entitlement holder for the benefit of the Beneficiary of all rights associated 3 with the Assets and the Reserve Trust Account, shall have control of the Assets and the Reserve Trust Account for the purpose of perfecting the interest granted hereby and shall issue entitlement orders to the Securities Intermediary as instructed by the Grantor and the Beneficiary in accordance with the terms of this Agreement. The Grantor hereby authorizes the Beneficiary to file or to instruct the Trustee to file UCC - 1 Financing Statements with respect to the Reserve Trust Account and the Assets for which such a financing statement is appropriate, and hereby appoints the Beneficiary as attorney-in-fact for the purpose of signing Grantor's name on any such financing statements. The Trustee shall at the written direction of the Beneficiary, file the completed UCC - 1 Financing Statements delivered to the Trustee by the Beneficiary with respect to the Reserve Trust Account and the Assets. Section 2. Withdrawal of Assets from the Reserve Trust Account. (a) The Beneficiary shall have the right, at any time and from time to time, without the consent of, or notice to, the Grantor, to withdraw from the Reserve Trust Account, by providing written notice to the Trustee of such withdrawal (the "Withdrawal Notice") (of which the Trustee promptly shall forward a copy to the Grantor), such amounts as are specified in such Withdrawal Notice. The Withdrawal Notice may designate a third party (the "Designee") to whom amounts specified therein shall be delivered. The Beneficiary need present no statement or document in addition to a Withdrawal Notice in order to withdraw any Assets; nor is such right of withdrawal or any other provision of this Agreement subject to any conditions or qualifications. (b) The Beneficiary may undertake to use and apply amounts drawn upon the Reserve Trust Account, without diminution because of the insolvency of the Beneficiary or the Grantor. 4 Section 3. Procedure for Withdrawals of Assets; Certain Covenants. (a) Following receipt of a Withdrawal Notice and in accordance with Section 2, the Trustee shall promptly take any and all steps necessary to transfer, absolutely and unequivocally, all right, title and interest to the Assets or amounts specified in such Withdrawal Notice and shall deliver such Assets or amounts as specified in such Withdrawal Notice. The Trustee shall be protected in relying conclusively upon any written demand, instruction, direction, acknowledgment, statement, notice, resolution, request, consent, order, certificate, report, appraisal, opinion, telegram, cablegram, facsimile, radiogram, letter, or other communication (collectively, "Communications") of the Beneficiary for any such withdrawal that on its face conforms to requirements of this Agreement. The Beneficiary shall execute a receipt evidencing the delivery of Assets or amounts when required in the normal and customary transaction of the business of banking. (b) Subject to Sections 4 and 10 of this Agreement, in the absence of a Withdrawal Notice, the Trustee shall allow no substitutions or withdrawals of any Asset from the Reserve Trust Account. (c) Subject to the terms of this Agreement, at the time any amount becomes payable or Asset becomes transferable by the Trustee from the Reserve Trust Account, such payment or transfer shall be effected in accordance with the written instructions contained in a Withdrawal Notice. If no such instructions from the Beneficiary are received by the Trustee at least one (1) full Business Day prior to the time set for such payment or transfer, such payment or transfer shall be effected as follows: (i) first from any cash in the Reserve Trust Account; (ii) then, from the proceeds of the sale by the Trustee of any or all of the debt obligations in the Reserve Trust Account (commencing with those obligations closest in maturity to the date in question); (iii) then, from any other Assets in the Reserve Trust Account. Section 4. Redemption, Investment and Substitution of Assets. (a) The Trustee shall surrender for payment all maturing Assets and all Assets called for redemption (and provide written notice to the Beneficiary and the Grantor to that effect) and deposit the proceeds of any such payment to the Reserve Trust Account. (b) The Trustee and the Beneficiary acknowledge that the Grantor has appointed Wellington Management Company, llp (the "Asset Manager") to manage and make investment decisions with regard to the Assets held by the Trustee in the Trust Account. The Grantor has provided written direction to the Trustee with regard to the engagement of the Asset Manager. The Asset Manager shall direct the Trustee to invest such Assets in Eligible Assets in accordance with the Investment Guidelines. From time to time, subject to the written consent of the Beneficiary, the Asset Manager may direct the Trustee in writing (an "Investment Order") to invest or reinvest, Assets held in the 5 Reserve Trust Account into other Eligible Assets in accordance with the Investment Guidelines. All investments and substitutions of Eligible Assets referred to in this paragraph shall meet the requirements of Eligible Assets and shall remain in compliance with any other applicable insurance laws and the Investment Guidelines. The parties agree and acknowledge that the Beneficiary is providing consent to investments made by the Asset Manager that are in compliance with the Investment Guidelines. The Trustee shall have no responsibility whatsoever to determine that any Assets in the Reserve Trust Account are or continue to be Eligible Assets. The Trustee shall execute Investment Orders and settle securities transactions by itself or by means of an agent or broker retained by the Asset Manager. The Trustee shall not be responsible for any act, error or omission, or for the solvency, of any investment manager, agent or broker unless such act, error or omission is the result, in whole or in part, of the Trustee's negligence, willful misconduct or lack of good faith. The Trustee shall not be responsible for any Loss (as herein defined) suffered by the Beneficiary or the Grantor due to the insolvency of the investment manager, agent or broker. (c) The Trustee shall not be liable for any loss, liability, claim or damage paid or incurred ("Loss") by the Reserve Trust Account from any investment, reinvestment, liquidation or substitution pursuant to the terms of this Agreement other than a Loss due to the Trustee's own negligence, willful misconduct or lack of good faith. Without limiting any other provision herein, the Trustee shall not be liable for any Loss due to changes in market rates or penalties for early redemption or any other fees, taxes or charges. Section 5. The Income Account. All payments of interest and dividends in respect to Assets in the Trust Account shall be deposited by the Trustee in a separate custody ledger income account (the "Income Account") within the Reserve Trust Account established by the Grantor and maintained by the Trustee at an office of the Trustee in New York City. Any interest, dividend or other income automatically credited on the payment date to the Income Account which is not subsequently received by the Trustee shall be reimbursed by the Grantor to the Trustee and the Trustee may debit the Income Account for this purpose. Pursuant to Section 8(a), the Trustee shall have the right to deduct its compensation and expenses from the Income Account, to the extent due and owing. Any amounts contained in the Income Account are part of the Assets of the Reserve Trust Account and, as such, are subject to the terms and conditions of this Agreement with respect to the Assets. Section 6. Right to Vote Assets. The Trustee will transmit to the Grantor and or its designee upon receipt, and will instruct any entities authorized to hold Assets in accordance with the terms hereof to transmit to the Grantor upon receipt, all financial reports, stockholder communications, notices, proxies and proxy soliciting materials received from issuers of Assets, and all information relating to exchange or tender offers received from offerors 6 with respect to such Assets. The Grantor and/or its designee shall have the full unqualified right to vote and execute consents and to exercise any and all proprietary rights not inconsistent with this Agreement with respect to any securities or other property forming a part of the Reserve Trust Account. Section 7. Additional Rights and Duties of the Trustee. (a) The Trustee shall, concurrent with delivery of each monthly Valuation Report, deliver a summary of account activity for the month just ended to the Grantor and Beneficiary. (b) Before accepting any Asset for deposit to the Reserve Trust Account, the Trustee shall determine that such Asset is in such form that the Beneficiary whenever necessary may, or the Trustee upon written direction by the Beneficiary may, negotiate such Asset without consent or signature from the Grantor or any other Person. (c) The Trustee shall notify the Grantor and the Beneficiary, within ten (10) days, of any deposits to or withdrawals from the Reserve Trust Account. (d) All Assets shall be safely held by the Trustee in its office in the United States, except that the Trustee may deposit any Assets in the Reserve Trust Account in a book-entry account maintained at a Federal Reserve Bank or in depositories such as The Depository Trust Company (the Federal Reserve Bank and such other depositories being referred to herein as "Depositories"). Assets may be held in the name of a nominee maintained by the Trustee or by any such Depositories. (e) The Trustee shall accept and may open all mail directed to the Grantor or the Beneficiary in care of the Trustee. The Trustee shall promptly forward all mail to the addressee whether or not opened. (f) The Trustee shall keep full and complete records of the administration of the Reserve Trust Account. Upon the reasonable written request of the Grantor or the Beneficiary, the Trustee shall promptly permit the Grantor or the Beneficiary, their respective agents, employees or independent auditors to examine, audit, excerpt, transcribe and copy, at their own expense, during the Trustee's normal business hours any books, documents, papers and records relating to the Reserve Trust Account or the Assets. (g) The Trustee is authorized to follow and rely conclusively upon all Communications (including, without limitation, Investment Orders, Withdrawal Notices and Termination Notices) given by officers, agents and/or employees named in letters and incumbency certificates furnished to the Trustee from time to time by the Grantor or the Beneficiary and by attorneys-in-fact acting under written authority furnished to the Trustee by the Grantor or the Beneficiary (collectively "Instructions"), including Instructions given by letter, facsimile transmission or electronic media, if the Trustee 7 reasonably believes such Instructions to be genuine and to have been signed, sent or presented by the proper party or parties. The Trustee shall not incur any liability to anyone resulting from actions taken by the Trustee in reliance in good faith on such Instructions. The Trustee shall not incur any liability in executing Instructions prior to receipt by it of (i) notice of the revocation of the written authority of the individual(s) named therein or (ii) notice from any officer, agent or employee of the Grantor or the Beneficiary named in a letter or incumbency certificate delivered hereunder prior to receipt by it of a more current certificate. (h) The duties and obligations of the Trustee shall only be such as are specifically set forth in this Agreement, as it may from time to time be amended in accordance with the terms hereof, and no implied duties or obligations shall be read into this Agreement against the Trustee. The Trustee shall be liable only for its own negligence, willful misconduct or lack of good faith. Subject to the preceding sentence, the Trustee is not liable (i) for acting in accordance with or relying upon any instruction, notice, demand, certificate or document contemplated by and given in accordance with this Agreement from the Grantor or the Beneficiary, (ii) for any consequential, punitive or special damages, (iii) for the acts or omissions of its nominees, unless the Trustee chose such person without due care, or (iv) for an amount in excess of the value of the Assets, valued as of the most recent Valuation Report. (i) No provision of this Agreement shall require the Trustee to take any action which, in the Trustee's reasonable judgment, would result in any violation of this Agreement or any provision of law. (j) The Trustee may confer with counsel of its selection in relation to matters arising under this Agreement and shall, upon demand, be indemnified and held harmless from and against any and all Losses by the Grantor hereunder for any actions taken, omitted or suffered by it in connection with this Agreement or under any transaction contemplated hereby in good faith without gross negligence or willful misconduct and in accordance with opinion of such counsel. The opinion of such law firm shall be full and complete authority and protection for the Trustee with respect to any action taken, omitted or suffered by it in good faith and in accordance with the opinion of such law firm. (k) Subject to the requirement of good faith, reasonableness and the lack of negligence or willful misconduct, the Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instructions) reasonably believed by the Trustee to be genuine and to have been signed, sent or presented by the proper party or parties. All notices to the Trustee (unless otherwise provided therein) shall be deemed to be effective when actually received by a responsible officer of the Trustee. (l) Whenever, in the administration of the Reserve Trust Account created by this Agreement, the Trustee shall reasonably deem it necessary or desirable 8 that a matter be proved or established prior to taking, suffering or omitting any action thereunder, subject to the requirement of reasonableness, good faith and lack of negligence and willful misconduct, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a statement or certificate signed by or on behalf of the Grantor and/or the Beneficiary and delivered to the Trustee and such certificate shall be full warrant to the Trustee for any action taken, suffered or omitted by it on reliance thereon, subject to this paragraph, but in its discretion exercised in a reasonable manner, the Trustee may in lieu thereof accept other evidence of the fact or matter or may require such other or additional evidence as it may deem reasonable. (m) Except when otherwise expressly provided in this Agreement and subject to the requirement of reasonableness, good faith and lack of negligence or willful misconduct, any Communications (including, without limitation, any Investment Order or Instructions) to be delivered or furnished by the Grantor or the Beneficiary shall be sufficient to be delivered or furnished in the name of the Grantor or the Beneficiary by such officer or officers of the Grantor or the Beneficiary as may be designated in a certificate, resolution or letter of advice by such party. Written notice of such designation by the Grantor shall be filed with the Trustee. The Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instruction) made by such officer or agent of the Grantor or the Beneficiary with respect to the authority conferred on it. (n) Except as may arise from the Trustee's own negligence or willful misconduct or lack of good faith, the Trustee is not responsible for any Losses resulting from reasons or causes beyond its control, including without limitation, nationalization, expropriation, currency restrictions, acts of war, terrorism, insurrection, revolution, civil unrest, riots or strikes, nuclear fusion or fission or acts of God. (o) The Parties acknowledge that nothing in this Agreement shall obligate the Trustee to extend credit, grant financial accommodation or otherwise advance moneys for the purpose of making any payments or part thereof or otherwise carrying out any Instructions, including, without limitation, any Investment Order. (p) In the event of any reasonable ambiguity or uncertainty hereunder or in any notice, instruction or other communication received by the Trustee hereunder, the Trustee may, in its reasonable discretion, refrain from taking any action other than retain possession of the Assets, unless the Trustee receives written instructions, signed by the Grantor and the Beneficiary, which eliminate such ambiguity or uncertainty. In the event of any dispute between or conflicting claims by or among the Grantor and the Beneficiary and/or any other Person with respect to any Assets, the Trustee shall be entitled, in its reasonable discretion, to refuse to comply with any and all claims, demands or instructions with respect to such Assets, other than a Withdrawal Notice, so long as such dispute or conflict shall continue, and the Trustee shall not be or become liable in any way for such failure or refusal to comply with such conflicting claims, 9 demands or instructions. The Trustee shall be entitled to refuse to act until, in its reasonable discretion, either (i) such conflicting or adverse claims or demands shall have been determined by a final order, judgment or decree of a court of competent jurisdiction, which order, judgment or decree is not subject to appeal, or settled by agreement between the conflicting parties as evidenced in a writing satisfactory to the Trustee or (ii) the Trustee shall have received security or an indemnity satisfactory to it sufficient to hold it harmless from and against any and all Losses which it may incur by reason of so acting. The Trustee may, in addition, elect, in its reasonable discretion, to commence an interpleader action or seek other judicial relief or orders as it may deem, in its sole discretion, if necessary. The costs and expenses (including reasonable attorneys' fees and expenses) incurred in connection with such proceeding shall be paid by, and shall be deemed an obligation of, the Grantor. (q) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, provided that the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (r) The Securities Intermediary agrees that it will comply with entitlement orders issued by the Trustee in accordance with the terms of this Agreement, and that such compliance is not subject to any conditions, qualifications or further consents. The Securities Intermediary will not comply with entitlement orders issued by any other Person. (s) The Securities Intermediary hereby waives any right of counterclaim, banker's lien, liens or perfection rights as securities intermediary with respect to the Assets, the proceeds thereof and the Reserve Trust Account. Section 8. The Trustee's Compensation, Expenses and Indemnification. (a) The Grantor, upon receipt of an invoice from the Trustee to the Grantor and without offset to the Beneficiary's interest, (i) shall pay the Trustee, as compensation for its services under this Agreement, a fee computed at rates determined by the Trustee from time to time and communicated in writing to the Grantor and (ii) shall pay or reimburse the Trustee for all of the Trustee's expenses and disbursements in connection with its duties under this Agreement (including reasonable attorneys' fees and expenses and reasonable accounting and consulting fees and expenses), except any such expense or disbursement as may arise from the Trustee's negligence, willful misconduct or lack of good faith. The Trustee shall be entitled to deduct its compensation and expenses solely from payments of dividends and interest in respect of the Assets held in the Income Account as provided in Section 5 of this Agreement. (b) The Grantor hereby indemnifies the Trustee for, and holds it harmless against, any Losses (including reasonable attorneys' fees and expenses and reasonable consulting and accountants' fees and expenses) incurred or paid (other than as 10 a result of the Trustee's gross negligence, willful misconduct or lack of good faith), arising out of or in connection with the performance of its duties and obligations under this Agreement, including without limitation any Loss arising out of or in connection with the status of the Trustee in connection with the performance of its duties and any nominee as the holder of record of any of all of the Assets. The Grantor hereby acknowledges that the foregoing indemnities shall survive the resignation of the Trustee or the termination of this Agreement. (c) No Assets shall be withdrawn from the Reserve Trust Account or used in any manner for paying compensation to, or reimbursement or indemnification of, the Trustee except as set forth in Section 5. (d) The Trustee hereby waives any and all rights of offset, counterclaim and recoupment against the Beneficiary and Reserve Trust Account, and waives any lien (statutory or otherwise) that it may assert against the Reserve Trust Account. Section 9. Resignation of the Trustee. (a) The Trustee may resign at any time by giving not less than ninety (90) days' written notice thereof to the Beneficiary and to the Grantor, such resignation to become effective on the acceptance of appointment by a successor trustee and the transfer to such successor trustee of all Assets in the Reserve Trust Account in accordance with paragraph (b) of this Section 9. The Grantor and the Beneficiary jointly also may remove the Trustee at any time, without assigning any reason therefor, on fifteen (15) days' prior written notice thereof to the Trustee. (b) Upon receipt of the Trustee's notice of resignation or notice to the trustee of removal, the Grantor and the Beneficiary shall promptly appoint a successor trustee. Any successor trustee shall be a bank that is a member of the Federal Reserve System or chartered in the State of New York and shall not be a parent, a subsidiary or an affiliate of the Grantor or any Beneficiary. If a successor Trustee has not accepted such appointment within thirty (30) days after the notice of resignation or removal, the Trustee may, in its sole discretion, apply at the expense of the Grantor to a court of competent jurisdiction for the appointment of a successor Trustee or for other appropriate relief. The costs and expenses (including reasonable attorneys' fees and expenses) incurred by the Trustee in connection with such proceeding shall be paid by, and be deemed an obligation of, the Grantor. Upon the acceptance of the appointment as trustee hereunder by a successor trustee, such successor trustee shall succeed to and become vested with all the rights, powers, privileges and duties of the Trustee, and the Trustee shall be discharged from any future duties and obligations under this Agreement, but the Trustee shall continue after its resignation to be entitled to the benefits of the indemnities provided herein for a Trustee. 11 Section 10. Termination of the Reserve Trust Account. (a) The Reserve Trust Account and this Agreement, except for the indemnities provided herein, which shall survive termination, may be terminated, other than pursuant to an order of a court having jurisdiction, only after (i) the Grantor has given the Trustee written notice of its intention to terminate the Reserve Trust Account (the "Notice of Intention"), and (ii) the Trustee has given the Grantor and the Beneficiary the written notice specified in paragraph (b) of this Section 10. The Notice of Intention shall specify the date on which the Grantor intends the Reserve Trust Account to terminate (the "Proposed Date"). (b) Within ten (10) Business Days following receipt by the Trustee of the Notice of Intention, the Trustee shall give at least thirty (30) days written notice (the "Termination Notice") to the Beneficiary, the Grantor, and the Colorado Insurance Commissioner of the date (the "Termination Date") on which the Reserve Trust Account shall terminate. The Termination Date shall be (a) the Proposed Date (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is at least thirty (30) days but no more than forty-five (45) days subsequent to the date the Termination Notice is given, (b) thirty (30) days subsequent to the date the Termination Notice is given (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is less than thirty (30) days subsequent to the date the Termination Notice is given; or (c) forty-five (45) days subsequent to the date the Termination Notice is given (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is more than forty-five (45) days subsequent to the date the Termination Notice is given. (c) On the Termination Date, after satisfaction of any outstanding Withdrawal Notices, or deduction of amounts required to satisfy any outstanding disputed Withdrawal Notice, and upon receipt of written certification of the Beneficiary that no Obligations of the Grantor remain unsatisfied, the Trustee shall transfer any Assets remaining in the Reserve Trust Account to the Grantor, at which time all duties and obligations of the Trustee with respect to such Assets shall cease. Section 11. Definitions. Except as the context shall otherwise require, the following terms shall have the following meanings for all purposes of this Agreement (the definitions to be applicable to both the singular and the plural forms of each term defined if both such forms of such term are used in this Agreement): The term "Agreement" shall have the meaning specified in the Preamble. The term "Assets" shall have the meaning specified in Section 1(b). The term "Beneficiary" shall have the meaning specified in the Preamble. 12 The term "Withdrawal Notice" shall have the meaning specified in Section 2(a). The term "Business Day" shall mean any day on which the offices of the Trustee in New York are open for business and shall refer to a full business day. The term "Communications" shall have the meaning specified in Section 3(a). The term "Depositories" shall have the meaning specified in Section 7(d). The term "Designee" shall have the meaning specified in Section 2. The term "Eligible Assets" shall mean assets deposited in the trust account, valued according to their current fair market value and consisting only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and investments which qualify as admitted assets under the Colorado Insurance Code and comply with the requirements specified by the Investment Guidelines issued by an institution that is not the parent, subsidiary or affiliate of either the Grantor or the Beneficiary, unless such institution is publicly traded. The term "Grantor" shall have the meaning set forth in the Preamble. The term "Income Account" shall have the meaning specified in Section 5. The term "Instructions" shall have the meaning specified in Section 7(g). The term "Investment Guidelines" shall have the meaning specified in Section 1(e). The term "Investment Order" shall have the meaning specified in Section 4(b). The term "Loss" shall have the meaning specified in Section 4(c). The term "Notice of Intention" shall have the meaning specified in Section 10(a). The term "Person" shall mean and include an individual, a corporation, a limited liability company, a partnership, an association, a trust, an unincorporated organization or a government or political subdivision thereof. The term "Proposed Date" shall have the meaning specified in Section 10(a). 13 The term "Reserve Trust Account" shall mean the account established pursuant to this Agreement by the Grantor with the Trustee as Account No. 327695. The term "Securities Intermediary" shall mean The Bank of New York. The term "Termination Date" shall have the meaning specified in Section 10(b). The term "Termination Notice" shall have the meaning specified in Section 10(b). The term "Trustee" shall mean The Bank of New York. The term "UCC" shall mean the New York Uniform Commercial Code. The term "Valuation Report" shall have the meaning specified in Section 1(d). The term "Withdrawal Notice" shall have the meaning specified in Section 2. Section 12. Governing Law. This Agreement and the Reserve Trust Account shall be governed by and construed in accordance with the internal laws of the State of New York; provided that perfection issues with respect to Article 9 of the UCC may give effect to applicable choice or conflict of law rules set forth in Article 9 of the UCC. Section 13. Successors and Assigns. No party may assign this Agreement or any of its obligations hereunder without the prior written consent of the other parties; provided, however, that this Agreement shall inure to the benefit of and bind those who, by operation of law, become successors to the parties, including, without limitation, any liquidator, rehabilitator, receiver or conservator and any successor, merged or consolidated entity; and provided, further, that, in the case of the Trustee, the successor trustee is eligible to be a trustee under the terms hereof. Section 14. Severability. In the event that any provision of this Agreement shall be declared invalid or unenforceable by a court having jurisdiction, such invalidity or unenforceability shall not effect the validity or enforceability of the remaining portions of this Agreement. 14 Section 15. Entire Agreement. This Agreement constitutes the entire agreement among the parties, and there are no understandings or agreements, conditions or qualifications regarding the rights and obligations of the Trustee which are not fully expressed in this Agreement. Section 16. Amendments. This Agreement may be modified or otherwise amended, and the observance of any term of this Agreement may be waived, only if such modification, amendment or waiver is in writing and signed by all of the parties. Section 17. Notices, etc. Unless otherwise provided in this Agreement, all Communications (including, without limitation, any Investment Orders or Instructions) required or permitted to be given or made under the terms hereof shall be in writing and shall be deemed to have been duly given or made (a) (i) when delivered personally, (ii) when made or given by telecopy, or (iii) in the case of International Priority Mail (Federal Express), upon the expiration of three days after any Communication shall have been deposited in International Priority Mail (Federal Express) for transmission or upon receipt thereof, whichever shall first occur and (b) when addressed as follows: To the Grantor: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: Nathan Gemmiti with a copy to: Scottish Re Group Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: Paul Goldean 15 and a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10005 Attention: Stephen G. Rooney To the Beneficiary: Security Life of Denver Insurance Company Attention: Mark Tullis c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 with a copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 If to the Trustee: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attn: Insurance Trust and Escrow Unit If to the Securities Intermediary: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attn: Insurance Trust and Escrow Unit Each party may from time to time designate a different address for Communications (including, without limitation, Investment Orders) by giving written notice of such change to the other parties. All Communications relating to the Beneficiary's approval of the Grantor's authorization to substitute Assets and to the termination of the Reserve Trust Account shall be in writing. 16 Section 18. Headings. The headings of the sections and the Table of Contents have been inserted for convenience of reference only, and shall not be deemed to constitute a part of this Agreement. Section 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall constitute an original, but such counterparts together shall constitute one and the same agreement. -the remainder of this page intentionally left blank- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield -------------------------------------- Name: Oscar Scofield Title: CEO/ President SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis -------------------------------------- Name: Mark Tullis Title: President THE BANK OF NEW YORK, AS SECURED PARTY AND TRUSTEE By: /s/ Robert W. Rich -------------------------------------- Name: Robert W. Rich Title: Vice President THE BANK OF NEW YORK, AS SECURITIES INTERMEDIARY By: /s/ Robert W. Rich -------------------------------------- Name: Robert W. Rich Title: Vice President EX-10.51 13 ex10-51.txt SECURITY TRUST AGREEMENT SECURITY TRUST AGREEMENT Dated as of December 31, 2004 by and among Scottish Re (U.S.), Inc. as Grantor, Security Life of Denver Insurance Company as Beneficiary, The Bank of New York as Trustee, and The Bank of New York as Securities Intermediary TABLE OF CONTENTS Page Section 1. Deposit of Assets to the Security Trust Account...................2 Section 2. Withdrawal of Assets by Beneficiary from the Security Trust Account.........................................................4 Section 3. Withdrawal of Assets by Grantor from the Security Trust Account...5 Section 4. Procedure for Withdrawals of Assets; Certain Covenants............6 Section 5. Redemption, Investment and Substitution of Assets.................7 Section 6. The Income Account................................................8 Section 7. Right to Vote Assets..............................................8 Section 8. Additional Rights and Duties of the Trustee and the Securities Intermediary....................................................8 Section 9. The Trustee's Compensation, Expenses and Indemnification.........11 Section 10. Resignation of the Trustee.......................................12 Section 11. Termination of the Security Trust Account........................12 Section 12. Definitions......................................................13 Section 13. Governing Law....................................................17 Section 14. Successors and Assigns...........................................17 Section 15. Severability.....................................................17 Section 16. Entire Agreement.................................................17 Section 17. Amendments.......................................................17 Section 18. Notices, etc.....................................................18 Section 19. Headings.........................................................19 Section 20. Counterparts.....................................................19 EXHIBITS A Security Trust Schedule B Investment Policies C SLDI Capital Adequacy Ratio Calculation D Grantor Capital Adequacy Ratio Calculation i SECURITY TRUST AGREEMENT SECURITY TRUST AGREEMENT, dated as of December 31, 2004 (the "Agreement"), by and among Scottish Re (U.S.), Inc., an insurance company organized and existing under the laws of and domiciled in the State of Delaware (hereinafter the "Grantor"), Security Life of Denver Insurance Company, a stock insurance company organized and existing under the laws of and domiciled in the State of Colorado (such insurer and its successors by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator thereof, being hereinafter referred to as the "Beneficiary"), The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as trustee and as secured party, being referred to as the "Trustee"), and The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as securities intermediary, being referred to as the "Securities Intermediary"). WITNESSETH: WHEREAS, the Grantor, the Beneficiary, Security Life of Denver International Limited, a Bermuda insurance company ("SLDI" and, together with the Beneficiary, the "Sellers"), and Scottish Re Group Limited ("Purchaser"), the indirect parent corporation of the Grantor, and Newco, a Bermuda insurance company, have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; and WHEREAS, the Grantor and the Beneficiary have entered into one or more Reinsurance Agreements, dated as of the date hereof, whereby the Grantor, as reinsurer, has agreed to reinsure specified business of the Beneficiary as ceding insurer (hereinafter referred to as the "Reinsurance Agreements"); and WHEREAS, pursuant to the terms of the Asset Purchase Agreement and the Reinsurance Agreements, the Beneficiary is required to pay the Grantor the amount of $160,000,000 (the "Security Amount"); and WHEREAS, the Grantor desires to establish with the Trustee a trust account (the "Security Trust Account") and transfer to the Trustee for deposit in the Security Trust Account cash and other Assets in an amount equal to the Security Amount in order to secure and to fund the obligation of Grantor (i) to make payments in connection with a recapture of the business subject to the Reinsurance Agreements after the occurrence of a Triggering Event up to an amount equal to the Security Amount, and (ii) to fund the Reserve Trust Account under certain circumstances; and WHEREAS, the Trustee has agreed to act as Trustee hereunder and, in accordance with the terms hereof, to hold cash or other Assets in trust in the Security Trust Account on the terms herein set forth. NOW, THEREFORE, for and in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Deposit of Assets to the Security Trust Account. (a) Concurrently with the execution and delivery of this Agreement, the Grantor hereby establishes a Security Trust Account and the Trustee hereby accepts the Security Trust Account herein created and declared upon the terms provided herein and shall administer the Security Trust Account as Trustee, and with respect to the security interest granted in Section 1(f) hereof, and as secured party for the exclusive benefit of the Beneficiary. The Grantor shall establish and the Trustee shall maintain the Security Trust Account as a securities account at The Bank of New York as Securities Intermediary with regard to the Security Trust Account. The Trustee shall be the entitlement holder with respect to the Security Trust Account. The Security Trust Account shall be subject to withdrawal by the Beneficiary and the Grantor as provided herein. The Trustee and its lawfully appointed successors are authorized and shall have power to receive such cash and other securities and property as the Grantor transfers to or vests in the Trustee or places under the Trustee's possession and control, and to hold, invest, reinvest, manage and dispose of the same for the uses and purposes and in the manner and according to the provisions hereinafter set forth. All such trusteed assets at all times shall be maintained as a trust account, separate and distinct from all other assets of the Trustee, and shall be continuously maintained by the Trustee. (b) Pursuant to Section 3.1(a) of the Reinsurance Agreement, the Grantor shall transfer to the Trustee, for deposit to the Security Trust Account, on the date hereof, cash and such other assets as may be designated by the Grantor in an amount equal to the Security Amount (all such assets actually received in the Security Trust Account and proceeds thereof are herein referred to individually as an "Asset" and collectively as the "Assets"). (c) If, at the end of a calendar quarter, the fair market value of the Assets in the Security Trust Account is less than the required amount as specified on Exhibit A hereto (the "Required Amount") for the next calendar quarter, other than as a result of withdrawals pursuant Section 3(c) or (d), the Grantor shall transfer cash or other assets to the Security Trust Account in an amount equal to such deficiency. If, as a result of any withdrawal pursuant to Section 3(d) the fair market value of the Assets in the Security Trust Account falls below the Required Amount, the Grantor shall not have the right to withdraw (i) any asset from the Security Trust Account, or (ii) any amount in the Income Account, in each case until such time as the fair market value of the Assets in the Security Trust Account following such withdrawal equals the Required Amount. (d) The Grantor hereby represents, warrants and covenants (i) that any Assets transferred to the Trustee for deposit to the Security Trust Account will be in such form that the Beneficiary may, upon satisfaction of the conditions set forth in Section 2, and the Trustee, upon written direction by the Beneficiary may, negotiate any such Assets without consent or signature from the Grantor or any Person other than a Depository (as such term is hereinafter defined) in accordance with the terms of this Agreement; and (ii) that all Assets transferred to the Trustee for 2 deposit to the Security Trust Account will consist only of cash (United States legal tender) and Eligible Securities (as hereinafter defined). (e) All Assets in the Security Trust Account shall be valued at their current fair market value in U.S. dollars as determined by the Trustee in its sole discretion exercised in a reasonable manner as described below. Within ten (10) Business Days after the end of each month the Trustee shall send to the Beneficiary and the Grantor a written report regarding the valuation of the Assets at the end of such month (the "Valuation Report"). Each report shall include a fair market value valuation of all Assets in the Security Trust Account in accordance with the asset prices provided by the market makers or such other appropriate independent sources of valuation as recommended in writing to the Trustee by the Grantor's investment manager or, in their absence, by an independent nationally recognized pricing service to which the Trustee subscribes in the normal conduct of its business (e.g., Interactive Data, Merrill Lynch, Bloomberg, Lehman Brothers Inc., etc.). The Trustee shall not be liable for incorrect fair market value of Assets caused by the use of inaccurate or erroneous prices provided by such pricing services or sources. If the price is not available as set forth above, the Trustee can obtain the price by retaining, at the expense of the Grantor and pursuant to the written recommendation of the Grantor's investment manager, a major independent securities valuation firm to appraise the value of such Assets. If the Grantor or the Beneficiary disputes the fair market value of the Assets in the Security Trust Account as set forth in the Valuation Report, then within ten Business Days following receipt of the Valuation Report, the Grantor or the Beneficiary, as the case may be, will notify the other party of its dispute regarding the valuation (the "Valuation Dispute Notice"). The Valuation Dispute Notice shall contain sufficient information to support the disputing party's valuation. The Trustee shall not be a party to any dispute between the Grantor and Beneficiary relating to the valuation of Assets set forth in the Valuation Report, but shall be provided with a copy of any Valuation Dispute Notice delivered by the Grantor or Beneficiary under this provision. The non-disputing party has five Business Days from the receipt of the Valuation Dispute Notice to agree with the disputing party's valuation or provide its own reasonable valuation of the specific Assets in dispute (the "Asset Response"). During no more than four Business Days after the Asset Response, the parties to the dispute will continue to work to resolve the disagreement, failing which they shall disclose to each other their final and last best proposal ("Proposal" as hereinafter defined) no later than the end of such four Business Day period. For purposes hereof, a "Proposal" of a party to the dispute shall consist of the valuation correction and related information supporting the valuation correction. If no resolution of disagreements is reached on or prior to the Business Day following such four Business Days, the parties to the dispute will on such next following Business Day submit their final and last best Proposal (previously disclosed to the other party as provided above) to arbitration by a major independent securities valuation firm, the identity of which shall be mutually agreed, and the parties to the dispute will abide by the result of such arbitration, which arbitration process shall require the arbitrator to select one of the two final and last best Proposals and to render its opinion regarding the reasonableness of the parties' actions for purposes of the next sentence. The cost of such arbitration shall be borne by the party who delivered the Valuation Dispute Notice if it rejects a reasonable Asset Response and otherwise the cost shall be shared equally by the Beneficiary and Grantor. To the extent feasible, and at the joint written direction of the Grantor and the Beneficiary, the Trustee shall adopt the valuation methodology underlying the valuation adopted in arbitration or agreed to by the Beneficiary and the Grantor. 3 Pending resolution of any dispute with respect to valuation of Assets, the Grantor and Beneficiary will continue to follow the requirements of this Agreement based on the Trustee's Valuation Report as submitted. Upon resolution of any dispute regarding the valuation, the Trustee will take the action hereunder that it would otherwise have been required to take, if any. (f) In order to secure the timely and complete payment and performance of each and all of the Grantor's Obligations, the Grantor hereby grants to the Trustee as agent of and as secured party for the exclusive benefit of the Beneficiary, a security interest in the Grantor's right, title and interest in the Security Trust Account and the Assets (including without limitation any residual interest therein). The Trustee, as entitlement holder for the benefit of the Beneficiary of all rights associated with the Assets and the Security Trust Account, shall have control (as defined in the UCC) of the Assets and Security Trust Account for the purpose of perfecting the interest granted hereby and shall issue entitlement orders to the Securities Intermediary as instructed by the Grantor and the Beneficiary in accordance with the terms of this Agreement. The Grantor hereby authorizes the Beneficiary to file or to instruct the Trustee to file UCC-1 Financing Statements with respect to the Security Trust Account and the Assets for which such a financing statement is appropriate, and hereby appoints the Beneficiary as attorney-in-fact for the purpose of signing Grantor's name on any such financing statements. The Trustee shall, at the written direction of the Beneficiary, file the completed UCC-1 Financing Statements delivered to the Trustee by the Beneficiary with respect to the Security Trust Account and the Assets. (g) The Required Amount shown on Exhibit A shall proportionately be adjusted from time to time to reflect any adjustment pursuant to Section 2.5(h) or 2.5(j) of the Asset Purchase Agreement, any Excess Withdrawal Amount and any Reserve Withdrawal Amount (but not any withdrawal pursuant to Section 3(a), (d) or (e)). For the avoidance of doubt, the proportionate adjustment to the Required Amount described in the immediately preceding sentence shall be determined by the Grantor and the Beneficiary as follows: the Required Amount for each quarter beginning with the quarter in which such adjustment is effected shall be decreased by the same percentage that the then current Assets in the Security Trust Account are decreased as a result of any of the withdrawals or adjustments described in the immediately preceding sentence. Section 2. Withdrawal of Assets by Beneficiary from the Security Trust Account. The Beneficiary shall have the right to direct the Trustee to withdraw Assets from the Security Trust Account (i) to fund a recapture payment pursuant to the terms of the Reinsurance Agreements following the occurrence of a Triggering Event, or (ii) to fund any shortfalls in the Reserve Trust Account following the occurrence of a Triggering Event, by providing a notice (the "Beneficiary's Withdrawal Notice") to the Trustee, with a copy to the Grantor. The Beneficiary's Withdrawal Notice shall specify the amount of Assets to be withdrawn and the reason for the withdrawal and shall be signed by an authorized signatory of the Beneficiary. Such Beneficiary's Withdrawal Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such Assets or the proceeds thereof to (i) the Beneficiary, if such Assets or proceeds are being withdrawn to fund a recapture payment, or (ii) the Reserve Trust Account, if such Assets or proceeds are being withdrawn to fund a shortfall in the Reserve Trust Account. 4 Section 3. Withdrawal of Assets by Grantor from the Security Trust Account. (a) Prior to the occurrence of a Triggering Event, the Grantor shall have the right to direct the Trustee to withdraw such Assets or amounts from the Security Trust Account at the end of each calendar quarter that are in excess of the Required Amount for the next calendar quarter as specified on Exhibit A, by providing a notice (the "Grantor's Withdrawal Notice") to the Trustee, with a copy to the Beneficiary. The Grantor's Withdrawal Notice shall specify the amount or Assets to be withdrawn and shall be signed by an authorized signatory of the Grantor. Such Grantor's Withdrawal Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such amount or Assets or the proceeds thereof to the Grantor. After such time as the Beneficiary has provided the Trustee with notice that a Triggering Event has occurred (a "Triggering Event Notice"), the Trustee will not honor any Grantor's Withdrawal Notice until such time as the Beneficiary provides the Trustee with notice that such Triggering Event has been cured. (b) Prior to the occurrence of a Triggering Event, Grantor shall have the right to direct the Trustee to withdraw excess amounts ("Excess Withdrawal Amounts") from the Security Trust Account in proportion to the reduction of the Excess Reserve Amount as defined in Section 5.24 of the Asset Purchase Agreement (i) upon implementation of any Purchaser Facility in accordance with Section 5.24 of the Asset Purchase Agreement, or (ii) upon novation of the Insurance Contracts, by providing written notice to the Trustee of such withdrawal (an "Excess Withdrawal Notice"), with a copy to the Beneficiary. For avoidance of doubt, the proportion referred to in the immediately preceding sentence shall be determined as follows: the then current balance in the Security Trust Account may be withdrawn pursuant to this Section 3(b) in the same percentage as the then-current Excess Reserve Amount is decreased as a result of the implementation of a Purchaser Facility or novations, as the case may be. The Excess Withdrawal Notice shall specify the Excess Withdrawal Amount, shall be signed by an authorized signatory of the Grantor and shall be deemed to have been approved, unless the Beneficiary shall indicate in writing to the Grantor and the Trustee that it desires to contest the Grantor's representations within ten (10) Business Days following the receipt of the Excess Withdrawal Notice. Unless contested by the Beneficiary, the Trustee shall deliver the Excess Withdrawal Amount to the Grantor. (c) In the event that the Reserves required under the Reinsurance Agreements are materially increased as a result of a required change in assumptions or methodology, the Grantor shall have the right to direct the Trustee to withdraw an amount equal to such increase (the "Reserve Withdrawal Amount") by providing a notice (the "Reserve Withdrawal Notice") to the Trustee, with a copy to the Beneficiary. The Reserve Withdrawal Notice shall specify the Reserve Withdrawal Amount and shall be signed by an authorized signatory of the Grantor; provided that no such withdrawal is permitted without the Beneficiary's consent, which consent shall not be unreasonably withheld. Any amounts withdrawn by the Grantor pursuant to this Section 3(c) from the Security Trust Account shall be deposited directly into the Reserve Trust Account. (d) Upon the occurrence of a Triggering Event other than a Triggering Event resulting from any event described in clause (iv) or (v) of the definition of the Triggering Event, the Grantor shall have the right to direct the Trustee to withdraw such Assets or amounts from 5 the Security Trust Account to fund any shortfall in the Reserve Trust Account by providing a notice to the Trustee of such withdrawal (a "Reserve Trust Shortfall Notice"), with a copy to the Beneficiary. The Reserve Trust Shortfall Notice shall specify the amount or Assets to be withdrawn and shall be signed by an authorized signatory of the Grantor. Such Reserve Trust Shortfall Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such amount of Assets or the proceeds thereof to the Reserve Trust Account. (e) Upon the occurrence of an ING Event, the Grantor shall have the right to direct the Trustee to withdraw all Assets or amounts from the Security Trust Account by providing a notice to the Trustee (an "ING Event Notice"), with a copy to the Beneficiary. The ING Event Notice shall specify the amount or Assets to be withdrawn and shall be signed by an authorized signatory of the Grantor. Such ING Event Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such amount of Assets or the proceeds thereof to the Grantor. Section 4. Procedure for Withdrawals of Assets; Certain Covenants. (a) Following receipt from the Beneficiary or the Grantor (as the case may be) of a Beneficiary's or Grantor's Withdrawal Notice, a Reserve Withdrawal Notice, an Excess Withdrawal Notice, a Reserve Trust Shortfall Notice or an ING Event Notice, and in accordance with Sections 2 and 3 as applicable, and provided that with respect to withdrawals pursuant to Sections 3(a) and (b), the Trustee has not received a Triggering Event Notice, the Trustee shall promptly take any and all steps necessary to transfer, absolutely and unequivocally, all right, title and interest to the Assets or amounts specified in such Beneficiary's Withdrawal Notice, Grantor's Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice and shall deliver such Assets or amounts as specified in such Beneficiary's Withdrawal Notice, Grantor's Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice. The Trustee shall be protected in relying conclusively upon any written demand, instruction, direction, acknowledgment, statement, notice, resolution, request, consent, order, certificate, report, appraisal, opinion, telegram, cablegram, facsimile, radiogram, letter, or other communication (collectively, "Communications") of the Beneficiary or the Grantor for any such withdrawal that on its face conforms to requirements of this Agreement. The Beneficiary or the Grantor, as the case may be, shall execute a receipt evidencing the delivery of Assets or amounts when required in the normal and customary transaction of the business of banking. (b) Subject to Section 5 of this Agreement, in the absence of a Beneficiary's or Grantor's Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice, the Trustee shall allow no substitutions or withdrawals of any Asset from the Security Trust Account. (c) Without limiting any other provision of this Agreement, the Trustee shall have no responsibility whatsoever to determine that any Assets withdrawn from the Security Trust Account pursuant to Sections 2 or 3 will be used and applied in the manner contemplated by this Agreement. 6 (d) Subject to the terms of this Agreement, at the time any amount becomes payable or Asset becomes transferable by the Trustee from the Security Trust Account, such payment or transfer shall be effected in accordance with the written instructions contained in a Beneficiary's Withdrawal Notice, Grantor's Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice. If no such instructions from the Grantor or the Beneficiary are received by the Trustee at least one full Business Day prior to the time set for such payment or transfer, such payment or transfer shall be effected as follows: (i) first from any cash in the Security Trust Account; (ii) then, from the proceeds of the sale by the Trustee of any or all of the debt obligations in the Security Trust Account (commencing with those obligations closest in maturity to the date in question); (iii) then, from any other Assets in the Security Trust Account. (e) Not later than sixty (60) calendar days after the end of each calendar year, and forty-five (45) days after the end of any calendar quarter other than any quarter ending on December 31, the Beneficiary shall provide to the Grantor a calculation of (x) the risk based capital of the Beneficiary, and (y) the capital adequacy ratio of SLDI calculated as set forth on Exhibit C. Each such calculation shall include reasonable supporting detail. The Beneficiary shall also provide written notice of the occurrence of any ING Event within two (2) Business Days after its occurrence. The Grantor may, at its own expense, review the books and records of the Beneficiary or SLDI to confirm the calculations provided by the Beneficiary pursuant to this Section 4(e). In addition, the Beneficiary shall cooperate fully with the Grantor and promptly respond to the Grantor's inquiries form time to time concerning the determination of whether an ING Event has occurred. Section 5. Redemption, Investment and Substitution of Assets. (a) The Trustee shall surrender for payment all maturing Assets and all Assets called for redemption and deposit the proceeds of any such payment to the Security Trust Account. (b) From time to time the Grantor may direct the Trustee in writing (an "Investment Order") to invest or reinvest cash or Eligible Securities held in the Security Trust Account in accordance with the Investment Policies set forth in Exhibit B. The Grantor agrees that all investments and substitutions of securities referred to in this paragraph (b) of this Section 5 shall be and remain in compliance with the relevant limitations of the applicable insurance laws and the Investment Policies set forth in Exhibit B. The Trustee shall have no responsibility whatsoever to determine that any Assets in the Security Trust Account are or continue to be Eligible Securities. The Trustee, based upon Investment Orders from the Grantor or its designee, shall execute Investment Orders and settle securities transactions by itself or by means of an agent or broker retained by the Grantor. The Trustee shall not be responsible for any act, error or omission, or for the solvency, of any investment manager, agent or broker unless such act, error or omission is the result, in whole or in part, of the Trustee's gross negligence, willful misconduct or lack of good faith. The Trustee shall not be responsible for any Loss (as herein defined) suffered by the Beneficiary or the Grantor due to the insolvency of the investment manager, agent or broker. (c) The Trustee shall not be liable for any loss, liability, claim or damage paid or incurred ("Loss") by the Security Trust Account from any investment, reinvestment, liquidation 7 or substitution pursuant to the terms of this Agreement other than a Loss due to the Trustee's own negligence, gross negligence, willful misconduct or lack of good faith. Without limiting any other provision herein, the Trustee shall not be liable for any Loss due to changes in market rates or penalties for early redemption or any other fees, taxes or changes. Section 6. The Income Account. All payments of interest and dividends in respect to Assets in the Security Trust Account shall be deposited by the Trustee in a separate custody ledger income account (the "Income Account") within the Security Trust Account established and maintained by the Grantor at an office of the Trustee in New York City. Any interest, dividend or other income automatically credited on the payment date to the Income Account which is not subsequently received by the Trustee shall be reimbursed by the Grantor to the Trustee and the Trustee may debit the Income Account for this purpose. Pursuant to Section 9(a), the Trustee shall have the right to deduct its compensation and expenses from the Income Account, to the extent due and owing; except as provided in the final sentence of Section 1(c), the balance of the Income Account shall be payable to the Grantor at the end of each calendar month. Section 7. Right to Vote Assets. The Trustee will transmit to the Grantor and or its designee upon receipt, and will instruct any entities authorized to hold Assets in accordance with the terms hereof to transmit to the Grantor upon receipt, all financial reports, stockholder communications, notices, proxies and proxy soliciting materials received from issuers of Assets, and all information relating to exchange or tender offers received from offerors with respect to such Assets. The Grantor and/or its designee shall have the full unqualified right to vote and execute consents and to exercise any and all proprietary rights not inconsistent with this Agreement with respect to any securities or other property forming a part of the Security Trust Account. Section 8. Additional Rights and Duties of the Trustee and the Securities Intermediary. (a) The Trustee shall, concurrent with delivery of each monthly Valuation Report, deliver a summary of account activity for the month just ended to the Grantor and the Beneficiary. (b) Before accepting any Asset for deposit to the Security Trust Account, the Trustee shall determine that such Asset is in such form that the Beneficiary whenever necessary may, or the Trustee upon written direction by the Beneficiary may, negotiate such Asset without consent or signature from the Grantor or any other Person, other than a Depository and the Trustee in accordance with the terms of this Agreement. (c) The Trustee may deposit any Assets in the Security Trust Account in a book-entry account maintained at a Federal Reserve Bank or in depositories such as The Depository Trust Company, the Participants Trust Company, Cedel, and Euroclear (the Federal Reserve Bank and such other depositories being referred to herein as "Depositories"). Assets may be held in the name of a nominee maintained by the Trustee or by any such Depositories. 8 (d) The Trustee shall accept and may open all mail directed to the Grantor or the Beneficiary in care of the Trustee. The Trustee shall forward all mail to the addressee whether or not opened. (e) The Trustee shall keep full and complete records of the administration of the Security Trust Account. Upon the reasonable written request of the Grantor or the Beneficiary, the Trustee shall promptly permit the Grantor or the Beneficiary, their respective agents, employees or independent auditors to examine, audit, excerpt, transcribe and copy, at their own expense, during the Trustee's normal business hours any books, documents, papers and records relating to the Security Trust Account or the Assets. (f) The Trustee is authorized to follow and rely conclusively upon all Communications (including, without limitation, Investment Orders, Excess Withdrawal Notices, Reserve Withdrawal Notices, Beneficiary's Withdrawal Notices, Grantor's Withdrawal Notices, Reserve Trust Shortfall Notices, ING Event Notices and Termination Notices), given by officers, agents and/or employees named in letters and incumbency certificates furnished to the Trustee from time to time by the Grantor or the Beneficiary and by attorneys-in-fact acting under written authority furnished to the Trustee by the Grantor or the Beneficiary (collectively "Instructions") including Instructions given by letter or facsimile transmission or electronic media, if the Trustee reasonably believes such Instructions to be genuine and to have been signed, sent or presented by the proper party or parties. The Trustee shall not incur any liability to anyone resulting from actions taken by the Trustee in reliance in good faith on such Instructions. The Trustee shall not incur any liability in executing Instructions prior to receipt by it of (i) notice of the revocation of the written authority of the individual(s) named therein or (ii) notice from any officer, agent or employee of the Grantor or the Beneficiary named in a letter or incumbency certificate delivered hereunder prior to receipt by it of a more current certificate. (g) The duties and obligations of the Trustee shall only be such as are specifically set forth in this Agreement, as it may from time to time be amended in accordance with the terms hereof, and no implied duties or obligations shall be read into this Agreement against the Trustee. The Trustee shall be liable only for its own negligence, gross negligence, willful misconduct or bad faith. In no event shall the Trustee be liable (i) for acting in accordance with or relying upon any instruction, notice, demand, certificate or document contemplated by and given in accordance with this Agreement from the Grantor or the Beneficiary, (ii) for any consequential, punitive or special damages, (iii) for the acts or omissions of its nominees, unless the Trustee chose such person without due care, or (iv) for an amount in excess of the value of the Assets, valued as of the most recent valuation report. (h) No provision of this Agreement shall require the Trustee to take any action which, in the Trustee's reasonable judgment, would result in any violation of this Agreement or any provision of law. (i) The Trustee may confer with counsel of its selection in relation to matters arising under this Agreement and shall, upon demand, be indemnified and held harmless from and against any and all Losses by the Grantor hereunder for any actions taken, omitted or suffered by it in connection with this Agreement or under any transaction contemplated hereby in good faith without gross negligence or willful misconduct and in accordance with opinion of such counsel. 9 The opinion of such law firm shall be full and complete authority and protection for the Trustee with respect to any action taken, suffered or omitted by it in good faith and in accordance with the opinion of such law firm. (j) Subject to the requirement of good faith, reasonableness and the lack of gross negligence or willful misconduct, the Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instructions) reasonably believed by the Trustee to be genuine and to have been signed, sent or presented by the proper party or parties. All notices to the Trustee (unless otherwise provided therein) shall be deemed to be effective when actually received by a responsible officer of the Trustee. (k) Whenever, in the administration of the Security Trust Account created by this Agreement, the Trustee shall reasonably deem it necessary or desirable that a matter be proved or established prior to taking, suffering or omitting any action thereunder, subject to the requirement of reasonableness, good faith and lack of gross negligence and willful misconduct, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a statement or certificate signed by or on behalf of the Grantor and/or the Beneficiary and delivered to the Trustee and such certificate shall be full warrant to the Trustee for any action taken, suffered or omitted by it on reliance thereon, subject to this paragraph, but in its discretion exercised in a reasonable manner, the Trustee may in lieu thereof accept other evidence of the fact or matter or may require such other or additional evidence as it may deem reasonable. (l) Except when otherwise expressly provided in this Agreement and subject to the requirement of reasonableness, good faith and lack of negligence or willful misconduct, any Communications (including, without limitation, any Investment Order or Instructions) to be delivered or furnished by the Grantor or the Beneficiary shall be sufficient to be delivered or furnished in the name of the Grantor or the Beneficiary by such officer or officers of the Grantor or the Beneficiary as may be designated in a certificate, resolution or letter of advice by such party. Written notice of such designation by the Grantor or the Beneficiary shall be filed with the Trustee. The Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instruction) made by such officer or agent of the Grantor or the Beneficiary with respect to the authority conferred on it. (m) Notwithstanding anything to the contrary provided herein, the Trustee is not responsible for any Losses resulting from reasons or causes beyond its control, including without limitation, nationalization, expropriation, currency restrictions, acts of war, terrorism, insurrection, revolution, civil unrest, riots or strikes, nuclear fusion or fission or acts of God. (n) The Parties acknowledge that nothing in this Agreement shall obligate the Trustee to extend credit, grant financial accommodation or otherwise advance moneys for the purpose of making any payments or part thereof or otherwise carrying out any Instructions, including, without limitation, any Investment Order. (o) In the event of any reasonable ambiguity or uncertainty hereunder or in any notice, instruction or other communication received by the Trustee hereunder, the Trustee may, in its reasonable discretion, refrain from taking any action other than retain possession of the 10 Assets, unless the Trustee receives written instructions, signed by the Grantor and the Beneficiary, which eliminate such ambiguity or uncertainty. In the event of any dispute between or conflicting claims by or among the Grantor and the Beneficiary and/or any other person or entity with respect to any Assets, the Trustee shall be entitled, in its reasonable discretion, to refuse to comply with any and all claims, demands or instructions with respect to such Assets, so long as such dispute or conflict shall continue, and the Trustee shall not be or become liable in any way for such failure or refusal to comply with such conflicting claims, demands or instructions. The Trustee shall be entitled to refuse to act until, in its reasonable discretion, either (i) such conflicting or adverse claims or demands shall have been determined by a final order, judgment or decree of a court of competent jurisdiction, which order, judgment or decree is not subject to appeal, or settled by agreement between the conflicting parties as evidenced in a writing satisfactory to the Trustee or (ii) the Trustee shall have received security or an indemnity satisfactory to it sufficient to hold it harmless from and against any and all Losses which it may incur by reason of so acting. The Trustee may, in addition, elect, in its reasonable discretion, to commence an interpleader action or seek other judicial relief or orders as it may deem, in its sole discretion, if necessary. The costs and expenses (including reasonable attorney's fees and expenses) incurred in connection with such proceeding shall be paid by, and shall be deemed an obligation of, the Grantor. (p) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, provided that the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (q) The Securities Intermediary agrees that it will comply with entitlement orders issued by the Trustee in accordance with the terms of this Agreement, and that such compliance is not subject to any conditions, qualifications or further consents. The Securities Intermediary will not comply with entitlement orders issued by any other Person. (r) The Securities Intermediary hereby waives any right of counterclaim, bankers lien, liens or perfection rights as securities intermediary with respect to the Assets, the proceeds thereof and the Security Trust Account. Section 9. The Trustee's Compensation, Expenses and Indemnification. (a) The Grantor, upon receipt of an invoice from the Trustee to the Grantor and without offset to the Beneficiary's interest, (i) shall pay the Trustee, as compensation for its services under this Agreement, a fee computed at rates determined by the Trustee from time to time and communicated in writing to the Grantor and (ii) shall pay or reimburse the Trustee for all of the Trustee's expenses and disbursements in connection with its duties under this Agreement (including reasonable attorneys' fees and expenses and reasonable accounting and consulting fees and expenses), except any such expense or disbursement as may arise from the Trustee's negligence, willful misconduct or lack of good faith. The Trustee shall be entitled to deduct its compensation and expenses from payments of dividends and interest in respect of the Assets held in the Income Account as provided in Section 6 of this Agreement. 11 (b) The Grantor hereby indemnifies the Trustee for, and holds it harmless against, any Losses (including reasonable attorneys' fees and expenses and reasonable consulting and accountants' fees and expenses) incurred or paid (other than as a result of the Trustee's gross negligence, willful misconduct or lack of good faith), arising out of or in connection with the performance of its duties and obligations under this Agreement, including without limitation any Loss arising out of or in connection with the status of the Trustee in connection with the performance of its duties and any nominee as the holder of record of any or all of the Assets. The Grantor hereby acknowledges that the foregoing indemnities shall survive the resignation of the Trustee or the termination of this Agreement. (c) No Assets shall be withdrawn from the Security Trust Account or used in any manner for paying compensation to, or reimbursement or indemnification of, the Trustee. (d) The Trustee hereby waives any and all rights of offset, counterclaim and recoupment against the Beneficiary and Security Trust Account, and waives any lien (statutory or otherwise) that it may assert against the Security Trust Account. Section 10. Resignation of the Trustee. (a) The Trustee may resign at any time by giving not less than ninety (90) days' written notice thereof to the Beneficiary and to the Grantor, such resignation to become effective on the acceptance of appointment by a successor trustee and the transfer to such successor trustee of all Assets in the Security Trust Account in accordance with paragraph (b) of this Section 10. The Grantor and the Beneficiary jointly also may remove the Trustee at any time, without assigning any reason therefor, on fifteen (15) days' prior written notice thereof to the Trustee. (b) Upon receipt of the Trustee's notice of resignation or notice to the Trustee of removal, the Grantor and the Beneficiary shall promptly appoint a successor trustee. Any successor trustee shall be a bank that is a member of the Federal Reserve System or chartered in the State of New York and shall not be a parent, a subsidiary or an affiliate of the Grantor or the Beneficiary. If a successor Trustee has not accepted such appointment within thirty (30) days after the notice of resignation or removal, the Trustee may, in its sole discretion, apply at the expense of the Grantor to a court of competent jurisdiction for the appointment of a successor Trustee or for other appropriate relief. The costs and expenses (including reasonable attorneys' fees and expenses) incurred by the Trustee in connection with such proceeding shall be paid by, and be deemed an obligation of, the Grantor. Upon the acceptance of the appointment as trustee hereunder by a successor trustee, such successor trustee shall succeed to and become vested with all the rights, powers, privileges and duties of the Trustee, and the Trustee shall be discharged from any future duties and obligations under this Agreement, but the Trustee shall continue after its resignation to be entitled to the benefits of the indemnities provided herein for a Trustee. Section 11. Termination of the Security Trust Account. (a) The Security Trust Account and this Agreement, except for the indemnities provided herein, which shall survive termination, may be terminated by the Grantor, other than pursuant to an order of a court having jurisdiction, upon the occurrence of any of the following events: (i) the release of all ING Facilities pursuant to implementation of one or more Purchaser 12 Facilities under Section 5.24 of the Asset Purchase Agreement or upon the novation of all Insurance Contracts or (ii) the depletion of all amounts and Assets in the Security Trust Account. To effect termination of the Security Trust Account, the Grantor shall give the Trustee written notice of its intention to terminate the Security Trust Account (the "Notice of Intention"), and (ii) the Trustee shall give the Beneficiary the written notice specified in paragraph (b) of this Section 11. The Notice of Intention shall specify the date on which the Grantor intends the Security Trust Account to terminate (the "Proposed Date"). (b) Within ten (10) Business Days following receipt by the Trustee of the Notice of Intention, the Trustee shall give written notification (the "Termination Notice") to the Beneficiary and the Grantor of the date (the "Termination Date") on which the Security Trust Account shall terminate. The Termination Date shall be (a) the Proposed Date (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is at least five (5) days subsequent to the date the Termination Notice is given; or (b) five (5) days subsequent to the date the Termination Notice is given (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is less than five (5) days subsequent to the date the Termination Notice is given. (c) On the Termination Date, after satisfaction of any outstanding Withdrawal Notices, or deduction of amounts required to satisfy any outstanding disputed Withdrawal Notices, and upon receipt of certification of the Beneficiary that the Grantor has no further obligation to maintain the Security Trust Account the Trustee shall transfer any Assets remaining in the Security Trust Account to the Grantor, at which time all duties and obligations of the Trustee with respect to such Assets shall cease. Section 12. Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. Except as the context shall otherwise require, the following terms shall have the following meanings for all purposes of this Agreement (the definitions to be applicable to both the singular and the plural forms of each term defined if both such forms of such term are used in this Agreement): The term "Agreement" shall mean this Security Trust Agreement by and among Grantor, Beneficiary, the Bank of New York as Trustee and the Bank of New York as Securities Intermediary. The term "Asset Purchase Agreement" shall have the meaning set forth in the preamble. The term "Asset Response" shall have the meaning specified in Section 1(e). The term "Assets" shall have the meaning specified in Section 1(b). The term "Beneficiary" shall mean Security Life of Denver Insurance Company. The term "Beneficiary's Withdrawal Notice" shall have the meaning specified in Section 2. 13 The term "Business Day" shall mean any day on which the offices of the Trustee in New York are open for business and shall refer to a full business day. The term "Communications" shall have the meaning specified in Section 4(a). The term "Depositories" shall have the meaning specified in Section 8(c). The term "Eligible Securities" shall mean and include any and all securities and other investments that are permitted under applicable insurance law as admitted assets in the preparation of the annual statement filed by the Grantor, other than real estate and foreign investments, and permitted pursuant to the Investment Policies attached hereto as Exhibit B. The term "Excess Withdrawal Amounts" shall have the meaning specified in Section 3(b). The term "Excess Withdrawal Notice" shall have the meaning specified in Section 3(b). The term "Grantor" shall mean Scottish Re (U.S.), Inc. The term "Grantor's Withdrawal Notice" shall have the meaning specified in Section 3(a). The term "Income Account" shall have the meaning specified in Section 6. The term "ING Event" shall mean any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Beneficiary, SLDI, or ING Groep N.V., a corporation organized in the Netherlands that is the indirect parent corporation of ING, the Beneficiary and SLDI, or any Person in the direct chain of ownership between ING Groep N.V. and the Beneficiary and SLDI; (ii) the risk based capital (under applicable Colorado Insurance Law requirements), calculated quarterly, of the Beneficiary falls below 125% Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Beneficiary is required to provide to the Grantor the report pursuant to Section 4(e) of this Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Exhibit C), calculated quarterly, of SLDI falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Beneficiary is required to provide to the Grantor the report pursuant to Section 4(e) of this Agreement that would reflect such deficiency; (iv) there has been a material breach of any "Reinsurance Agreement" (as defined in the Asset Purchase Agreement) by the Beneficiary or SLDI, including, without limitation, failure to pay material premiums to the Grantor or any Affiliate of Grantor, and such breach has not been cured within thirty (30) days after notice. 14 The term "ING Event Notice" shall have the meaning specified in Section 3(e). The term "Instructions" shall have the meaning specified in Section 8(f). The term "Investment Orders" shall have the meaning specified in Section 5(b). The term "Loss" shall have the meaning specified in Section 5(c). The term "Notice of Intention" shall have the meaning specified in Section 11(a). The term "Obligations" shall mean, with respect to the Reinsurance Agreements, any and all amounts due and payable to the Beneficiary as defined and explicitly set forth in the Reinsurance Agreements. The term "Person" shall mean and include an individual, a corporation, a limited liability company, a partnership, an association, a trust, an unincorporated organization or a government or political subdivision thereof. The term "Proposal" shall have the meaning specified in Section 1(e). The term "Proposed Date" shall have the meaning specified in Section 11(a). The term "Purchaser" shall have the meaning specified in the preamble. The term "Reinsurance Agreements" shall mean the Reinsurance Agreements, dated as of the date hereof, by and between the Grantor and the Beneficiary, whereby the Grantor, as reinsurer, has agreed to reinsure a certain book of the reinsurance business of the Beneficiary as ceding insurer. The term "Required Amount" shall have the meaning specified in Section 1(c). The term "Reserve Trust Account" shall mean the trust account established pursuant to the Reserve Trust Agreement. The term "Reserve Trust Agreement" shall mean the Reserve Trust Agreement, dated the date hereof by and among the Grantor, the Beneficiary, The Bank of New York, as Trustee and The Bank of New York, as Securities Intermediary. The term "Reserve Trust Shortfall Notice" shall have the meaning specified in Section 3(d). The term "Reserve Withdrawal Amount" shall have the meaning specified in Section 3(c). The term "Reserve Withdrawal Notice" shall have the meaning specified in Section 3(c). The term "Scottish Annuity & Life" means Scottish Annuity & Life Insurance Company (Cayman) Ltd., a company organized under the laws of the Cayman Islands. 15 The term "Scottish Re Group" means Scottish Re Group Limited, a holding company organized under the laws of the Cayman Islands. The term "Security Amount" shall have the meaning specified in the preamble. The term "Security Trust Account" shall mean the trust account established pursuant to this Agreement. The term "Securities Intermediary" shall mean The Bank of New York. The term "Sellers" shall have the meaning specified in the preamble. The term "SLDI" shall have the meaning specified in the preamble. The term "Termination Date" shall have the meaning specified in Section 11(b). The term "Termination Notice" shall have the meaning specified in Section 11(b). The term "Triggering Event" shall mean any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Grantor or any Affiliate of Grantor that at the time in question is reinsuring any of the Business (an "Affiliated Reinsurer"), Scottish Annuity & Life or Scottish Re Group or any Person in the direct chain of ownership between the Grantor or any Affiliated Reinsurer and Scottish Re Group; (ii) the risk based capital (under applicable Delaware Insurance Law requirements), calculated quarterly, of the Grantor or any Affiliated Reinsurer domiciled in the United States falls below 125% Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Grantor is required to provide to the Beneficiary a report pursuant to any Reinsurance Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Exhibit D), calculated quarterly, of consolidated Scottish Re Group or consolidated Scottish Annuity & Life falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company a report pursuant to any Reinsurance Agreement that would reflect such deficiency; (iv) there has been a material breach of any "Reinsurance Agreement" (as such term is defined in the Asset Purchase Agreement) by the Grantor or any Affiliated Reinsurer of the Grantor, including, without limitation, failure to fund any trust as required, and such breach has not been cured within thirty (30) days after notice; or (v) there has been a termination or amendment to any keepwell agreement described in Section 5.26 of the Asset Purchase Agreement without the Beneficiary's prior written consent, which consent shall not be unreasonably withheld. 16 The term "Triggering Event Notice" shall have the meaning specified in Section 3(a). The term "Trustee" shall mean The Bank of New York. The term "UCC" shall mean the New York Uniform Commercial Code. The term "Valuation Dispute Notice" shall have the meaning specified in Section 1(e). The term "Valuation Report" shall have the meaning specified in Section 1(e). The term "Withdrawal Notice" shall mean either a Grantor's Withdrawal Notice or a Beneficiary's Withdrawal Notice. Section 13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York; provided that perfection issues with respect to Article 9 of the UCC may give effect to applicable choice or conflict of law rules set forth in Article 9 of the UCC. Section 14. Successors and Assigns. No Party may assign this Agreement or any of its obligations hereunder without the prior written consent of the other Parties; provided, however, that this Agreement shall inure to the benefit of and bind those who, by operation of law, become successors to the Parties, including, without limitation, any liquidator, rehabilitator, receiver or conservator and any successor, merged or consolidated entity; and provided, further, that, in the case of the Trustee, the successor trustee is eligible to be a trustee under the terms hereof. Section 15. Severability. In the event that any provision of this Agreement shall be declared invalid or unenforceable by a court having jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remaining portions of this Agreement. Section 16. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto, and there are no understandings or agreements, conditions or qualifications regarding the obligations of the Trustee and the Securities Intermediary which are not fully expressed in this Agreement. Section 17. Amendments. This Agreement may be modified or otherwise amended, and the observance of any term of this Agreement may be waived, only if such modification, amendment or waiver is in writing and signed by all of the Parties. 17 Section 18. Notices, etc. Unless otherwise provided in this Agreement, all Communications (including, without limitation, any Investment Orders or Instructions) required or permitted to be given or made under the terms hereof shall be in writing and shall be deemed to have been duly given or made (a) (i) when delivered personally, (ii) when made or given by telecopier, or (iii) in the case of International Priority Mail (Federal Express), upon the expiration of three days after any Communication shall have been deposited in International Priority Mail (Federal Express) for transmission or upon receipt thereof, whichever shall first occur and (b) when addressed as follows: To the Grantor: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: Nathan Gemmiti with a copy to: Scottish Re Group Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: Paul Goldean and a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10005 Attention: Stephen G. Rooney To the Beneficiary: Security Life of Denver Insurance Company Attention: Mark Tullis c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 with a copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and 18 David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 If to the Trustee: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attention: Insurance Trust and Escrow Unit If to the Securities Intermediary: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attention: Insurance Trust and Escrow Unit Each party may from time to time designate a different address for Communications (including, without limitation, Investment Orders) by giving written notice of such change to the other parties. All Communications relating to the Beneficiary's approval of the Grantor's authorization to substitute Assets and to the termination of the Security Trust Account shall be in writing. Section 19. Headings. The headings of the sections and the Table of Contents have been inserted for convenience of reference only, and shall not be deemed to constitute a part of this Agreement. Section 20. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall constitute an original, but such counterparts together shall constitute one and the same Agreement. 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis -------------------------------------- Name: Mark Tullis Title: President SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield -------------------------------------- Name: Oscar Scofield Title: CEO/ President THE BANK OF NEW YORK, AS SECURED PARTY AND TRUSTEE By: /s/ Robert W. Rich --------------------------------------- Name: Robert W. Rich Title: Vice President THE BANK OF NEW YORK, AS SECURITIES INTERMEDIARY By: /s/ Robert W. Rich --------------------------------------- Name: Robert W. Rich Title: Vice President EX-10.52 14 ex10-52.txt COINSURANCE AGREEMENT ================================================================================ COINSURANCE AGREEMENT between SECURITY LIFE OF DENVER INTERNATIONAL LIMITED (referred to as the Company) and SCOTTISH RE LIFE (BERMUDA) LIMITED (referred to as the Reinsurer) Effective Date: December 31, 2004 ================================================================================ TABLE OF CONTENTS Page ARTICLE I DEFINITIONS...................................................1 Section 1.1. Definitions.................................................1 ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED...................4 Section 2.1. Coinsurance.................................................4 Section 2.2. Reinsurance Coverage........................................5 Section 2.3. Reserves....................................................5 Section 2.4. Insurance Contract and Reserve Assumption Changes...........6 ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION................6 Section 3.1. Payments by the Company.....................................6 Section 3.2. Delayed Payments............................................6 Section 3.3. Offset and Recoupment Rights................................7 Section 3.4. Administration..............................................7 Section 3.5. Certain Reports.............................................7 ARTICLE IV REINSURANCE CREDIT; SECURITY..................................7 Section 4.1. Licenses....................................................7 Section 4.2. Security....................................................7 Section 4.3. SLDI Reserve Trust Agreement................................8 Section 4.4. Investment of Trust Assets..................................8 Section 4.5. Deposit of Assets...........................................8 Section 4.6. Adjustment of Security and Withdrawals......................8 Section 4.7. Withdrawals by the Company..................................9 Section 4.8. Assets in Trust of the Company..............................9 Section 4.9. Compliance by the Company...................................9 Section 4.10. Reports....................................................10 ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS..................10 Section 5.1. Oversights.................................................10 Section 5.2. Cooperation................................................10 Section 5.3. Regulatory Matters.........................................10 ARTICLE VI DAC TAX......................................................10 Section 6.1. Election...................................................10 ARTICLE VII ARBITRATION..................................................12 Section 7.1. Arbitration................................................12 Section 7.2. Arbitration Procedure......................................12 ARTICLE VIII INSOLVENCY...................................................13 Section 8.1. Insolvency of the Company..................................13 ARTICLE IX DURATION; RECAPTURE..........................................14 Section 9.1. Duration...................................................14 Section 9.2. Survival...................................................14 Section 9.3. Recapture..................................................14 Section 9.4. Recapture Payments.........................................14 ARTICLE X INDEMNIFICATION..............................................14 Section 10.1. Reinsurer's Obligation to Indemnify........................14 Section 10.2. Company's Obligation to Indemnify..........................15 Section 10.3. Certain Definitions and Procedures.........................15 ARTICLE XI MISCELLANEOUS................................................15 Section 11.1. Notices....................................................15 Section 11.2. Entire Agreement...........................................16 Section 11.3. Captions...................................................16 Section 11.4. Governing Law and Jurisdiction.............................17 Section 11.5. No Third Party Beneficiaries...............................17 Section 11.6. Expenses...................................................17 Section 11.7. Counterparts...............................................17 Section 11.8. Severability...............................................17 Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages......17 Section 11.10.Treatment of Confidential Information......................18 Section 11.11.Assignment.................................................18 Section 11.12.Service of Process.........................................18 ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS....................19 Section 12.1. Representations, Warranties, and Covenants of the Reinsurer..................................................19 ii COINSURANCE AGREEMENT THIS COINSURANCE AGREEMENT (the "Agreement"), is made and entered into as of December 31, 2004 (the "Effective Date") by and between Security Life of Denver International Limited, a Bermuda-domiciled life insurance company (the "Company") and Scottish Re Life (Bermuda) Limited, a Bermuda-domiciled life insurance company (the "Reinsurer"). WHEREAS, the Company, Security Life of Denver Insurance Company, a Colorado-domiciled insurance company ("SLD" and, together with the Company, the "Sellers"), and Scottish Re Group Limited ("Purchaser"), the indirect parent corporation of Reinsurer, the Reinsurer, and Scottish Re (U.S.), Inc., have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which the Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; WHEREAS, as contemplated by the Asset Purchase Agreement, the Company wishes to retrocede to the Reinsurer, and the Reinsurer wishes to indemnity reinsure, on a one-hundred percent (100%) coinsurance basis, the Covered Insurance Contracts (as hereinafter defined); and WHEREAS, the Company wishes the Reinsurer to perform, or cause the performance of, certain administrative functions on behalf of the Company with respect to the Covered Insurance Contracts, and the Company and the Reinsurer have entered into an Administrative Services Agreement of even date herewith (the "Administrative Services Agreement") pursuant to which the Reinsurer shall provide, or cause the provision of, such administrative services; NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Reinsurer agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. The following terms shall have the respective meanings set forth below throughout this Agreement: "Administrative Services Agreement" has the meaning set forth in the preamble. "Affiliated Reinsurer" has the meaning set forth in the definition of "Triggering Event". "Agreement" has the meaning set forth in the preamble. "Asset Purchase Agreement" has the meaning set forth in the preamble. "Bermuda SAP" means the statutory accounting practices prescribed or permitted by the BMA, including any accounting principles permitted under one or more Directions under Section 56 of the Bermuda Insurance Act 1978. "BMA" means the Bermuda Monetary Authority. "Company" has the meaning set forth in the preamble. "Company Indemnified Parties" has the meaning set forth in Section 10.1 of this Agreement. "Confidential Information" means all documents and information concerning one party, any of its Affiliates, the Reinsured Liabilities or the Covered Insurance Contracts, including any information relating to any person insured directly or indirectly under the Covered Insurance Contracts, furnished to the other party or such other party's Affiliates or representatives in connection with this Agreement or the transactions contemplated hereby, except that Confidential Information shall not include information which: (a) at the time of disclosure or thereafter is generally available to and known by the public other than by way of a wrongful disclosure by a party hereto or by any representative of a party hereto; (b) was available on a nonconfidential basis from a source other than the parties hereto or their representatives, provided that such source is not and was not bound by a confidentiality agreement with a party hereto; or (c) was independently developed without violating any obligations under this Agreement and without the use of any Confidential Information. "Confidentiality Agreement" means that certain confidentiality agreement dated May 4, 2004 by and between ING and Purchaser. "Covered Insurance Contracts" means all Insurance Contracts that are reinsurance agreements under which the reinsurance is assumed by the Company, other than on a coinsurance funds withheld basis, modified coinsurance basis or coinsurance/modified coinsurance basis, as listed on Schedule 1.1(a). The parties agree to update Schedule 1.1(a) from time to time to reflect Covered Insurance Contracts entered into in accordance with the terms of this Agreement or discovered after the Effective Date. "DAC Asset" shall mean the amount of deferred acquisition costs of the Company, up to the amount of the Loss Reserve Redundancy, as permitted under that certain Direction under Section 56, issued by the BMA, dated April 28, 1999, as further described in Schedule 2.4(b) of the Asset Purchase Agreement and such similar Direction under Section 56 with respect to deferred acquisition costs of the Reinsurer, issued by the BMA on December 23, 2004. "Effective Date" means the effective date shown in the preamble of this Agreement. "Eligible Assets" has the meaning set forth in Section 4.4 of this Agreement. "Excess Amount" has the meaning set forth in Section 9.4 of this Agreement. 2 "Independent Accountant" has the meaning set forth in 6.1(f) of this Agreement. "Loss Reserve Redundancy" means the excess of (i) the Reserves over (ii) the level of reserves for the Covered Insurance Contracts calculated under U.S. GAAP in accordance with the reserve assumptions set forth in Exhibit A hereto, as certified by a member of the American Academy of Actuaries. The Loss Reserve Redundancy shall initially be the portion of the amount set forth on the SLDI Closing Statements as the amount required to be included on line 13(a) of the Bermuda Statutory Financial Return ("Sundry Assets - Loss Reserve Redundancy") with respect to the Business that is attributable to the Covered Insurance Contracts hereunder. "Premiums" means premiums, considerations, deposits and similar receipts with respect to the Covered Insurance Contracts. "Recapture Date" has the meaning set forth in Section 9.3 of this Agreement. "Reinsurer" has the meaning set forth in the preamble. "Reinsurer Indemnified Parties" has the meaning set forth in Section 10.2 of this Agreement. "Required Balance" has the meaning set forth in Section 4.3 of this Agreement. "Reserves" means the aggregate amount of reserves and other liabilities with respect to the Covered Insurance Contracts calculated for each calendar quarter on the same basis upon which the Company is required to calculate such reserves and other liabilities to comply with (i) the requirements of the BMA with respect to any Statutory Financial Return filed by the Company in accordance with Bermuda SAP and (ii) the terms of any "mirror image" reserve requirement contained in any Covered Insurance Contract, or any underlying reinsurance agreement or as otherwise required by Applicable Law to permit the Company to take statutory financial statement credit. "Scottish Annuity & Life" means Scottish Annuity & Life Insurance Company (Cayman) Ltd., a company organized under the laws of the Cayman Islands. "Scottish Re Group" means Scottish Re Group Limited, a holding company organized under the laws of the Cayman Islands. "Shortfall Amount" has the meaning set forth in Section 9.4 of this Agreement. "Triggering Event" means any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Reinsurer or any Affiliate of Reinsurer that at the time in question is reinsuring any of the Business (an "Affiliated Reinsurer"), Scottish Annuity & Life or Scottish Re Group; 3 (ii) the risk based capital (under applicable insurance law requirements), calculated quarterly, of any Affiliated Reinsurer domiciled in the United States falls below 125% of the Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.5 of this Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Schedule 1.1(b)), calculated quarterly, of consolidated Scottish Re Group or consolidated Scottish Annuity & Life falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.5 of this Agreement that would reflect such deficiency; (iv) there has been a material breach of any Reinsurance Agreement by the Reinsurer or an Affiliated Reinsurer, including, without limitation, failure to fund any trust as required, and such breach has not been cured within thirty (30) calendar days after notice; or (v) there has been a termination or amendment to any keepwell agreement described in Section 5.26 of the Asset Purchase Agreement without the Company's prior written consent, which consent shall not be unreasonably withheld. "Termination Date" means the date on which this Agreement is terminated in accordance with the terms and conditions of Article IX hereof. "UCC" means the New York Uniform Commercial Code. ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED Section 2.1. Coinsurance. (a) Subject to the terms and conditions of this Agreement, the Company hereby cedes on a coinsurance basis to the Reinsurer as of the Effective Date, and the Reinsurer hereby accepts and agrees to assume and indemnity reinsure on a coinsurance basis as of the Effective Date, one hundred percent (100%) of all Reinsured Liabilities arising under or relating to the Covered Insurance Contracts. This Agreement is an agreement for indemnity reinsurance solely between the Company and the Reinsurer and shall not create any legal relationship whatsoever between the Reinsurer and any Person other than the Company. The reinsurance effected under this Agreement shall be maintained in force, without reduction, unless such reinsurance is terminated or reduced as provided herein. (b) On and after the Effective Date, the Reinsurer will have the responsibility for paying to or on behalf of the Company, as and when due, all Reinsured Liabilities arising under or attributable to the Covered Insurance Contracts. 4 Section 2.2. Reinsurance Coverage. In no event shall the reinsurance provided hereunder with respect to a particular Covered Insurance Contract be in force and binding unless such Covered Insurance Contract is in force and binding as of the Effective Date; provided, however, that the Covered Insurance Contracts reinsured hereunder shall include (a) all lapsed or surrendered insurance contracts subject to the reinsurance hereunder, that are reinstated in accordance with their terms on and after the Effective Date; and (b) all Unexecuted Assumed Reinsurance Contracts of the Company other than on a coinsurance funds withheld basis, modified coinsurance basis or coinsurance/modified coinsurance basis. Upon the reinstatement of any lapsed or surrendered policy included within Covered Insurance Contracts, such reinstated Covered Insurance Contract shall be automatically reinsured hereunder, when, and to the extent that, the Company is liable under such reinstated Covered Insurance Contract. Section 2.3. Reserves. On and after the Effective Date, the Reinsurer shall establish and maintain as a liability on its Statutory Financial Returns filed with the BMA, Reserves for the Covered Insurance Contracts ceded hereunder, calculated consistent with (a) the reserve requirements, Bermuda SAP and actuarial principles applicable to the Company under Bermuda Law; and (b) otherwise in accordance with any valuation bases and methods of determining Reserves that may be provided in the Covered Insurance Contracts. The Reinsurer shall also establish and maintain the DAC Asset as an admitted asset offsetting such Reserves in part on its Statutory Financial Returns. The Reinsurer shall provide the Company, no later than forty-five (45) calendar days after the end of each calendar year, with copies of all actuarial opinions and actuarial memoranda and all reserve evaluations pertaining to (i) the Reserves for the Covered Insurance Contracts, and (ii) the determination of the value of the DAC Asset, including, without limitation, any actuarial opinions and reserve evaluations performed by independent actuaries, auditors or other outside consultants. The Company agrees that the Reserves that it establishes and maintains on its Statutory Financial Returns filed with the BMA with respect to the Covered Insurance Contracts shall be consistent with the Reserves established by the Reinsurer; provided, however, that the Company may, at its own cost at any time, upon reasonable notice to the Reinsurer following the Effective Date, examine the Books and Records, and any other books and records that would have been included in the Books and Records had they been in existence on the Effective Date, maintained by the Reinsurer in accordance with the terms of this Agreement, and review the Reinsurer's reserve procedures. If as a result of such examination the Company believes that the Reserves are not consistent with the requirements of clauses (a) and (b) of the first sentence of this Section 2.3 in all material respects, or if the value of the DAC Asset is materially overstated, the Reinsurer shall, at the Company's request and expense, obtain and deliver to the Company an actuarial opinion as to the adequacy of the Reserves for the Covered Insurance Contracts, or the value of the DAC Asset, as the case may be, produced by an independent actuary reasonably acceptable to the Company. In the event that the actuarial opinion so rendered reasonably indicates a material inadequacy in the Reserves for the Covered Insurance Contracts, or in the Reinsurer's reserve procedures, or a material overstatement of the value of the DAC Asset, the Reinsurer shall promptly adjust the amount of the Reserves for the Covered Insurance Contracts or the value of the DAC Asset, and implement appropriate changes to its procedures so as to avoid inadequacies in future periods; provided, however, the Reinsurer shall have the right to contest the findings of such actuarial opinion in accordance with the provisions of Article VII. 5 Section 2.4. Insurance Contract and Reserve Assumption Changes. The Company shall not change (a) the terms and conditions of any Covered Insurance Contracts or (b) the assumptions and methods used to establish the Reserves attributable to the Covered Insurance Contracts, except as required by Applicable Law, and the Company shall notify the Reinsurer promptly upon becoming aware of the requirement to effect any such change and provide the Reinsurer the opportunity to contest such requirement. ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION Section 3.1. Payments by the Company. (a) As consideration for the Reinsurer's agreement to provide reinsurance pursuant to the Reinsurance Agreements between the Company and the Reinsurer, the Company is transferring, on the Effective Date, to the Reinsurer, the SLDI Reserve Trust Account and the SLDI Security Trust Account, as appropriate, as an initial reinsurance premium, the Transferred Statutory Assets, including, without limitation, the DAC Asset, Investment Assets, and cash having a value determined in accordance with Section 2.4(d) of the Asset Purchase Agreement. (b) The Reinsurer shall be entitled prior to the Recapture Date, as additional reinsurance premium, to immediate payment of amounts equal to Premiums received by the Company on and after the Effective Date that are attributable to the Covered Insurance Contracts; provided, however, that following the occurrence of a Triggering Event, the Company shall be entitled to retain such amounts as funds withheld under this Agreement, provided further, however, that such funds may be used by the Company as set forth in Section 4.7 of this Agreement, and any amount remaining upon termination of this Agreement pursuant to Section 9.1, other than as a result of a recapture, shall be paid to the Reinsurer. Any funds withheld pursuant to this Section 3.1(b) shall be credited against the Required Balance. For the avoidance of doubt, the parties acknowledge and agree that the Company retains all right, title and interest to all Premiums and other amounts received with respect to the Covered Insurance Contracts, subject to its contractual obligations under this Agreement to pay corresponding amounts over to the Reinsurer. (c) To the extent that the Company recovers amounts from any third party relating to the Business attributable to the Covered Insurance Contracts (including, without limitation, Premiums in arrears from a policyholder or ceding company with respect to a reinstated Covered Insurance Contract, litigation recoveries, premium and reinsurance recoverables), the Company shall, immediately upon receipt of any such amounts, transfer such amounts to the Reinsurer and provide the Reinsurer with any pertinent information that the Company may have relating thereto. Section 3.2. Delayed Payments. If there is a delayed settlement of any payment due hereunder, interest will accrue on such payment at the 180-Day Treasury Rate then in effect until settlement is made. For purposes of this Section 3.2, a payment will be considered overdue, and such interest will begin to accrue, on the first day immediately following the date such payment is due. For greater clarity, (i) a payment shall be deemed to be due hereunder on the last date on which such payment may be timely made under the applicable provision, and 6 (ii) interest will not accrue on any payment due the Reinsurer hereunder unless the delayed settlement thereof was caused by the Company. Section 3.3. Offset and Recoupment Rights. Any debits or credits incurred on and after the Effective Date in favor of or against either the Company or Reinsurer with respect to this Agreement or any other reinsurance agreements or trust agreements that constitute Related Agreements or otherwise are deemed mutual debits or credits, as the case may be, shall be set off and recouped, and only the net balance shall be allowed or paid. This Section 3.3 shall apply notwithstanding the existence of any insolvency, rehabilitation, conservatorship or comparable proceeding by or against the Company or the Reinsurer. Section 3.4. Administration. The Reinsurer will administer, or cause the administration of, the Covered Insurance Contracts and provide quarterly accountings with respect thereto to the Company in accordance with the Administrative Services Agreement. All reports, remittances and payments due to or from a party hereto shall be made in accordance with the procedures set forth in the Administrative Services Agreement. Section 3.5. Certain Reports. (a) Not later than sixty (60) calendar days after the end of each calendar year, and forty-five (45) days after the end of any calendar quarter other than the quarter ending on December 31, the Reinsurer shall provide to the Company a calculation of (x) the risk based capital of each entity identified in Clause (ii) of the definition of the Triggering Event, and (y) the capital adequacy ratio calculated as set forth on Schedule 1.1(b) of the entities identified in Clause (iii) of the definition of Triggering Event. Each such calculation shall include reasonable supporting detail. (b) The Reinsurer shall also provide written notice of the occurrence of any Triggering Event within two (2) Business Days after its occurrence. The Company may, at its own expense, review Reinsurer's or an Affiliated Reinsurer's books and records reasonably necessary to confirm the calculations provided by Reinsurer pursuant to this Section 3.5(b). In addition, Reinsurer shall cooperate fully with the Company and promptly respond to the Company's reasonable inquiries from time to time concerning the determination of whether a Triggering Event has occurred. ARTICLE IV REINSURANCE CREDIT; SECURITY Section 4.1. Licenses. At all times during the term of this Agreement, the Reinsurer shall hold and maintain all licenses and authorizations required under Bermuda Law and otherwise take all action that may be necessary (i) so that the Company shall receive full reserve credits for reinsurance ceded under this Agreement in the Statutory Financial Return filed with the BMA, and (ii) to perform its obligations hereunder. Section 4.2. Security. In accordance with the Asset Purchase Agreement, the Reinsurer, as grantor, is creating the SLDI Reserve Trust Account with a trustee approved by the Company, naming the Company as sole beneficiary thereof. The SLDI Reserve Trust Account shall initially be funded with Investment Assets and cash transferred from the Company. In accordance with the SLDI Reserve Trust Agreement, the Reinsurer hereby pledges the assets in 7 the SLDI Trust Account to perfect a first priority security interest in favor of the Company under Article 9 of the UCC. During the term of the SLDI Reserve Trust Agreement, the Reinsurer shall not, and shall direct that the trustee shall not, grant or cause to be created in favor of any third person any security interest whatsoever in any of the assets in the SLDI Trust Accounts. Section 4.3. SLDI Reserve Trust Agreement. The trustee shall hold assets in the SLDI Reserve Trust Account pursuant to the terms of the SLDI Reserve Trust Agreement. The fair market value of assets in the SLDI Reserve Trust Account shall be not less than the Reserves attributable to the Covered Insurance Contracts and to the "Reserves" under the other Insurance Contracts reinsured by the Reinsurer on a coinsurance basis under the other Reinsurance Agreements between the Company and the Reinsurer, net of the aggregate value of the DAC Asset that is attributable to all Covered Insurance Contracts under the Reinsurance Agreements between the Company and the Reinsurer (such net amount being the "Required Balance"). Section 4.4. Investment of Trust Assets. The assets held in the SLDI Reserve Trust Account shall be valued at their fair market value as of the date as of which such assets are required to be valued. The assets that may be held in the SLDI Reserve Trust Account (the "Eligible Assets") shall consist of cash and investments of the type permitted by Bermuda Law; provided, that (i) each such investment that is a security is issued by an institution that is not the Reinsurer, the Company or an Affiliate of either party, and (ii) such investments comply with the requirements specified by the Eligible Asset Guidelines as set forth on Schedule 4.4. Section 4.5. Deposit of Assets. Prior to depositing assets in the SLDI Reserve Trust Account, Reinsurer will execute assignments or endorsements in blank, or transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the direction of the Company, may whenever necessary negotiate these assets without the consent or signature from the Reinsurer or any other entity. Section 4.6. Adjustment of Security and Withdrawals. The Reinsurer shall maintain Eligible Assets in the SLDI Reserve Trust Account with an aggregate fair market value at least equal to the Required Balance. The amount of assets held in the SLDI Reserve Trust Account shall be adjusted following the end of each calendar quarter. (a) If the aggregate fair market value of the Eligible Assets held in the SLDI Reserve Trust Account at the end of any calendar quarter is less than the Required Balance, the Reinsurer shall, no later than fifteen (15) calendar days following delivery of the reserve report included in the quarterly report provided pursuant to the Administrative Services Agreement, transfer additional Eligible Assets to the SLDI Reserve Trust Account so that the aggregate fair market value of the Eligible Assets held in the SLDI Reserve Trust Account is not less than the Required Balance. (b) If the aggregate fair market value of the Eligible Assets in the SLDI Reserve Trust Account at the end of any calendar quarter exceeds 102% of the Required Balance, then the Reinsurer shall have the right to seek approval (which shall not be unreasonably or arbitrarily withheld) from the Company to withdraw the excess. For the purposes of the foregoing sentence, in the event that a Triggering Event has occurred, the parties 8 acknowledge and agree that it shall not be unreasonable for the Company to withhold its consent to any such withdrawal. Section 4.7. Withdrawals by the Company. The Company may withdraw the assets held in the SLDI Reserve Trust Account at any time and from time to time, notwithstanding any other provisions of this Agreement, and assets withdrawn from such SLDI Reserve Trust Account shall be utilized and applied by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company), without diminution because of insolvency on the part of the Company or the Reinsurer; provided however, that following any such withdrawal the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) may only apply such assets for one or more of the following purposes: (a) to pay, or reimburse the Company for payment of, Premiums received by Reinsurer hereunder which are to be returned to policyholders or ceding companies because of cancellations of Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; (b) to pay, or reimburse the Company for payment of, surrenders, benefits, losses or other amounts payable pursuant to the provisions of the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; and (c) to fund an account with the Company in an amount no less than the deduction, for reinsurance ceded, from the Company's liabilities for the Reserves to be maintained with respect to the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis. Section 4.8. Assets in Trust of the Company. Any assets deposited into an account of the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) pursuant to Section 4.7(c), and any interest or other earnings thereon shall be held by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) in trust for the benefit of the Reinsurer, subject to the Company's right to apply such assets to amounts due and payable by the Reinsurer to the Company under this Agreement, and shall at all times be maintained, separate and apart from any assets of the Company, for the sole purpose of funding the payments and reimbursements described in Sections 4.7(a) through (c), inclusive, of this Article IV. Section 4.9. Compliance by the Company. The Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) shall ensure that any assets held in trust pursuant to 9 Section 4.7(c) comply with the provisions of Sections 4.4, 4.7(a) and 4.7(b) in accordance with its fiduciary obligations as trustee with respect to such amounts. Section 4.10. Reports. At the Company's request, the Reinsurer shall provide the Company with its audited Annual Statutory Financial Return along with the audit report thereon, as well as any quarterly reports required to be filed by the Reinsurer. ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS Section 5.1. Oversights. Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery, and provided, further, that the party making such error or omission or responsible for such delay shall be responsible for any additional liability which attaches as a result. If (a) the failure of either party to comply with any provision of this Agreement is unintentional or the result of a misunderstanding or oversight and (b) such failure to comply is promptly rectified, both parties shall be restored as closely as possible to the positions they would have occupied if no error or oversight had occurred. Section 5.2. Cooperation. Each party hereto shall cooperate fully with the other in all reasonable respects in order to accomplish the objectives of this Agreement. Section 5.3. Regulatory Matters. If the Company or the Reinsurer receives notice of, or otherwise becomes aware of, any regulatory inquiry, investigation or proceeding relating to the Covered Insurance Contracts, the Company or the Reinsurer, as applicable, shall promptly notify the other party thereof, whereupon the parties shall cooperate in good faith and use their respective commercially reasonable efforts to resolve such matter in a mutually satisfactory manner, in light of all the relevant business, regulatory and legal facts and circumstances. ARTICLE VI DAC TAX Section 6.1. Election. (a) All uncapitalized terms used herein shall have the meanings set forth in the regulations under Section 848 of the Code. (b) Each of the Company and the Reinsurer acknowledges that it is subject to taxation under Subchapter L of the Code and hereby makes the election contemplated by Section 1.848-2(g)(8) of the Treasury Regulations with respect to this Agreement. Each of the Company and the Reinsurer (i) agrees that such election is effective for the taxable year of each party that includes the Effective Date and for all subsequent years during which this Agreement remains in effect and (ii) warrants that it will take no action to revoke the election. 10 (c) Pursuant to Section 1.848-2(g)(8) of the Treasury Regulations, each of the Company and the Reinsurer hereby agrees (i) to attach a schedule to its federal income tax return for its first taxable year ending on or after the Effective Date that identifies this Agreement as a reinsurance agreement for which the joint election under Section 1.848-2(g)(8) has been made, (ii) that the party with net positive consideration for this Agreement for each taxable year will capitalize its specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Code, and (iii) to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. The Reinsurer shall prepare and execute duplicate copies of the schedule described in the preceding sentence as soon as practicable after the Effective Date and submit them to the Company for execution. The Company shall execute the copies and return one of them to the Reinsurer within thirty (30) calendar days of the receipt of such copies. (d) The Company shall submit a schedule to the Reinsurer by May 1 of each year of its calculation of the net consideration under this Agreement for the preceding taxable year. This schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Company stating that the Company shall report such net consideration in its federal income tax return for the preceding taxable year. (e) The Reinsurer may contest such calculation by providing an alternative calculation to the Company in writing within thirty (30) calendar days after the date on which the Reinsurer receives the Company's calculation. If the Reinsurer does not so notify the Company, the Reinsurer shall report the net consideration under this Agreement as determined by the Company in the Reinsurer's federal income tax return for the preceding taxable year. (f) If Reinsurer contests the Company's calculation of the net consideration under this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount of net consideration within thirty (30) calendar days after the date on which the Reinsurer submits its alternative calculation. If Reinsurer and the Company reach an agreement as to the amount of net consideration under this Agreement, each party shall report such amount in its federal income tax return for the preceding taxable year. If, during such period, Reinsurer and the Company are unable to reach an agreement, they shall promptly thereafter cause Deloitte & Touche USA LLP (the "Independent Accountants") to promptly review (which review shall commence no later than five (5) calendar days after the selection of the Independent Accountants) this Agreement and the calculations of Reinsurer and the Company for the purpose of calculating the net consideration under this Agreement. In making such calculation, the Independent Accountants shall consider only those items or amounts in the Company's calculation as to which the Reinsurer has disagreed. The Independent Accountants shall deliver to Reinsurer and the Company, as promptly as practicable (but no later than thirty (30) calendar days after the commencement of their review), a report setting forth such calculation, which calculation shall result in a net consideration between the amount thereof shown in the Company's calculation delivered pursuant to Section 6.1(d) and the amount thereof shown in Reinsurer's calculation delivered pursuant to Section 6.1(e). Such report shall be final and binding upon Reinsurer and the 11 Company. The fees, costs and expenses of the Independent Accountants shall be borne (i) by the Company if the difference between the net consideration as calculated by the Independent Accountants and the Company's calculation delivered pursuant to Section 6.1(d) is greater than the difference between the net consideration as calculated by the Independent Accountants and Reinsurer's calculation delivered pursuant to Section 6.1(e), (ii) by the Reinsurer if the first such difference is less than the second such difference, and (iii) otherwise equally by Reinsurer and the Company. ARTICLE VII ARBITRATION Section 7.1. Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLDI Closing Statement and the assets to be transferred to the Reinsurer, the SLDI Reserve Trust Account and the SLDI Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC tax, which shall be resolved in accordance with Article VI hereof, or (iii) matters relating to whether a Triggering Event has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 7.2. (b) The parties intend this Section 7.1 to be enforceable in accordance with the Bermuda International Conciliation and Arbitration Act 1993, including any amendments to such law which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 7.1(a), the other party may request the court specified in Section 11.4 to compel arbitration. Section 7.2. Arbitration Procedure. The Company and Reinsurer intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 7.1(a)) be resolved without resort to any litigation. Accordingly, the Company and Reinsurer agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Company and Reinsurer agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Supplementary Rules for the Resolution of Intra-Industry U.S. Reinsurance and Insurance Disputes of the American Arbitration Association. The arbitration hearing will be before a panel of three (3) disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of the Company or any of its Affiliates. The Company and Reinsurer will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the 12 date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either the Company or Reinsurer fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the Appointment Committee of the Chartered Institute of Arbitrators (Bermuda Branch) will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including, without limitation, each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Company or Reinsurer) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 11.4. No such award or judgment will bear interest except as provided in Section 3.2. In no event may the arbitrators award punitive or exemplary damages. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE VIII INSOLVENCY Section 8.1. Insolvency of the Company. In the event of the insolvency of the Company, all coinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the Reinsurer directly to the Company or to its statutory liquidator, receiver or statutory successor on the basis of the liability of the Company under the Covered Insurance Contracts without diminution because of the insolvency of the Company. It is understood, however, that in the event of the insolvency of the Company, the liquidator, receiver or statutory successor of the Company shall give written notice of the pendency of a claim against the Company on a Covered Insurance Contract within a reasonable period of time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. It is further understood that the expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. 13 ARTICLE IX DURATION; RECAPTURE Section 9.1. Duration. This Agreement shall continue in force until such time as (i) the Company's liability with respect to all Covered Insurance Contracts reinsured hereunder is terminated in accordance with their respective terms, or the Company has elected to recapture the reinsurance of Covered Insurance Contracts following the occurrence of a Triggering Event, and (ii) the Company has received payments which discharge such liability in full in accordance with the provisions of this Agreement. In no event shall the interpretation of this Section 9.1 imply any unilateral right of the Reinsurer to terminate this Agreement; provided, however, that in the event that the Company fails to timely pay any material amount due the Reinsurer hereunder, and such amount remains unpaid for thirty (30) days, the Reinsurer shall have the right to terminate reinsurance hereunder upon the end of such period. In such case, the provisions of Section 9.3 shall apply as if the Termination Date were a Recapture Date and the Reinsurer shall be relieved of all liability under this Agreement to make future payments to the Company. Section 9.2. Survival. Notwithstanding the other provisions of this Article IX, the terms and conditions of Articles I, VI and X and the provisions of Sections 11.1, 11.4, 11.6, 11.9 and 11.10 shall remain in full force and effect after the Termination Date. Section 9.3. Recapture. Upon the occurrence of a Triggering Event, the Company shall have the right to recapture all, and not less than all, of the reinsurance ceded under this Agreement, by providing the Reinsurer with written notice of its intent to effect recapture. Recapture of the Covered Insurance Contracts shall be effective on the tenth (10th) day following the day on which the Company has provided the Reinsurer with such notice (the "Recapture Date"). Section 9.4. Recapture Payments. On the Recapture Date, the Company shall be entitled to withdraw an amount equal to a portion of the Required Balance attributable to the Covered Insurance Contracts reinsured hereunder from the SLDI Reserve Trust as consideration for assumption by the Company of the Reinsured Liabilities under the recaptured Covered Insurance Contracts. In the event that the fair market value of the assets in the SLDI Reserve Trust exceeds the Required Balance (the "Excess Amount"), and the fair market value of the assets in the SLDI Security Trust Account is less than the amount required by Exhibit A to the SLDI Security Trust Agreement on the Recapture Date (the "Shortfall Amount"), the Company shall also be permitted to withdraw such Excess Amount equal to the pro-rata portion of the Shortfall Amount attributable to the Covered Insurance Contracts reinsured hereunder. In addition, the Company shall be entitled to withdraw a pro-rata portion of the remaining balance in the SLDI Security Trust Account attributable to the Covered Insurance Contracts hereunder less any amounts owed to the Reinsurer under this Agreement as of the Recapture Date. ARTICLE X INDEMNIFICATION Section 10.1. Reinsurer's Obligation to Indemnify. The Reinsurer hereby agrees to indemnify, defend and hold harmless the Company and its Affiliates and their 14 respective directors, officers and employees (collectively, the "Company Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Company to the extent arising from (i) any breach of the representations, warranties, and covenants of the Reinsurer contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee, agent, representative, successor, or permitted assign of the Company or any of its Affiliates, unless such person is acting at the direction or request of the Reinsurer, and (ii) any successful enforcement of this indemnity. Section 10.2. Company's Obligation to Indemnify. The Company hereby agrees to indemnify, defend and hold harmless the Reinsurer and its Affiliates and their respective directors, officers and employees (collectively, the "Reinsurer Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Reinsurer to the extent arising from (i) any breach of the representations, warranties and covenants of the Company contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee (other than in such employee's capacity as an employee of the Company), agent, representative, successor, or permitted assign of the Reinsurer or any of its Affiliates, and (ii) any successful enforcement of this indemnity. Section 10.3. Certain Definitions and Procedures. In the event either the Reinsurer or the Company shall have a claim for indemnity against the other party under the terms of this Agreement, the parties shall follow the procedures set forth in Article X of the Asset Purchase Agreement. ARTICLE XI MISCELLANEOUS Section 11.1. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified, postage prepaid, or by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: To Company: Security Life of Denver International Limited Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel 15 ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 To the Reinsurer: Scottish Re Life (Bermuda) Limited Crown House, Third Floor 4 Par-la-ville Road Hamilton HM 08 Bermuda Attention: General Counsel With a concurrent copy to: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel and Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP 125 W. 55th Street New York, NY 10019 Section 11.2. Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements and the Confidentiality Agreement, and other documents delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements understanding negotiations, discussions, whether oral or written, of the parties and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein. Section 11.3. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 16 Section 11.4. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in New York, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by hand in Bermuda, addressed to such party, with a concurrent copy by U.S. registered mail, shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. Section 11.5. No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. Section 11.6. Expenses. Except as otherwise provided herein, the parties hereto shall each bear their respective expenses incurred in connection with the negotiation, preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of counsel, actuaries and other representatives. Section 11.7. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. Section 11.8. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any first party action filed by the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be 17 recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby. Section 11.10. Treatment of Confidential Information. (a) The parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated by this Agreement, the parties will keep confidential and will not use or disclose the other party's Confidential Information and the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority. (b) The confidentiality obligations contained in this Agreement or in any other agreement between the parties hereto, as they relate to the reinsurance hereunder, shall not apply to the federal tax structure or federal tax treatment of this Agreement and each party hereto may disclose to any and all persons, without limitation of any kind, the federal tax structure and federal tax treatment of this Agreement; provided, that such disclosure may not be made until the earliest of (x) the date of the public announcement of discussions relating to this Agreement, (y) the date of the public announcement of this Agreement, or (z) the date of the execution of this Agreement. The preceding sentence is intended to cause this Agreement to be treated as not having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. Subject to the provision with respect to disclosure in the first sentence of this subsection (b), each party hereto acknowledges that it has no proprietary or exclusive rights to the federal tax structure of this Agreement or any federal tax matter or federal tax idea related to this Agreement. Section 11.11. Assignment. This Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Except as provided below in this Section 11.11, neither party may assign any of its duties or obligations hereunder without the prior written consent of the other party. The Reinsurer shall be entitled to assign its administrative duties hereunder without the prior written consent of the Company, unless the person or entity to whom such duties are to be assigned is not, at the time of such assignment, a subsidiary of the Reinsurer, in which event the Reinsurer shall obtain the prior written consent of the Company, such consent not to be unreasonably withheld. Section 11.12. Service of Process. The Reinsurer hereby designates The Corporation Trust Company as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company. 18 ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS Section 12.1. Representations, Warranties, and Covenants of the Reinsurer. For purposes of perfecting the security interest in the SLDI Reserve Trust Account and the SLDI Security Trust Account, the Reinsurer hereby represents and warrants to the Company, and covenants for the benefit of the Company, as follows: (a) The Reinsurer is a stock insurance company organized under the laws of Bermuda. From the date of creation until the date hereof, the chief executive office of the Reinsurer within the meaning of section 9-307 of the UCC has been (and, immediately following the date hereof, will be) located in Hamilton, Bermuda. The Reinsurer shall not change its jurisdiction of organization or its chief executive office (within the meaning of section 9-307 of the UCC), except upon thirty (30) calendar days' prior written notice to the Company. In the event that the Reinsurer changes its jurisdiction of organization or the location of its chief executive office, it will only change to a jurisdiction of organization or change the location of its chief executive office to a jurisdiction in the United States. The Reinsurer's true corporate name, as reflected in its organization documents of record in Bermuda, is (and, for the past five years, has been) that set forth in the preamble hereto. (b) The Reinsurer owns and will own its interest in the assets in the SLDI Reserve Trust Account and the SLDI Security Trust Account free and clear of any security interest in, or lien or adverse claim on, such assets. From and after the date hereof, the Reinsurer will not authorize the filing of any other financing statement with respect to any asset in the SLDI Reserve Trust Account or the SLDI Security Trust Account, nor authorize the granting of "control" (as defined in the UCC) over any of such asset to any Person other than the Company. From and after the date hereof, the Reinsurer will not grant any further security interest in, or lien on, the assets in the SLDI Reserve Trust Account or the SLDI Security Trust Account. (c) The Reinsurer will do, execute or otherwise authenticate, acknowledge and deliver, or cause to be done, executed or otherwise authenticated, acknowledged and delivered, such instruments of transfer or other records, and take such other steps or actions, as the Company may reasonably deem necessary to create, perfect or preserve the security interest granted to the Company by Section 4.2 hereof and under the SLDI Security Trust Agreement or to ensure that such security interest remains prior to any and all other security interests, liens or other interests of any other Person; and the Reinsurer hereby authorizes the Company, in the Reinsurer's name or otherwise, to take, or cause to be taken, any of the foregoing steps or actions upon any failure by the Reinsurer to comply with any written request of the Company in respect of any matter subject to this Section 12.1(c). [The rest of this page intentionally left blank.] 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective December 31, 2004. SECURITY LIFE OF DENVER INTERNATIONAL LIMITED By: /s/ David Pendergrass ----------------------------------- Name: David Pendergrass Title: Vice President SCOTTISH RE LIFE (BERMUDA) LIMITED By: /s/ Elizabeth Murphy ----------------------------------- Name: Elizabeth Murphy Title: CFO 20 EX-10.53 15 ex10-53.txt COINSURANCE/MODIFIED COINSURANCE AGREEMENT ================================================================================ COINSURANCE/MODIFIED COINSURANCE AGREEMENT between SECURITY LIFE OF DENVER INTERNATIONAL LIMITED (referred to as the Company) and SCOTTISH RE LIFE (BERMUDA) LIMITED (referred to as the Reinsurer) Effective Date: December 31, 2004 ================================================================================ TABLE OF CONTENTS Page ARTICLE I DEFINITIONS..........................................................1 Section 1.1. Definitions..............................................1 ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED.........................4 Section 2.1. Coinsurance/Modified Coinsurance.........................4 Section 2.2. Reinsurance Coverage.....................................4 Section 2.3. Coinsurance Reserves.....................................5 Section 2.4. Insurance Contract and Reserve Assumption Changes........5 ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION.....................6 Section 3.1. Payments by the Company..................................6 Section 3.2. Settlement...............................................6 Section 3.3. Delayed Payments.........................................7 Section 3.4. Offset and Recoupment Rights.............................7 Section 3.5. Administration...........................................7 Section 3.6. Certain Reports..........................................7 ARTICLE IV REINSURANCE CREDIT; SECURITY........................................8 Section 4.1. Licenses.................................................8 Section 4.2. Security.................................................8 Section 4.3. SLDI Reserve Trust Agreement.............................8 Section 4.4. Investment of Trust Assets...............................8 Section 4.5. Deposit of Assets........................................8 Section 4.6. Adjustment of Security and Withdrawals...................8 Section 4.7. Withdrawals by the Company...............................9 Section 4.8. Assets in Trust of the Company...........................9 Section 4.9. Compliance by the Company...............................10 Section 4.10. Reports.................................................10 ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS.........................10 Section 5.1. Oversights..............................................10 Section 5.2. Cooperation.............................................10 Section 5.3. Regulatory Matters......................................10 ARTICLE VI DAC TAX............................................................11 Section 6.1. Election................................................11 ARTICLE VII ARBITRATION.......................................................12 Section 7.1. Arbitration.............................................12 Section 7.2. Arbitration Procedure...................................12 ARTICLE VIII INSOLVENCY.......................................................13 Section 8.1. Insolvency of the Company...............................13 ARTICLE IX DURATION; RECAPTURE................................................14 Section 9.1. Duration................................................14 Section 9.2. Survival................................................14 Section 9.3. Recapture...............................................14 Section 9.4. Recapture Payments......................................14 ARTICLE X INDEMNIFICATION.....................................................15 Section 10.1. Reinsurer's Obligation to Indemnify.....................15 Section 10.2. Company's Obligation to Indemnify.......................15 Section 10.3. Certain Definitions and Procedures......................15 ARTICLE XI MISCELLANEOUS......................................................15 Section 11.1. Notices.................................................15 Section 11.2. Entire Agreement........................................17 Section 11.3. Captions................................................17 Section 11.4. Governing Law and Jurisdiction..........................17 Section 11.5. No Third Party Beneficiaries............................17 Section 11.6. Expenses................................................17 Section 11.7. Counterparts............................................17 Section 11.8. Severability............................................18 Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages...18 Section 11.10.Treatment of Confidential Information...................18 Section 11.11.Assignment..............................................18 Section 11.12.Service of Process......................................19 ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS.........................19 Section 12.1. Representations, Warranties, and Covenants of the Reinsurer........................................19 ii COINSURANCE/MODIFIED COINSURANCE AGREEMENT THIS COINSURANCE/MODIFIED COISNURANCE AGREEMENT (the "Agreement"), is made and entered into as of December 31, 2004 (the "Effective Date") by and between Security Life of Denver International Limited, a Bermuda-domiciled life insurance company (the "Company") and Scottish Re Life (Bermuda) Limited, a Bermuda-domiciled life insurance company (the "Reinsurer"). WHEREAS, the Company, Security Life of Denver Insurance Company, a Colorado-domiciled insurance company ("SLD" and, together with the Company, the "Sellers"), and Scottish Re Group Limited ("Purchaser"), the indirect parent corporation of Reinsurer, the Reinsurer, and Scottish Re (U.S.), Inc., have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which the Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; WHEREAS, as contemplated by the Asset Purchase Agreement, the Company wishes to cede and retrocede to the Reinsurer, and the Reinsurer wishes to indemnity reinsure, on a one-hundred percent (100%) coinsurance/modified coinsurance basis, the Covered Insurance Contracts (as hereinafter defined); and WHEREAS, the Company wishes the Reinsurer to perform, or cause the performance of, certain administrative functions on behalf of the Company with respect to the Covered Insurance Contracts, and the Company and the Reinsurer have entered into an Administrative Services Agreement of even date herewith (the "Administrative Services Agreement") pursuant to which the Reinsurer shall provide, or cause the provision of, such administrative services; NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Reinsurer agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. The following terms shall have the respective meanings set forth below throughout this Agreement: "Administrative Services Agreement" has the meaning set forth in the preamble. "Affiliated Reinsurer" has the meaning set forth in the definition of "Triggering Event". "Agreement" has the meaning set forth in the preamble. "Asset Purchase Agreement" has the meaning set forth in the preamble. "Bermuda SAP" means the statutory accounting practices prescribed or permitted by the BMA, including any accounting principles permitted under one or more Directions under Section 56 of the Bermuda Insurance Act 1978. "BMA" means the Bermuda Monetary Authority. "Company" has the meaning set forth in the preamble. "Company Indemnified Parties" has the meaning set forth in Section 10.1 of this Agreement. "Confidential Information" means all documents and information concerning one party, any of its Affiliates, the Reinsured Liabilities or the Covered Insurance Contracts, including any information relating to any person insured directly or indirectly under the Covered Insurance Contracts, furnished to the other party or such other party's Affiliates or representatives in connection with this Agreement or the transactions contemplated hereby, except that Confidential Information shall not include information which: (a) at the time of disclosure or thereafter is generally available to and known by the public other than by way of a wrongful disclosure by a party hereto or by any representative of a party hereto; (b) was available on a nonconfidential basis from a source other than the parties hereto or their representatives, provided that such source is not and was not bound by a confidentiality agreement with a party hereto; or (c) was independently developed without violating any obligations under this Agreement and without the use of any Confidential Information. "Confidentiality Agreement" means that certain confidentiality agreement dated May 4, 2004 by and between ING and Purchaser. "Covered Insurance Contracts" means all Insurance Contracts that are reinsurance agreements under which the reinsurance is assumed by the Company on a coinsurance/modified coinsurance basis or on a modified coinsurance basis, as listed on Schedule 1.1(a). The parties agree to update Schedule 1.1(a) from time to time to reflect Covered Insurance Contracts entered into in accordance with the terms of this Agreement or discovered after the Effective Date. "DAC Asset" shall mean the amount of deferred acquisition costs of the Company, up to the amount of the Loss Reserve Redundancy, as permitted under that certain Direction under Section 56, issued by the BMA, dated April 28, 1999, as further described in Schedule 2.4(b) of the Asset Purchase Agreement and such similar Direction under Section 56 with respect to deferred acquisition costs of the Reinsurer, issued by the BMA on December 23, 2004. "Effective Date" means the effective date shown in the preamble of this Agreement. "Eligible Assets" has the meaning set forth in Section 4.4 of this Agreement. "Excess Amount" has the meaning set forth in Section 9.4 of this Agreement. "Independent Accountant" has the meaning set forth in 6.1(f) of this Agreement. 2 "Loss Reserve Redundancy" means the excess of (i) the Reserves over (ii) the level of reserves for the Covered Insurance Contracts calculated under U.S. GAAP in accordance with the reserve assumptions set forth in Exhibit A hereto, as certified by a member of the American Academy of Actuaries. The Loss Reserve Redundancy shall initially be the portion of the amount set forth on the SLDI Closing Statements as the amount required to be included on line 13(a) of the Bermuda Statutory Financial Return ("Sundry Assets - Loss Reserve Redundancy") with respect to the Business that is attributable to the Covered Insurance Contracts hereunder. "Premiums" means premiums, considerations, deposits and similar receipts with respect to the Covered Insurance Contracts. "Recapture Date" has the meaning set forth in Section 9.3 of this Agreement. "Reinsurer" has the meaning set forth in the preamble. "Reinsurer Indemnified Parties" has the meaning set forth in Section 10.2 of this Agreement. "Required Balance" has the meaning set forth in Section 4.3 of this Agreement. "Reserves" means the aggregate amount of reserves and other liabilities with respect to the Covered Insurance Contracts calculated for each calendar quarter on the same basis upon which the Company is required to calculate such reserves and other liabilities to comply with (i) the requirements of the BMA with respect to any Statutory Financial Return filed by the Company in accordance with Bermuda SAP and (ii) the terms of any "mirror image" reserve requirement contained in any Covered Insurance Contract, or any underlying reinsurance agreement or as otherwise required by Applicable Law to permit the Company to take statutory financial statement credit. "Scottish Annuity & Life" means Scottish Annuity & Life Insurance Company (Cayman) Ltd., a company organized under the laws of the Cayman Islands. "Scottish Re Group" means Scottish Re Group Limited, a holding company organized under the laws of the Cayman Islands. "Shortfall Amount" has the meaning set forth in Section 9.4 of this Agreement. "Triggering Event" means any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Reinsurer or any Affiliate of Reinsurer that at the time in question is reinsuring any of the Business (an "Affiliated Reinsurer"), Scottish Annuity & Life or Scottish Re Group; (ii) the risk based capital (under applicable insurance law requirements), calculated quarterly, of any Affiliated Reinsurer domiciled in the United States falls below 125% of the Company Action Level RBC, and is not increased to at least 125% 3 within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.6 of this Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Schedule 1.1(b)), calculated quarterly, of consolidated Scottish Re Group or consolidated Scottish Annuity & Life falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.6 of this Agreement that would reflect such deficiency; (iv) there has been a material breach of any Reinsurance Agreement by the Reinsurer or an Affiliated Reinsurer, including, without limitation, failure to fund any trust as required, and such breach has not been cured within thirty (30) calendar days after notice; or (v) there has been a termination or amendment to any keepwell agreement described in Section 5.26 of the Asset Purchase Agreement without the Company's prior written consent, which consent shall not be unreasonably withheld. "Termination Date" means the date on which this Agreement is terminated in accordance with the terms and conditions of Article IX hereof. "UCC" means the New York Uniform Commercial Code. ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED Section 2.1. Coinsurance/Modified Coinsurance. (a) Subject to the terms and conditions of this Agreement, the Company hereby cedes on a coinsurance/modified coinsurance basis to the Reinsurer as of the Effective Date, and the Reinsurer hereby accepts and agrees to assume and indemnity reinsure on a coinsurance/modified coinsurance basis as of the Effective Date, one hundred percent (100%) of all Reinsured Liabilities arising under or relating to the Covered Insurance Contracts. This Agreement is an agreement for indemnity reinsurance solely between the Company and the Reinsurer and shall not create any legal relationship whatsoever between the Reinsurer and any Person other than the Company. The reinsurance effected under this Agreement shall be maintained in force, without reduction, unless such reinsurance is terminated or reduced as provided herein. (b) On and after the Effective Date, the Reinsurer will have the responsibility for paying to or on behalf of the Company, as and when due, all Reinsured Liabilities arising under or attributable to the Covered Insurance Contracts. Section 2.2. Reinsurance Coverage. In no event shall the reinsurance provided hereunder with respect to a particular Covered Insurance Contract be in force and binding unless such Covered Insurance Contract is in force and binding as of the Effective Date; 4 provided, however, that the Covered Insurance Contracts reinsured hereunder shall include (a) all lapsed or surrendered insurance contracts subject to the reinsurance hereunder, that are reinstated in accordance with their terms on and after the Effective Date, and (b) all Unexecuted Assumed Reinsurance Contracts of the Company on a modified coinsurance basis or coinsurance/modified coinsurance basis. Upon the reinstatement of any lapsed or surrendered policy included within Covered Insurance Contracts, such reinstated Covered Insurance Contract shall be automatically reinsured hereunder, when, and to the extent that, the Company is liable under such reinstated Covered Insurance Contract. Section 2.3. Reserves. On and after the Effective Date, the Reinsurer shall establish and maintain as a liability on its Statutory Financial Returns filed with the BMA, Reserves for the Covered Insurance Contracts ceded hereunder, calculated consistent with (a) the reserve requirements, Bermuda SAP and actuarial principles applicable to the Company under Bermuda Law; and (b) otherwise in accordance with any valuation bases and methods of determining Reserves that may be provided in the Covered Insurance Contracts. The Reinsurer shall also establish and maintain the DAC Asset as an admitted asset offsetting such Reserves in part on its Statutory Financial Returns. The Reinsurer shall provide the Company, no later than forty-five (45) calendar days after the end of each calendar year, with copies of all actuarial opinions and actuarial memoranda and all reserve evaluations pertaining to (i) the Reserves for the Covered Insurance Contracts, and (ii) the determination of the value of the DAC Asset, including, without limitation, any actuarial opinions and reserve evaluations performed by independent actuaries, auditors or other outside consultants. The Company agrees that the Reserves that it establishes and maintains on its Statutory Financial Returns filed with the BMA with respect to the Covered Insurance Contracts shall be consistent with the Reserves established by the Reinsurer; provided, however, that the Company may, at its own cost at any time, upon reasonable notice to the Reinsurer following the Effective Date, examine the Books and Records, and any other books and records that would have been included in the Books and Records had they been in existence on the Effective Date, maintained by the Reinsurer in accordance with the terms of this Agreement, and review the Reinsurer's reserve procedures. If as a result of such examination the Company believes that the Reserves are not consistent with the requirements of clauses (a) and (b) of the first sentence of this Section 2.3 in all material respects, or if the value of the DAC Asset is materially overstated, the Reinsurer shall, at the Company's request and expense, obtain and deliver to the Company an actuarial opinion as to the adequacy of the Reserves for the Covered Insurance Contracts, or the value of the DAC Asset, as the case may be, produced by an independent actuary reasonably acceptable to the Company. In the event that the actuarial opinion so rendered reasonably indicates a material inadequacy in the Reserves for the Covered Insurance Contracts, or in the Reinsurer's reserve procedures, or a material overstatement of the value of the DAC Asset, the Reinsurer shall promptly adjust the amount of the Reserves for the Covered Insurance Contracts or the value of the DAC Asset, and implement appropriate changes to its procedures so as to avoid inadequacies in future periods; provided, however, the Reinsurer shall have the right to contest the findings of such actuarial opinion in accordance with the provisions of Article VII. Section 2.4. Insurance Contract and Reserve Assumption Changes. The Company shall not change (a) the terms and conditions of any Covered Insurance Contracts or (b) the assumptions and methods used to establish the Reserves attributable to the Covered Insurance Contracts, except as required by Applicable Law, and the Company shall notify the 5 Reinsurer promptly upon becoming aware of the requirement to effect any such change and provide the Reinsurer the opportunity to contest such requirement. ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION Section 3.1. Payments by the Company. (a) As consideration for the Reinsurer's agreement to provide reinsurance pursuant to the Reinsurance Agreements between the Company and the Reinsurer, the Company is transferring, on the Effective Date, to the Reinsurer, the SLDI Reserve Trust Account and the SLDI Security Trust Account, as appropriate, as an initial reinsurance premium, Transferred Statutory Assets, including, without limitation, the DAC Asset, Investment Assets, and cash having a value determined in accordance with Section 2.4(d) of the Asset Purchase Agreement. (b) The Reinsurer shall be entitled prior to the Recapture Date, as additional reinsurance premium, to payment of amounts equal to Premiums received by the Company on and after the Effective Date that are attributable to the Covered Insurance Contracts; provided, however, that following the occurrence of a Triggering Event, the Company shall be entitled to retain such amounts as funds withheld under this Agreement, provided further, however, that such funds may be used by the Company as set forth in Section 4.7 of this Agreement, and any amount remaining upon termination of this Agreement pursuant to Section 9.1, other than as a result of a recapture, shall be paid to the Reinsurer. Any funds withheld pursuant to this Section 3.1(b) shall be credited against the Required Balance. For the avoidance of doubt, the parties acknowledge and agree that the Company retains all right, title and interest to all Premiums and other amounts received with respect to the Covered Insurance Contracts, subject to its contractual obligations under this Agreement to pay corresponding amounts over to the Reinsurer in accordance with Section 3.2 hereof. (c) To the extent that the Company recovers amounts from any third party relating to the Business attributable to the Covered Insurance Contracts (including, without limitation, Premiums in arrears from a policyholder or ceding company with respect to a reinstated Covered Insurance Contract, litigation recoveries, premium and reinsurance recoverables), the Company shall transfer such amounts to the Reinsurer and provide the Reinsurer with any pertinent information that the Company may have relating thereto in accordance with Section 3.2 hereof. Section 3.2. Settlement. During the term of this Agreement, a settlement amount between the Company and the Reinsurer as of the last day of any relevant accounting period shall be calculated according to the terms of the Covered Insurance Contracts as if the Reinsurer was in the Company's position under each Covered Insurance Contract and the Company was in the ceding company's position under each such Covered Insurance Contract. In connection with the quarterly accounting pursuant to the Administrative Services Agreement, (i) the Company will pay to the Reinsurer any net amounts the Company receives from the ceding companies under the Covered Insurance Contracts, including without limitation any modified coinsurance reserve adjustment, and (ii) the Reinsurer will pay to the Company any net amount the Company is obligated to pay to the ceding companies under the Covered Insurance 6 Contracts, including without limitation any modified coinsurance reserve adjustment. Notwithstanding anything to the contrary in the foregoing sentences, the amount of any change in the "Reinsurance IMR" as defined in the SLD-SLDI Retrocession Agreements (as modified, amended or restated) and any investment income on such Reinsurance IMR shall be retained by the Company and shall not be included in any settlement between the Company and the Reinsurer. Section 3.3. Delayed Payments. If there is a delayed settlement of any payment due hereunder, interest will accrue on such payment at the 180-Day Treasury Rate then in effect until settlement is made. For purposes of this Section 3.3, a payment will be considered overdue, and such interest will begin to accrue, on the first day immediately following the date such payment is due. For greater clarity, (i) a payment shall be deemed to be due hereunder on the last date on which such payment may be timely made under the applicable provision, and (ii) interest will not accrue on any payment due the Reinsurer hereunder unless the delayed settlement thereof was caused by the Company. Section 3.4. Offset and Recoupment Rights. Any debits or credits incurred on and after the Effective Date in favor of or against either the Company or Reinsurer with respect to this Agreement or any other reinsurance agreements or trust agreements that constitute Related Agreements or otherwise are deemed mutual debits or credits, as the case may be, shall be set off and recouped, and only the net balance shall be allowed or paid. This Section 3.4 shall apply notwithstanding the existence of any insolvency, rehabilitation, conservatorship or comparable proceeding by or against the Company or the Reinsurer. Section 3.5. Administration. The Reinsurer will administer, or cause the administration of, the Covered Insurance Contracts and provide quarterly accountings with respect thereto to the Company in accordance with the Administrative Services Agreement. All reports, remittances and payments due to or from a party hereto shall be made in accordance with the procedures set forth in the Administrative Services Agreement. Section 3.6. Certain Reports. (a) Not later than sixty (60) calendar days after the end of each calendar year, and forty-five (45) days after the end of any calendar quarter other than the quarter ending on December 31, the Reinsurer shall provide to the Company a calculation of (x) the risk based capital of each entity identified in Clause (ii) of the definition of the Triggering Event, and (y) the capital adequacy ratio calculated as set forth on Schedule 1.1(b) of the entities identified in Clause (iii) of the definition of Triggering Event. Each such calculation shall include reasonable supporting detail. (b) The Reinsurer shall also provide written notice of the occurrence of any Triggering Event within two (2) Business Days after its occurrence. The Company may, at its own expense, review Reinsurer's or an Affiliated Reinsurer's books and records reasonably necessary to confirm the calculations provided by Reinsurer pursuant to this Section 3.6(b). In addition, Reinsurer shall cooperate fully with the Company and promptly respond to the Company's reasonable inquiries from time to time concerning the determination of whether a Triggering Event has occurred. 7 ARTICLE IV REINSURANCE CREDIT; SECURITY Section 4.1. Licenses. At all times during the term of this Agreement, the Reinsurer shall hold and maintain all licenses and authorizations required under Bermuda Law and otherwise take all action that may be necessary (i) so that the Company shall receive full reserve credits for reinsurance ceded on a coinsurance basis under this Agreement in the Statutory Financial Return filed with the BMA, and (ii) to perform its obligations hereunder. Section 4.2. Security. In accordance with the Asset Purchase Agreement, the Reinsurer, as grantor, is creating the SLDI Reserve Trust Account with a trustee approved by the Company, naming the Company as sole beneficiary thereof. The SLDI Reserve Trust Account shall initially be funded with Investment Assets and cash transferred from the Company. In accordance with the SLDI Reserve Trust Agreement, the Reinsurer hereby pledges the assets in the SLDI Trust Account to perfect a first priority security interest in favor of the Company under Article 9 of the UCC. During the term of the SLDI Reserve Trust Agreement, the Reinsurer shall not, and shall direct that the trustee shall not, grant or cause to be created in favor of any third person any security interest whatsoever in any of the assets in the SLDI Trust Accounts. Section 4.3. SLDI Reserve Trust Agreement. The trustee shall hold assets in the SLDI Reserve Trust Account pursuant to the terms of the SLDI Reserve Trust Agreement. The fair market value of assets in the SLDI Reserve Trust Account shall be not less than the Reserves attributable to the Covered Insurance Contracts and to the "Reserves" under the other Insurance Contracts reinsured by the Reinsurer on a coinsurance basis under the other Reinsurance Agreements between the Company and the Reinsurer, net of the aggregate value of the DAC Asset that is attributable to all Covered Insurance Contracts under the Reinsurance Agreements between the Company and the Reinsurer (such net amount being the "Required Balance"). Section 4.4. Investment of Trust Assets. The assets held in the SLDI Reserve Trust Account shall be valued at their fair market value as of the date as of which such assets are required to be valued. The assets that may be held in the SLDI Reserve Trust Account (the "Eligible Assets") shall consist of cash and investments of the type permitted by Bermuda Law; provided, that (i) each such investment that is a security is issued by an institution that is not the Reinsurer, the Company or an Affiliate of either party, and (ii) such investments comply with the requirements specified by the Eligible Asset Guidelines as set forth on Schedule 4.4. Section 4.5. Deposit of Assets. Prior to depositing assets in the SLDI Reserve Trust Account, Reinsurer will execute assignments or endorsements in blank, or transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the direction of the Company, may whenever necessary negotiate these assets without the consent or signature from the Reinsurer or any other entity. Section 4.6. Adjustment of Security and Withdrawals. The Reinsurer shall maintain Eligible Assets in the SLDI Reserve Trust Account with an aggregate fair market value at least equal to the Required Balance. The amount of assets held in the SLDI Reserve Trust Account shall be adjusted following the end of each calendar quarter. 8 (a) If the aggregate fair market value of the Eligible Assets held in the SLDI Reserve Trust Account at the end of any calendar quarter is less than the Required Balance, the Reinsurer shall, no later than fifteen (15) calendar days following delivery of the reserve report included in the quarterly report provided pursuant to the Administrative Services Agreement, transfer additional Eligible Assets to the SLDI Reserve Trust Account so that the aggregate fair market value of the Eligible Assets held in the SLDI Reserve Trust Account is not less than the Required Balance. (b) If the aggregate fair market value of the Eligible Assets in the SLDI Reserve Trust Account at the end of any calendar quarter exceeds 102% of the Required Balance, then the Reinsurer shall have the right to seek approval (which shall not be unreasonably or arbitrarily withheld) from the Company to withdraw the excess. For the purposes of the foregoing sentence, in the event that a Triggering Event has occurred, the parties acknowledge and agree that it shall not be unreasonable for the Company to withhold its consent to any such withdrawal. Section 4.7. Withdrawals by the Company. The Company may withdraw the assets held in the SLDI Reserve Trust Account at any time and from time to time, notwithstanding any other provisions of this Agreement, and assets withdrawn from such SLDI Reserve Trust Account shall be utilized and applied by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company), without diminution because of insolvency on the part of the Company or the Reinsurer; provided however, that following any such withdrawal the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) may only apply such assets for one or more of the following purposes: (a) to pay, or reimburse the Company for payment of, Premiums received by Reinsurer hereunder which are to be returned to policyholders or ceding companies because of cancellations of Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; (b) to pay, or reimburse the Company for payment of, surrenders, benefits, losses or other amounts payable pursuant to the provisions of the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; and (c) to fund an account with the Company in an amount no less than the deduction, for reinsurance ceded, from the Company's liabilities for the Reserves to be maintained with respect to the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis. Section 4.8. Assets in Trust of the Company. Any assets deposited into an account of the Company (or any successor by operation of law of the Company, including, but 9 not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) pursuant to Section 4.7(c), and any interest or other earnings thereon shall be held by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) in trust for the benefit of the Reinsurer, subject to the Company's right to apply such assets to amounts due and payable by the Reinsurer to the Company under this Agreement, and shall at all times be maintained, separate and apart from any assets of the Company, for the sole purpose of funding the payments and reimbursements described in Sections 4.7(a) through (c), inclusive, of this Article IV. Section 4.9. Compliance by the Company. The Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) shall ensure that any assets held in trust pursuant to Section 4.7(c) comply with the provisions of Sections 4.4, 4.7(a) and 4.7(b) in accordance with its fiduciary obligations as trustee with respect to such amounts. Section 4.10. Reports. At the Company's request, the Reinsurer shall provide the Company with its audited Annual Statutory Financial Return along with the audit report thereon, as well as any quarterly reports required to be filed by the Reinsurer. ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS Section 5.1. Oversights. Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery, and provided, further, that the party making such error or omission or responsible for such delay shall be responsible for any additional liability which attaches as a result. If (a) the failure of either party to comply with any provision of this Agreement is unintentional or the result of a misunderstanding or oversight and (b) such failure to comply is promptly rectified, both parties shall be restored as closely as possible to the positions they would have occupied if no error or oversight had occurred. Section 5.2. Cooperation. Each party hereto shall cooperate fully with the other in all reasonable respects in order to accomplish the objectives of this Agreement. Section 5.3. Regulatory Matters. If the Company or the Reinsurer receives notice of, or otherwise becomes aware of, any regulatory inquiry, investigation or proceeding relating to the Covered Insurance Contracts, the Company or the Reinsurer, as applicable, shall promptly notify the other party thereof, whereupon the parties shall cooperate in good faith and use their respective commercially reasonable efforts to resolve such matter in a mutually satisfactory manner, in light of all the relevant business, regulatory and legal facts and circumstances. 10 ARTICLE VI DAC TAX Section 6.1. Election. (a) All uncapitalized terms used herein shall have the meanings set forth in the regulations under Section 848 of the Code. (b) Each of the Company and the Reinsurer acknowledges that it is subject to taxation under Subchapter L of the Code and hereby makes the election contemplated by Section 1.848-2(g)(8) of the Treasury Regulations with respect to this Agreement. Each of the Company and the Reinsurer (i) agrees that such election is effective for the taxable year of each party that includes the Effective Date and for all subsequent years during which this Agreement remains in effect and (ii) warrants that it will take no action to revoke the election. (c) Pursuant to Section 1.848-2(g)(8) of the Treasury Regulations, each of the Company and the Reinsurer hereby agrees (i) to attach a schedule to its federal income tax return for its first taxable year ending on or after the Effective Date that identifies this Agreement as a reinsurance agreement for which the joint election under Section 1.848-2(g)(8) has been made, (ii) that the party with net positive consideration for this Agreement for each taxable year will capitalize its specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Code, and (iii) to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. The Reinsurer shall prepare and execute duplicate copies of the schedule described in the preceding sentence as soon as practicable after the Effective Date and submit them to the Company for execution. The Company shall execute the copies and return one of them to the Reinsurer within thirty (30) calendar days of the receipt of such copies. (d) The Company shall submit a schedule to the Reinsurer by May 1 of each year of its calculation of the net consideration under this Agreement for the preceding taxable year. This schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Company stating that the Company shall report such net consideration in its federal income tax return for the preceding taxable year. (e) The Reinsurer may contest such calculation by providing an alternative calculation to the Company in writing within thirty (30) calendar days after the date on which the Reinsurer receives the Company's calculation. If the Reinsurer does not so notify the Company, the Reinsurer shall report the net consideration under this Agreement as determined by the Company in the Reinsurer's federal income tax return for the preceding taxable year. (f) If Reinsurer contests the Company's calculation of the net consideration under this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount of net consideration within thirty (30) calendar days after the date on which the Reinsurer submits its alternative calculation. If Reinsurer and the Company reach an agreement as to the amount of net consideration under this Agreement, each party shall report such amount in its federal income tax return for the preceding taxable year. 11 If, during such period, Reinsurer and the Company are unable to reach an agreement, they shall promptly thereafter cause Deloitte & Touche USA LLP (the "Independent Accountants") to promptly review (which review shall commence no later than five (5) calendar days after the selection of the Independent Accountants) this Agreement and the calculations of Reinsurer and the Company for the purpose of calculating the net consideration under this Agreement. In making such calculation, the Independent Accountants shall consider only those items or amounts in the Company's calculation as to which the Reinsurer has disagreed. The Independent Accountants shall deliver to Reinsurer and the Company, as promptly as practicable (but no later than thirty (30) calendar days after the commencement of their review), a report setting forth such calculation, which calculation shall result in a net consideration between the amount thereof shown in the Company's calculation delivered pursuant to Section 6.1(d) and the amount thereof shown in Reinsurer's calculation delivered pursuant to Section 6.1(e). Such report shall be final and binding upon Reinsurer and the Company. The fees, costs and expenses of the Independent Accountants shall be borne (i) by the Company if the difference between the net consideration as calculated by the Independent Accountants and the Company's calculation delivered pursuant to Section 6.1(d) is greater than the difference between the net consideration as calculated by the Independent Accountants and Reinsurer's calculation delivered pursuant to Section 6.1(e), (ii) by the Reinsurer if the first such difference is less than the second such difference, and (iii) otherwise equally by Reinsurer and the Company. ARTICLE VII ARBITRATION Section 7.1. Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLDI Closing Statement and the assets to be transferred to the Reinsurer, the SLDI Reserve Trust Account and the SLDI Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC tax, which shall be resolved in accordance with Article VI hereof, or (iii) matters relating to whether a Triggering Event has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 7.2. (b) The parties intend this Section 7.1 to be enforceable in accordance with the Bermuda International Conciliation and Arbitration Act 1993, including any amendments to such law which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 7.1(a), the other party may request the court specified in Section 11.4 to compel arbitration. Section 7.2. Arbitration Procedure. The Company and Reinsurer intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 7.1(a)) be resolved without resort to any litigation. Accordingly, the Company and Reinsurer agree that they will negotiate diligently and in good faith to agree on a mutually 12 satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Company and Reinsurer agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Supplementary Rules for the Resolution of Intra-Industry U.S. Reinsurance and Insurance Disputes of the American Arbitration Association. The arbitration hearing will be before a panel of three (3) disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of the Company or any of its Affiliates. The Company and Reinsurer will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either the Company or Reinsurer fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the Appointment Committee of the Chartered Institute of Arbitrators (Bermuda Branch) will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including, without limitation, each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Company or Reinsurer) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 11.4. No such award or judgment will bear interest except as provided in Section 3.2. In no event may the arbitrators award punitive or exemplary damages. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE VIII INSOLVENCY Section 8.1. Insolvency of the Company. In the event of the insolvency of the Company, all coinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the Reinsurer directly to the Company or to its statutory liquidator, receiver or statutory successor on the basis of the liability of the Company under the Covered Insurance Contracts without diminution because of the insolvency of the Company. It is understood, however, that in the event of the insolvency of the Company, the liquidator, 13 receiver or statutory successor of the Company shall give written notice of the pendency of a claim against the Company on a Covered Insurance Contract within a reasonable period of time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. It is further understood that the expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. ARTICLE IX DURATION; RECAPTURE Section 9.1. Duration. This Agreement shall continue in force until such time as (i) the Company's liability with respect to all Covered Insurance Contracts reinsured hereunder is terminated in accordance with their respective terms, or the Company has elected to recapture the reinsurance of Covered Insurance Contracts following the occurrence of a Triggering Event, and (ii) the Company has received payments which discharge such liability in full in accordance with the provisions of this Agreement. In no event shall the interpretation of this Section 9.1 imply any unilateral right of the Reinsurer to terminate this Agreement; provided, however, that in the event that the Company fails to timely pay any material amount due the Reinsurer hereunder, and such amount remains unpaid for thirty (30) days, the Reinsurer shall have the right to terminate reinsurance hereunder upon the end of such period. In such case, the provisions of Section 9.3 shall apply as if the Termination Date were a Recapture Date and the Reinsurer shall be relieved of all liability under this Agreement to make future payments to the Company. Section 9.2. Survival. Notwithstanding the other provisions of this Article IX, the terms and conditions of Articles I, VI and X and the provisions of Sections 11.1, 11.4, 11.6, 11.9 and 11.10 shall remain in full force and effect after the Termination Date. Section 9.3. Recapture. Upon the occurrence of a Triggering Event, the Company shall have the right to recapture all, and not less than all, of the reinsurance ceded under this Agreement, by providing the Reinsurer with written notice of its intent to effect recapture. Recapture of the Covered Insurance Contracts shall be effective on the tenth (10th) day following the day on which the Company has provided the Reinsurer with such notice (the "Recapture Date"). Section 9.4. Recapture Payments. On the Recapture Date, the Company shall be entitled to withdraw an amount equal to a portion of the Required Balance attributable to the Covered Insurance Contracts reinsured hereunder from the SLDI Reserve Trust as consideration for assumption by the Company of the Reinsured Liabilities under the recaptured Covered Insurance Contracts. In the event that the fair market value of the assets in the SLDI Reserve Trust exceeds the Required Balance (the "Excess Amount"), and the fair market value of the assets in the SLDI Security Trust Account is less than the amount required by Exhibit A to the SLDI Security Trust Agreement on the Recapture Date (the "Shortfall Amount"), the Company 14 shall also be permitted to withdraw such Excess Amount equal to the pro-rata portion of the Shortfall Amount attributable to the Covered Insurance Contracts reinsured hereunder. In addition, the Company shall be entitled to withdraw a pro-rata portion of the remaining balance in the SLDI Security Trust Account attributable to the Covered Insurance Contracts hereunder less any amounts owed to the Reinsurer under this Agreement as of the Recapture Date. ARTICLE X INDEMNIFICATION Section 10.1. Reinsurer's Obligation to Indemnify. The Reinsurer hereby agrees to indemnify, defend and hold harmless the Company and its Affiliates and their respective directors, officers and employees (collectively, the "Company Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Company to the extent arising from (i) any breach of the representations, warranties, and covenants of the Reinsurer contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee, agent, representative, successor, or permitted assign of the Company or any of its Affiliates, unless such person is acting at the direction or request of the Reinsurer, and (ii) any successful enforcement of this indemnity. Section 10.2. Company's Obligation to Indemnify. The Company hereby agrees to indemnify, defend and hold harmless the Reinsurer and its Affiliates and their respective directors, officers and employees (collectively, the "Reinsurer Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Reinsurer to the extent arising from (i) any breach of the representations, warranties and covenants of the Company contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee (other than in such employee's capacity as an employee of the Company), agent, representative, successor, or permitted assign of the Reinsurer or any of its Affiliates, and (ii) any successful enforcement of this indemnity. Section 10.3. Certain Definitions and Procedures. In the event either the Reinsurer or the Company shall have a claim for indemnity against the other party under the terms of this Agreement, the parties shall follow the procedures set forth in Article X of the Asset Purchase Agreement. ARTICLE XI MISCELLANEOUS Section 11.1. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified, postage prepaid, or by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown 15 on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: To Company: Security Life of Denver International Limited Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 And David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 To the Reinsurer: Scottish Re Life (Bermuda) Limited Crown House, Third Floor 4 Par-la-ville Road Hamilton HM 08 Bermuda With a concurrent copy to: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel and Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP 125 W. 55th Street New York, NY 10019 16 Section 11.2. Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements and the Confidentiality Agreement, and other documents delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements understanding negotiations, discussions, whether oral or written, of the parties and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein. Section 11.3. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 11.4. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in New York, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by hand in Bermuda, addressed to such party, with a concurrent copy by U.S. registered mail, shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. Section 11.5. No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. Section 11.6. Expenses. Except as otherwise provided herein, the parties hereto shall each bear their respective expenses incurred in connection with the negotiation, preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of counsel, actuaries and other representatives. Section 11.7. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. 17 Section 11.8. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any first party action filed by the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby. Section 11.10. Treatment of Confidential Information. (a) The parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated by this Agreement, the parties will keep confidential and will not use or disclose the other party's Confidential Information and the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority. (b) The confidentiality obligations contained in this Agreement or in any other agreement between the parties hereto, as they relate to the reinsurance hereunder, shall not apply to the federal tax structure or federal tax treatment of this Agreement and each party hereto may disclose to any and all persons, without limitation of any kind, the federal tax structure and federal tax treatment of this Agreement; provided, that such disclosure may not be made until the earliest of (x) the date of the public announcement of discussions relating to this Agreement, (y) the date of the public announcement of this Agreement, or (z) the date of the execution of this Agreement. The preceding sentence is intended to cause this Agreement to be treated as not having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. Subject to the provision with respect to disclosure in the first sentence of this subsection (b), each party hereto acknowledges that it has no proprietary or exclusive rights to the federal tax structure of this Agreement or any federal tax matter or federal tax idea related to this Agreement. Section 11.11. Assignment. This Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Except as provided below in this Section 11.11, neither party may assign any of its duties or obligations hereunder 18 without the prior written consent of the other party. The Reinsurer shall be entitled to assign its administrative duties hereunder without the prior written consent of the Company, unless the person or entity to whom such duties are to be assigned is not, at the time of such assignment, a subsidiary of the Reinsurer, in which event the Reinsurer shall obtain the prior written consent of the Company, such consent not to be unreasonably withheld. Section 11.12. Service of Process. The Reinsurer hereby designates The Corporation Trust Company as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company. ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS Section 12.1. Representations, Warranties, and Covenants of the Reinsurer. For purposes of perfecting the security interest in the SLDI Reserve Trust Account and the SLDI Security Trust Account, the Reinsurer hereby represents and warrants to the Company, and covenants for the benefit of the Company, as follows: (a) The Reinsurer is a stock insurance company organized under the laws of Bermuda. From the date of creation until the date hereof, the chief executive office of the Reinsurer within the meaning of section 9-307 of the UCC has been (and, immediately following the date hereof, will be) located in Hamilton, Bermuda. The Reinsurer shall not change its jurisdiction of organization or its chief executive office (within the meaning of section 9-307 of the UCC), except upon thirty (30) calendar days' prior written notice to the Company. In the event that the Reinsurer changes its jurisdiction of organization or the location of its chief executive office, it will only change to a jurisdiction of organization or change the location of its chief executive office to a jurisdiction in the United States. The Reinsurer's true corporate name, as reflected in its organization documents of record in Bermuda, is (and, for the past five years, has been) that set forth in the preamble hereto. (b) The Reinsurer owns and will own its interest in the assets in the SLDI Reserve Trust Account and the SLDI Security Trust Account free and clear of any security interest in, or lien or adverse claim on, such assets. From and after the date hereof, the Reinsurer will not authorize the filing of any other financing statement with respect to any asset in the SLDI Reserve Trust Account or the SLDI Security Trust Account, nor authorize the granting of "control" (as defined in the UCC) over any of such asset to any Person other than the Company. From and after the date hereof, the Reinsurer will not grant any further security interest in, or lien on, the assets in the SLDI Reserve Trust Account or the SLDI Security Trust Account. (c) The Reinsurer will do, execute or otherwise authenticate, acknowledge and deliver, or cause to be done, executed or otherwise authenticated, acknowledged and delivered, such instruments of transfer or other records, and take such other steps or actions, as the Company may reasonably deem necessary to create, perfect or preserve the security interest granted to the Company by Section 4.2 hereof and under the SLDI Security Trust Agreement or to ensure that such security interest remains prior to any and all other security interests, liens or other interests of any other Person; and the Reinsurer hereby authorizes the Company, in the Reinsurer's name or otherwise, to take, or cause to be taken, any of the foregoing steps or actions 19 upon any failure by the Reinsurer to comply with any written request of the Company in respect of any matter subject to this Section 12.1(c). [The rest of this page intentionally left blank.] 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective December 31, 2004. SECURITY LIFE OF DENVER INTERNATIONAL LIMITED By: /s/ David Pendergrass ------------------------------------- Name: David Pendergrass Title: Vice President SCOTTISH RE LIFE (BERMUDA) LIMITED By: /s/ Elizabeth Murphy ------------------------------------- Name: Elizabeth Murphy Title: CFO 21 EX-10.54 16 ex10-54.txt COINSURANCE FUNDS WITHHELD AGREEMENT ================================================================================ COINSURANCE FUNDS WITHHELD AGREEMENT between SECURITY LIFE OF DENVER INTERNATIONAL LIMITED (referred to as the Company) and SCOTTISH RE LIFE (BERMUDA) LIMITED (referred to as the Reinsurer) Effective Date: December 31, 2004 ================================================================================ TABLE OF CONTENTS Page ARTICLE I DEFINITIONS..........................................................1 Section 1.1. Definitions................................................1 ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED.........................4 Section 2.1. Coinsurance Funds Withheld.................................4 Section 2.2. Reinsurance Coverage.......................................5 Section 2.3. Reserves...................................................5 Section 2.4. Insurance Contract and Reserve Assumption Changes..........6 ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION.....................6 Section 3.1. Payments by the Company....................................6 Section 3.2. Funds Withheld Account.....................................6 Section 3.3. Delayed Payments...........................................7 Section 3.4. Offset and Recoupment Rights...............................7 Section 3.5. Administration.............................................7 Section 3.6. Certain Reports............................................8 ARTICLE IV REINSURANCE CREDIT; SECURITY........................................8 Section 4.1. Licenses...................................................8 Section 4.2. Security...................................................8 Section 4.3. SLDI Reserve Trust Agreement...............................8 Section 4.4. Investment of Trust Assets.................................9 Section 4.5. Deposit of Assets..........................................9 Section 4.6. Adjustment of Security and Withdrawals.....................9 Section 4.7. Withdrawals by the Company.................................9 Section 4.8. Assets in Trust of the Company............................10 Section 4.9. Compliance by the Company.................................10 Section 4.10. Reports...................................................10 ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS.........................10 Section 5.1. Oversights................................................10 Section 5.2. Cooperation...............................................11 Section 5.3. Regulatory Matters........................................11 ARTICLE VI DAC TAX............................................................11 Section 6.1. Election..................................................11 ARTICLE VII ARBITRATION.......................................................13 Section 7.1. Arbitration...............................................13 Section 7.2. Arbitration Procedure.....................................13 ARTICLE VIII INSOLVENCY.......................................................14 Section 8.1. Insolvency of the Company.................................14 ARTICLE IX DURATION; RECAPTURE................................................14 Section 9.1. Duration..................................................14 Section 9.2. Survival..................................................15 Section 9.3. Recapture.................................................15 Section 9.4. Recapture Payments........................................15 ARTICLE X INDEMNIFICATION.....................................................15 Section 10.1. Reinsurer's Obligation to Indemnify.......................15 Section 10.2. Company's Obligation to Indemnify.........................15 Section 10.3. Certain Definitions and Procedures........................16 ARTICLE XI MISCELLANEOUS......................................................16 Section 11.1. Notices...................................................16 Section 11.2. Entire Agreement..........................................17 Section 11.3. Captions..................................................17 Section 11.4. Governing Law and Jurisdiction............................17 Section 11.5. No Third Party Beneficiaries..............................18 Section 11.6. Expenses..................................................18 Section 11.7. Counterparts..............................................18 Section 11.8. Severability..............................................18 Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages.....18 Section 11.10. Treatment of Confidential Information.....................18 Section 11.11. Assignment................................................19 Section 11.12. Service of Process........................................19 ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS.........................19 Section 12.1. Representations, Warranties, and Covenants of the Reinsurer...............................................19 ii COINSURANCE FUNDS WITHHELD AGREEMENT THIS COINSURANCE FUNDS WITHHELD AGREEMENT (the "Agreement"), is made and entered into as of December 31, 2004 (the "Effective Date") by and between Security Life of Denver International Limited, a Bermuda-domiciled life insurance company (the "Company") and Scottish Re Life (Bermuda) Limited, a Bermuda-domiciled life insurance company (the "Reinsurer"). WHEREAS, the Company, Security Life of Denver Insurance Company, a Colorado-domiciled insurance company ("SLD" and, together with the Company, the "Sellers"), and Scottish Re Group Limited ("Purchaser"), the indirect parent corporation of the Reinsurer, the Reinsurer, and Scottish Re (U.S.), Inc., have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; WHEREAS, as contemplated by the Asset Purchase Agreement, the Company wishes to retrocede to the Reinsurer, and the Reinsurer wishes to indemnity reinsure, on a one-hundred percent (100%) coinsurance funds withheld basis, the Covered Insurance Contracts (as hereinafter defined); and WHEREAS, the Company wishes the Reinsurer to perform, or cause the performance of, certain administrative functions on behalf of the Company with respect to the Covered Insurance Contracts, and the Company and the Reinsurer have entered into an Administrative Services Agreement of even date herewith (the "Administrative Services Agreement") pursuant to which the Reinsurer shall provide, or cause the provision of, such administrative services; NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Reinsurer agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. The following terms shall have the respective meanings set forth below throughout this Agreement: "Administrative Services Agreement" has the meaning set forth in the preamble. "Affiliated Reinsurer" has the meaning set forth in the definition of "Triggering Event". "Agreement" has the meaning set forth in the preamble. "Asset Purchase Agreement" has the meaning set forth in the preamble. "Bermuda SAP" means the statutory accounting practices prescribed or permitted by the BMA, including any accounting principles permitted under one or more Directions under Section 56 of the Bermuda Insurance Act 1978. "BMA" means the Bermuda Monetary Authority. "Company" has the meaning set forth in the preamble. "Company Indemnified Parties" has the meaning set forth in Section 10.1 of this Agreement. "Confidential Information" means all documents and information concerning one party, any of its Affiliates, the Reinsured Liabilities or the Covered Insurance Contracts, including any information relating to any person insured directly or indirectly under the Covered Insurance Contracts, furnished to the other party or such other party's Affiliates or representatives in connection with this Agreement or the transactions contemplated hereby, except that Confidential Information shall not include information which: (a) at the time of disclosure or thereafter is generally available to and known by the public other than by way of a wrongful disclosure by a party hereto or by any representative of a party hereto; (b) was available on a nonconfidential basis from a source other than the parties hereto or their representatives, provided that such source is not and was not bound by a confidentiality agreement with a party hereto; or (c) was independently developed without violating any obligations under this Agreement and without the use of any Confidential Information. "Confidentiality Agreement" means that certain confidentiality agreement dated May 4, 2004 by and between ING and Purchaser. "Covered Insurance Contracts" means all Insurance Contracts that are reinsurance agreements under which the reinsurance is assumed by the Company on a coinsurance funds withheld basis, as listed on Schedule 1.1(a). The parties agree to update Schedule 1.1(a) from time to time to reflect Covered Insurance Contracts entered into in accordance with the terms of this Agreement or discovered after the Effective Date. "DAC Asset" shall mean the amount of deferred acquisition costs of the Company, up to the amount of the Loss Reserve Redundancy, as permitted under that certain Direction under Section 56, issued by the BMA, dated April 28, 1999, as further described in Schedule 2.4(b) of the Asset Purchase Agreement and such similar Direction under Section 56 with respect to deferred acquisition costs of the Reinsurer, issued by the BMA on December 23, 2004. "Effective Date" means the effective date shown in the preamble of this Agreement. "Eligible Assets" has the meaning set forth in Section 4.4 of this Agreement. "Excess Amount" has the meaning set forth in Section 9.4 of this Agreement. 2 "Funds Withheld Account" has the meaning set forth in Section 3.2 of this Agreement. "Funds Withheld Balance" has the meaning set forth in Section 3.2 of this Agreement. "Independent Accountant" has the meaning set forth in Section 6.1(f) of this Agreement. "Loss Reserve Redundancy" means the excess of (i) the Reserves over (ii) the level of reserves for the Covered Insurance Contracts calculated under U.S. GAAP in accordance with the reserve assumptions set forth in Exhibit A hereto, as certified by a member of the American Academy of Actuaries. The Loss Reserve Redundancy shall initially be the portion of the amount set forth on the SLDI Closing Statements as the amount required to be included on line 13(a) of the Bermuda Statutory Financial Return ("Sundry Assets - Loss Reserve Redundancy") with respect to the Business that is attributable to the Covered Insurance Contracts hereunder. "Premiums" means premiums, considerations, deposits and similar receipts with respect to the Covered Insurance Contracts. "Recapture Date" has the meaning set forth in Section 9.3 of this Agreement. "Reinsurer" has the meaning set forth in the preamble. "Reinsurer Indemnified Parties" has the meaning set forth in Section 10.2 of this Agreement. "Required Balance" has the meaning set forth in Section 4.3 of this Agreement. "Reserves" means the aggregate amount of reserves and other liabilities with respect to the Covered Insurance Contracts calculated for each calendar quarter on the same basis upon which the Company is required to calculate such reserves and other liabilities to comply with (i) the requirements of the BMA with respect to any Statutory Financial Return filed by the Company in accordance with Bermuda SAP and (ii) the terms of any "mirror image" reserve requirement contained in any Covered Insurance Contract, or any underlying reinsurance agreement or as otherwise required by Applicable Law to permit the Company to take statutory financial statement credit. "Scottish Annuity & Life" means Scottish Annuity & Life Insurance Company (Cayman) Ltd., a company organized under the laws of the Cayman Islands. "Scottish Re Group" means Scottish Re Group Limited, a holding company organized under the laws of the Cayman Islands. "Shortfall Amount" has the meaning set forth in Section 9.4 of this Agreement. "Triggering Event" means any of the following occurrences: 3 (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Reinsurer or any Affiliate of Reinsurer that at the time in question is reinsuring any of the Business (an "Affiliated Reinsurer"), Scottish Annuity & Life or Scottish Re Group; (ii) the risk based capital (under applicable insurance law requirements), calculated quarterly, of any Affiliated Reinsurer domiciled in the United States falls below 125% of the Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.6 of this Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Schedule 1.1(b)), calculated quarterly, of consolidated Scottish Re Group or consolidated Scottish Annuity & Life falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company the report pursuant to Section 3.6 of this Agreement that would reflect such deficiency; (iv) there has been a material breach of any Reinsurance Agreement by the Reinsurer or an Affiliated Reinsurer, including, without limitation, failure to fund any trust as required, and such breach has not been cured within thirty (30) calendar days after notice; or (v) there has been a termination or amendment to any keepwell agreement described in Section 5.26 of the Asset Purchase Agreement without the Company's prior written consent, which consent shall not be unreasonably withheld. "Termination Date" means the date on which this Agreement is terminated in accordance with the terms and conditions of Article IX hereof. "UCC" means the New York Uniform Commercial Code. ARTICLE II BASIS OF COINSURANCE AND BUSINESS COINSURED Section 2.1. Coinsurance Funds Withheld. (a) Subject to the terms and conditions of this Agreement, the Company hereby cedes on a coinsurance funds withheld basis to the Reinsurer as of the Effective Date, and the Reinsurer hereby accepts and agrees to assume and indemnity reinsure on a coinsurance funds withheld basis as of the Effective Date, one hundred percent (100%) of all Reinsured Liabilities arising under or relating to the Covered Insurance Contracts. This Agreement is an agreement for indemnity reinsurance solely between the Company and the Reinsurer and shall not create any legal relationship whatsoever between the Reinsurer and any Person other than the Company. The reinsurance effected under this Agreement shall be maintained in force, without reduction, unless such reinsurance is terminated or reduced as provided herein. 4 (b) On and after the Effective Date, the Reinsurer will have the responsibility for paying to or on behalf of the Company, as and when due, all Reinsured Liabilities arising under or attributable to the Covered Insurance Contracts. Section 2.2. Reinsurance Coverage. In no event shall the reinsurance provided hereunder with respect to a particular Covered Insurance Contract be in force and binding unless such Covered Insurance Contract is in force and binding as of the Effective Date; provided, however, that the Covered Insurance Contracts reinsured hereunder shall include (a) all lapsed or surrendered insurance contracts subject to the reinsurance hereunder, that are reinstated in accordance with their terms on and after the Effective Date; and (b) all Unexecuted Assumed Reinsurance Contracts of the Company on a coinsurance funds withheld basis. Upon the reinstatement of any lapsed or surrendered policy included within Covered Insurance Contracts, such reinstated Covered Insurance Contract shall be automatically reinsured hereunder, when, and to the extent that, the Company is liable under such reinstated Covered Insurance Contract. Section 2.3. Reserves. On and after the Effective Date, the Reinsurer shall establish and maintain as a liability on its Statutory Financial Returns filed with the BMA, Reserves for the Covered Insurance Contracts ceded hereunder, calculated consistent with (a) the reserve requirements, Bermuda SAP and actuarial principles applicable to the Company under Bermuda Law; and (b) otherwise in accordance with any valuation bases and methods of determining Reserves that may be provided in the Covered Insurance Contracts. The Reinsurer shall also establish and maintain the DAC Asset as an admitted asset offsetting such Reserves in part on its Statutory Financial Returns. The Reinsurer shall provide the Company, no later than forty-five (45) calendar days after the end of each calendar year, with copies of all actuarial opinions and actuarial memoranda and all reserve evaluations pertaining to (i) the Reserves for the Covered Insurance Contracts, and (ii) the determination of the value of the DAC Asset, including, without limitation, any actuarial opinions and reserve evaluations performed by independent actuaries, auditors or other outside consultants. The Company agrees that the Reserves that it establishes and maintains on its Statutory Financial Returns filed with the BMA with respect to the Covered Insurance Contracts shall be consistent with the Reserves established by the Reinsurer; provided, however, that the Company may, at its own cost at any time, upon reasonable notice to the Reinsurer following the Effective Date, examine the Books and Records, and any other books and records that would have been included in the Books and Records had they been in existence on the Effective Date, maintained by the Reinsurer in accordance with the terms of this Agreement, and review the Reinsurer's reserve procedures. If as a result of such examination the Company believes that the Reserves are not consistent with the requirements of clauses (a) and (b) of the first sentence of this Section 2.3 in all material respects, or if the value of the DAC Asset is materially overstated, the Reinsurer shall, at the Company's request and expense, obtain and deliver to the Company an actuarial opinion as to the adequacy of the Reserves for the Covered Insurance Contracts, or the value of the DAC Asset, as the case may be, produced by an independent actuary reasonably acceptable to the Company. In the event that the actuarial opinion so rendered reasonably indicates a material inadequacy in the Reserves for the Covered Insurance Contracts, or in the Reinsurer's reserve procedures, or a material overstatement of the value of the DAC Asset, the Reinsurer shall promptly adjust the amount of the Reserves for the Covered Insurance Contracts or the value of the DAC Asset, and implement appropriate changes to its procedures so as to avoid inadequacies 5 in future periods; provided, however, the Reinsurer shall have the right to contest the findings of such actuarial opinion in accordance with the provisions of Article VII. Section 2.4. Insurance Contract and Reserve Assumption Changes. The Company shall not change (a) the terms and conditions of any Covered Insurance Contracts or (b) the assumptions and methods used to establish the Reserves attributable to the Covered Insurance Contracts, except as required by Applicable Law, and the Company shall notify the Reinsurer promptly upon becoming aware of the requirement to effect any such change and provide the Reinsurer the opportunity to contest such requirement. ARTICLE III TRANSFER OF ASSETS; ACCOUNTING; ADMINISTRATION Section 3.1. Payments by the Company. (a) As consideration for the Reinsurer's agreement to provide reinsurance pursuant to the Reinsurance Agreements between the Company and the Reinsurer, the Company is transferring, on the Effective Date, to the Reinsurer, the SLDI Reserve Trust Account and the SLDI Security Trust Account, as appropriate, as an initial reinsurance premium, Transferred Statutory Assets, including, without limitation, the DAC Asset, Investment Assets, and cash having a value determined in accordance with Section 2.4(d) of the Asset Purchase Agreement. (b) The Reinsurer shall be entitled prior to the Recapture Date, as additional reinsurance premium, to payment of amounts equal to Premiums received by the Company on and after the Effective Date that are attributable to the Covered Insurance Contracts provided, however, that following the occurrence of a Triggering Event, the Company shall be entitled to retain such amounts as funds withheld under this Agreement, provided further, however, that such funds may be used by the Company as set forth in Section 4.7 of this Agreement, and any amount remaining upon termination of this Agreement pursuant to Section 9.1, other than as a result of a recapture, shall be paid to the Reinsurer. Any funds withheld pursuant to this Section 3.1(b) shall be credited against the Required Balance. For the avoidance of doubt, the parties acknowledge and agree that the Company retains all right, title and interest to all Premiums and other amounts received with respect to the Covered Insurance Contracts, subject to its contractual obligations under this Agreement to pay corresponding amounts over to the Reinsurer in accordance with Section 3.2 hereof. (c) To the extent that the Company recovers amounts from any third party relating to the Business attributable to the Covered Insurance Contracts (including, without limitation, Premiums in arrears from a policyholder or ceding company with respect to a reinstated Covered Insurance Contract, litigation recoveries, premium and reinsurance recoverables), the Company shall transfer such amounts to the Reinsurer and provide the Reinsurer with any pertinent information that the Company may have relating thereto in accordance with Section 3.2 hereof. Section 3.2. Funds Withheld Account. (a) The Company shall maintain a funds withheld account payable to the Reinsurer on its books during the term of this Agreement (the "Funds Withheld Account"). The 6 aggregate amount maintained by the Company on its books as a receivable for funds held by or deposited with ceding companies under the Covered Insurance Contracts at any time shall be the "Funds Withheld Balance" at such time. (b) Simultaneously with the payment of the initial reinsurance premium pursuant to Section 3.1(a), the Company shall withhold from the Reinsurer an amount equal to the amount maintained by the Company on its books as a receivable for funds held by or deposited with ceding companies under the Covered Insurance Contracts as of the Effective Date as the initial Funds Withheld Balance. (c) During the term of this Agreement, the Funds Withheld Balance as of the last day of any relevant accounting period shall be determined according to the terms of the Covered Insurance Contracts as if the Reinsurer was in the Company's position under each Covered Insurance Contract and the Company was in the ceding company's position under each such Covered Insurance Contract; provided, however, the Funds Withheld Balance may not be less than zero (0). In connection with the quarterly accounting pursuant to the Administrative Services Agreement, (i) the Company will pay to the Reinsurer any net amount the Company receives from the ceding companies under the Covered Insurance Contracts, including without limitation any cash settlement under the funds withheld accounts, and (ii) the Reinsurer will pay to the Company any net amount the Company is obligated to pay to the ceding companies under the Covered Insurance Contracts, including without limitation any cash settlement under the funds withheld accounts. Notwithstanding anything to the contrary in the foregoing sentences, the amount of any change in the "Reinsurance IMR" as defined in the SLD-SLDI Retrocession Agreements (as modified, amended or restated) and any investment income on such Reinsurance IMR shall be retained by the Company and shall not be included in any settlement between the Company and the Reinsurer. Section 3.3. Delayed Payments. If there is a delayed settlement of any payment due hereunder, interest will accrue on such payment at the 180-Day Treasury Rate then in effect until settlement is made. For purposes of this Section 3.3, a payment will be considered overdue, and such interest will begin to accrue, on the first day immediately following the date such payment is due. For greater clarity, (i) a payment shall be deemed to be due hereunder on the last date on which such payment may be timely made under the applicable provision, and (ii) interest will not accrue on any payment due the Reinsurer hereunder unless the delayed settlement thereof was caused by the Company. Section 3.4. Offset and Recoupment Rights. Any debits or credits incurred on and after the Effective Date in favor of or against either the Company or Reinsurer with respect to this Agreement or any other reinsurance agreements or trust agreements that constitute Related Agreements or otherwise are deemed mutual debits or credits, as the case may be, shall be set off and recouped, and only the net balance shall be allowed or paid. This Section 3.4 shall apply notwithstanding the existence of any insolvency, rehabilitation, conservatorship or comparable proceeding by or against the Company or the Reinsurer. Section 3.5. Administration. The Reinsurer will administer, or cause the administration of, the Covered Insurance Contracts and provide quarterly accountings with respect thereto to the Company in accordance with the Administrative Services Agreement. All 7 reports, remittances and payments due to or from a party hereto shall be made in accordance with the procedures set forth in the Administrative Services Agreement. Section 3.6. Certain Reports. (a) Not later than sixty (60) calendar days after the end of each calendar year, and forty-five (45) days after the end of any calendar quarter other than the quarter ending on December 31, the Reinsurer shall provide to the Company a calculation of (x) the risk based capital of each entity identified in Clause (ii) of the definition of the Triggering Event, and (y) the capital adequacy ratio calculated as set forth on Schedule 1.1(b) of the entities identified in Clause (iii) of the definition of Triggering Event. Each such calculation shall include reasonable supporting detail. (b) The Reinsurer shall also provide written notice of the occurrence of any Triggering Event within two (2) Business Days after its occurrence. The Company may, at its own expense, review Reinsurer's or an Affiliated Reinsurer's books and records reasonably necessary to confirm the calculations provided by Reinsurer pursuant to this Section 3.6(b). In addition, Reinsurer shall cooperate fully with the Company and promptly respond to the Company's reasonable inquiries from time to time concerning the determination of whether a Triggering Event has occurred. ARTICLE IV REINSURANCE CREDIT; SECURITY Section 4.1. Licenses. At all times during the term of this Agreement, the Reinsurer shall hold and maintain all licenses and authorizations required under Bermuda Law and otherwise take all action that may be necessary (i) so that the Company shall receive full reserve credits for reinsurance ceded under this Agreement in the Statutory Financial Return filed with the BMA, and (ii) to perform its obligations hereunder. Section 4.2. Security. In accordance with the Asset Purchase Agreement, the Reinsurer, as grantor, is creating the SLDI Reserve Trust Account with a trustee approved by the Company, naming the Company as sole beneficiary thereof. The SLDI Reserve Trust Account shall initially be funded with Investment Assets and cash transferred from the Company. In accordance with the SLDI Reserve Trust Agreement, the Reinsurer hereby pledges the assets in the SLDI Trust Account to perfect a first priority security interest in favor of the Company under Article 9 of the UCC. During the term of the SLDI Reserve Trust Agreement, the Reinsurer shall not, and shall direct that the trustee shall not, grant or cause to be created in favor of any third person any security interest whatsoever in any of the assets in the SLDI Trust Accounts. Section 4.3. SLDI Reserve Trust Agreement. The trustee shall hold assets in the SLDI Reserve Trust Account pursuant to the terms of the SLDI Reserve Trust Agreement. The fair market value of assets in the SLDI Reserve Trust Account shall be not less than the Reserves attributable to the Covered Insurance Contracts and to the "Reserves" under the other Insurance Contracts reinsured by the Reinsurer on a coinsurance basis under the other Reinsurance Agreements between the Company and the Reinsurer, net of the aggregate value of the DAC Asset that is attributable to all Covered Insurance Contracts under the Reinsurance 8 Agreements between the Company and the Reinsurer and net of the Funds Withheld Balance hereunder (such net amount being the "Required Balance"). Section 4.4. Investment of Trust Assets. The assets held in the SLDI Reserve Trust Account shall be valued at their fair market value as of the date as of which such assets are required to be valued. The assets that may be held in the SLDI Reserve Trust Account (the "Eligible Assets") shall consist of cash and investments of the type permitted by Bermuda Law; provided, that (i) each such investment that is a security is issued by an institution that is not the Reinsurer, the Company or an Affiliate of either party, and (ii) such investments comply with the requirements specified by the Eligible Asset Guidelines as set forth on Schedule 4.4. Section 4.5. Deposit of Assets. Prior to depositing assets in the SLDI Reserve Trust Account, Reinsurer will execute assignments or endorsements in blank, or transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the direction of the Company, may whenever necessary negotiate these assets without the consent or signature from the Reinsurer or any other entity. Section 4.6. Adjustment of Security and Withdrawals. The Reinsurer shall maintain Eligible Assets in the SLDI Reserve Trust Account with an aggregate fair market value at least equal to the Required Balance. The amount of assets held in the SLDI Reserve Trust Account shall be adjusted following the end of each calendar quarter. (a) If the aggregate fair market value of the Eligible Assets held in the SLDI Reserve Trust Account at the end of any calendar quarter is less than the Required Balance, the Reinsurer shall, no later than fifteen (15) calendar days following delivery of the reserve report included in the quarterly report provided pursuant to the Administrative Services Agreement, transfer additional Eligible Assets to the SLDI Reserve Trust Account so that the aggregate fair market value of the Eligible Assets held in the SLDI Reserve Trust Account is not less than the Required Balance. (b) If the aggregate fair market value of the Eligible Assets in the SLDI Reserve Trust Account at the end of any calendar quarter exceeds 102% of the Required Balance, then the Reinsurer shall have the right to seek approval (which shall not be unreasonably or arbitrarily withheld) from the Company to withdraw the excess. For the purposes of the foregoing sentence, in the event that a Triggering Event has occurred, the parties acknowledge and agree that it shall not be unreasonable for the Company to withhold its consent to any such withdrawal. Section 4.7. Withdrawals by the Company. The Company may withdraw the assets held in the SLDI Reserve Trust Account at any time and from time to time, notwithstanding any other provisions of this Agreement, and assets withdrawn from such SLDI Reserve Trust Account shall be utilized and applied by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company), without diminution because of insolvency on the part of the Company or the Reinsurer; provided however, that following any such withdrawal the Company (or any successor by operation of law of the Company, including, but not limited to, 9 any liquidator, rehabilitator, receiver or conservator of the Company) may only apply such assets for one or more of the following purposes: (a) to pay, or reimburse the Company for payment of, Premiums received by Reinsurer hereunder which are to be returned to policyholders or ceding companies because of cancellations of Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; (b) to pay, or reimburse the Company for payment of, surrenders, benefits, losses or other amounts payable pursuant to the provisions of the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis; and (c) to fund an account with the Company in an amount no less than the deduction, for reinsurance ceded, from the Company's liabilities for the Reserves to be maintained with respect to the Covered Insurance Contracts reinsured hereunder and any other "Covered Insurance Contracts" under any other Reinsurance Agreements between the Company and the Reinsurer that are reinsured on a coinsurance basis. Section 4.8. Assets in Trust of the Company. Any assets deposited into an account of the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) pursuant to Section 4.7(c), and any interest or other earnings thereon shall be held by the Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) in trust for the benefit of the Reinsurer, subject to the Company's right to apply such assets to amounts due and payable by the Reinsurer to the Company under this Agreement, and shall at all times be maintained, separate and apart from any assets of the Company, for the sole purpose of funding the payments and reimbursements described in Sections 4.7(a) through (c), inclusive, of this Article IV. Section 4.9. Compliance by the Company. The Company (or any successor by operation of law of the Company, including, but not limited to, any liquidator, rehabilitator, receiver or conservator of the Company) shall ensure that any assets held in trust pursuant to Section 4.7(c) comply with the provisions of Sections 4.4, 4.7(a) and 4.7(b) in accordance with its fiduciary obligations as trustee with respect to such amounts. Section 4.10. Reports. At the Company's request, the Reinsurer shall provide the Company with its audited Annual Statutory Financial Return along with the audit report thereon, as well as any quarterly reports required to be filed by the Reinsurer. ARTICLE V OVERSIGHTS; COOPERATION; REGULATORY MATTERS Section 5.1. Oversights. Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from 10 any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery, and provided, further, that the party making such error or omission or responsible for such delay shall be responsible for any additional liability which attaches as a result. If (a) the failure of either party to comply with any provision of this Agreement is unintentional or the result of a misunderstanding or oversight and (b) such failure to comply is promptly rectified, both parties shall be restored as closely as possible to the positions they would have occupied if no error or oversight had occurred. Section 5.2. Cooperation. Each party hereto shall cooperate fully with the other in all reasonable respects in order to accomplish the objectives of this Agreement. Section 5.3. Regulatory Matters. If the Company or the Reinsurer receives notice of, or otherwise becomes aware of, any regulatory inquiry, investigation or proceeding relating to the Covered Insurance Contracts, the Company or the Reinsurer, as applicable, shall promptly notify the other party thereof, whereupon the parties shall cooperate in good faith and use their respective commercially reasonable efforts to resolve such matter in a mutually satisfactory manner, in light of all the relevant business, regulatory and legal facts and circumstances. ARTICLE VI DAC TAX Section 6.1. Election. (a) All uncapitalized terms used herein shall have the meanings set forth in the regulations under Section 848 of the Code. (b) Each of the Company and the Reinsurer acknowledges that it is subject to taxation under Subchapter L of the Code and hereby makes the election contemplated by Section 1.848-2(g)(8) of the Treasury Regulations with respect to this Agreement. Each of the Company and the Reinsurer (i) agrees that such election is effective for the taxable year of each party that includes the Effective Date and for all subsequent years during which this Agreement remains in effect and (ii) warrants that it will take no action to revoke the election. (c) Pursuant to Section 1.848-2(g)(8) of the Treasury Regulations, each of the Company and the Reinsurer hereby agrees (i) to attach a schedule to its federal income tax return for its first taxable year ending on or after the Effective Date that identifies this Agreement as a reinsurance agreement for which the joint election under Section 1.848-2(g)(8) has been made, (ii) that the party with net positive consideration for this Agreement for each taxable year will capitalize its specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1) of the Code, and (iii) to exchange information pertaining to the amount of net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service. The Reinsurer shall prepare and execute duplicate copies of the schedule described in the preceding sentence as soon as practicable after the Effective Date and submit them to the Company for execution. The 11 Company shall execute the copies and return one of them to the Reinsurer within thirty (30) calendar days of the receipt of such copies. (d) The Company shall submit a schedule to the Reinsurer by May 1 of each year of its calculation of the net consideration under this Agreement for the preceding taxable year. This schedule of calculations shall be accompanied by a statement signed by an authorized representative of the Company stating that the Company shall report such net consideration in its federal income tax return for the preceding taxable year. (e) The Reinsurer may contest such calculation by providing an alternative calculation to the Company in writing within thirty (30) calendar days after the date on which the Reinsurer receives the Company's calculation. If the Reinsurer does not so notify the Company, the Reinsurer shall report the net consideration under this Agreement as determined by the Company in the Reinsurer's federal income tax return for the preceding taxable year. (f) If Reinsurer contests the Company's calculation of the net consideration under this Agreement, the parties shall act in good faith to reach an agreement as to the correct amount of net consideration within thirty (30) calendar days after the date on which the Reinsurer submits its alternative calculation. If Reinsurer and the Company reach an agreement as to the amount of net consideration under this Agreement, each party shall report such amount in its federal income tax return for the preceding taxable year. If, during such period, Reinsurer and the Company are unable to reach an agreement, they shall promptly thereafter cause Deloitte & Touche USA LLP (the "Independent Accountants") to promptly review (which review shall commence no later than five (5) calendar days after the selection of the Independent Accountants) this Agreement and the calculations of Reinsurer and the Company for the purpose of calculating the net consideration under this Agreement. In making such calculation, the Independent Accountants shall consider only those items or amounts in the Company's calculation as to which the Reinsurer has disagreed. The Independent Accountants shall deliver to Reinsurer and the Company, as promptly as practicable (but no later than thirty (30) calendar days after the commencement of their review), a report setting forth such calculation, which calculation shall result in a net consideration between the amount thereof shown in the Company's calculation delivered pursuant to Section 6.1(d) and the amount thereof shown in Reinsurer's calculation delivered pursuant to Section 6.1(e). Such report shall be final and binding upon Reinsurer and the Company. The fees, costs and expenses of the Independent Accountants shall be borne (i) by the Company if the difference between the net consideration as calculated by the Independent Accountants and the Company's calculation delivered pursuant to Section 6.1(d) is greater than the difference between the net consideration as calculated by the Independent Accountants and Reinsurer's calculation delivered pursuant to Section 6.1(e), (ii) by the Reinsurer if the first such difference is less than the second such difference, and (iii) otherwise equally by Reinsurer and the Company. 12 ARTICLE VII ARBITRATION Section 7.1. Arbitration. (a) After the Closing Date, any dispute between the parties with respect to the calculation of amounts that are to be calculated, reported, or that may be audited pursuant to this Agreement (other than disputes relating to: (i) the SLDI Closing Statement and the assets to be transferred to the Reinsurer, the SLDI Reserve Trust Account and the SLDI Security Trust Account pursuant to Article II of the Asset Purchase Agreement, which shall be resolved in accordance with the Asset Purchase Agreement; (ii) calculations relating to DAC tax, which shall be resolved in accordance with Article VI hereof, or (iii) matters relating to whether a Triggering Event has occurred), shall be decided through negotiation and, if necessary, arbitration as set forth in Section 7.2. (b) The parties intend this Section 7.1 to be enforceable in accordance with the Bermuda International Conciliation and Arbitration Act 1993, including any amendments to such law which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 7.1(a), the other party may request the court specified in Section 11.4 to compel arbitration. Section 7.2. Arbitration Procedure. The Company and Reinsurer intend that any dispute between them arising under this Agreement (excluding those disputes identified in Section 7.1(a)) be resolved without resort to any litigation. Accordingly, the Company and Reinsurer agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, the Company and Reinsurer agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Supplementary Rules for the Resolution of Intra-Industry U.S. Reinsurance and Insurance Disputes of the American Arbitration Association. The arbitration hearing will be before a panel of three (3) disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of the Company or any of its Affiliates. The Company and Reinsurer will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either the Company or Reinsurer fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the Appointment Committee of the Chartered Institute of Arbitrators (Bermuda Branch) will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. 13 The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including, without limitation, each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either the Company or Reinsurer) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 11.4. No such award or judgment will bear interest except as provided in Section 3.2. In no event may the arbitrators award punitive or exemplary damages. Each party will be responsible for paying (a) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (b) one-half of the fees and expenses charged by each arbitrator. ARTICLE VIII INSOLVENCY Section 8.1. Insolvency of the Company. In the event of the insolvency of the Company, all coinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the Reinsurer directly to the Company or to its statutory liquidator, receiver or statutory successor on the basis of the liability of the Company under the Covered Insurance Contracts without diminution because of the insolvency of the Company. It is understood, however, that in the event of the insolvency of the Company, the liquidator, receiver or statutory successor of the Company shall give written notice of the pendency of a claim against the Company on a Covered Insurance Contract within a reasonable period of time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. It is further understood that the expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. ARTICLE IX DURATION; RECAPTURE Section 9.1. Duration. This Agreement shall continue in force until such time as (i) the Company's liability with respect to all Covered Insurance Contracts reinsured hereunder is terminated in accordance with their respective terms, or the Company has elected to recapture the reinsurance of Covered Insurance Contracts following the occurrence of a Triggering Event, and (ii) the Company has received payments which discharge such liability in full in accordance with the provisions of this Agreement. In no event shall the interpretation of this Section 9.1 imply any unilateral right of the Reinsurer to terminate this Agreement; provided, however, that in the event that the Company fails to timely pay any material amount due the Reinsurer hereunder, and such amount remains unpaid for thirty (30) days, the Reinsurer 14 shall have the right to terminate reinsurance hereunder upon the end of such period. In such case, the provisions of Section 9.3 shall apply as if the Termination Date were a Recapture Date and the Reinsurer shall be relieved of all liability under this Agreement to make future payments to the Company. Section 9.2. Survival. Notwithstanding the other provisions of this Article IX, the terms and conditions of Articles I, VI and X and the provisions of Sections 11.1, 11.4, 11.6, 11.9 and 11.10 shall remain in full force and effect after the Termination Date. Section 9.3. Recapture. Upon the occurrence of a Triggering Event, the Company shall have the right to recapture all, and not less than all, of the reinsurance ceded under this Agreement, by providing the Reinsurer with written notice of its intent to effect recapture. Recapture of the Covered Insurance Contracts shall be effective on the tenth (10th) day following the day on which the Company has provided the Reinsurer with such notice (the "Recapture Date"). Section 9.4. Recapture Payments. On the Recapture Date, the Company shall be entitled to withdraw an amount equal to a portion of the Required Balance attributable to the Covered Insurance Contracts reinsured hereunder from the SLDI Reserve Trust as consideration for assumption by the Company of the Reinsured Liabilities under the recaptured Covered Insurance Contracts. In the event that the fair market value of the assets in the SLDI Reserve Trust exceeds the Required Balance (the "Excess Amount"), and the fair market value of the assets in the SLDI Security Trust Account is less than the amount required by Exhibit A to the SLDI Security Trust Agreement on the Recapture Date (the "Shortfall Amount"), the Company shall also be permitted to withdraw such Excess Amount equal to the pro-rata portion of the Shortfall Amount attributable to the Covered Insurance Contracts reinsured hereunder. In addition, the Company shall be entitled to withdraw a pro-rata portion of the remaining balance in the SLDI Security Trust Account attributable to the Covered Insurance Contracts hereunder less any amounts owed to the Reinsurer under this Agreement as of the Recapture Date. ARTICLE X INDEMNIFICATION Section 10.1. Reinsurer's Obligation to Indemnify. The Reinsurer hereby agrees to indemnify, defend and hold harmless the Company and its Affiliates and their respective directors, officers and employees (collectively, the "Company Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Company to the extent arising from (i) any breach of the representations, warranties, and covenants of the Reinsurer contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee, agent, representative, successor, or permitted assign of the Company or any of its Affiliates, unless such person is acting at the direction or request of the Reinsurer, and (ii) any successful enforcement of this indemnity. Section 10.2. Company's Obligation to Indemnify. The Company hereby agrees to indemnify, defend and hold harmless the Reinsurer and its Affiliates and their 15 respective directors, officers and employees (collectively, the "Reinsurer Indemnified Parties") from and against all losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages reasonably and actually incurred by the Reinsurer to the extent arising from (i) any breach of the representations, warranties and covenants of the Company contained in this Agreement, except to the extent that such losses, liabilities, claims, expenses (including reasonable attorneys' fees and expenses) and damages are attributable to acts or omissions of a person who is a director, officer, employee (other than in such employee's capacity as an employee of the Company), agent, representative, successor, or permitted assign of the Reinsurer or any of its Affiliates, and (ii) any successful enforcement of this indemnity. Section 10.3. Certain Definitions and Procedures. In the event either the Reinsurer or the Company shall have a claim for indemnity against the other party under the terms of this Agreement, the parties shall follow the procedures set forth in Article X of the Asset Purchase Agreement. ARTICLE XI MISCELLANEOUS Section 11.1. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified, postage prepaid, or by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: To Company: Security Life of Denver International Limited Attention: President c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 16 To the Reinsurer: Scottish Re Life (Bermuda) Limited Crown House, Third Floor 4 Par-la-ville Road Hamilton HM 08 Bermuda Attention: General Counsel With a concurrent copy to: Scottish Re (U.S.), Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel and Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP 125 W. 55th Street New York, NY 10019 Section 11.2. Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the other Related Agreements and the Confidentiality Agreement, and other documents delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements understanding negotiations, discussions, whether oral or written, of the parties and there are no general or specific warranties, representations or other agreements by or among the parties in connection with the entering into of this Agreement or the subject matter hereof except as specifically set forth or contemplated herein. Section 11.3. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 11.4. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in New York, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by hand in Bermuda, addressed to such party, with a concurrent copy by U.S. registered mail, shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such 17 action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. Section 11.5. No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. Section 11.6. Expenses. Except as otherwise provided herein, the parties hereto shall each bear their respective expenses incurred in connection with the negotiation, preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of counsel, actuaries and other representatives. Section 11.7. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. Section 11.8. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. Section 11.9. Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any first party action filed by the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby. Section 11.10. Treatment of Confidential Information. (a) The parties agree that, other than as contemplated by this Agreement and to the extent permitted or required to implement the transactions contemplated by this Agreement, the parties will keep confidential and will not use or disclose the other party's Confidential Information and the terms and conditions of this Agreement, including, without limitation, the exhibits and schedules hereto, except as otherwise required by Applicable Law or 18 any order or ruling of any state insurance regulatory authority, the Securities and Exchange Commission or any other Governmental Authority. (b) The confidentiality obligations contained in this Agreement or in any other agreement between the parties hereto, as they relate to the reinsurance hereunder, shall not apply to the federal tax structure or federal tax treatment of this Agreement and each party hereto may disclose to any and all persons, without limitation of any kind, the federal tax structure and federal tax treatment of this Agreement; provided, that such disclosure may not be made until the earliest of (x) the date of the public announcement of discussions relating to this Agreement, (y) the date of the public announcement of this Agreement, or (z) the date of the execution of this Agreement. The preceding sentence is intended to cause this Agreement to be treated as not having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the Internal Revenue Code of 1986, as amended, and shall be construed in a manner consistent with such purpose. Subject to the provision with respect to disclosure in the first sentence of this subsection (b), each party hereto acknowledges that it has no proprietary or exclusive rights to the federal tax structure of this Agreement or any federal tax matter or federal tax idea related to this Agreement. Section 11.11. Assignment. This Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Except as provided below in this Section 11.11, neither party may assign any of its duties or obligations hereunder without the prior written consent of the other party. The Reinsurer shall be entitled to assign its administrative duties hereunder without the prior written consent of the Company, unless the person or entity to whom such duties are to be assigned is not, at the time of such assignment, a subsidiary of the Reinsurer, in which event the Reinsurer shall obtain the prior written consent of the Company, such consent not to be unreasonably withheld. Section 11.12. Service of Process. The Reinsurer hereby designates The Corporation Trust Company as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company. ARTICLE XII REPRESENTATIONS, WARRANTIES AND COVENANTS Section 12.1. Representations, Warranties, and Covenants of the Reinsurer. For purposes of perfecting the security interest in the SLDI Reserve Trust Account and the SLDI Security Trust Account, the Reinsurer hereby represents and warrants to the Company, and covenants for the benefit of the Company, as follows: (a) The Reinsurer is a stock insurance company organized under the laws of Bermuda. From the date of creation until the date hereof, the chief executive office of the Reinsurer within the meaning of section 9-307 of the UCC has been (and, immediately following the date hereof, will be) located in Hamilton, Bermuda. The Reinsurer shall not change its jurisdiction of organization or its chief executive office (within the meaning of section 9-307 of the UCC), except upon thirty (30) calendar days' prior written notice to the Company. In the event that the Reinsurer changes its jurisdiction of organization or the location of its chief 19 executive office, it will only change to a jurisdiction of organization or change the location of its chief executive office to a jurisdiction in the United States. The Reinsurer's true corporate name, as reflected in its organization documents of record in Bermuda, is (and, for the past five years, has been) that set forth in the preamble hereto. (b) The Reinsurer owns and will own its interest in the assets in the SLDI Reserve Trust Account and the SLDI Security Trust Account free and clear of any security interest in, or lien or adverse claim on, such assets. From and after the date hereof, the Reinsurer will not authorize the filing of any other financing statement with respect to any asset in the SLDI Reserve Trust Account or the SLDI Security Trust Account, nor authorize the granting of "control" (as defined in the UCC) over any of such asset to any Person other than the Company. From and after the date hereof, the Reinsurer will not grant any further security interest in, or lien on, the assets in the SLDI Reserve Trust Account or the SLDI Security Trust Account. (c) The Reinsurer will do, execute or otherwise authenticate, acknowledge and deliver, or cause to be done, executed or otherwise authenticated, acknowledged and delivered, such instruments of transfer or other records, and take such other steps or actions, as the Company may reasonably deem necessary to create, perfect or preserve the security interest granted to the Company by Section 4.2 hereof and under the SLDI Security Trust Agreement or to ensure that such security interest remains prior to any and all other security interests, liens or other interests of any other Person; and the Reinsurer hereby authorizes the Company, in the Reinsurer's name or otherwise, to take, or cause to be taken, any of the foregoing steps or actions upon any failure by the Reinsurer to comply with any written request of the Company in respect of any matter subject to this Section 12.1(c). [The rest of this page intentionally left blank.] 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective December 31, 2004. SECURITY LIFE OF DENVER INTERNATIONAL LIMITED By: /s/ David Pendergrass ----------------------------------------- Name: David Pendergrass Title: Vice President SCOTTISH RE LIFE (BERMUDA) LIMITED By: /s/ Elizabeth Murphy ----------------------------------------- Name: Elizabeth Murphy Title: CFO EX-10.55 17 ex10-55.txt RESERVE TRUST AGREEMENT RESERVE TRUST AGREEMENT Dated as of December 31, 2004 SCOTTISH RE LIFE (BERMUDA) LIMITED as Grantor and SECURITY LIFE OF DENVER INTERNATIONAL LIMITED as Beneficiary and THE BANK OF NEW YORK as Trustee and THE BANK OF NEW YORK as Securities Intermediary TABLE OF CONTENTS Page Section 1. Deposit of Assets to the Reserve Trust Account....................1 Section 2. Withdrawal of Assets from the Reserve Trust Account...............4 Section 3. Procedure for Withdrawals of Assets; Certain Covenants............5 Section 4. Redemption, Investment and Substitution of Assets.................5 Section 5. The Income Account................................................6 Section 6. Right to Vote Assets..............................................6 Section 7. Additional Rights and Duties of the Trustee.......................7 Section 8. The Trustee's Compensation, Expenses and Indemnification.........10 Section 9. Resignation of the Trustee.......................................11 Section 10. Termination of the Reserve Trust Account.........................12 Section 11. Definitions......................................................12 Section 12. Governing Law....................................................14 Section 13. Successors and Assigns...........................................14 Section 14. Severability.....................................................14 Section 15. Entire Agreement.................................................14 Section 16. Amendments.......................................................15 Section 17. Notices, etc.....................................................15 Section 18. Headings.........................................................16 Section 19. Counterparts.....................................................16 EXHIBITS - -------- A - Investment Guidelines RESERVE TRUST AGREEMENT THIS RESERVE TRUST AGREEMENT, dated as of December 31, 2004 (this "Agreement"), by and among Scottish Re Life (Bermuda) Limited, a Bermuda-domiciled life insurance company (hereinafter the "Grantor"), Security Life of Denver International Limited, a Bermuda-domiciled life insurance company (such insurer and its successors by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator thereof, being hereinafter referred to as the "Beneficiary"), The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as trustee, being referred to as the "Trustee"), and The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as securities intermediary, being referred to as the "Securities Intermediary"). RECITALS WHEREAS, the Grantor desires to establish with the Trustee a trust account (the "Reserve Trust Account") and transfer to the Trustee for deposit in the Reserve Trust Account cash and other Assets (as hereinafter defined) to be made subject to this Agreement in order to secure payments of certain amounts at any time and from time to time owing by Grantor to the Beneficiary; and WHEREAS, the Trustee has agreed to act as Trustee hereunder and, in accordance with the terms hereof, to hold cash or other Assets in trust in the Reserve Trust Account on the terms herein set forth; and WHEREAS, this Agreement is made for the sole use and benefit of the Beneficiary and for the purpose of setting forth the duties and powers of the Trustee with respect to the Trust Account. NOW, THEREFORE, for and in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Deposit of Assets to the Reserve Trust Account. (a) Concurrently with the execution and delivery of this Agreement, the Grantor hereby establishes a Reserve Trust Account, and the Trustee hereby accepts the Reserve Trust Account herein created and declared upon the terms provided herein and shall administer the Reserve Trust Account as Trustee, and with respect to the security interest granted in Section 1(f) hereof, as secured party for the exclusive use and benefit of the Beneficiary. The Grantor shall establish and the Trustee shall maintain the Reserve Trust Account as a securities account at The Bank of New York as Securities Intermediary with regard to the Reserve Trust Account. The Trustee shall be the entitlement holder with respect to the Reserve Trust Account. The Reserve Trust Account is established for the exclusive use and benefit of the Beneficiary and shall be subject to withdrawal by the Beneficiary at any time, as provided herein. The Trustee and its lawfully appointed successors are authorized and shall have power to receive such cash and Eligible Assets as the Grantor transfers to or vest in the Trustee or places under the Trustee's possession and control, and to hold, invest, reinvest, manage and dispose of the same for the uses and purposes and in the manner and according to the provisions hereinafter set forth. All such trusteed Eligible Assets at all times shall be maintained as a trust account, separate and distinct from all other assets of the Trustee, and shall be continuously maintained by the Trustee. (b) The Grantor shall transfer to the Trustee, for deposit to the Reserve Trust Account cash (United States legal tender) and Eligible Assets as it may from time to time be required to deposit by this Agreement or otherwise (all such Eligible Assets actually received in the Reserve Trust Account and proceeds thereof as well as amounts transferred under Sections 3 and 4 and reinvestments thereof are "Assets"). (c) The Grantor hereby represents, warrants and covenants (i) that any Assets transferred by the Grantor to the Trustee for deposit to the Reserve Trust Account will be in such form that the Beneficiary and the Trustee, upon written direction by the Beneficiary, may freely and unconditionally negotiate any such Assets without notice to the Grantor or consent or signature from the Grantor to any Person; and (ii) that all Assets transferred by the Grantor to the Trustee for deposit to the Reserve Trust Account will consist only of Eligible Assets. Prior to depositing Eligible Assets into the Reserve Trust Account, the Grantor shall, as necessary, execute any assignments, endorsements in blank or such other documents required to transfer legal title of Eligible Assets requiring such to the Trustee. (d) All Assets in the Reserve Trust Account shall be valued at their current fair market value in U.S. dollars as determined by the Trustee in its sole discretion exercised in a reasonable manner as described below. Within ten (10) Business Days after the end of each month the Trustee shall send to the Beneficiary and the Grantor a written report regarding the valuation of the Assets at the end of such month (the "Valuation Report"). Each Valuation Report shall include a fair market value valuation of all Assets in the Trust Account in accordance with the asset prices provided by the market makers or such other appropriate independent sources of valuation as recommended in writing to the Trustee by the Grantor's investment manager or, in their absence, by an independent nationally recognized pricing service to which the Trustee subscribes in the normal conduct of its business (e.g., Interactive Data, Merrill Lynch, Bloomberg, Lehman Brothers, etc.). Subject to the Trustee's own negligence, lack of good faith or willful misconduct, the Trustee shall not be liable for incorrect fair market value of Assets caused by the use of inaccurate or erroneous prices provided by such pricing services or sources. If the price is not available as set forth above, the Trustee can obtain the price by retaining, at the expense of the Grantor and pursuant to the written -2- recommendation of the Grantor's investment manager, a major independent securities valuation firm to appraise the value of such Assets. If the Grantor or the Beneficiary disputes the fair market value of the Assets in the Security Trust Account as set forth in the Valuation Report, then within ten (10) Business Days following receipt of the Valuation Report, the Grantor or the Beneficiary, as the case may be, will notify the other party of its dispute regarding the valuation (the "Valuation Dispute Notice"). The Valuation Dispute Notice shall contain sufficient information to support the disputing party's valuation. The Trustee shall not be a party to any dispute between the Grantor and Beneficiary relating to the valuation of Assets set forth in the Valuation Report, but shall be provided with a copy of any Valuation Dispute Notice delivered by the Grantor or Beneficiary under this provision. The non-disputing party has five (5) Business Days from the receipt of the Valuation Dispute Notice to agree with the disputing party's valuation or provide its own reasonable valuation of the specific Assets in dispute (the "Asset Response"). During no more than four (4) Business Days after the Asset Response, the parties to the dispute will continue to work to resolve the disagreement, failing which they shall disclose to each other their final and last best proposal ("Proposal" as hereinafter defined) no later than the end of such four (4) Business Day period. For purposes hereof, a "Proposal" of a party to the dispute shall consist of the valuation correction and related information supporting the valuation correction. If no resolution of disagreements is reached on or prior to the Business Day following such four (4) Business Days, the parties to the dispute will on such next following Business Day submit their final and last best Proposal (previously disclosed to the other party as provided above) to arbitration by a major independent securities valuation firm, the identity of which shall be mutually agreed, and the parties to the dispute will abide by the result of such arbitration, which arbitration process shall require the arbitrator to select one of the two final and last best Proposals and to render its opinion regarding the reasonableness of the parties' actions for purposes of the next sentence. The cost of such arbitration shall be borne by the party who delivered the Valuation Dispute Notice if it rejects a reasonable Asset Response and otherwise the cost shall be shared equally by the Beneficiary and Grantor. To the extent feasible, and at the joint written direction of the Grantor and the Beneficiary, the Trustee shall adopt the valuation methodology underlying the valuation adopted in arbitration or agreed to by the Beneficiary and the Grantor. Pending resolution of any dispute with respect to valuation of Assets, the Grantor and Beneficiary will continue to follow the requirements of this Agreement based on the Trustee's Valuation Report as submitted. Upon resolution of any dispute regarding the valuation, the Trustee will take the action hereunder that it would otherwise have been required to take, if any. (e) All Assets held within the Trust Account shall consist only of cash and Eligible Assets and shall be invested in accordance with the investment guidelines attached hereto at Exhibit A (the "Investment Guidelines"). (f) The Grantor hereby grants to the Trustee, as agent of and as secured party for the exclusive benefit of the Beneficiary, a security interest in the -3- Grantor's right, title and interest in and to the Reserve Trust Account and the Assets, including without limitation any residual interest therein. The Trustee, as entitlement holder for the benefit of the Beneficiary of all rights associated with the Assets and the Reserve Trust Account, shall have control of the Assets and the Reserve Trust Account for the purpose of perfecting the interest granted hereby and shall issue entitlement orders to the Securities Intermediary as instructed by the Grantor and the Beneficiary in accordance with the terms of this Agreement. The Grantor hereby authorizes the Beneficiary to file or to instruct the Trustee to file UCC - 1 Financing Statements with respect to the Reserve Trust Account and the Assets for which such a financing statement is appropriate, and hereby appoints the Beneficiary as attorney-in-fact for the purpose of signing Grantor's name on any such financing statements. The Trustee shall at the written direction of the Beneficiary, file the completed UCC - 1 Financing Statements delivered to the Trustee by the Beneficiary with respect to the Reserve Trust Account and the Assets. Section 2. Withdrawal of Assets from the Reserve Trust Account. The Beneficiary shall have the right, at any time and from time to time, without the consent of, or notice to, the Grantor, to withdraw from the Reserve Trust Account, by providing written notice to the Trustee of such withdrawal (the "Withdrawal Notice") (of which the Trustee promptly shall forward a copy to the Grantor), such amounts as are specified in such Withdrawal Notice. The Withdrawal Notice may designate a third party (the "Designee") to whom amounts specified therein shall be delivered. The Beneficiary need present no statement or document in addition to a Withdrawal Notice in order to withdraw any Assets; nor is such right of withdrawal or any other provision of this Agreement subject to any conditions or qualifications. -4- Section 3. Procedure for Withdrawals of Assets; Certain Covenants. (a) Following receipt of a Withdrawal Notice and in accordance with Section 2, the Trustee shall promptly take any and all steps necessary to transfer, absolutely and unequivocally, all right, title and interest to the Assets or amounts specified in such Withdrawal Notice and shall deliver such Assets or amounts as specified in such Withdrawal Notice. The Trustee shall be protected in relying conclusively upon any written demand, instruction, direction, acknowledgment, statement, notice, resolution, request, consent, order, certificate, report, appraisal, opinion, telegram, cablegram, facsimile, radiogram, letter, or other communication (collectively, "Communications") of the Beneficiary for any such withdrawal that on its face conforms to requirements of this Agreement. The Beneficiary shall execute a receipt evidencing the delivery of Assets or amounts when required in the normal and customary transaction of the business of banking. (b) Subject to Sections 4 and 10 of this Agreement, in the absence of a Withdrawal Notice, the Trustee shall allow no substitutions or withdrawals of any Asset from the Reserve Trust Account. (c) Subject to the terms of this Agreement, at the time any amount becomes payable or Asset becomes transferable by the Trustee from the Reserve Trust Account, such payment or transfer shall be effected in accordance with the written instructions contained in a Withdrawal Notice. If no such instructions from the Beneficiary are received by the Trustee at least one (1) full Business Day prior to the time set for such payment or transfer, such payment or transfer shall be effected as follows: (i) first from any cash in the Reserve Trust Account; (ii) then, from the proceeds of the sale by the Trustee of any or all of the debt obligations in the Reserve Trust Account (commencing with those obligations closest in maturity to the date in question); (iii) then, from any other Assets in the Reserve Trust Account. Section 4. Redemption, Investment and Substitution of Assets. (a) The Trustee shall surrender for payment all maturing Assets and all Assets called for redemption (and provide written notice to the Beneficiary and the Grantor to that effect) and deposit the proceeds of any such payment to the Reserve Trust Account. (b) The Trustee and the Beneficiary acknowledge that the Grantor has appointed Asset Allocation and Management (the "Asset Manager") to manage and make investment decisions with regard to the Assets held by the Trustee in the Trust Account. The Grantor has provided written direction to the Trustee with regard to the engagement of the Asset Manager. The Asset Manager shall direct the Trustee to invest such Assets in Eligible Assets in accordance with the Investment Guidelines. From time to time the Asset Manager may direct the Trustee in writing (an "Investment Order") to invest or reinvest, Assets held in the Reserve Trust Account into other Eligible Assets in -5- accordance with the Investment Guidelines. All investments and substitutions of Eligible Assets referred to in this paragraph shall meet the requirements of Eligible Assets and shall remain in compliance with any other applicable insurance laws and the Investment Guidelines. The Trustee shall have no responsibility whatsoever to determine that any Assets in the Reserve Trust Account are or continue to be Eligible Assets. The Trustee shall execute Investment Orders and settle securities transactions by itself or by means of an agent or broker retained by the Asset Manager. The Trustee shall not be responsible for any act, error or omission, or for the solvency, of any investment manager, agent or broker unless such act, error or omission is the result, in whole or in part, of the Trustee's negligence, willful misconduct or lack of good faith. The Trustee shall not be responsible for any Loss (as herein defined) suffered by the Beneficiary or the Grantor due to the insolvency of the investment manager, agent or broker. (c) The Trustee shall not be liable for any loss, liability, claim or damage paid or incurred ("Loss") by the Reserve Trust Account from any investment, reinvestment, liquidation or substitution pursuant to the terms of this Agreement other than a Loss due to the Trustee's own negligence, willful misconduct or lack of good faith. Without limiting any other provision herein, the Trustee shall not be liable for any Loss due to changes in market rates or penalties for early redemption or any other fees, taxes or charges. Section 5. The Income Account. All payments of interest and dividends in respect to Assets in the Trust Account shall be deposited by the Trustee in a separate custody ledger income account (the "Income Account") within the Reserve Trust Account established by the Grantor and maintained by the Trustee at an office of the Trustee in New York City. Any interest, dividend or other income automatically credited on the payment date to the Income Account which is not subsequently received by the Trustee shall be reimbursed by the Grantor to the Trustee and the Trustee may debit the Income Account for this purpose. Pursuant to Section 8(a), the Trustee shall have the right to deduct its compensation and expenses from the Income Account, to the extent due and owing. Any amounts contained in the Income Account are part of the Assets of the Reserve Trust Account and, as such, are subject to the terms and conditions of this Agreement with respect to the Assets. Section 6. Right to Vote Assets. The Trustee will transmit to the Grantor and or its designee upon receipt, and will instruct any entities authorized to hold Assets in accordance with the terms hereof to transmit to the Grantor upon receipt, all financial reports, stockholder communications, notices, proxies and proxy soliciting materials received from issuers of Assets, and all information relating to exchange or tender offers received from offerors with respect to such Assets. The Grantor and/or its designee shall have the full unqualified right to vote and execute consents and to exercise any and all proprietary -6- rights not inconsistent with this Agreement with respect to any securities or other property forming a part of the Reserve Trust Account. Section 7. Additional Rights and Duties of the Trustee. (a) The Trustee shall, concurrent with delivery of each monthly Valuation Report, deliver a summary of account activity for the month just ended to the Grantor and Beneficiary. (b) Before accepting any Asset for deposit to the Reserve Trust Account, the Trustee shall determine that such Asset is in such form that the Beneficiary whenever necessary may, or the Trustee upon written direction by the Beneficiary may, negotiate such Asset without consent or signature from the Grantor or any other Person. (c) The Trustee shall notify the Grantor and the Beneficiary, within ten (10) days, of any deposits to or withdrawals from the Reserve Trust Account. (d) All Assets shall be safely held by the Trustee in its office in the United States, except that the Trustee may deposit any Assets in the Reserve Trust Account in a book-entry account maintained at a Federal Reserve Bank or in depositories such as The Depository Trust Company (the Federal Reserve Bank and such other depositories being referred to herein as "Depositories"). Assets may be held in the name of a nominee maintained by the Trustee or by any such Depositories. (e) The Trustee shall accept and may open all mail directed to the Grantor or the Beneficiary in care of the Trustee. The Trustee shall promptly forward all mail to the addressee whether or not opened. (f) The Trustee shall keep full and complete records of the administration of the Reserve Trust Account. Upon the reasonable written request of the Grantor or the Beneficiary, the Trustee shall promptly permit the Grantor or the Beneficiary, their respective agents, employees or independent auditors to examine, audit, excerpt, transcribe and copy, at their own expense, during the Trustee's normal business hours any books, documents, papers and records relating to the Reserve Trust Account or the Assets. (g) The Trustee is authorized to follow and rely conclusively upon all Communications (including, without limitation, Investment Orders, Withdrawal Notices and Termination Notices) given by officers, agents and/or employees named in letters and incumbency certificates furnished to the Trustee from time to time by the Grantor or the Beneficiary and by attorneys-in-fact acting under written authority furnished to the Trustee by the Grantor or the Beneficiary (collectively "Instructions"), including Instructions given by letter, facsimile transmission or electronic media, if the Trustee reasonably believes such Instructions to be genuine and to have been signed, sent or presented by the proper party or parties. The Trustee shall not incur any liability to -7- anyone resulting from actions taken by the Trustee in reliance in good faith on such Instructions. The Trustee shall not incur any liability in executing Instructions prior to receipt by it of (i) notice of the revocation of the written authority of the individual(s) named therein or (ii) notice from any officer, agent or employee of the Grantor or the Beneficiary named in a letter or incumbency certificate delivered hereunder prior to receipt by it of a more current certificate. (h) The duties and obligations of the Trustee shall only be such as are specifically set forth in this Agreement, as it may from time to time be amended in accordance with the terms hereof, and no implied duties or obligations shall be read into this Agreement against the Trustee. The Trustee shall be liable only for its own negligence, willful misconduct or lack of good faith. Subject to the preceding sentence, the Trustee is not liable (i) for acting in accordance with or relying upon any instruction, notice, demand, certificate or document contemplated by and given in accordance with this Agreement from the Grantor or the Beneficiary, (ii) for any consequential, punitive or special damages, (iii) for the acts or omissions of its nominees, unless the Trustee chose such person without due care, or (iv) for an amount in excess of the value of the Assets, valued as of the most recent Valuation Report. (i) No provision of this Agreement shall require the Trustee to take any action which, in the Trustee's reasonable judgment, would result in any violation of this Agreement or any provision of law. (j) The Trustee may confer with counsel of its selection in relation to matters arising under this Agreement and shall, upon demand, be indemnified and held harmless from and against any and all Losses by the Grantor hereunder for any actions taken, omitted or suffered by it in connection with this Agreement or under any transaction contemplated hereby in good faith without gross negligence or willful misconduct and in accordance with opinion of such counsel. The opinion of such law firm shall be full and complete authority and protection for the Trustee with respect to any action taken, omitted or suffered by it in good faith and in accordance with the opinion of such law firm. (k) Subject to the requirement of good faith, reasonableness and the lack of negligence or willful misconduct, the Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instructions) reasonably believed by the Trustee to be genuine and to have been signed, sent or presented by the proper party or parties. All notices to the Trustee (unless otherwise provided therein) shall be deemed to be effective when actually received by a responsible officer of the Trustee. (l) Whenever, in the administration of the Reserve Trust Account created by this Agreement, the Trustee shall reasonably deem it necessary or desirable that a matter be proved or established prior to taking, suffering or omitting any action thereunder, subject to the requirement of reasonableness, good faith and lack of -8- negligence and willful misconduct, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a statement or certificate signed by or on behalf of the Grantor and/or the Beneficiary and delivered to the Trustee and such certificate shall be full warrant to the Trustee for any action taken, suffered or omitted by it on reliance thereon, subject to this paragraph, but in its discretion exercised in a reasonable manner, the Trustee may in lieu thereof accept other evidence of the fact or matter or may require such other or additional evidence as it may deem reasonable. (m) Except when otherwise expressly provided in this Agreement and subject to the requirement of reasonableness, good faith and lack of negligence or willful misconduct, any Communications (including, without limitation, any Investment Order or Instructions) to be delivered or furnished by the Grantor or the Beneficiary shall be sufficient to be delivered or furnished in the name of the Grantor or the Beneficiary by such officer or officers of the Grantor or the Beneficiary as may be designated in a certificate, resolution or letter of advice by such party. Written notice of such designation by the Grantor shall be filed with the Trustee. The Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instruction) made by such officer or agent of the Grantor or the Beneficiary with respect to the authority conferred on it. (n) Except as may arise from the Trustee's own negligence or willful misconduct or lack of good faith, the Trustee is not responsible for any Losses resulting from reasons or causes beyond its control, including without limitation, nationalization, expropriation, currency restrictions, acts of war, terrorism, insurrection, revolution, civil unrest, riots or strikes, nuclear fusion or fission or acts of God. (o) The Parties acknowledge that nothing in this Agreement shall obligate the Trustee to extend credit, grant financial accommodation or otherwise advance moneys for the purpose of making any payments or part thereof or otherwise carrying out any Instructions, including, without limitation, any Investment Order. (p) In the event of any reasonable ambiguity or uncertainty hereunder or in any notice, instruction or other communication received by the Trustee hereunder, the Trustee may, in its reasonable discretion, refrain from taking any action other than retain possession of the Assets, unless the Trustee receives written instructions, signed by the Grantor and the Beneficiary, which eliminate such ambiguity or uncertainty. In the event of any dispute between or conflicting claims by or among the Grantor and the Beneficiary and/or any other Person with respect to any Assets, the Trustee shall be entitled, in its reasonable discretion, to refuse to comply with any and all claims, demands or instructions with respect to such Assets, other than a Withdrawal Notice, so long as such dispute or conflict shall continue, and the Trustee shall not be or become liable in any way for such failure or refusal to comply with such conflicting claims, demands or instructions. The Trustee shall be entitled to refuse to act until, in its reasonable discretion, either (i) such conflicting or adverse claims or demands shall have -9- been determined by a final order, judgment or decree of a court of competent jurisdiction, which order, judgment or decree is not subject to appeal, or settled by agreement between the conflicting parties as evidenced in a writing satisfactory to the Trustee or (ii) the Trustee shall have received security or an indemnity satisfactory to it sufficient to hold it harmless from and against any and all Losses which it may incur by reason of so acting. The Trustee may, in addition, elect, in its reasonable discretion, to commence an interpleader action or seek other judicial relief or orders as it may deem, in its sole discretion, if necessary. The costs and expenses (including reasonable attorneys' fees and expenses) incurred in connection with such proceeding shall be paid by, and shall be deemed an obligation of, the Grantor. (q) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, provided that the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (r) The Securities Intermediary agrees that it will comply with entitlement orders issued by the Trustee in accordance with the terms of this Agreement, and that such compliance is not subject to any conditions, qualifications or further consents. The Securities Intermediary will not comply with entitlement orders issued by any other Person. (s) The Securities Intermediary hereby waives any right of counterclaim, banker's lien, liens or perfection rights as securities intermediary with respect to the Assets, the proceeds thereof and the Reserve Trust Account. Section 8. The Trustee's Compensation, Expenses and Indemnification. (a) The Grantor, upon receipt of an invoice from the Trustee to the Grantor and without offset to the Beneficiary's interest, (i) shall pay the Trustee, as compensation for its services under this Agreement, a fee computed at rates determined by the Trustee from time to time and communicated in writing to the Grantor and (ii) shall pay or reimburse the Trustee for all of the Trustee's expenses and disbursements in connection with its duties under this Agreement (including reasonable attorneys' fees and expenses and reasonable accounting and consulting fees and expenses), except any such expense or disbursement as may arise from the Trustee's negligence, willful misconduct or lack of good faith. The Trustee shall be entitled to deduct its compensation and expenses solely from payments of dividends and interest in respect of the Assets held in the Income Account as provided in Section 5 of this Agreement. (b) The Grantor hereby indemnifies the Trustee for, and holds it harmless against, any Losses (including reasonable attorneys' fees and expenses and reasonable consulting and accountants' fees and expenses) incurred or paid (other than as a result of the Trustee's gross negligence, willful misconduct or lack of good faith), arising out of or in connection with the performance of its duties and obligations under -10- this Agreement, including without limitation any Loss arising out of or in connection with the status of the Trustee in connection with the performance of its duties and any nominee as the holder of record of any of all of the Assets. The Grantor hereby acknowledges that the foregoing indemnities shall survive the resignation of the Trustee or the termination of this Agreement. (c) No Assets shall be withdrawn from the Reserve Trust Account or used in any manner for paying compensation to, or reimbursement or indemnification of, the Trustee except as set forth in Section 5. (d) The Trustee hereby waives any and all rights of offset, counterclaim and recoupment against the Beneficiary and Reserve Trust Account, and waives any lien (statutory or otherwise) that it may assert against the Reserve Trust Account. Section 9. Resignation of the Trustee. (a) The Trustee may resign at any time by giving not less than ninety (90) days' written notice thereof to the Beneficiary and to the Grantor, such resignation to become effective on the acceptance of appointment by a successor trustee and the transfer to such successor trustee of all Assets in the Reserve Trust Account in accordance with paragraph (b) of this Section 9. The Grantor and the Beneficiary jointly also may remove the Trustee at any time, without assigning any reason therefor, on fifteen (15) days' prior written notice thereof to the Trustee. (b) Upon receipt of the Trustee's notice of resignation or notice to the trustee of removal, the Grantor and the Beneficiary shall promptly appoint a successor trustee. Any successor trustee shall be a bank that is a member of the Federal Reserve System or chartered in the State of New York and shall not be a parent, a subsidiary or an affiliate of the Grantor or any Beneficiary. If a successor Trustee has not accepted such appointment within thirty (30) days after the notice of resignation or removal, the Trustee may, in its sole discretion, apply at the expense of the Grantor to a court of competent jurisdiction for the appointment of a successor Trustee or for other appropriate relief. The costs and expenses (including reasonable attorneys' fees and expenses) incurred by the Trustee in connection with such proceeding shall be paid by, and be deemed an obligation of, the Grantor. Upon the acceptance of the appointment as trustee hereunder by a successor trustee, such successor trustee shall succeed to and become vested with all the rights, powers, privileges and duties of the Trustee, and the Trustee shall be discharged from any future duties and obligations under this Agreement, but the Trustee shall continue after its resignation to be entitled to the benefits of the indemnities provided herein for a Trustee. -11- Section 10. Termination of the Reserve Trust Account. (a) The Reserve Trust Account and this Agreement, except for the indemnities provided herein, which shall survive termination, may be terminated, other than pursuant to an order of a court having jurisdiction, only after (i) the Grantor has given the Trustee written notice of its intention to terminate the Reserve Trust Account (the "Notice of Intention"), and (ii) the Trustee has given the Grantor and the Beneficiary the written notice specified in paragraph (b) of this Section 10. The Notice of Intention shall specify the date on which the Grantor intends the Reserve Trust Account to terminate (the "Proposed Date"). (b) Within ten (10) Business Days following receipt by the Trustee of the Notice of Intention, the Trustee shall give written notice (the "Termination Notice") to the Beneficiary and the Grantor of the date (the "Termination Date") on which the Reserve Trust Account shall terminate. The Termination Date shall be (a) the Proposed Date (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is at least thirty (30) days but no more than forty-five (45) days subsequent to the date the Termination Notice is given, (b) thirty (30) days subsequent to the date the Termination Notice is given (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is less than thirty (30) days subsequent to the date the Termination Notice is given; or (c) forty-five (45) days subsequent to the date the Termination Notice is given (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is more than forty-five (45) days subsequent to the date the Termination Notice is given. (c) On the Termination Date, after satisfaction of any outstanding Withdrawal Notices, or deduction of amounts required to satisfy any outstanding disputed Withdrawal Notice, and upon receipt of written certification of the Beneficiary that no Obligations of the Grantor remain unsatisfied, the Trustee shall transfer any Assets remaining in the Reserve Trust Account to the Grantor, at which time all duties and obligations of the Trustee with respect to such Assets shall cease. Section 11. Definitions. Except as the context shall otherwise require, the following terms shall have the following meanings for all purposes of this Agreement (the definitions to be applicable to both the singular and the plural forms of each term defined if both such forms of such term are used in this Agreement): The term "Agreement" shall have the meaning specified in the Preamble. The term "Assets" shall have the meaning specified in Section 1(b). The term "Beneficiary" shall have the meaning specified in the Preamble. -12- The term "Withdrawal Notice" shall have the meaning specified in Section 2(a). The term "Business Day" shall mean any day on which the offices of the Trustee in New York are open for business and shall refer to a full business day. The term "Communications" shall have the meaning specified in Section 3(a). The term "Depositories" shall have the meaning specified in Section 7(d). The term "Designee" shall have the meaning specified in Section 2. The term "Eligible Assets" shall mean assets deposited in the trust account, valued according to their current fair market value and consisting only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and investments that comply with the requirements specified by the Investment Guidelines issued by an institution that is not the parent, subsidiary or affiliate of either the Grantor or the Beneficiary. The term "Grantor" shall have the meaning set forth in the Preamble. The term "Income Account" shall have the meaning specified in Section 5. The term "Instructions" shall have the meaning specified in Section 7(g). The term "Investment Guidelines" shall have the meaning specified in Section 1(e). The term "Investment Order" shall have the meaning specified in Section 4(b). The term "Loss" shall have the meaning specified in Section 4(c). The term "Notice of Intention" shall have the meaning specified in Section 10(a). The term "Person" shall mean and include an individual, a corporation, a limited liability company, a partnership, an association, a trust, an unincorporated organization or a government or political subdivision thereof. The term "Proposed Date" shall have the meaning specified in Section 10(a). The term "Reserve Trust Account" shall mean the account established pursuant to this Agreement by the Grantor with the Trustee as Account No. 327694. -13- The term "Securities Intermediary" shall mean The Bank of New York. The term "Termination Date" shall have the meaning specified in Section 10(b). The term "Termination Notice" shall have the meaning specified in Section 10(b). The term "Trustee" shall mean The Bank of New York. The term "UCC" shall mean the New York Uniform Commercial Code. The term "Valuation Report" shall have the meaning specified in Section 1(d). The term "Withdrawal Notice" shall have the meaning specified in Section 2. Section 12. Governing Law. This Agreement and the Reserve Trust Account shall be governed by and construed in accordance with the internal laws of the State of New York; provided that perfection issues with respect to Article 9 of the UCC may give effect to applicable choice or conflict of law rules set forth in Article 9 of the UCC. Section 13. Successors and Assigns. No party may assign this Agreement or any of its obligations hereunder without the prior written consent of the other parties; provided, however, that this Agreement shall inure to the benefit of and bind those who, by operation of law, become successors to the parties, including, without limitation, any liquidator, rehabilitator, receiver or conservator and any successor, merged or consolidated entity; and provided, further, that, in the case of the Trustee, the successor trustee is eligible to be a trustee under the terms hereof. Section 14. Severability. In the event that any provision of this Agreement shall be declared invalid or unenforceable by a court having jurisdiction, such invalidity or unenforceability shall not effect the validity or enforceability of the remaining portions of this Agreement. Section 15. Entire Agreement. This Agreement constitutes the entire agreement among the parties, and there are no understandings or agreements, conditions or qualifications regarding the rights and obligations of the Trustee which are not fully expressed in this Agreement. -14- Section 16. Amendments. This Agreement may be modified or otherwise amended, and the observance of any term of this Agreement may be waived, only if such modification, amendment or waiver is in writing and signed by all of the parties. Section 17. Notices, etc. Unless otherwise provided in this Agreement, all Communications (including, without limitation, any Investment Orders or Instructions) required or permitted to be given or made under the terms hereof shall be in writing and shall be deemed to have been duly given or made (a) (i) when delivered personally, (ii) when made or given by telecopy, or (iii) in the case of International Priority Mail (Federal Express), upon the expiration of three days after any Communication shall have been deposited in International Priority Mail (Federal Express) for transmission or upon receipt thereof, whichever shall first occur and (b) when addressed as follows: To the Grantor: Scottish Re Life (Bermuda) Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: Paul Goldean with a copy to: Scottish Re Group Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: Paul Goldean and a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10005 Attention: Stephen G. Rooney To the Beneficiary: Security Life of Denver International Limited Attention: Mark Tullis c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 -15- with a copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 If to the Trustee: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attn: Insurance Trust and Escrow Unit If to the Securities Intermediary: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attn: Insurance Trust and Escrow Unit Each party may from time to time designate a different address for Communications (including, without limitation, Investment Orders) by giving written notice of such change to the other parties. All Communications relating to the Beneficiary's approval of the Grantor's authorization to substitute Assets and to the termination of the Reserve Trust Account shall be in writing. Section 18. Headings. The headings of the sections and the Table of Contents have been inserted for convenience of reference only, and shall not be deemed to constitute a part of this Agreement. Section 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall constitute an original, but such counterparts together shall constitute one and the same agreement. -16- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. SCOTTISH RE LIFE (BERMUDA) LIMITED By: /s/ Elizabeth Murphy ---------------------------------- Name: Elizabeth Murphy Title: CFO SECURITY LIFE OF DENVER INTERNATIONAL LIMITED By: /s/ David Pendergrass ---------------------------------- Name: David Pendergrass Title: Vice President THE BANK OF NEW YORK, AS SECURED PARTY AND TRUSTEE By: /s/ Robert W. Rich ---------------------------------- Name: Robert W. Rich Title: Vice President THE BANK OF NEW YORK, AS SECURITIES INTERMEDIARY By: /s/ Robert W. Rich ---------------------------------- Name: Robert W. Rich Title: Vice President -17- EX-10.56 18 ex10-56.txt SECURITY TRUST AGREEMENT SECURITY TRUST AGREEMENT Dated as of December 31, 2004 by and among Scottish Re Life (Bermuda) Limited as Grantor, Security Life of Denver International Limited as Beneficiary, The Bank of New York as Trustee, and The Bank of New York as Securities Intermediary TABLE OF CONTENTS Page Section 1. Deposit of Assets to the Security Trust Account...................2 Section 2. Withdrawal of Assets by Beneficiary from the Security Trust Account.........................................................4 Section 3. Withdrawal of Assets by Grantor from the Security Trust Account...5 Section 4. Procedure for Withdrawals of Assets; Certain Covenants............6 Section 5. Redemption, Investment and Substitution of Assets.................7 Section 6. The Income Account................................................8 Section 7. Right to Vote Assets..............................................8 Section 8. Additional Rights and Duties of the Trustee and the Securities Intermediary....................................................9 Section 9. The Trustee's Compensation, Expenses and Indemnification.........12 Section 10. Resignation of the Trustee.......................................12 Section 11. Termination of the Security Trust Account........................13 Section 12. Definitions......................................................14 Section 13. Governing Law....................................................18 Section 14. Successors and Assigns...........................................18 Section 15. Severability.....................................................18 Section 16. Entire Agreement.................................................18 Section 17. Amendments.......................................................18 Section 18. Notices, etc.....................................................18 Section 19. Headings.........................................................20 Section 20. Counterparts.....................................................20 EXHIBITS A Security Trust Schedule B Investment Policies C SLDI Capital Adequacy Ratio Calculation D Grantor Capital Adequacy Ratio Calculation SECURITY TRUST AGREEMENT SECURITY TRUST AGREEMENT, dated as of December 31, 2004 (the "Agreement"), by and among Scottish Re Life (Bermuda) Limited, an insurance company organized and existing under the laws of and domiciled in Bermuda (hereinafter the "Grantor"), Security Life of Denver International Limited, a stock insurance company organized and existing under the laws of and domiciled in Bermuda (such insurer and its successors by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator thereof, being hereinafter referred to as the "Beneficiary"), The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as trustee and as secured party, being referred to as the "Trustee"), and The Bank of New York, a New York banking corporation as trustee and as secured party, for the benefit of the Beneficiary (such bank, in its capacity as securities intermediary, being referred to as the "Securities Intermediary"). WITNESSETH: WHEREAS, the Grantor, the Beneficiary, Security Life of Denver Insurance Company, a stock life insurance company domiciled in Colorado ("SLD" and, together with the Beneficiary, the "Sellers"), and Scottish Re Group Limited ("Purchaser"), the indirect parent corporation of the Grantor, and Scottish Re (U.S.), Inc., a stock life insurance company domiciled in Delaware, have entered into an Asset Purchase Agreement, dated as of October 17, 2004 (the "Asset Purchase Agreement"), pursuant to which Sellers have agreed to sell, and the Purchaser has agreed to purchase, the individual life reinsurance business and certain assets of Sellers; WHEREAS, the Grantor and the Beneficiary have entered into one or more Reinsurance Agreements, dated as of the date hereof, whereby the Grantor, as reinsurer, has agreed to reinsure specified business of the Beneficiary as ceding insurer (hereinafter referred to as the "Reinsurance Agreements"); and WHEREAS, pursuant to the terms of the Asset Purchase Agreement and the Reinsurance Agreements, the Beneficiary is required to pay the Grantor the amount of $330,000,000 (the "Security Amount"); and WHEREAS, the Grantor desires to establish with the Trustee a trust account (the "Security Trust Account") and transfer to the Trustee for deposit in the Security Trust Account cash and other Assets in an amount equal to the Security Amount in order to secure and to fund the obligation of Grantor (i) to make payments in connection with a recapture of the business subject to the Reinsurance Agreements after the occurrence of a Triggering Event up to an amount equal to the Security Amount, and (ii) to fund the Reserve Trust Account under certain circumstances; and WHEREAS, the Trustee has agreed to act as Trustee hereunder and, in accordance with the terms hereof, to hold cash or other Assets in trust in the Security Trust Account on the terms herein set forth. NOW, THEREFORE, for and in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Deposit of Assets to the Security Trust Account. (a) Concurrently with the execution and delivery of this Agreement, the Grantor hereby establishes a Security Trust Account and the Trustee hereby accepts the Security Trust Account herein created and declared upon the terms provided herein and shall administer the Security Trust Account as Trustee, and with respect to the security interest granted in Section 1(f) hereof, and as secured party for the exclusive benefit of the Beneficiary. The Grantor shall establish and the Trustee shall maintain the Security Trust Account as a securities account at The Bank of New York as Securities Intermediary with regard to the Security Trust Account. The Trustee shall be the entitlement holder with respect to the Security Trust Account. The Security Trust Account shall be subject to withdrawal by the Beneficiary and the Grantor as provided herein. The Trustee and its lawfully appointed successors are authorized and shall have power to receive such cash and other securities and property as the Grantor transfers to or vests in the Trustee or places under the Trustee's possession and control, and to hold, invest, reinvest, manage and dispose of the same for the uses and purposes and in the manner and according to the provisions hereinafter set forth. All such trusteed assets at all times shall be maintained as a trust account, separate and distinct from all other assets of the Trustee, and shall be continuously maintained by the Trustee. (b) Pursuant to Section 3.1(a) of the Reinsurance Agreement, the Grantor shall transfer to the Trustee, for deposit to the Security Trust Account, on the date hereof, cash and such other assets as may be designated by the Grantor in an amount equal to the Security Amount (all such assets actually received in the Security Trust Account and proceeds thereof are herein referred to individually as an "Asset" and collectively as the "Assets"). (c) If, at the end of a calendar quarter, the fair market value of the Assets in the Security Trust Account is less than the required amount as specified on Exhibit A hereto (the "Required Amount") for the next calendar quarter, other than as a result of withdrawals pursuant Section 3(c), (d) or (e) the Grantor shall transfer cash or other assets to the Security Trust Account in an amount equal to such deficiency. If, as a result of any withdrawal pursuant to Section 3(e) the fair market value of the Assets in the Security Trust Account falls below the Required Amount, the Grantor shall not have the right to withdraw (i) any asset from the Security Trust Account, or (ii) any amount in the Income Account, in each case until such time as the fair market value of the Assets in the Security Trust Account following such withdrawal equals the Required Amount. (d) The Grantor hereby represents, warrants and covenants (i) that any Assets transferred to the Trustee for deposit to the Security Trust Account will be in such form that the Beneficiary may, upon satisfaction of the conditions set forth in Section 2, and the Trustee, upon written direction by the Beneficiary may, negotiate any such Assets without consent or signature from the Grantor or any Person other than a Depository (as such term is hereinafter defined) in accordance with the terms of this Agreement; and (ii) that all Assets transferred to the Trustee for 2 deposit to the Security Trust Account will consist only of cash (United States legal tender) and Eligible Securities (as hereinafter defined). (e) All Assets in the Security Trust Account shall be valued at their current fair market value in U.S. dollars as determined by the Trustee in its sole discretion exercised in a reasonable manner as described below. Within ten (10) Business Days after the end of each month the Trustee shall send to the Beneficiary and the Grantor a written report regarding the valuation of the Assets at the end of such month (the "Valuation Report"). Each report shall include a fair market value valuation of all Assets in the Security Trust Account in accordance with the asset prices provided by the market makers or such other appropriate independent sources of valuation as recommended in writing to the Trustee by the Grantor's investment manager or, in their absence, by an independent nationally recognized pricing service to which the Trustee subscribes in the normal conduct of its business (e.g., Interactive Data, Merrill Lynch, Bloomberg, Lehman Brothers Inc., etc.). The Trustee shall not be liable for incorrect fair market value of Assets caused by the use of inaccurate or erroneous prices provided by such pricing services or sources. If the price is not available as set forth above, the Trustee can obtain the price by retaining, at the expense of the Grantor and pursuant to the written recommendation of the Grantor's investment manager, a major independent securities valuation firm to appraise the value of such Assets. If the Grantor or the Beneficiary disputes the fair market value of the Assets in the Security Trust Account as set forth in the Valuation Report, then within ten Business Days following receipt of the Valuation Report, the Grantor or the Beneficiary, as the case may be, will notify the other party of its dispute regarding the valuation (the "Valuation Dispute Notice"). The Valuation Dispute Notice shall contain sufficient information to support the disputing party's valuation. The Trustee shall not be a party to any dispute between the Grantor and Beneficiary relating to the valuation of Assets set forth in the Valuation Report, but shall be provided with a copy of any Valuation Dispute Notice delivered by the Grantor or Beneficiary under this provision. The non-disputing party has five Business Days from the receipt of the Valuation Dispute Notice to agree with the disputing party's valuation or provide its own reasonable valuation of the specific Assets in dispute (the "Asset Response"). During no more than four Business Days after the Asset Response, the parties to the dispute will continue to work to resolve the disagreement, failing which they shall disclose to each other their final and last best proposal ("Proposal" as hereinafter defined) no later than the end of such four Business Day period. For purposes hereof, a "Proposal" of a party to the dispute shall consist of the valuation correction and related information supporting the valuation correction. If no resolution of disagreements is reached on or prior to the Business Day following such four Business Days, the parties to the dispute will on such next following Business Day submit their final and last best Proposal (previously disclosed to the other party as provided above) to arbitration by a major independent securities valuation firm, the identity of which shall be mutually agreed, and the parties to the dispute will abide by the result of such arbitration, which arbitration process shall require the arbitrator to select one of the two final and last best Proposals and to render its opinion regarding the reasonableness of the parties' actions for purposes of the next sentence. The cost of such arbitration shall be borne by the party who delivered the Valuation Dispute Notice if it rejects a reasonable Asset Response and otherwise the cost shall be shared equally by the Beneficiary and Grantor. To the extent feasible, and at the joint written direction of the Grantor and the Beneficiary, the Trustee shall adopt the valuation methodology underlying the valuation adopted in arbitration or agreed to by the Beneficiary and the Grantor. 3 Pending resolution of any dispute with respect to valuation of Assets, the Grantor and Beneficiary will continue to follow the requirements of this Agreement based on the Trustee's Valuation Report as submitted. Upon resolution of any dispute regarding the valuation, the Trustee will take the action hereunder that it would otherwise have been required to take, if any. (f) In order to secure the timely and complete payment and performance of each and all of the Grantor's Obligations, the Grantor hereby grants to the Trustee as agent of and as secured party for the exclusive benefit of the Beneficiary, a security interest in the Grantor's right, title and interest in the Security Trust Account and the Assets (including without limitation any residual interest therein). The Trustee, as entitlement holder for the benefit of the Beneficiary of all rights associated with the Assets and the Security Trust Account, shall have control (as defined in the UCC) of the Assets and Security Trust Account for the purpose of perfecting the interest granted hereby and shall issue entitlement orders to the Securities Intermediary as instructed by the Grantor and the Beneficiary in accordance with the terms of this Agreement. The Grantor hereby authorizes the Beneficiary to file or to instruct the Trustee to file UCC-1 Financing Statements with respect to the Security Trust Account and the Assets for which such a financing statement is appropriate, and hereby appoints the Beneficiary as attorney-in-fact for the purpose of signing Grantor's name on any such financing statements. The Trustee shall, at the written direction of the Beneficiary, file the completed UCC-1 Financing Statements delivered to the Trustee by the Beneficiary with respect to the Security Trust Account and the Assets. (g) The Required Amount shown on Exhibit A shall be proportionately adjusted from time to time to reflect any adjustment pursuant to Section 2.5(h) or 2.5(j) of the Asset Purchase Agreement, any PGAAP Adjustment Amount, any Excess Withdrawal Amount and any Reserve Withdrawal Amount (but not any withdrawal pursuant to Section 3(a), (e) or (f)). For the avoidance of doubt, the proportionate adjustment to the Required Amount described in the immediately preceding sentence shall be determined by the Grantor and the Beneficiary as follows: the Required Amount for each quarter beginning with the quarter in which such adjustment is effected shall be decreased by the same percentage that the then current Assets in the Security Trust Account are decreased as a result of any of the withdrawals or adjustments described in the immediately preceding sentence. Section 2. Withdrawal of Assets by Beneficiary from the Security Trust Account. The Beneficiary shall have the right to direct the Trustee to withdraw Assets from the Security Trust Account (i) to fund a recapture payment pursuant to the terms of the Reinsurance Agreements following the occurrence of a Triggering Event, or (ii) to fund any shortfalls in the Reserve Trust Account following the occurrence of a Triggering Event, by providing a notice (the "Beneficiary's Withdrawal Notice") to the Trustee, with a copy to the Grantor. The Beneficiary's Withdrawal Notice shall specify the amount of Assets to be withdrawn and the reason for the withdrawal and shall be signed by an authorized signatory of the Beneficiary. Such Beneficiary's Withdrawal Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such Assets or the proceeds thereof to (i) the Beneficiary, if such Assets or proceeds are being withdrawn to fund a recapture payment, or (ii) the Reserve Trust Account, if such Assets or proceeds are being withdrawn to fund a shortfall in the Reserve Trust Account. 4 Section 3. Withdrawal of Assets by Grantor from the Security Trust Account. (a) Prior to the occurrence of a Triggering Event, the Grantor shall have the right to direct the Trustee to withdraw such Assets or amounts from the Security Trust Account at the end of each calendar quarter that are in excess of the Required Amount for the next calendar quarter as specified on Exhibit A, by providing a notice (the "Grantor's Withdrawal Notice") to the Trustee, with a copy to the Beneficiary. The Grantor's Withdrawal Notice shall specify the amount or Assets to be withdrawn and shall be signed by an authorized signatory of the Grantor. Such Grantor's Withdrawal Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such amount or Assets or the proceeds thereof to the Grantor. After such time as the Beneficiary has provided the Trustee with notice that a Triggering Event has occurred (a "Triggering Event Notice"), the Trustee will not honor any Grantor's Withdrawal Notice until such time as the Beneficiary provides the Trustee with notice that such Triggering Event has been cured. (b) Prior to the occurrence of a Triggering Event, Grantor shall have the right to direct the Trustee to withdraw excess amounts ("Excess Withdrawal Amounts") from the Security Trust Account in proportion to the reduction of the Excess Reserve Amount as defined in Section 5.24 of the Asset Purchase Agreement (i) upon implementation of any Purchaser Facility in accordance with Section 5.24 of the Asset Purchase Agreement, or (ii) upon novation of the Insurance Contracts, by providing written notice to the Trustee of such withdrawal (an "Excess Withdrawal Notice"), with a copy to the Beneficiary. For avoidance of doubt, the proportion referred to in the immediately preceding sentence shall be determined as follows: the then current balance in the Security Trust Account may be withdrawn pursuant to this Section 3(b) in the same percentage as the then-current Excess Reserve Amount is decreased as a result of the implementation of a Purchaser Facility or novations, as the case may be. The Excess Withdrawal Notice shall specify the Excess Withdrawal Amount, shall be signed by an authorized signatory of the Grantor and shall be deemed to have been approved, unless the Beneficiary shall indicate in writing to the Grantor and the Trustee that it desires to contest the Grantor's representations within ten (10) Business Days following the receipt of the Excess Withdrawal Notice. Unless contested by the Beneficiary, the Trustee shall deliver the Excess Withdrawal Amount to the Grantor. (c) In the event that the Reserves established and maintained by the Grantor under the Reinsurance Agreements are increased as a result of an accounting adjustment under Bermuda SAP required to be made under applicable purchase accounting principles in connection with the transactions contemplated by the Asset Purchase Agreement, the Grantor shall have the right to withdraw Assets from the SLDI Security Trust Account in an amount equal to the amount of such increase (the "PGAAP Adjustment Amount") by providing a notice (the "PGAAP Withdrawal Notice") to the trustee, with a copy to the Beneficiary. The PGAAP Withdrawal Notice shall specify the PGAAP Adjustment Amount, shall be signed by an authorized signatory of the Grantor and shall be deemed to have been approved, unless the Beneficiary shall indicate in writing to the Grantor and the Trustee that it desires to contest the PGAAP Adjustment Amount within ten (10) Business Days following the receipt of the PGAAP Withdrawal Notice. Unless contested by the Beneficiary, the Trustee shall deliver the PGAAP Adjustment Amount to the SLDI Reserve Trust Account. 5 (d) In the event that the Reserves required under the Reinsurance Agreements are materially increased as a result of a required change in assumptions or methodology, the Grantor shall have the right to direct the Trustee to withdraw an amount equal to such increase (the "Reserve Withdrawal Amount") by providing a notice (the "Reserve Withdrawal Notice") to the Trustee, with a copy to the Beneficiary. The Reserve Withdrawal Notice shall specify the Reserve Withdrawal Amount and shall be signed by an authorized signatory of the Grantor; provided that no such withdrawal is permitted without the Beneficiary's consent, which consent shall not be unreasonably withheld. Any amounts withdrawn by the Grantor pursuant to this Section 3(d) from the Security Trust Account shall be deposited directly into the Reserve Trust Account. (e) Upon the occurrence of a Triggering Event other than a Triggering Event resulting from any event described in clause (iv) or (v) of the definition of the Triggering Event, the Grantor shall have the right to direct the Trustee to withdraw such Assets or amounts from the Security Trust Account to fund any shortfall in the Reserve Trust Account by providing a notice to the Trustee of such withdrawal (a "Reserve Trust Shortfall Notice"), with a copy to the Beneficiary. The Reserve Trust Shortfall Notice shall specify the amount or Assets to be withdrawn and shall be signed by an authorized signatory of the Grantor. Such Reserve Trust Shortfall Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such amount of Assets or the proceeds thereof to the Reserve Trust Account. (f) Upon the occurrence of an ING Event, the Grantor shall have the right to direct the Trustee to withdraw all Assets or amounts from the Security Trust Account by providing a notice to the Trustee (an "ING Event Notice"), with a copy to the Beneficiary. The ING Event Notice shall specify the amount or Assets to be withdrawn and shall be signed by an authorized signatory of the Grantor. Such ING Event Notice shall be effective, and shall be honored by the Trustee, on the tenth (10th) Business Day after receipt by the Trustee. The Trustee shall deliver such amount of Assets or the proceeds thereof to the Grantor. Section 4. Procedure for Withdrawals of Assets; Certain Covenants (a) Following receipt from the Beneficiary or the Grantor (as the case may be) of a Beneficiary's or Grantor's Withdrawal Notice, a PGAAP Withdrawal Notice, a Reserve Withdrawal Notice, an Excess Withdrawal Notice, a Reserve Trust Shortfall Notice or an ING Event Notice, and in accordance with Sections 2 and 3 as applicable, and provided that with respect to withdrawals pursuant to Sections 3(a) and (b), the Trustee has not received a Triggering Event Notice, the Trustee shall promptly take any and all steps necessary to transfer, absolutely and unequivocally, all right, title and interest to the Assets or amounts specified in such Beneficiary's Withdrawal Notice, Grantor's Withdrawal Notice, PGAAP Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice and shall deliver such Assets or amounts as specified in such Beneficiary's Withdrawal Notice, Grantor's Withdrawal Notice, PGAAP Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice. The Trustee shall be protected in relying conclusively upon any written demand, instruction, direction, acknowledgment, statement, notice, resolution, request, consent, order, certificate, report, appraisal, opinion, telegram, cablegram, facsimile, radiogram, letter, or other 6 communication (collectively, "Communications") of the Beneficiary or the Grantor for any such withdrawal that on its face conforms to requirements of this Agreement. The Beneficiary or the Grantor, as the case may be, shall execute a receipt evidencing the delivery of Assets or amounts when required in the normal and customary transaction of the business of banking. (b) Subject to Section 5 of this Agreement, in the absence of a Beneficiary's or Grantor's Withdrawal Notice, PGAAP Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice, the Trustee shall allow no substitutions or withdrawals of any Asset from the Security Trust Account. (c) Without limiting any other provision of this Agreement, the Trustee shall have no responsibility whatsoever to determine that any Assets withdrawn from the Security Trust Account pursuant to Sections 2 or 3 will be used and applied in the manner contemplated by this Agreement. (d) Subject to the terms of this Agreement, at the time any amount becomes payable or Asset becomes transferable by the Trustee from the Security Trust Account, such payment or transfer shall be effected in accordance with the written instructions contained in a Beneficiary's Withdrawal Notice, Grantor's Withdrawal Notice, PGAAP Withdrawal Notice, Reserve Withdrawal Notice, Excess Withdrawal Notice, Reserve Trust Shortfall Notice or ING Event Notice. If no such instructions from the Grantor or the Beneficiary are received by the Trustee at least one full Business Day prior to the time set for such payment or transfer, such payment or transfer shall be effected as follows: (i) first from any cash in the Security Trust Account; (ii) then, from the proceeds of the sale by the Trustee of any or all of the debt obligations in the Security Trust Account (commencing with those obligations closest in maturity to the date in question); (iii) then, from any other Assets in the Security Trust Account. (e) Not later than sixty (60) calendar days after the end of each calendar year, and forty-five (45) days after the end of any calendar quarter other than any quarter ending on December 31, the Beneficiary shall provide to the Grantor a calculation of (x) the risk based capital of SLD, and (y) the capital adequacy ratio of the Beneficiary calculated as set forth on Exhibit C. Each such calculation shall include reasonable supporting detail. The Beneficiary shall also provide written notice of the occurrence of any ING Event within two (2) Business Days after its occurrence. The Grantor may, at its own expense, review the books and records of the Beneficiary or SLD to confirm the calculations provided by the Beneficiary pursuant to this Section 4(e). In addition, the Beneficiary shall cooperate fully with the Grantor and promptly respond to the Grantor's inquiries form time to time concerning the determination of whether an ING Event has occurred. Section 5. Redemption, Investment and Substitution of Assets. (a) The Trustee shall surrender for payment all maturing Assets and all Assets called for redemption and deposit the proceeds of any such payment to the Security Trust Account. (b) From time to time the Grantor may direct the Trustee in writing (an "Investment Order") to invest or reinvest cash or Eligible Securities held in the Security Trust Account in accordance with the Investment Policies set forth in Exhibit B. The Grantor agrees that all 7 investments and substitutions of securities referred to in this paragraph (b) of this Section 5 shall be and remain in compliance with the relevant limitations of the applicable insurance laws and the Investment Policies set forth in Exhibit B. The Trustee shall have no responsibility whatsoever to determine that any Assets in the Security Trust Account are or continue to be Eligible Securities. The Trustee, based upon Investment Orders from the Grantor or its designee, shall execute Investment Orders and settle securities transactions by itself or by means of an agent or broker retained by the Grantor. The Trustee shall not be responsible for any act, error or omission, or for the solvency, of any investment manager, agent or broker unless such act, error or omission is the result, in whole or in part, of the Trustee's gross negligence, willful misconduct or lack of good faith. The Trustee shall not be responsible for any Loss (as herein defined) suffered by the Beneficiary or the Grantor due to the insolvency of the investment manager, agent or broker. (c) The Trustee shall not be liable for any loss, liability, claim or damage paid or incurred ("Loss") by the Security Trust Account from any investment, reinvestment, liquidation or substitution pursuant to the terms of this Agreement other than a Loss due to the Trustee's own negligence, gross negligence, willful misconduct or lack of good faith. Without limiting any other provision herein, the Trustee shall not be liable for any Loss due to changes in market rates or penalties for early redemption or any other fees, taxes or changes. Section 6. The Income Account. All payments of interest and dividends in respect to Assets in the Security Trust Account shall be deposited by the Trustee in a separate custody ledger income account (the "Income Account") within the Security Trust Account established and maintained by the Grantor at an office of the Trustee in New York City. Any interest, dividend or other income automatically credited on the payment date to the Income Account which is not subsequently received by the Trustee shall be reimbursed by the Grantor to the Trustee and the Trustee may debit the Income Account for this purpose. Pursuant to Section 9(a), the Trustee shall have the right to deduct its compensation and expenses from the Income Account, to the extent due and owing; except as provided in the final sentence of Section 1(c), the balance of the Income Account shall be payable to the Grantor at the end of each calendar month. Section 7. Right to Vote Assets. The Trustee will transmit to the Grantor and or its designee upon receipt, and will instruct any entities authorized to hold Assets in accordance with the terms hereof to transmit to the Grantor upon receipt, all financial reports, stockholder communications, notices, proxies and proxy soliciting materials received from issuers of Assets, and all information relating to exchange or tender offers received from offerors with respect to such Assets. The Grantor and/or its designee shall have the full unqualified right to vote and execute consents and to exercise any and all proprietary rights not inconsistent with this Agreement with respect to any securities or other property forming a part of the Security Trust Account. 8 Section 8. Additional Rights and Duties of the Trustee and the Securities Intermediary. (a) The Trustee shall, concurrent with delivery of each monthly Valuation Report, deliver a summary of account activity for the month just ended to the Grantor and the Beneficiary. (b) Before accepting any Asset for deposit to the Security Trust Account, the Trustee shall determine that such Asset is in such form that the Beneficiary whenever necessary may, or the Trustee upon written direction by the Beneficiary may, negotiate such Asset without consent or signature from the Grantor or any other Person, other than a Depository and the Trustee in accordance with the terms of this Agreement. (c) The Trustee may deposit any Assets in the Security Trust Account in a book-entry account maintained at a Federal Reserve Bank or in depositories such as The Depository Trust Company, the Participants Trust Company, Cedel, and Euroclear (the Federal Reserve Bank and such other depositories being referred to herein as "Depositories"). Assets may be held in the name of a nominee maintained by the Trustee or by any such Depositories. (d) The Trustee shall accept and may open all mail directed to the Grantor or the Beneficiary in care of the Trustee. The Trustee shall forward all mail to the addressee whether or not opened. (e) The Trustee shall keep full and complete records of the administration of the Security Trust Account. Upon the reasonable written request of the Grantor or the Beneficiary, the Trustee shall promptly permit the Grantor or the Beneficiary, their respective agents, employees or independent auditors to examine, audit, excerpt, transcribe and copy, at their own expense, during the Trustee's normal business hours any books, documents, papers and records relating to the Security Trust Account or the Assets. (f) The Trustee is authorized to follow and rely conclusively upon all Communications (including, without limitation, Investment Orders, Excess Withdrawal Notices, Reserve Withdrawal Notices, Beneficiary's Withdrawal Notices, Grantor's Withdrawal Notices, PGAAP Withdrawal Notices, Reserve Trust Shortfall Notices, ING Event Notices and Termination Notices), given by officers, agents and/or employees named in letters and incumbency certificates furnished to the Trustee from time to time by the Grantor or the Beneficiary and by attorneys-in-fact acting under written authority furnished to the Trustee by the Grantor or the Beneficiary (collectively "Instructions") including Instructions given by letter or facsimile transmission or electronic media, if the Trustee reasonably believes such Instructions to be genuine and to have been signed, sent or presented by the proper party or parties. The Trustee shall not incur any liability to anyone resulting from actions taken by the Trustee in reliance in good faith on such Instructions. The Trustee shall not incur any liability in executing Instructions prior to receipt by it of (i) notice of the revocation of the written authority of the individual(s) named therein or (ii) notice from any officer, agent or employee of the Grantor or the Beneficiary named in a letter or incumbency certificate delivered hereunder prior to receipt by it of a more current certificate. 9 (g) The duties and obligations of the Trustee shall only be such as are specifically set forth in this Agreement, as it may from time to time be amended in accordance with the terms hereof, and no implied duties or obligations shall be read into this Agreement against the Trustee. The Trustee shall be liable only for its own negligence, gross negligence, willful misconduct or bad faith. In no event shall the Trustee be liable (i) for acting in accordance with or relying upon any instruction, notice, demand, certificate or document contemplated by and given in accordance with this Agreement from the Grantor or the Beneficiary, (ii) for any consequential, punitive or special damages, (iii) for the acts or omissions of its nominees, unless the Trustee chose such person without due care, or (iv) for an amount in excess of the value of the Assets, valued as of the most recent valuation report. (h) No provision of this Agreement shall require the Trustee to take any action which, in the Trustee's reasonable judgment, would result in any violation of this Agreement or any provision of law. (i) The Trustee may confer with counsel of its selection in relation to matters arising under this Agreement and shall, upon demand, be indemnified and held harmless from and against any and all Losses by the Grantor hereunder for any actions taken, omitted or suffered by it in connection with this Agreement or under any transaction contemplated hereby in good faith without gross negligence or willful misconduct and in accordance with opinion of such counsel. The opinion of such law firm shall be full and complete authority and protection for the Trustee with respect to any action taken, suffered or omitted by it in good faith and in accordance with the opinion of such law firm. (j) Subject to the requirement of good faith, reasonableness and the lack of gross negligence or willful misconduct, the Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instructions) reasonably believed by the Trustee to be genuine and to have been signed, sent or presented by the proper party or parties. All notices to the Trustee (unless otherwise provided therein) shall be deemed to be effective when actually received by a responsible officer of the Trustee. (k) Whenever, in the administration of the Security Trust Account created by this Agreement, the Trustee shall reasonably deem it necessary or desirable that a matter be proved or established prior to taking, suffering or omitting any action thereunder, subject to the requirement of reasonableness, good faith and lack of gross negligence and willful misconduct, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a statement or certificate signed by or on behalf of the Grantor and/or the Beneficiary and delivered to the Trustee and such certificate shall be full warrant to the Trustee for any action taken, suffered or omitted by it on reliance thereon, subject to this paragraph, but in its discretion exercised in a reasonable manner, the Trustee may in lieu thereof accept other evidence of the fact or matter or may require such other or additional evidence as it may deem reasonable. (l) Except when otherwise expressly provided in this Agreement and subject to the requirement of reasonableness, good faith and lack of negligence or willful misconduct, any Communications (including, without limitation, any Investment Order or Instructions) to be delivered or furnished by the Grantor or the Beneficiary shall be sufficient to be delivered or 10 furnished in the name of the Grantor or the Beneficiary by such officer or officers of the Grantor or the Beneficiary as may be designated in a certificate, resolution or letter of advice by such party. Written notice of such designation by the Grantor or the Beneficiary shall be filed with the Trustee. The Trustee shall be protected in acting upon any Communications (including, without limitation, any Investment Order or Instruction) made by such officer or agent of the Grantor or the Beneficiary with respect to the authority conferred on it. (m) Notwithstanding anything to the contrary provided herein, the Trustee is not responsible for any Losses resulting from reasons or causes beyond its control, including without limitation, nationalization, expropriation, currency restrictions, acts of war, terrorism, insurrection, revolution, civil unrest, riots or strikes, nuclear fusion or fission or acts of God. (n) The Parties acknowledge that nothing in this Agreement shall obligate the Trustee to extend credit, grant financial accommodation or otherwise advance moneys for the purpose of making any payments or part thereof or otherwise carrying out any Instructions, including, without limitation, any Investment Order. (o) In the event of any reasonable ambiguity or uncertainty hereunder or in any notice, instruction or other communication received by the Trustee hereunder, the Trustee may, in its reasonable discretion, refrain from taking any action other than retain possession of the Assets, unless the Trustee receives written instructions, signed by the Grantor and the Beneficiary, which eliminate such ambiguity or uncertainty. In the event of any dispute between or conflicting claims by or among the Grantor and the Beneficiary and/or any other person or entity with respect to any Assets, the Trustee shall be entitled, in its reasonable discretion, to refuse to comply with any and all claims, demands or instructions with respect to such Assets, so long as such dispute or conflict shall continue, and the Trustee shall not be or become liable in any way for such failure or refusal to comply with such conflicting claims, demands or instructions. The Trustee shall be entitled to refuse to act until, in its reasonable discretion, either (i) such conflicting or adverse claims or demands shall have been determined by a final order, judgment or decree of a court of competent jurisdiction, which order, judgment or decree is not subject to appeal, or settled by agreement between the conflicting parties as evidenced in a writing satisfactory to the Trustee or (ii) the Trustee shall have received security or an indemnity satisfactory to it sufficient to hold it harmless from and against any and all Losses which it may incur by reason of so acting. The Trustee may, in addition, elect, in its reasonable discretion, to commence an interpleader action or seek other judicial relief or orders as it may deem, in its sole discretion, if necessary. The costs and expenses (including reasonable attorney's fees and expenses) incurred in connection with such proceeding shall be paid by, and shall be deemed an obligation of, the Grantor. (p) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, provided that the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (q) The Securities Intermediary agrees that it will comply with entitlement orders issued by the Trustee in accordance with the terms of this Agreement, and that such compliance 11 is not subject to any conditions, qualifications or further consents. The Securities Intermediary will not comply with entitlement orders issued by any other Person. (r) The Securities Intermediary hereby waives any right of counterclaim, bankers lien, liens or perfection rights as securities intermediary with respect to the Assets, the proceeds thereof and the Security Trust Account. Section 9. The Trustee's Compensation, Expenses and Indemnification. (a) The Grantor, upon receipt of an invoice from the Trustee to the Grantor and without offset to the Beneficiary's interest, (i) shall pay the Trustee, as compensation for its services under this Agreement, a fee computed at rates determined by the Trustee from time to time and communicated in writing to the Grantor and (ii) shall pay or reimburse the Trustee for all of the Trustee's expenses and disbursements in connection with its duties under this Agreement (including reasonable attorneys' fees and expenses and reasonable accounting and consulting fees and expenses), except any such expense or disbursement as may arise from the Trustee's negligence, willful misconduct or lack of good faith. The Trustee shall be entitled to deduct its compensation and expenses from payments of dividends and interest in respect of the Assets held in the Income Account as provided in Section 6 of this Agreement. (b) The Grantor hereby indemnifies the Trustee for, and holds it harmless against, any Losses (including reasonable attorneys' fees and expenses and reasonable consulting and accountants' fees and expenses) incurred or paid (other than as a result of the Trustee's gross negligence, willful misconduct or lack of good faith), arising out of or in connection with the performance of its duties and obligations under this Agreement, including without limitation any Loss arising out of or in connection with the status of the Trustee in connection with the performance of its duties and any nominee as the holder of record of any or all of the Assets. The Grantor hereby acknowledges that the foregoing indemnities shall survive the resignation of the Trustee or the termination of this Agreement. (c) No Assets shall be withdrawn from the Security Trust Account or used in any manner for paying compensation to, or reimbursement or indemnification of, the Trustee. (d) The Trustee hereby waives any and all rights of offset, counterclaim and recoupment against the Beneficiary and Security Trust Account, and waives any lien (statutory or otherwise) that it may assert against the Security Trust Account. Section 10. Resignation of the Trustee. (a) The Trustee may resign at any time by giving not less than ninety (90) days' written notice thereof to the Beneficiary and to the Grantor, such resignation to become effective on the acceptance of appointment by a successor trustee and the transfer to such successor trustee of all Assets in the Security Trust Account in accordance with paragraph (b) of this Section 10. The Grantor and the Beneficiary jointly also may remove the Trustee at any time, without assigning any reason therefor, on fifteen (15) days' prior written notice thereof to the Trustee. (b) Upon receipt of the Trustee's notice of resignation or notice to the Trustee of removal, the Grantor and the Beneficiary shall promptly appoint a successor trustee. Any 12 successor trustee shall be a bank that is a member of the Federal Reserve System or chartered in the State of New York and shall not be a parent, a subsidiary or an affiliate of the Grantor or the Beneficiary. If a successor Trustee has not accepted such appointment within thirty (30) days after the notice of resignation or removal, the Trustee may, in its sole discretion, apply at the expense of the Grantor to a court of competent jurisdiction for the appointment of a successor Trustee or for other appropriate relief. The costs and expenses (including reasonable attorneys' fees and expenses) incurred by the Trustee in connection with such proceeding shall be paid by, and be deemed an obligation of, the Grantor. Upon the acceptance of the appointment as trustee hereunder by a successor trustee, such successor trustee shall succeed to and become vested with all the rights, powers, privileges and duties of the Trustee, and the Trustee shall be discharged from any future duties and obligations under this Agreement, but the Trustee shall continue after its resignation to be entitled to the benefits of the indemnities provided herein for a Trustee. Section 11. Termination of the Security Trust Account. (a) The Security Trust Account and this Agreement, except for the indemnities provided herein, which shall survive termination, may be terminated by the Grantor, other than pursuant to an order of a court having jurisdiction, upon the occurrence of any of the following events: (i) the release of all ING Facilities pursuant to implementation of one or more Purchaser Facilities under Section 5.24 of the Asset Purchase Agreement or upon the novation of all Insurance Contracts or (ii) the depletion of all amounts and Assets in the Security Trust Account. To effect termination of the Security Trust Account, the Grantor shall give the Trustee written notice of its intention to terminate the Security Trust Account (the "Notice of Intention"), and (ii) the Trustee shall give the Beneficiary the written notice specified in paragraph (b) of this Section 11. The Notice of Intention shall specify the date on which the Grantor intends the Security Trust Account to terminate (the "Proposed Date"). (b) Within ten (10) Business Days following receipt by the Trustee of the Notice of Intention, the Trustee shall give written notification (the "Termination Notice") to the Beneficiary and the Grantor of the date (the "Termination Date") on which the Security Trust Account shall terminate. The Termination Date shall be (a) the Proposed Date (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is at least five (5) days subsequent to the date the Termination Notice is given; or (b) five (5) days subsequent to the date the Termination Notice is given (or if not a Business Day, the next Business Day thereafter), if the Proposed Date is less than five (5) days subsequent to the date the Termination Notice is given. (c) On the Termination Date, after satisfaction of any outstanding Withdrawal Notices, or deduction of amounts required to satisfy any outstanding disputed Withdrawal Notices, and upon receipt of certification of the Beneficiary that the Grantor has no further obligation to maintain the Security Trust Account the Trustee shall transfer any Assets remaining in the Security Trust Account to the Grantor, at which time all duties and obligations of the Trustee with respect to such Assets shall cease. 13 Section 12. Definitions. Any capitalized term used but not defined herein shall have the meaning set forth in the Asset Purchase Agreement. Except as the context shall otherwise require, the following terms shall have the following meanings for all purposes of this Agreement (the definitions to be applicable to both the singular and the plural forms of each term defined if both such forms of such term are used in this Agreement): The term "Agreement" shall mean this Security Trust Agreement by and among Grantor, Beneficiary, the Bank of New York as Trustee and the Bank of New York as Securities Intermediary. The term "Asset Purchase Agreement" shall have the meaning set forth in the preamble. The term "Asset Response" shall have the meaning specified in Section 1(e). The term "Assets" shall have the meaning specified in Section 1(b). The term "Beneficiary" shall mean Security Life of Denver Insurance Company. The term "Beneficiary's Withdrawal Notice" shall have the meaning specified in Section 2. The term "Business Day" shall mean any day on which the offices of the Trustee in New York are open for business and shall refer to a full business day. The term "Communications" shall have the meaning specified in Section 4(a). The term "Depositories" shall have the meaning specified in Section 8(c). The term "Eligible Securities" shall mean and include any and all securities and other investments that are permitted under applicable insurance law as admitted assets in the preparation of the annual statement filed by the Grantor, other than real estate and foreign investments, and permitted pursuant to the Investment Policies attached hereto as Exhibit B. The term "Excess Withdrawal Amounts" shall have the meaning specified in Section 3(b). The term "Excess Withdrawal Notice" shall have the meaning specified in Section 3(b). The term "Grantor" shall mean Scottish Re (U.S.), Inc. The term "Grantor's Withdrawal Notice" shall have the meaning specified in Section 3(a). The term "Income Account" shall have the meaning specified in Section 6. 14 The term "ING Event" shall mean any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Beneficiary, SLD, or ING Groep N.V., a corporation organized in the Netherlands that is the indirect parent corporation of ING, SLD and the Beneficiary, or any Person in the direct chain of ownership between ING Groep N.V. and SLD and the Beneficiary; (ii) the risk based capital (under applicable Colorado Insurance Law requirements), calculated quarterly, of SLD falls below 125% Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Beneficiary is required to provide to the Grantor the report pursuant to Section 4(e) of this Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Exhibit C), calculated quarterly, of the Beneficiary falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Beneficiary is required to provide to the Grantor the report pursuant to Section 4(e) of this Agreement that would reflect such deficiency; (iv) there has been a material breach of any "Reinsurance Agreement" (as defined in the Asset Purchase Agreement) by the Beneficiary or SLD, including, without limitation, failure to pay material premiums to the Grantor or any Affiliate of Grantor, and such breach has not been cured within thirty (30) days after notice. The term "ING Event Notice" shall have the meaning specified in Section 3(f). The term "Instructions" shall have the meaning specified in Section 8(f). The term "Investment Orders" shall have the meaning specified in Section 5(b). The term "Loss" shall have the meaning specified in Section 5(c). The term "Notice of Intention" shall have the meaning specified in Section 11(a). The term "Obligations" shall mean, with respect to the Reinsurance Agreements, any and all amounts due and payable to the Beneficiary as defined and explicitly set forth in the Reinsurance Agreements. The term "Person" shall mean and include an individual, a corporation, a limited liability company, a partnership, an association, a trust, an unincorporated organization or a government or political subdivision thereof. The term "PGAAP Adjustment Amount" shall have the meaning specified in Section 3(c). The term "PGAAP Withdrawal Notice" shall have the meaning specified in Section 3(c). 15 The term "Proposal" shall have the meaning specified in Section 1(e). The term "Proposed Date" shall have the meaning specified in Section 11(a). The term "Purchaser" shall have the meaning specified in the preamble. The term "Reinsurance Agreements" shall mean the Reinsurance Agreements, dated as of the date hereof, by and between the Grantor and the Beneficiary, whereby the Grantor, as reinsurer, has agreed to reinsure a certain book of the reinsurance business of the Beneficiary as ceding insurer. The term "Required Amount" shall have the meaning specified in Section 1(c). The term "Reserve Trust Account" shall mean the trust account established pursuant to the Reserve Trust Agreement. The term "Reserve Trust Agreement" shall mean the Reserve Trust Agreement, dated the date hereof by and among the Grantor, the Beneficiary, The Bank of New York, as Trustee and The Bank of New York, as Securities Intermediary. The term "Reserve Trust Shortfall Notice" shall have the meaning specified in Section 3(e). The term "Reserve Withdrawal Amount" shall have the meaning specified in Section 3(d). The term "Reserve Withdrawal Notice" shall have the meaning specified in Section 3(d). The term "Scottish Annuity & Life" means Scottish Annuity & Life Insurance Company (Cayman) Ltd., a company organized under the laws of the Cayman Islands. The term "Scottish Re Group" means Scottish Re Group Limited, a holding company organized under the laws of the Cayman Islands. The term "Security Amount" shall have the meaning specified in the preamble. The term "Security Trust Account" shall mean the trust account established pursuant to this Agreement. The term "Securities Intermediary" shall mean The Bank of New York. The term "Sellers" shall have the meaning specified in the preamble. The term "SLD Reserve Trust Account" means the trust account established pursuant to the SLD Reserve Trust Agreement. The term "SLD Reserve Trust Agreement" shall mean the Reserve Trust Agreement, dated the date hereof by and among the SLD, Scottish Re (U.S.) Inc., The Bank of New York, as Trustee and The Bank of New York, as Securities Intermediary. 16 The term "SLDI" shall have the meaning specified in the preamble. The term "Termination Date" shall have the meaning specified in Section 11(b). The term "Termination Notice" shall have the meaning specified in Section 11(b). The term "Triggering Event" shall mean any of the following occurrences: (i) the existence of an insolvency, rehabilitation, conservation or comparable proceeding by or against the Grantor or any Affiliate of Grantor that at the time in question is reinsuring any of the Business (an "Affiliated Reinsurer"), Scottish Annuity & Life or Scottish Re Group or any Person in the direct chain of ownership between the Grantor or any Affiliated Reinsurer and Scottish Re Group; (ii) the risk based capital, calculated quarterly, of any Affiliated Reinsurer domiciled in the United States (such risk based capital to be calculated in accordance with the insurance laws of the jurisdiction of domicile of such Affiliate Reinsurer) falls below 125% Company Action Level RBC, and is not increased to at least 125% within thirty (30) calendar days after the date upon which the Grantor is required to provide to the Beneficiary a report pursuant to any Reinsurance Agreement that would reflect such deficiency; (iii) the capital adequacy ratio (as currently calculated for Standard & Poor's as set forth on Exhibit D), calculated quarterly, of consolidated Scottish Re Group or consolidated Scottish Annuity & Life falls below 100%, and is not increased to at least 100% within thirty (30) calendar days after the date upon which the Reinsurer is required to provide to the Company a report pursuant to any Reinsurance Agreement that would reflect such deficiency; (iv) there has been a material breach of any "Reinsurance Agreement" (as defined in the Asset Purchase Agreement) by the Grantor or any Affiliated Reinsurer of the Grantor, including, without limitation, failure to fund any trust as required, and such breach has not been cured within thirty (30) days after notice; or (v) there has been a termination or amendment to any keepwell agreement described in Section 5.26 of the Asset Purchase Agreement without the Beneficiary's prior written consent, which consent shall not be unreasonably withheld. The term "Triggering Event Notice" shall have the meaning specified in Section 3(a). The term "Trustee" shall mean The Bank of New York. The term "UCC" shall mean the New York Uniform Commercial Code. The term "Valuation Dispute Notice" shall have the meaning specified in Section 1(e). The term "Valuation Report" shall have the meaning specified in Section 1(e). 17 The term "Withdrawal Notice" shall mean either a Grantor's Withdrawal Notice or a Beneficiary's Withdrawal Notice. Section 13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York; provided that perfection issues with respect to Article 9 of the UCC may give effect to applicable choice or conflict of law rules set forth in Article 9 of the UCC. Section 14. Successors and Assigns. No Party may assign this Agreement or any of its obligations hereunder without the prior written consent of the other Parties; provided, however, that this Agreement shall inure to the benefit of and bind those who, by operation of law, become successors to the Parties, including, without limitation, any liquidator, rehabilitator, receiver or conservator and any successor, merged or consolidated entity; and provided, further, that, in the case of the Trustee, the successor trustee is eligible to be a trustee under the terms hereof. Section 15. Severability. In the event that any provision of this Agreement shall be declared invalid or unenforceable by a court having jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remaining portions of this Agreement. Section 16. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto, and there are no understandings or agreements, conditions or qualifications regarding the obligations of the Trustee and the Securities Intermediary which are not fully expressed in this Agreement. Section 17. Amendments. This Agreement may be modified or otherwise amended, and the observance of any term of this Agreement may be waived, only if such modification, amendment or waiver is in writing and signed by all of the Parties. Section 18. Notices, etc. Unless otherwise provided in this Agreement, all Communications (including, without limitation, any Investment Orders or Instructions) required or permitted to be given or made under the terms hereof shall be in writing and shall be deemed to have been duly given or made (a) (i) when delivered personally, (ii) when made or given by telecopier, or (iii) in the case of International Priority Mail (Federal Express), upon the expiration of three days after any Communication shall have been deposited in International Priority Mail (Federal Express) for transmission or upon receipt thereof, whichever shall first occur and (b) when addressed as follows: 18 To the Grantor: Scottish Re Life (Bermuda) Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: Paul Goldean with a copy to: Scottish Re Group Limited Crown House, Third Floor 4 Par-la-Ville Road Hamilton, HM 12 BERMUDA Attention: Paul Goldean and a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10005 Attention: Stephen G. Rooney To the Beneficiary: Security Life of Denver International Limited Attention: Mark Tullis c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 with a copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 19 If to the Trustee: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attention: Insurance Trust and Escrow Unit If to the Securities Intermediary: The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attention: Insurance Trust and Escrow Unit Each party may from time to time designate a different address for Communications (including, without limitation, Investment Orders) by giving written notice of such change to the other parties. All Communications relating to the Beneficiary's approval of the Grantor's authorization to substitute Assets and to the termination of the Security Trust Account shall be in writing. Section 19. Headings. The headings of the sections and the Table of Contents have been inserted for convenience of reference only, and shall not be deemed to constitute a part of this Agreement. Section 20. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall constitute an original, but such counterparts together shall constitute one and the same Agreement. 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. SECURITY LIFE OF DENVER INTERNATIONAL LIMITED By: /s/ David Pendergrass --------------------------------------------- Name: David Pendergrass Title: Vice President SCOTTISH RE LIFE (BERMUDA) LIMITED By: /s/ Elizabeth Murphy -------------------------------------------- Name: Elizabeth Murphy Title: CFO THE BANK OF NEW YORK, AS SECURED PARTY AND TRUSTEE By: /s/ Robert W. Rich --------------------------------------------- Name: Robert W. Rich Title: Vice President THE BANK OF NEW YORK, AS SECURITIES INTERMEDIARY By: /s/ Robert W. Rich --------------------------------------------- Name: Robert W. Rich Title: Vice President 21 EX-10.57 19 ex10-57.txt LICENSE AGREEMENT - -------------------------------------------------------------------------------- TECHNOLOGY TRANSFER AND LICENSE AGREEMENT by and between Security Life of Denver Insurance Company ING North America Insurance Corporation and Scottish Re (U.S.), Inc. Dated as of December 31, 2004 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page Section 1. Definitions........................................................2 Section 2. Owned Principally-Used Computer Programs...........................2 Section 3. Owned Generally Used Programs......................................4 Section 4. Licensed Computer Programs.........................................4 Section 5. Data and Databases.................................................5 Section 6. Recapture of Retroceded Business...................................5 Section 7. Improvements.......................................................6 Section 8. Further Actions....................................................7 Section 9. Representations and Warranties.....................................7 Section 10. Indemnity..........................................................8 Section 11. Arbitration........................................................9 Section 12. Delivery By Sellers...............................................10 Section 13. Other Computer Programs...........................................10 Section 14. Equitable Rights..................................................11 Section 15. Term..............................................................11 Section 16. Miscellaneous.....................................................11 Schedules Schedule 4 Assumed Computer Programs Schedule 7 Improvements Schedule 13 Approved Desktop Software This TECHNOLOGY TRANSFER AND LICENSE AGREEMENT (this "Agreement"), dated as of December 31, 2004 (the "Effective Date"), is entered into by and between Security Life of Denver Insurance Company, an insurance company formed and doing business under the laws of the state of Colorado and maintaining its principal offices at 1290 Broadway, Denver, CO 80203, ING North America Insurance Corporation, a corporation formed and doing business under the laws of the state of Delaware and maintaining its principal offices at 5780 Powers Ferry Road NW, Atlanta, GA 30327 ("Sellers") and Scottish Re (U.S.), Inc. an insurance company formed and doing business under the laws of the state of Delaware and maintaining its principal offices at 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 ("Purchaser"). W I T N E S S E T H: WHEREAS, Security Life of Denver Insurance Company and Security Life of Denver International Limited, on the one hand, and Scottish Re Group Limited and Scottish Re (U.S.), Inc., on the other hand, have entered into that certain Asset Purchase Agreement, dated October 17, 2004 (hereinafter, the "Asset Purchase Agreement; and i - -------------------------------------------------------------------------------- WHEREAS, the execution and delivery of this Agreement is a condition precedent to the parties' obligation to consummate the transactions contemplated by the Asset Purchase Agreement; NOW, THEREFORE, in consideration of the representations, warranties, covenants, conditions and agreements set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: Section 1. Definitions. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Asset Purchase Agreement. Section 2. Owned Principally-Used Computer Programs. (a) Subject to the retention of certain rights by Sellers pursuant to Sections 2(a)(iii) and 2(b) below, Sellers hereby sell, assign, transfer and convey to Purchaser all of Sellers' right, title and interest in and to the Owned Principally-Used Computer Programs, as set forth in Schedule 3.13(a) of the Asset Purchase Agreement, and any Improvements (as defined herein) as they exist as of the Closing. (i) The foregoing sale, assignment, transfer and conveyance in Section 2(a) expressly excludes the following SAGE components as enumerated on said Schedule 3.13(a) to the Asset Purchase Agreement: (A) IMR Framework Tools of CGI Information Systems & Management Consultants, Inc. ("CGI") and e-WAM tools from Wyde Corporation ("Wyde") (together, the "SAGE Tools"), which SAGE Tools shall be deemed Assumed Computer Programs as described in Section 4 hereof, and (B) those portions of SAGE created prior to September 15, 2002 owned by CGI (the "Licensed SAGE Portions" and, together with the SAGE Tools, the "CGI SAGE Components"), which Licensed SAGE Portions shall not be deemed Assumed Computer Programs hereunder, as to which Sellers have rights under certain licenses as set forth on Schedule 1.1(a) to the Asset Purchase Agreement, as amended (the "CGI Licenses"). (ii) Each of the Sellers hereby assigns to Purchaser (A) all of its rights and benefits in, and to the use of, the CGI SAGE Components, together with any and all related documentation and supporting material, howsoever derived and (B) all of its rights in the CGI Licenses. (iii) Purchaser acknowledges that Sellers may retain rights from CGI and Wyde with respect to use of the CGI SAGE Components or may enter into a new license with CGI or Wyde with respect to use of the CGI SAGE Components. In either event, Sellers agree that (A) neither the rights retained by Sellers (or any one of them) nor any new license with respect to the use of the CGI SAGE Components shall diminish or otherwise derogate from rights granted to Purchaser hereunder or under the Asset Purchase Agreement to use the CGI SAGE Components in the same manner as used by or for Sellers prior to the Closing Date and (B) Sellers will not take any action (including without limitation Page 2 - -------------------------------------------------------------------------------- breaching the CGI Licenses) that will diminish or otherwise derogate from rights granted to Purchaser hereunder or under the Asset Purchase Agreement to use the CGI SAGE Components in the same manner as used by or for Sellers prior to the Closing Date. (b) Sellers hereby retain, and Purchaser hereby grants to Sellers, a worldwide, fully paid up, royalty-free, perpetual, non-exclusive license to use, execute, reproduce, display, perform, sublicense, distribute solely within Sellers and their Affiliates, modify, and create derivative works of (to include any revision, modification, translation, abridgment, condensation, expansion or compilation) the Owned Principally-Used Computer Programs (excluding the CGI SAGE Components) solely for (i) internal use by Sellers and any Affiliate of Sellers and (ii) use in connection with providing services to Purchaser pursuant to the Transition Services Agreement (the "Sellers' License"). In no event shall Sellers (or any of their Affiliates or successors) sublicense, distribute or display the Owned Principally-Used Computer Programs or any significant portion thereof (other than the SAGE Tools) to any third parties, other than consultants who are assisting Sellers, any Affiliate of Sellers or any successor of Sellers, in connection with the relevant Computer Programs, provided that such consultants have executed written confidentiality agreements containing limitations on use and disclosure substantially similar to those in the Confidentiality Agreement. Purchaser shall have no duty hereunder to deliver software or documentation to Sellers in support of this grant of Sellers' License; provided, that upon the reasonable request of Sellers, at Sellers' expense, Purchaser shall provide Sellers with a copy of any of the Owned Principally-Used Computer Programs as the same existed on the Effective Date. (c) Purchaser hereby disclaims any and all liability with respect to the Owned Principally-Used Computer Programs licensed to Sellers under the Sellers' License, including without limitation liability arising out of or resulting from any representations or warranties as to the Owned Principally-Used Computer Programs, including without limitations any representations or warranties that the Owned Principally-Used Computer Programs will be uninterrupted or error free or will operate in combination with any other software programs or data. The Sellers' License for the Computer Programs described in Section 2(b) above is provided "AS IS" as of the Closing Date. Purchaser expressly disclaims all representations or warranties as to the Computer Programs licensed to Sellers under the Sellers' License, including without limitation representations or warranties that the Computer Programs licensed pursuant to such Sellers' License will be uninterrupted or error free or will operate in combination with any other software programs or data. (d) Sellers covenant to Purchaser that, at and after the Closing Date, Sellers (and their Affiliates and successors) shall exercise any license that they have in the Licensed SAGE Portions (whether such license is independently obtained from CGI or otherwise retained in accordance with Section 2(a)(iii)) solely for (i) internal use by Sellers and any Affiliate and (ii) use in connection with providing services to Purchaser pursuant to the Transition Services Agreement. In no event shall Sellers (or any of their Affiliates or successors) sublicense, distribute or display SAGE, or any component thereof (including Licensed SAGE Portions), to third parties, other than consultants who are assisting Sellers or any Affiliate or successors of Sellers in connection with the relevant Computer Programs, provided that such consultants have Page 3 - -------------------------------------------------------------------------------- executed written confidentiality agreements containing limitations on use and disclosure substantially similar to those in the Confidentiality Agreement. (e) Sellers shall promptly notify Purchaser if Sellers learn of or receive notice that any third party is infringing any of the Owned Principally-Used Programs or any Implemented Improvements (as defined in Section 7(b) of this Agreement) licensed hereunder, if any, and shall provide reasonable cooperation to Purchaser, at Purchaser's expense, in the investigation and prosecution (either civil or criminal) of any claims related thereto. Section 3. Owned Generally Used Programs. (a) Sellers hereby grant to Purchaser a worldwide, royalty-free, fully paid up, non-exclusive, perpetual, irrevocable, unrestricted license to use, execute, reproduce, display, perform, sublicense, distribute, modify, and create derivative works of (to include any revision, modification, translation, abridgement, condensation, expansion or compilation) the Owned Generally-Used Computer Programs, if any. (b) Sellers shall retain ownership of and unrestricted rights in the Owned Generally-Used Computer Programs, if any, subject to the license to Purchaser granted in Section 3(a). Section 4. Licensed Computer Programs. (a) Sellers represent and warrant, as of the Closing, that (i) the applicable Seller or Affiliate of Sellers is licensee of each of the Licensed Computer Programs, as set forth in Schedule 3.13.(c) of the Asset Purchase Agreement and (ii) they have obtained the consent of each licensor of the Licensed Computer Programs to permit Sellers to assign the relevant Licensed Computer Program License to Purchaser or its designee. Those Licensed Computer Programs for which sufficient consents have been obtained by Sellers to assign the licenses for such Licensed Computer Programs are hereby duly assigned to Purchaser and shall be termed herein "Assumed Computer Programs" and are set forth on Schedule 4 hereto. Purchaser hereby assumes and agrees to perform, and shall be bound by all of the obligations of, and restrictions on the "licensee" under, each of the Licensed Computer Program Licenses relating to the Assumed Computer Programs. (b) Purchaser acknowledges that, to the extent permitted by each Assumed Computer Program license agreement or pursuant to a written consent from the applicable "licensor," Sellers will retain the right to access, use and execute the Assumed Computer Programs, subject to the following limitations: (i) Purchaser hereby disclaims any and all liability with respect to the Assumed Computer Programs that are the subject of such rights retained by Sellers, including without limitation liability arising out of or resulting from any representations or warranties as to the Assumed Computer Programs that are the subject of such rights retained by Sellers hereunder, including without limitations any representations or warranties that the Assumed Computer Programs will be uninterrupted or error free or will operate in combination with any other software programs or data. Page 4 - -------------------------------------------------------------------------------- (ii) Sellers shall abide by the terms of each applicable Assumed Computer Program license. (iii) Purchaser shall not incur any incremental charge by reason of Sellers' use of any Assumed Computer Program. (iv) Sellers shall be fully liable for any and all breaches of the Licensed Computer Program Licenses relating to the Assumed Computer Programs attributable to the acts or omissions of Sellers, except for any such acts or omissions of Sellers related to the performance of the Transition Services (as defined in the Transition Services Agreement) taken at the request or direction of Purchaser, for which Purchaser shall be solely liable. Purchaser shall have no duty hereunder to deliver software or documentation to Sellers in support of Sellers' retained rights; provided, that upon the reasonable request of Sellers, at Sellers' expense, Purchaser shall provide Sellers with a copy of the same as it existed on the Effective Date. Section 5. Data and Databases. (a) Subject to Section 5(b) below, Sellers hereby sell, assign, transfer and convey to Purchaser all of Sellers' right, title and interest in and to the Databases and Data. (b) The foregoing sale, assignment, transfer and conveyance in Section 5(a) is subject to the Sellers' right to retain a single instance of the Data and the Databases as they exist as of the Closing Date. With respect to any Data the use of which is subject to a contract or license assigned by Sellers to Purchaser pursuant to the Asset Purchase Agreement, Sellers shall only retain such Data to the extent such retention is permitted by such contract or license. Sellers shall retain any such instance of the Data and Databases solely (i) for internal use by Sellers and each Affiliate of Sellers and (ii) to provide services to Purchaser and its Affiliates under the terms of the Transition Services Agreement. In no event shall Sellers (or any of their Affiliates or successors) sublicense, distribute or display the Data or Databases to any third parties, other than consultants who are assisting Sellers, any Affiliate of Sellers or any successor of Sellers, in connection with the relevant Data or Databases, provided that such consultants have executed written confidentiality agreements containing limitations on use and disclosure substantially similar to those in the Confidentiality Agreement. Except as set forth in the Asset Purchase Agreement or pursuant to Section 6 below, Purchaser shall have no duty hereunder to deliver all or any part of the Data or any Database; provided, that upon the reasonable request of Sellers, at Sellers' expense, Purchaser shall provide Sellers with a copy of the same as it existed on the Effective Date. Section 6. Recapture of Retroceded Business. (a) Purchaser shall maintain the Data and Databases which continue to be relevant to the Business (including any additions, deletions and modifications thereto) (i) in a manner consistent with Purchaser's then-current practices in maintaining other data relevant to the Business, (ii) in a manner substantially in accordance with industry standards and (iii) in a Page 5 - -------------------------------------------------------------------------------- manner that permits its segregation from other data unrelated to the Business for purposes of transitioning the Business to Sellers in accordance with Section 6(c) hereof in the event that Sellers terminate the Administrative Services Agreement in connection with a recapture of the Covered Insurance Contracts pursuant to the Reinsurance Agreements. Purchaser shall take such other actions as may reasonably be necessary from time to time to ensure that the Data and Databases are preserved so that they may be available for purposes of transitioning the Business to Sellers in accordance with Section 6(c) hereof in the event of such a recapture of the Business. (b) Purchaser shall comply with all Legal Requirements, and those regulatory and contractual requirements of Sellers and their Affiliates applicable to the Business immediately prior to the Closing, with regard to confidential information included in the Data or Databases, for so long as the retroceded business remains subject to recapture by Sellers. (c) In the event Sellers terminate the Administrative Services Agreement in connection with a recapture of the Covered Insurance Contracts pursuant to the Reinsurance Agreements, and subject to any third party restrictions and any required third party consents, Purchaser shall grant to Sellers such licenses to current versions of all computer programs (including any Computer Programs), databases (including any Databases) and data (including any Data) solely for the purpose of, and only to the extent necessary for, administering the Business during the period of such recapture. Purchaser and Sellers shall cooperate in any transition of the Business from Purchaser to Sellers in the event of such recapture, and Purchaser shall share equally all costs of soliciting and securing any necessary consents from third parties with interests in the relevant computer programs (including any Computer Programs), databases (including any Databases) and data (including any Data). Section 7. Improvements. (a) Schedule 7 hereto lists certain projects undertaken by Sellers prior to October 17, 2004 to improve or enhance the performance or utility of certain Computer Programs for which there is demonstrable work product that is identified by Sellers to Purchaser on Schedule 7 (collectively, "Improvements"). Purchaser may elect, in its sole discretion and for its benefit, to continue to develop one or more Improvements. In no event shall any modifications to the Computer Programs made by or on behalf of Purchaser that are not identified on Schedule 7 and for which there is not demonstrable work product prior to October 17, 2004 be deemed "Improvements." (b) If, within the one year period following the date hereof, Purchaser completes any such Improvement (with completion being deemed to occur upon the commencement of the use of any such Improvement in a production environment) (an "Implemented Improvement"), Purchaser shall (i) provide Sellers with a copy of such Implemented Improvement in machine readable form, on media in use by Purchaser at the time, and (ii) grant a license for such Implemented Improvement to Sellers on the same terms as set forth in Sections 2(b) and 2(c) above and subject to the conditions of 2(e); provided, however, that in no event shall Purchaser be required to provide such a copy or such a license if Purchaser's licenses with third parties would prohibit (either implicitly or explicitly) Purchaser from providing such a copy or such a license. This section 7(b) shall not (A) bind any third party purchaser or assignee of the Computer Programs to which the Improvements relate, unless such purchaser or assignee is an Page 6 - -------------------------------------------------------------------------------- Affiliate of Purchaser, or (B) encumber Purchaser's right to sell, assign, transfer or otherwise convey the same to any third party that is not an Affiliate of Purchaser. Section 8. Further Actions. At the reasonable request of either party from time to time, the other party shall use commercially reasonable efforts to deliver such materials or copies, execute and deliver such documents, take such actions, make such statements, or deliver or file such materials, or to cause any Affiliate of such party to do the same, as may be necessary to record, perfect, establish, memorialize or enforce any disposition of property documented herein. Section 9. Representations and Warranties. (a) Sellers hereby represent and warrant as follows: (i) The Owned Generally-Used Computer Programs, if any, and the Owned Principally-Used Computer Programs materially comply with their written specifications (if any) and do not contain back doors, Trojan horses, viruses, worms, drop dead devices, time bombs, malware or spyware, or other software routines or hardware components designed to permit unauthorized access, or to disable or erase software, hardware or data, or to perform similar other actions; (ii) Sellers have the authority and any and all necessary consents (copies of which have been provided to Purchaser) to assign to Purchaser the CGI Licenses and Sellers rights in the CGI SAGE Components; (iii) Sellers have the authority and any and all necessary consents (copies of which have been provided to Purchaser) to assign to Purchaser hereunder the licenses for the Assumed Computer Programs; (iv) All Data and the Databases are owned or legally possessed by Sellers, and Sellers have authority to transfer their rights in and to the Data and the Databases and the use thereof to Purchaser on the terms described herein; (v) Sellers (A) have all rights necessary to (x) use, execute, reproduce, display, perform, sublicense, create derivative works of (to include any revision, modification, translation, abridgment, condensation, expansion or compilation) or otherwise exercise rights in SAGE as it exists as of the Closing, as Sellers have historically done in the Business, (y) access and use the SAGE source code, as Sellers have historically accessed and used the same in the Business and (z) modify or create derivative works from (to include any revision, modification, translation, abridgment, condensation, expansion or compilation) SAGE as Sellers have historically done in the Business and (B) have not violated any of the CGI Licenses by virtue of the modifications made to SAGE by Sellers or access to or use of SAGE source code by Sellers prior to the Closing; and (vi) Purchaser's continued exercise of the rights described in Section 9(a)(v) following the Closing shall not violate any right or infringe any intellectual property rights of any third party. Page 7 - -------------------------------------------------------------------------------- (b) Except as expressly set forth herein or in the Asset Purchase Agreement, NEITHER PARTY MAKES OR RECEIVES ANY WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY CONCERNING THE OWNED PRINCIPALLY-USED COMPUTER PROGRAMS, OWNED GENERALLY-USED COMPUTER PROGRAMS, LICENSED COMPUTER PROGRAMS, DATA AND DATABASES, INCLUDING, WITHOUT LIMITATION, ALL WARRANTIES OF TITLE, MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. Section 10. Indemnity. (a) Indemnification by Sellers. Sellers agree to indemnify and hold harmless Purchaser and each of its directors, officers, employees, agents, representatives and Affiliates (and the directors, officers, employees, representatives and agents of such Affiliates) from any and all Losses to the extent they result from (i) third party claims arising out of or caused by any breach of any of the representations and warranties set forth herein or (ii) claims by CGI, Wyde or either of their successors arising out of or based upon Sellers' or any Affiliates' of Sellers use or possession of the CGI SAGE Components, (iii) third party claims arising out of or based upon (A) the delivery by Purchaser of copies of any of the Computer Programs, Data or Databases to Sellers, upon Sellers' request, in accordance with the terms of this Agreement, or (B) Sellers' failure to remove any operating system software or system or application software right-to-use licenses from the Transferred Assets as required by Section 13 hereof, or (iv) any successful enforcement of this indemnity. (b) Indemnification by Purchaser. Purchaser agrees to indemnify and hold harmless Sellers and each of their directors, officers, employees, agents, representatives and Affiliates (and the directors, officers, employees, representatives and agents of such Affiliates) from any and all Losses to the extent they result from (i) third party claims arising out of or caused by any breach of any of Purchaser's obligations under Section 6 hereof, (ii) third party claims arising out of or resulting from any access or use of the Approved Desktop Software (as defined in Section 13 hereof) by (A) Purchaser, its Affiliates or their respective employees, agents and representatives or (B) Sellers or any Affiliate or Subcontractor of Sellers, to the extent that such access or use of the Approved Desktop Software is in connection with the provision of any Transition Services or any Special Project hereunder, or (iii) any successful enforcement of this indemnity. (c) Indemnification Procedures. In the event either Purchaser or Sellers shall have a claim for indemnity against the other party under the terms of this Agreement with respect to a third-party claim, the parties shall follow the procedures set forth in Section 10.3 of the Asset Purchase Agreement. The parties hereto shall follow the procedures set forth in Section 11 hereof with respect to any other claim for indemnity. (d) Limitations on Indemnification. Any indemnification obligation of Sellers hereunder shall be in accordance with the terms and conditions applicable to breaches of representations and warranties set forth in Article X of the Asset Purchase Agreement, including, without limitation, Sections 10.4 and 10.5 of the Asset Purchase Agreement. For the avoidance of doubt, the dollar limitations set forth in Section 10.4(c) of the Asset Purchase Agreement shall Page 8 - -------------------------------------------------------------------------------- be applied to any breaches of representations or warranties in this Agreement as though such representations and warranties had been set forth in the Asset Purchase Agreement. Section 11. Arbitration. (a) Arbitration. After the Closing Date, except with regard to the relief set forth in Section 14, any dispute between Purchaser and Sellers with reference to the interpretation or performance of this Agreement, whether such dispute arises before or after the termination of this Agreement, shall be decided through negotiation and, if necessary, arbitration as set forth in this Section 11. The parties intend this Section 11 to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 11(a), the other party may request the court specified in Section 16(f) to compel arbitration in accordance with the Federal Arbitration Act. (b) Procedures. Sellers and Purchaser intend that any dispute between them arising under this Agreement be resolved without resort to any litigation. Accordingly, Sellers and Purchaser agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, Sellers and Purchaser agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Commercial Arbitration Rules of the American Arbitration Association. The arbitration hearing will be before a panel of three disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of either Seller or any of its Affiliates. Sellers and Purchaser will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either Sellers or Purchaser fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the American Arbitration Association will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision Page 9 - -------------------------------------------------------------------------------- (including without limitation each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either Sellers or Purchaser) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 16(f). In no event may the arbitrators award punitive or exemplary damages, except for the liable party's fraud, theft, embezzlement or other intentional acts or omissions of bad faith. Each party will be responsible for paying (i) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (ii) one-half of the fees and expenses charged by each arbitrator. Section 12. Delivery By Sellers. (a) All materials conveyed or licensed to Purchaser under or pursuant to this Agreement or the Asset Purchase Agreement, whether Computer Programs, Data or Databases, shall be segregated from Sellers' other materials in all material respects, at Sellers' expense, and delivered by Sellers to Purchaser (in machine-readable form, where applicable) as promptly as practicable (i) upon request by Purchaser, (ii) if not earlier requested, upon the date of termination or expiration of the Transition Services Agreement. (b) All Computer Programs, Data and Databases sold, assigned, transferred or conveyed to Purchaser under or pursuant to this Agreement or the Asset Purchase Agreement, or which are owned by Sellers or any Affiliate of Sellers and licensed to Purchaser under or pursuant to this Agreement or the Asset Purchase Agreement, shall be segregated from Sellers' other computer programs, data and databases in all material respects, at Sellers' expense, and delivered by Sellers (in machine-readable form) together with any available historical records thereof. With regard to Owned Principally-Used Computer Programs, such delivery shall include (i) all available source code (if available, as annotated by or for Sellers for their use or the use of any third party) and (ii) all available user and administrator documentation (as prepared by or for Sellers for their use or the use of any third party). (c) All third party-owned Computer Programs, Data and Databases licensed, sublicensed or as to which a license agreement is assigned to Purchaser under this Agreement or the Asset Purchase Agreement, or pursuant to either, shall be segregated from Sellers' other computer programs, data and databases in all material respects and provided to Purchaser (in machine-readable form, where applicable) together with a copy of all available ancillary third party materials. Section 13. Other Computer Programs. Purchaser acknowledges and agrees that Sellers are not providing any operating system software or system or application software right-to-use licenses with certain computers used by the Transferred Employees, any such software and licenses being Purchaser's sole responsibility to obtain. Purchaser further acknowledges, agrees and is notified that, to the extent any hardware constituting part of the Transferred Assets contains any software, other than the software and related components described on Schedule 13 hereto (such software and related components contained in or residing on the computers used by the Transferred Employees being collectively referred to herein as the "Approved Desktop Software"), Sellers shall remove such software as promptly as possible using commercially reasonable efforts. Purchaser shall provide Sellers with such reasonable cooperation and access (for as long as reasonably necessary) as Sellers may request for the purpose removing such Page 10 - -------------------------------------------------------------------------------- software from the Transferred Assets, including, without limitation, access to and reasonable cooperation of any Transferred Employees with particular skills or expertise. Section 14. Equitable Rights. The parties acknowledge and agree that money damages would not be a sufficient remedy for any failure of either party to timely deliver materials sold, assigned or licensed to the other party, including, without limitation, any such failure upon Sellers' termination of the Administrative Services Agreement in connection with a recapture of the Covered Insurance Contracts pursuant to the Reinsurance Agreements, under or pursuant to this Agreement or the APA, and that each party shall be entitled to seek equitable relief, including, without limitation, injunction and specific performance, as a remedy for such breach by the other party and that the breaching party shall not oppose the granting of such equitable relief, unless such non-performance or breach was caused directly or indirectly by the act or omission of the party seeking such equitable relief. Such remedy shall not be deemed to be the exclusive remedy for breach of this Agreement, but shall be in addition to the other remedies available to a party under this Agreement. Section 15. Term. This Agreement shall become effective on the Effective Date and shall remain in force in perpetuity (or for the longest period permitted by law). Section 16. Miscellaneous. (a) Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified mail, postage prepaid, or by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: To Sellers: Security Life of Denver Insurance Company Security Life of Denver International Limited Attention: Mark Tullis c/o ING North America Insurance Corporation 780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 And David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 Page 11 - -------------------------------------------------------------------------------- To Purchaser: Scottish Re (U.S.) Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: Nate Gemmiti, Esq. With a copy to: Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10019 (b) Entire Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the Related Agreements, the Confidentiality Agreement, and the other documents delivered pursuant hereto and thereto constitute the entire agreement among the parties hereto and their respective Affiliates with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them with respect thereto. (c) Successors and Assigns. The rights and obligations of the parties under this Agreement shall not be subject to assignment, and any attempted assignment shall be invalid ab initio; provided, that the foregoing shall not be construed to limit in any way Purchaser's rights to assign the Computer Programs, Data, Databases and related agreements and materials conveyed, transferred, assigned or licensed to Purchaser hereunder. The terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by and against the successors of the parties hereto. (d) Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. (e) Waivers and Amendments. Except as otherwise permitted herein, any modification, supplement, or amendment to this Agreement, or any waiver hereunder, shall be effective only if made in writing and signed by the designated officer of each of the parties hereto. No waiver of any provisions of this Agreement and no consent to any default under this Agreement shall be effective unless the same shall be in writing and signed by or on behalf of the party against whom such waiver or consent is claimed. No course of dealing or failure of any party to strictly enforce any term, right or condition of this Agreement shall be construed as a waiver of such term, right or condition. Waiver by either party of any default by the other party shall not be deemed a waiver of any other default. (f) Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contract entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in New York, over any suit, action or proceeding arising out of or relating Page 12 - -------------------------------------------------------------------------------- to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by U.S. registered mail addressed to such party at the address(es) set forth in Section 16(a) hereof shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. (g) No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. (h) Execution in Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. (i) Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only as broad as is enforceable. (j) Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any first party action filed by the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby, except for the liable party's fraud, theft, embezzlement or other intentional acts or omissions of bad faith. Page 13 - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties have, by their duly authorized representatives, executed and delivered this Agreement as of the Effective Date. SECURITY LIFE OF DENVER ING NORTH AMERICA INSURANCE CORPORATION INSURANCE COMPANY By: /s/ Mark Tullis By: /s/ David Pendergrass ------------------------------- ------------------------------- Print: Mark Tullis Print: David Pendergrass ---------------------------- ---------------------------- Title: President Title: Vice President ---------------------------- ---------------------------- Date: December 31, 2004 Date: December 31, 2004 ----------------------------- ----------------------------- SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield ----------------------------- Print: Oscar Scofield -------------------------- Title: CEO/ President -------------------------- Date: December 31, 2004 --------------------------- Page 14 - -------------------------------------------------------------------------------- EX-10.58 20 ex10-58.txt TRANSITION SERVICES AGREEMENT - -------------------------------------------------------------------------------- TRANSITION AND INTEGRATION SERVICES AGREEMENT by and between Security Life of Denver Insurance Company and Scottish Re (US), Inc. Dated as of December 31, 2004 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Section 1. Definitions.......................................................1 Section 2. Services to be Provided...........................................3 Section 3. Standard of Services, Review Procedures and Penalties.............9 Section 4. Subcontracting...................................................11 Section 5. Consideration for Services; Fee Dispute Resolution...............12 Section 6. Term and Termination.............................................14 Section 7. Transition Project Management....................................18 Section 8. Relationships Among the Parties..................................18 Section 9. Compliance With and Changes to Laws and Policies.................18 Section 10. Inability to Perform Services; Technology Changes................19 Section 11. Covenants and Other Agreements...................................20 Section 12. Dispute Resolution...............................................21 Section 13. Indemnification..................................................22 Section 14. Ownership, Data and Security.....................................22 Section 15. Force Majeure....................................................23 Section 16. Survival.........................................................25 Section 17. Notices..........................................................25 Section 18. Binding Effect; Assignment.......................................26 Section 19. Execution in Counterparts........................................26 Section 20. Waivers and Amendments...........................................26 Section 21. Exhibits; Schedules..............................................26 Section 22. Arbitration......................................................26 Section 23. Governing Law and Jurisdiction...................................28 Section 24. Sole Agreement...................................................28 Section 25. Waiver of Jury Trial; Multiplied and Punitive Damages............28 Section 26. Confidentiality..................................................28 Section 27. Captions.........................................................30 Section 28. Severability.....................................................30 Section 29. No Third Party Beneficiaries.....................................30 Section 30. Equitable Rights.................................................30 Schedules Schedule 2(a)(i) Scheduled Services Schedule 2(e) Transition Employees Schedule 2(g) Retained Employees, Retained Contractors & Designated Services Schedule 4(a) Current Subcontracted Services and Current Subcontractors Schedule 5(a)(i) Cost of Transition Employees Schedule 5(a)(iii) Hourly Rates for IT Services Schedule 5(a)(iv) Loaded Costs for non-IT Transition Services Schedule 5(a)(v) Cost of Retained Employees and Retained Contractors Schedule 5(a)(vi) Estimated Direct Costs Schedule 7(a) Transition Project Managers Schedule 9(c)(i) Privacy Policies -i- This TRANSITION SERVICES AND INTEGRATION AGREEMENT (this "Agreement"), dated as of December 31, 2004 (the "Effective Date"), is entered into by and among Security Life of Denver Insurance Company, a Colorado corporation (collectively with any of its Affiliates that may provide services hereunder, "Provider"), and Scottish Re (US), Inc., a Delaware corporation ("Recipient") for itself and for the benefit of Purchaser Affiliates (collectively, the "Recipient Transition Group"). W I T N E S S E T H: WHEREAS, Provider and Security Life of Denver International Limited, on the one hand, and Scottish Re Group Limited and Recipient, on the other hand, have entered into that certain Asset Purchase Agreement, dated October 17, 2004 (hereinafter, the "Asset Purchase Agreement"); and WHEREAS, the execution and delivery of this Agreement is a condition precedent to the parties' obligation to consummate the transactions contemplated by the Asset Purchase Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: Section 1. Definitions. All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Asset Purchase Agreement. With respect to all defined terms, whenever the singular term is used, the same shall include the plural, and whenever the plural is used, the same shall include the singular, where appropriate. "Added Scheduled Services" shall have the meaning set forth in Section 2(a)(i). "Asset Purchase Agreement" shall have the meaning set forth in the Recitals. "Confidential Information" shall have the meaning set forth in Section 26. "Current Subcontracted Services" shall have the meaning set forth in Section 4(a). "Current Subcontractor" shall have the meaning set forth in Section 4(a). "Designated Services" shall have the meaning set forth in Section 2(g). "Force Majeure Events" shall have the meaning set forth in Section 15(b). "IT Services" means all Transition Services relating to information technology. "Integration Services" means such services (i) as are required to transition the Business to Recipient, which may include, without limitation, knowledge transfer, process migration, data conversion, parallel testing and special project support and (ii) as mutually agreed-upon by the parties pursuant to Section 2(a)(iii) hereof. -1- "New Subcontractor" shall have the meaning set forth in Section 4(b). "Other Party" shall have the meaning set forth in Section 6(c)(i). "Privacy Policy" means the Provider Privacy Policy or the Recipient Privacy Policy, as applicable. "Provider Indemnified Parties" shall have the meaning set forth in Section 13(b). "Provider Privacy Policy" means the privacy policies of Provider, copies of which have been provided to Recipient. "Recipient Indemnified Parties" shall have the meaning set forth in Section 13(a). "Recipient Privacy Policy" means the privacy policies of Recipient, copies of which have been provided to Provider. "Retained Contractor Retention Period" shall have the meaning set forth in Section 2(g). "Retained Contractors" shall have the meaning set forth in Section 2(g). "Retained Employee Retention Period" shall have the meaning set forth in Section 2(g). "Retained Employees" shall have the meaning set forth in Section 2(g). "Retention Termination Date" shall have the meaning set forth in Section 2(g). "Scheduled Services" means each service listed on Schedule 2(a)(i) of this Agreement (as such schedule may be revised from time to time upon mutual agreement of the parties in accordance with Section 2.1(a)(i)). "Service Shortfall" shall have the meaning set forth in Section 3(d). "Shortfall Notice" shall have the meaning set forth in Section 3(d). "Special Project" means any service that Recipient requests Provider to provide and Provider has agreed in writing to provide pursuant to Section 2(b) hereof, which service does not fall within (i) the scope of the Transition Services identified in Section 2(a) or (ii) the scope of the Designated Services identified pursuant to Section 2(g). "Subcontractor" means any Current Subcontractor (as defined in and permitted by Section 4(a) hereof) and/or any New Subcontractor (as defined in and permitted by Section 4(b) hereof). "Taxes" shall have the meaning set forth in Section 5(e). -2- "Technology Change" means a material change to the technology infrastructure or applications used to provide any Transition Service, which change has a material adverse impact on any Transition Service or on another party's technology infrastructure or applications. "Termination Assistance" shall have the meaning set forth in Section 6(e). "Third Party Vendors" means those third party vendors with which Provider has in effect as of the Effective Date contractual arrangements to provide general services that may relate to the Transition Services. For the avoidance of doubt, no Third Party Vendors shall be deemed to be Subcontractors hereunder. "Third Party Vendor Services" means the reasonable cooperation by Provider described in Section 2(a)(ii). "Transition Assistance" shall have the meaning set forth in Section 6(e). "Transition Employees" means the employees or independent contractors of Provider or an Affiliate of Provider identified on Schedule 2(e) (any independent contractors are identified as such on Schedule 2(e)) who will serve Provider or an Affiliate of Provider full-time in the provision of the Transition Services (each such employee or independent contract is individually referred to herein as a "Transition Employee"). Transition Employees shall not include any Retained Employees or Retained Contractors. "Transition Plan" shall have the meaning set forth in Section 6(e). "Transition Project Managers" means the two individuals, one designated by Provider and one designated by Recipient, who are primarily responsible for administering this Agreement as described in Section 7. "Transition Services" means the Scheduled Services, the Added Scheduled Services, the Integration Services, the Third Party Vendor Services and Transition Assistance, and, for the avoidance of doubt, does not include any Designated Services. "TSA Monthly Invoice" means an invoice setting forth the fees payable by Recipient for all services provided hereunder, which invoice shall be delivered pursuant to Section 5(c) of this Agreement. "TSA Records" shall have the meaning set forth in Section 5(f). "Unauthorized Access" shall have the meaning set forth in Section 26. Section 2. Services to be Provided. (a) Transition Services. (i) Scheduled Services. Subject to Recipient's obligations pursuant to Section 2(h), and for the period of time described in Section 6 hereof, Provider shall provide or cause to be provided in accordance with the terms hereof, to Recipient -3- Transition Group all Scheduled Services. In addition, for so long as the Transition Services are being provided hereunder, Provider shall provide Recipient with reasonable access to all available service operating manuals and other relevant and existing materials reasonably required to use and receive such Transition Services and copies of any supplements or updates to such manuals and materials. During the period of time beginning on the Effective Date and ending sixty (60) days thereafter, Schedule 2(a)(i) may be amended from time to time upon the written request of Recipient to add as "Scheduled Services" any services that were being provided to the Business immediately prior to the Effective Date which services (A) were not previously identified in a writing (including electronic mail messages) between the parties as services being provided to the Business as of the Closing Date and (B) can, using commercially reasonable efforts, be provided to Recipient by Provider or its Affiliates (such requested services that meet the criteria set forth in clauses (A) and (B) above are collectively referred to herein as the "Added Scheduled Services"). For the avoidance of doubt, Added Scheduled Services shall be considered Scheduled Services hereunder. Provider shall have ten (10) Business Days from the date of receipt of a valid request to provide an Added Scheduled Service to commence the provision of such service in accordance with the terms and conditions of this Agreement. At such time, Schedule 2(a)(i) shall be amended to reflect the Added Scheduled Service, and the amended Schedule 2(a)(i) shall be initialed by the Transition Project Manager of each party and attached to this Agreement. (ii) Third Party Vendor Services. Upon Recipient's reasonable written request, Provider shall cooperate with Recipient in Recipient's negotiation for a direct agreement with any Third Party Vendor. (iii) Integration Services. As soon as practicable following the Effective Date, the parties shall use commercially reasonable efforts to agree upon and document the terms applicable to the delivery of the Integration Services, including the services descriptions, pricing, specific milestones and deadlines. If Provider and Recipient fail to agree upon the terms applicable to the delivery of the Integration Services within ninety (90) days after the Effective Date, the parties will resolve their dispute concerning the terms applicable to the delivery of such Integration Services in accordance with Section 12(a). Any such dispute shall be resolved taking into account (A) the nature of this Agreement, (B) Recipient's business needs and obligations under this Agreement and the Administrative Services Agreement and (C) Provider's capacity limitations in light of its need to support its ongoing business operations and to provide other Transition Services hereunder. (iv) Failure to Provide Services or Meet Applicable Standard Levels. To the extent that Provider fails to provide or fails to timely provide any Transition Service as required under this Agreement or fails to meet the applicable standard of service for any Transition Service as set forth herein, unless such failure was caused primarily by the act or omission of Recipient Transition Group, and such failure is the primary cause of Recipient's inability to provide any services in accordance with its obligations under the Administrative Services Agreement, Recipient shall have no liability under the Administrative Services Agreement for its failure to meet its obligations to provide such affected Administrative Services until such time as the earlier -4- of the following: (A) Provider cures such failure hereunder to the extent required to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, or (B) Recipient, using commercially reasonable efforts, finds an alternative source for such Transition Service or a work-around sufficient to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, the incremental costs associated with which shall be reimbursed by Provider. (b) Special Projects. If Recipient requests in writing that Provider provide a Special Project, which request shall include a description of the service(s) required to be performed in conjunction with such Special Project, Provider shall (i) within five (5) Business Days after the date of receipt of the request provide Recipient with written notice of receipt of the request and (ii) within ten (10) Business Days after the date of receipt of such request, provide Recipient with either (A) a written proposal for such Special Project, giving reasonable priority to other demands on Provider's resources under this Agreement and otherwise, or (B) written notice of its decision not to accept such Special Project, in which case Provider shall have no further obligation under this Agreement with respect to such Special Project, it being understood that Provider shall not be required to accept any requested Special Project and provide a written proposal therefor unless (x) with respect to Special Projects that constitute IT Services, Provider is the only reasonably-available source of information or expertise needed to undertake such Special Project, and such Special Project can be completed by Provider using commercially reasonable efforts and without any adverse impact on the Transition Services being provided or on Provider's or its Affiliates' other businesses, taking into account resource limitations and the other demands on the time of the individuals needed to undertake such Special Project in conjunction with the Transition Services and Provider's and its Affiliates' other businesses, and (y) with respect to any other Special Projects, Provider determines in good faith that it can perform such Special Project using commercially reasonable efforts using Transition Employees employed at the time Provider receives the request to perform the Special Project and without any adverse impact on the Transition Services being provided or on Provider's or its Affiliates' other businesses. For purposes of determining whether Provider is the only reasonably-available source of information or expertise under clause (x) of the foregoing sentence, it is specifically acknowledged and agreed that Provider will not be deemed to have access to or use of the Retained Employees or Retained Contractors. Each written proposal for a Special Project submitted by Provider pursuant to clause (ii)(A) above shall refer to the description provided by Recipient, include the estimated time and price of performing the Special Project (including any third-party consents necessary to perform the Special Project), and include any potential impact on then-existing Transition Services. If the parties agree on such proposal, Provider shall perform such Special Project in accordance with the terms of this Agreement. If the parties do not agree on such proposal within fifteen (15) Business Days after the date it is delivered to Recipient, Provider shall have no further obligation under this Agreement with respect to such Special Project. All work product created or delivered by Provider (alone or with others) pursuant to any Special Project, together with associated intellectual property rights, shall, unless otherwise indicated in an applicable Special Project proposal, be owned by Recipient, except that Recipient shall acquire no right thereby in confidential information or trademarks, service marks, or logos of Provider or its Affiliates. To the extent that Provider fails to provide any Special Project required to be provided by Provider under this Section 2(b), unless such failure was caused primarily by the act or omission of -5- Recipient Transition Group, and such failure is the primary cause of Recipient's inability to provide any services in accordance with its obligations under the Administrative Services Agreement, Recipient shall have no liability under the Administrative Services Agreement for its failure to meet its obligations to provide such affected Administrative Services until such time as the earlier of the following: (A) Provider cures such failure hereunder to the extent required to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, or (B) Recipient, using commercially reasonable efforts, finds an alternative source for such Special Project or a work-around sufficient to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, the incremental costs associated with which shall be reimbursed by Provider. (c) No Obligation to Provide Other Services. Except for the Transition Services, the Designated Services (as defined in Section 2(g) below), and any Special Projects agreed upon in accordance with Section 2(b) above, Provider shall have no obligation to provide any other services to Recipient pursuant to this Agreement. (d) Non-Exclusivity. Nothing herein shall prevent Recipient Transition Group during the term of this Agreement from obtaining any of the Transition Services or Designated Services from any other Person or from providing any Transition Service or Designated Service to itself using its own facilities and employees; provided, however, that the foregoing shall not excuse Recipient from complying with the provisions regarding notice of termination set forth in Section 6(b) of this Agreement or from its payment obligations with respect to Transition Services previously rendered. (e) Transition Employees. The parties acknowledge and agree that the Transition Employees are employees or independent contractors of the particular Seller or Affiliate of Sellers for whom such employee works, and not employees of Recipient. In all cases, Provider reserves the right to give direction and make final decisions with regard to any and all work assignments and employment matters. In the event of any question or conflict, the instruction of Provider shall be binding. During the term of this Agreement, Provider will use commercially reasonable efforts to (i) retain the Transition Employees to the extent such employees continue to be required to perform Transition Services and (ii) manage the number of Transition Employees so as to be commensurate with the level of services being provided at any time. On or about the first Business Day of each calendar month, the Transition Project Managers of each party shall meet (in person or telephonically) to discuss staffing levels, and shall consider in good faith each other's suggestions with respect thereto. Provider will give Recipient thirty (30) days notice prior to terminating any Transition Employee, and Recipient will have the opportunity to request that such Transition Employee be retained for a longer period of time (subject to the payment obligations described in Section 6(b) below), in which case Provider will use commercially reasonable efforts to retain such Transition Employee or replace such Transition Employee with another employee of appropriate skill and knowledge; provided, that in no event will Provider be obligated to retain any Transition Employee beyond the date that is eighteen (18) months after the Effective Date, unless the transition period is extended beyond such date by mutual agreement of the parties in accordance with Section 6(a) hereof, in which case Provider will use commercially reasonable efforts to retain such Transition Employee or replace such Transition Employee with another employee of appropriate skill and -6- knowledge. The inability to retain any particular Transition Employee(s) shall not excuse Provider from its obligation to provide the Transition Services hereunder. Recipient may, in its reasonable discretion, provide notice to Provider of its determination that the number of Transition Employees performing a particular Transition Service is in excess of that reasonably required to perform such Transition Service then being performed or that such Transition Service is no longer required and that, therefore, one or more Transition Employees should be terminated. Within five (5) Business Days of such notice, Provider shall advise Recipient in writing (to include electronic mail correspondence) of the impact, if any, that the termination of such Transition Employee(s) would have on the Transition Services and Special Projects, if any, then being provided and any impact on the standard of services therefor. Recipient will thereafter notify Provider of its election to either (A) have Provider terminate one or more Transition Employees or (B) have Provider continue to retain one or more Transition Employees. If Recipient notifies Provider that it elects to have one or more Transition Employees terminated, (x) Recipient shall have no obligation to pay for such number of Transition Employees from and after the date that is thirty (30) days after the date of Recipient's notification to Provider and (y) from and after the date that is thirty (30) after the date of Recipient's notification to Provider, Provider shall have no liability under this Agreement for any adverse impact on the Transition Services and Special Projects (including but not limited to failure to provide or timely provide or perform the same and failure to meet required service levels), which adverse impact was described to Recipient in writing (including by electronic mail correspondence) prior to such termination. In no event shall any such adverse impact on the Transition Services that was described to Recipient in writing (including by electronic mail correspondence), including but not limited to failure to provide or timely provide or perform the same and failure to meet required service levels, resulting directly or indirectly from the termination of one or more Transition Employees at Recipient's request or direction excuse Recipient from the performance of any of its duties or obligations under the Administrative Services Agreement. (f) No Requirements. Nothing in this Agreement requires Recipient Transition Group (or any of its successors and assigns) to request any particular quantity or level of any Transition Service provided under this Agreement. (g) Retained Employees and Retained Contractors. (i) Retained Employees. In lieu of utilizing the Retained Employees (as defined below) to provide certain Scheduled Services, Provider agrees to second the employees listed on Schedule 2(g) (the "Retained Employees" and, each, a "Retained Employee") to Recipient to perform such services as may be required by Recipient relating to the projects and objectives described on Schedule 2(g) (collectively, the "Designated Services"). During the Retained Employee Retention Period (as defined below), Provider agrees to retain the Retained Employees as Provider employees, and Provider will use reasonable efforts consistent with past practice to preserve positive employer/employee relationships with the Retained Employees but will not be required to pay any retention bonuses other than those reflected on Schedule 5(a)(v) or otherwise take any actions beyond what would be taken to preserve employer/employee relationships with employees who are not Retained Employees. Provider is not required to retain any Retained Employee who (A) voluntarily resigns from employment with Provider, (B) is terminated by Provider for gross or willful misconduct that causes -7- demonstrable and serious injury to Provider or has an adverse impact on Provider's standing and reputation, (C) is terminated by Provider for materially and continually failing to perform his or her duties and responsibilities, or (D) becomes unable to perform the essential functions of his or her position due to a disability that cannot be reasonably accommodated. For purposes of this Agreement, the "Retained Employee Retention Period" for each Retained Employee will begin on January 1, 2005 and will continue until June 30, 2006 or the Retention Termination Date (as defined below) for such Retained Employee, whichever occurs earlier. During the Retained Employee Retention Period, Provider will assign the Retained Employees to the provision of the Designated Services. Recipient may, in its reasonable discretion, provide notice to Provider of its determination that the number of Retained Employees performing the Designated Services is in excess of that reasonably required to perform such Designated Services then being performed or that certain Designated Services are no longer required and that, therefore, one or more specific Retained Employees should be removed from the roster of Retained Employees. From and after the date that is thirty (30) days after the date of Recipient's notification to Provider that one or more Retained Employees should be removed from the roster of Retained Employees (the "Retention Termination Date"), Recipient shall have no obligation to pay for the Retained Employees so identified and Provider shall have no liability under this Agreement to second or otherwise make such Retained Employees available to Recipient pursuant to this Section 2(g). Notwithstanding the foregoing, it is the intent of the Parties that throughout the Retained Employee Retention Period, (x) each Retained Employee engaged hereunder shall continue to be employed solely by Provider, continue to report to Provider for purposes of payroll, employee benefits and other administrative matters, and continue to be subject to Provider's employment policies and procedures; (y) Recipient shall have no authority to hire, fire, discipline or otherwise affect the employment relationship of the Retained Employees with Provider, and will not in any case be considered to be an employer or joint employer of such Retained Employees or to assume any responsibilities or obligations of such an employer; and (z) Provider will continue to be fully responsible with regard to worker's compensation, unemployment compensation, payroll tax, severance, and related matters with respect to all Retained Employees. The foregoing shall in no way limit Recipient's obligations under Section 5 and Section 13(b) with respect to the Retained Employees. The provisions of this Section 2(g) shall in no way affect Provider's responsibility to provide or cause to be provided the Transition Services. (ii) Retained Contractors. During the Retained Contractor Retention Period (as defined below), Provider agrees to make those independent contractors listed on Schedule 2(g) (the "Retained Contractors" and, each, a "Retained Contractor") available to Recipient full-time to perform, at Recipient's direction, the Designated Services. During the Retained Contractor Retention Period, Provider will use commercially reasonable efforts to retain the Retained Contractors to the extent such contractors continue to be required to perform Designated Services. Each of Recipient and Provider will cooperate and use commercially reasonable efforts either to (A) assign (and obtain, as necessary, the consent of each Retained Contractor to the assignment of) each contract between Provider or its Affiliate and any of the Retained Contractors to Recipient or (B) negotiate a direct agreement between Recipient and each of the Retained -8- Contractors on substantially the same or better terms as those currently in effect under the applicable contract between Provider or its Affiliate and such Retained Contractor, as promptly as possible after the Closing Date. The "Retained Contractor Retention Period" for each Retained Contractors will begin on January 1, 2005 and will continue until the earliest to occur of (x) June 30, 2006, (y) the date on which the contract between Provider or its Affiliate and such Retained Contractor is assigned to Recipient or Recipient enters into a direct agreement with such Retained Contractor, or (z) the date that is thirty (30) days following the date Provider receives written notification from Recipient that such Retained Contractor should be removed from the roster of Retained Contractors. All benefits that inure to Provider or its Affiliate under Provider's or such Affiliate's contractual arrangements with any Retained Contractor shall be passed through to Recipient to the extent such benefits relate to the Designated Services provided by such Retained Contractor. (h) Reasonable Assistance. As necessary in connection with the Transition Services and any agreed-upon Special Projects, and provided that Provider complies with Recipient's security procedures and privacy policies as then in effect, Recipient shall provide Provider with any reasonable assistance, including providing to Provider such information, data, access to premises, management decisions, access to and reasonable cooperation of any Transferred Employees, Retained Employees and Retained Contractors with particular skills or expertise, approvals and acceptances, as may be reasonably required to permit Provider to provide the Transition Services, Designated Services and any agreed-upon Special Projects hereunder. (i) Recipient Employees. It is expressly understood that, except as otherwise provided herein, any services rendered by Recipient employees after the Effective Date shall not be considered Transition Services, and Provider shall not be responsible for providing the same. (j) Access. As necessary in connection with the Transition Services, the Designated Services, and any agreed-upon Special Projects, and provided that Recipient complies with Provider's security procedures and privacy policies as then in effect, Provider shall give Recipient reasonable access to the servers and other information technology systems used to provide the Transition Services, the Designated Services, and any agreed-upon Special Projects; all requests for such access shall be made in advance by Recipient's Transition Project Manager to Provider's Transition Project Manager. Nothing in this Agreement shall require Provider to provide any third party with access to its systems, its computing environment or its confidential information other than on commercially reasonable terms regarding privacy, security, confidentiality and timing. Section 3. Standard of Services, Review Procedures and Penalties. (a) Standard of Services for Transition Services. Provider agrees that it shall provide the Transition Services or, if Provider is utilizing a Subcontractor (as permitted under Section 4 hereof), Provider shall cause such Subcontractor to provide such Transition Services, at least (i) with respect to IT Services, at the same service levels at which such services were performed within or for the Business immediately prior to the Effective Date or, with respect to any other Transition Services, using at least the same standard of care that Provider or -9- a Current Subcontractor used immediately prior to the Effective Date in performing such services within or for the Business, (ii) in substantial compliance with Applicable Law, and (iii) in compliance with industry standards. Provider agrees (w) to provide Recipient with documentation describing with reasonable specificity, and pass through to Recipient Transition Group, any Current Subcontractor obligations to meet service levels for Current Subcontracted Services, and (x) to enforce all contractual provisions with such Current Subcontractors with respect to their obligations to meet such service levels or otherwise ensure that all applicable service level standards are met. Provider agrees (y) to provide Recipient with documentation describing with reasonable specificity, and to pass through to Recipient Transition Group, any New Subcontractor obligations to meet service levels with respect to Transition Services to be provided by New Subcontractors (as permitted under Section 4 hereof), if any, and (z) to enforce all contractual provisions with such New Subcontractors with respect to their obligations to meet such service levels or otherwise ensure that all applicable service level standards are met. As of the Effective Date, IBM is the only Current Subcontractor that is obligated to meet service levels for Current Subcontracted Services, and a true and correct copy of such service level obligations applicable to the Current Subcontracted Services provided by IBM has been provided to Recipient. (b) Change in IT Services. Provider reserves the right to make any changes to (i) the manner in which the IT Services are provided and (ii) the location from which the IT Services are provided, including any changes to personnel involved in the provision of such IT Services, provided that Provider shall not, without Recipient's prior written consent, such consent not to be unreasonably withheld, thereby cause any adverse change in service levels required hereunder or functionality being supported, or result in any additional costs to Recipient. (c) Monthly Meeting. For the first twelve (12) weeks after the Effective Date, the Transition Project Managers of each party shall meet at least once weekly, or more frequently if mutually agreed upon, (in person or telephonically) to discuss the status of the transition, manage open issues, discuss any planned termination dates for particular Transition Services, and review service levels achieved and missed in the previous month, to the extent such information is available, as well as non-achievement of targets and corrective actions taken or planned. Thereafter, such meetings shall be held (in person or telephonically) on at least a monthly basis, or more frequently if mutually agreed upon. Once per month, during the first twelve (12) weeks after the Effective Date and thereafter, in advance of each such monthly meeting, Provider's Transition Project Manager shall provide to Recipient's Project Manager a written report summarizing all available current information on compliance with and deviation from the service levels and technology management standards as are applicable in accordance with the provisions of Section 3(a). (d) Failure to Meet Standards for Services. If Recipient provides Provider with written notice ("Shortfall Notice") of any failure to meet the standards for Transition Services required by Section 3(a) hereof ("Service Shortfall"), as determined by Recipient in good faith, Provider shall rectify such failure as soon as possible using commercially reasonable efforts. Provider shall be responsible for all internal and out-of-pocket costs incurred by Recipient in curing the Service Shortfall. In addition, if such Service Shortfall is not cured (i) for particular Transition Services provided by IBM, within the time frames required by the service -10- level obligations of IBM described in the last sentence of Section 3(a) above or (ii) for any other Transition Service, within the cure window for such Transition Service as set forth on Schedule 2(a)(i), if any, or, if no cure window is set forth on Schedule 2(a)(i), within a commercially reasonable time, then Provider shall reimburse Recipient for all incremental costs incurred by Recipient in procuring an alternative provider of such services (in excess of the costs expected to be incurred by Recipient hereunder) and confer upon Recipient the benefit of any applicable service level credits on amounts paid to Provider hereunder, which service level credits shall be determined in accordance with Provider's contract with IBM, as it relates to the Transition Services provided by IBM. Neither Provider nor its Affiliates will take any action to cause IBM to treat the Business, Provider or Security Life of Denver International Limited any less favorably under that certain Information Technology Services Agreement between ING North America Insurance Corporation and IBM dated December 16, 2003 than such entities were treated by IBM immediately prior to the Effective Date. Section 4. Subcontracting. (a) Current Subcontractors. Provider reserves the right to continue to subcontract the performance of those Transition Services that are being subcontracted immediately prior to the Effective Date ("Current Subcontracted Services") to such subcontractor that is not an Affiliate of Provider and that is providing those Current Subcontracted Services to the Business immediately prior to the Effective Date ("Current Subcontractor"), which Current Subcontracted Services shall be listed on Schedule 4(a) along with the applicable Current Subcontractor; provided, that Provider (i) shall remain primarily responsible under this Agreement for any and all obligations with respect to such Current Subcontracted Services as are undertaken by such Current Subcontractor and (ii) shall be responsible for compliance by any Current Subcontractor with the terms and conditions of this Agreement and for any acts or omissions of such Current Subcontractor, other than such acts or omissions at the request or direction of Recipient. Notwithstanding the foregoing, and except as set forth in Section 4(d) hereof, under no circumstances shall Provider have any liability or responsibility for any act or omission of any Current Subcontractor that can be characterized as a failure to adequately or appropriately perform any Current Subcontracted Services if the applicable Current Subcontracted Services otherwise meet the service level standards described in Section 3(a) hereof. (b) New Subcontractors. Except in connection with a global, enterprise-wide or multi-business unit contracting arrangement entered into by Provider or its Affiliates, or as otherwise provided in Section 4(a), Provider may not subcontract the performance of any obligations of Provider hereunder to any subcontractor that is not an Affiliate of Provider without Recipient's prior written approval, such approval not to be unreasonably withheld or delayed. Provider shall notify Recipient if it does not or cannot secure the right to disclose to Recipient those portions of a contract between Provider (or an Affiliate of Provider) and such subcontractor relating to service levels and the remedies for failing to achieve such service levels for applicable Transition Service(s), and Provider's failure to obtain such approval shall be deemed a reasonable basis for Recipient to withhold its approval hereunder. Each such subcontractor approved by Recipient in accordance herewith shall be referred to as a "New Subcontractor." Provider (i) shall remain primarily responsible under this Agreement for any and all obligations undertaken by any such New Subcontractor and (ii) shall be responsible for compliance by any -11- New Subcontractor with the terms and conditions of this Agreement and for any acts or omissions of such New Subcontractor, other than such acts or omissions at the request or direction of Recipient. Notwithstanding the foregoing, and except as set forth in Section 4(d) hereof, under no circumstances shall Provider have any liability or responsibility for any act or omission of any New Subcontractor that can be characterized as a failure to adequately or appropriately perform any New Subcontracted Services if the applicable New Subcontracted Services otherwise meet the service level standards described in Section 3(a) hereof. Notwithstanding the foregoing, if Recipient contracts directly with any subcontractor for the provision of any Transition Services, Provider shall have no further obligations or responsibilities with respect to such Transition Services, and Provider shall have no liability whatsoever for any acts or omissions of such subcontractor. Provider will provide reasonable advance notice to Recipient of any new subcontractor permitted hereunder but not required to be approved in advance by Recipient, and any Transition Services provided by any such new subcontractor will be provided on the same terms and conditions as such new subcontractor is contractually bound to provide any similar services to Provider and/or its Affiliates generally. As of the date of this Agreement, to Provider's Knowledge, no global, enterprise-wide or multi-business unit arrangement with a new subcontractor that would result in the provision of Transition Services by such new subcontractor is currently anticipated. (c) Right to Disclose. Provider shall use commercially reasonable efforts to procure from IBM and each other Subcontractor the right to disclose to Recipient those portions of the applicable contract between Provider (or an Affiliate of Provider) and such Subcontractor relating to service levels for any Transition Service. Schedule 4(c) sets forth a list of all Current Subcontractors for which Provider does not have the right to disclose such information as of the Effective Date. (d) Subcontractor Benefits. In addition to all other rights and obligations of the parties with respect to Subcontractors as set forth herein, all benefits that inure to Provider under Provider's contractual arrangements with any Subcontractors shall be passed through to Recipient to the extent such benefits relate to the Transition Services provided by such Subcontractor. Section 5. Consideration for Services; Fee Dispute Resolution. (a) Consideration for Transition Services and Designated Services. In full consideration for Provider (or a permitted Subcontractor) providing the Transition Services and Designated Services hereunder and any and all rights granted hereunder, Recipient shall pay to Provider and reimburse Provider for, each of the following: (i) the (A) loaded cost of each Transition Employee who is an employee of Provider or any of its Affiliates during the applicable measurement period and (B) cost, on a pass-through basis, of each Transition Employee who is an independent contractor of Provider or any of its Affiliates during the applicable measurement period, as set forth on Schedule 5(a)(i); (ii) all fees and other charges, on a pass-through basis, from Subcontractors relating to the Transition Services; -12- (iii) the cost of any Provider employees (other than Transition Employees) providing IT Services, which cost will be at the hourly rates set forth on Schedule 5(a)(iii); (iv) the cost of any other Provider employees providing Transition Services (other than Transition Employees and employees providing IT Services), which cost will be Provider's loaded cost associated with such employee, determined by Provider in accordance with Schedule 5(a)(iv); (v) the (A) loaded cost of each Retained Employee who is an employee of Provider or of any of its Affiliates during the applicable measurement period, and (B) cost, on a pass-through basis, of each Retained Contractor who is an independent contractor of Provider or of any of its Affiliates during the applicable measurement period, as set forth on Schedule 5(a)(v); and (vi) all of Provider's direct costs in connection with the provision of Transition Services and Designated Services (e.g. travel expenses, computer and telephone costs for Transition Employees and Retained Employees, consent or additional license fees charged by third party licensors in connection with Provider providing or Recipient Transition Group receiving the Transition Services and the Designated Services hereunder); provided, that all travel will be pre-approved by Recipient and will be reimbursed in accordance with Recipient's travel reimbursement guidelines provided to Provider in writing; direct costs in excess of $1,000 that are not listed on Schedule 5(a)(vi) will not be incurred without the prior approval of Recipient's Transition Project Manager. For the avoidance of doubt, the overarching principle in the calculation of the consideration for the Transition Services and the Designated Services is that Provider will neither sustain a loss, nor earn a profit, as a result of the provision of such services. In no event shall Recipient be obligated to reimburse Provider, subject to Section 6(b)(i) hereof, for any fees, such as "kill fees" that would have been incurred by Provider as a result of Provider's decision to sell the Business. (b) Consideration for Special Projects. Pricing for any Special Projects will be negotiated separately in good faith and mutually agreed to by the parties. (c) Payment. Commencing with the calendar month ending January 31, 2005, Provider shall provide Recipient with accurate TSA Monthly Invoices by the fifteenth (15th) day of the month following the end of each calendar month for (i) all Transition Services and Designated Services rendered by Provider during such month, and (ii) all invoices related to the Transition Services and Designated Services received from Subcontractors or other third parties during such month (the parties acknowledging that there may be a lag in the submission of charges from third parties relating to the provision of Transition Services and Designated Services and that any such lag shall not excuse Recipient from its obligation to timely make payment of all undisputed amounts set forth in the TSA Monthly Invoices, provided, that Provider uses its commercially reasonable efforts to obtain such Subcontractor or third party invoices). Payment of all undisputed amounts in each TSA Monthly Invoice shall be due and payable within sixty (60) days of Recipient's receipt of such TSA Monthly Invoice. (d) Fee Dispute Resolution. If a dispute arises as to any TSA Monthly Invoice, the parties shall use their commercially reasonable efforts to reach an agreement with -13- respect to such disputed amount. If the respective parties at Recipient and Provider responsible for preparing and reviewing, as the case may be, the TSA Monthly Invoices are unable to reach an agreement within ten (10) Business Days after Recipient has notified Provider that there is a fee dispute, then the Transition Project Managers of Recipient and Provider shall confer and use their commercially reasonable efforts to come to a resolution of the dispute. If the parties are unable to agree upon a resolution of the dispute within ten (10) Business Days after the Transition Project Managers of Recipient and Provider have conferred, then the dispute shall be settled in accordance with Section 22 hereof. (e) Taxes. Any local or state sales tax, transfer tax, value-added tax, goods and services tax or similar tax (including any such taxes that are required to be withheld, but excluding all other taxes including, but not limited to, taxes based upon or calculated by reference to income, receipts or capital) ("Taxes") imposed on the fees paid to Provider pursuant to this Section 5 shall be separately stated on the relevant invoice and shall be paid by Recipient to Provider. Provider shall be responsible for submitting Taxes to the appropriate taxing authority. (f) TSA Records. Provider shall maintain true and correct records of all receipts, invoices, reports and other documents relating to the Transition Services and Designated Services rendered hereunder (the "TSA Records") in accordance with its standard accounting practices and procedures, consistently applied, which practices and procedures are employed by Provider in its provision of Transition Services and Designated Services. Section 6. Term and Termination. (a) Period of Services. Provider hereby agrees to provide or cause to be provided the Transition Services and the Designated Services for the period of time beginning on the Effective Date and ending eighteen (18) months thereafter, unless such service is earlier terminated as provided herein. Recipient may earlier terminate this Agreement, any Transition Service provided hereunder, or the Designated Services in accordance with Section 6(b) below and either party may earlier terminate this Agreement in accordance with Section 6(c) below. In the event that Recipient requests that Provider provide any Transition Service or the Designated Services beyond the eighteen (18) month anniversary of the Effective Date, Provider will consider such request, and the parties shall negotiate in good faith to determine whether they can agree on terms (including pricing) for the extension of the term of this Agreement with respect to such Transition Service or Designated Services. (b) Termination of Individual Transition Services or Designated Services. (i) Termination of Transition Services. Any specific Transition Service may be terminated by Recipient in accordance with this Section 6(b) or by either party in accordance with Section 6(c). The termination of any particular Transition Service in accordance with this Section 6(b) shall not terminate any other Transition Service or any Special Project or terminate this Agreement with respect to any other Transition Service or Special Project. Whenever Recipient desires to terminate a Transition Service, for any reason or no reason, Recipient shall provide to Provider not fewer than thirty (30) days, or such greater number of days as may be designated on -14- Schedule 2(a)(i) with respect to any Scheduled Service, prior to the proposed termination date, written notice describing the Transition Service to be terminated and the termination date. Upon such termination date, charges for such terminated Transition Service shall cease to accrue, but Recipient shall continue to be responsible for the costs of any other services being provided hereunder, including, without limitation, the cost of all Transition Employees who continue to be employed following the termination of such Transition Service, subject to Provider's obligation to manage the number of Transition Employees as described herein. It is expressly understood that so long as the required notice is given in accordance with this Section 6(b), Recipient Transition Group shall have no obligation to pay for any "early-termination" or "kill fee" costs or expenses payable to third parties (including, without limitation, Subcontractors and independent contractors) or incurred internally by Provider as a result of the termination of Transition Services in accordance with the terms of this Section 6(b) or the termination, diminishment or other modification of services or equipment provided to Provider by a third party, which costs would have been incurred by Provider upon the disposition of the Business if no Transition Services were provided. No such termination of any Transition Service shall in any way affect Provider's obligation to provide or make available any other service provided or required pursuant to this Agreement or Recipient's obligation to pay for the same, all in accordance with the terms of this Agreement. (ii) Resumed Services. During the term of this Agreement (not to extend beyond eighteen (18) months, except as provided above), Recipient may request that Provider resume the performance of any previously-terminated Transition Service. If, using commercially reasonable efforts, Provider can resume the performance of such Transition Service utilizing Transition Employees who continue to be employed at the time of the request, taking into account the skills and experience of such Transition Employees and any other demands on the time of such Transition Employees in connection with provision of other Transition Services, Provider will resume the performance of such terminated Transition Service within a commercially reasonable period of time not to exceed thirty (30) days following the date of Recipient's request. (iii) Termination of Designated Services. The Designated Services shall terminate automatically upon the removal from the roster of Retained Employees and Retained Contractors of, respectively, the last Retained Employee and Retained Contractor in accordance with the provisions of Section 2(g). (c) Termination of Agreement. (i) Either party (the "Terminating Party") may terminate this Agreement (or with respect to Section 6(c)(i)(A), any particular Transition Service(s)) with immediate effect by notice in writing to the other party (the "Other Party") upon or at any time after the occurrence of any of the following events: (A) The Other Party is in default of any of its material obligations under this Agreement, or if Provider is in default of any of its material obligations with respect to any particular Transition Service, and (if the breach is capable of being remedied) has failed to remedy the breach -15- within thirty (30) days after receipt of notice in writing from the Terminating Party giving the particulars of the breach; (B) The Other Party shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; and (C) An involuntary case or other proceeding shall be commenced against the Other Party seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days, or an order for relief shall be entered against the Other Party. (ii) If this Agreement is terminated by Recipient in accordance with Section 6(c)(i), (iii) or (iv) hereof, or if any portion of this Agreement is terminated by Recipient in accordance with Section 6(c)(i)(A) or 6(c)(iii) hereof, subject to Section 25 hereof, as Recipient's sole and exclusive remedy, Recipient shall be entitled to recover, and Provider shall pay to Recipient, Recipient Transition Group's reasonable and actual incremental costs (in excess of the costs expected to be incurred by Recipient Transition Group under this Agreement) incurred in procuring substitute services for a period of time following termination of the Agreement (not to extend beyond the day that is eighteen (18) months after the Effective Date) or such relevant portion thereof that is reasonable under the circumstances until Recipient Transition Group can arrange for Recipient Transition Group or a third party to commence providing the terminated Transition Services and Designated Services. Subject to Section 25 hereof, upon payment of such incremental costs, if any, in accordance with this Section 6(c)(ii), Provider shall have no further liability or obligation to Recipient pursuant to this Agreement. In the event that Recipient terminates the Agreement pursuant to Section 6(c)(i), (iii) or (iv), and such termination is the primary cause of Recipient's inability to provide any services in accordance with its obligations under the Administrative Services Agreement, Recipient shall have no liability under the Administrative Services Agreement for its failure to meet its obligations to provide such affected services until such time as Recipient, using commercially reasonable efforts, finds an alternative source for such Transition Service or Designated Service or a work-around sufficient to enable Recipient to resume providing such services in accordance with its obligations under the -16- Administrative Services Agreement, the incremental costs associated with which shall be reimbursed by Provider. (iii) If Provider entirely fails to perform any particular Transition Service required hereunder for a period of fifteen (15) days or more for any reason other than Recipient Transition Group's failure to take actions required of Recipient under this Agreement, Recipient may terminate this Agreement as to such Transition Service upon written notice to Provider, with termination to be effective upon receipt of such notice or on such later date as Recipient may specify. (iv) Subject to Section 10(a), if, for a period of five (5) consecutive Business Days or more, Provider entirely fails to perform the Transition Services required hereunder as a whole in substantially all respects and to such an extent that the ability of the Recipient Transition Group to continue the Business as a whole is endangered, unless such failure was caused primarily by the act or omission of Recipient Transition Group, Recipient may terminate this Agreement upon written notice to Provider specifying a termination date. (d) Effect of Termination; Return of Materials. As promptly as practicable upon termination of this Agreement, or, if applicable, upon earlier termination of any particular Transition Service and any related Transition Assistance or, if applicable, upon earlier termination of the Designated Services, and except as otherwise set forth in the Technology Transfer and License Agreement and subject to Provider's rights to retain an instance of all Data and a copy of all Computer Programs as described therein, (A) each party will return to the other party all materials and property in its possession or control (or the possession or control of an Affiliate) which is owned by or licensed to such other party or its Affiliates, and (B)(i) all materials and property (to the extent embodied in a tangible form) that constitute any part of the Transferred Assets (as defined in the Asset Purchase Agreement), which materials and property are no longer needed for the performance of other Transition Services or other Transition Assistance or Designated Services under this Agreement, shall be delivered to Recipient in such machine readable format and media as mutually agreed upon by the parties and (ii) copies of any and all additions or modifications made or caused to be made to the Owned Principally-Used Computer Programs (including, to the extent available, both object code and source code) by either Provider or Recipient for the benefit of Recipient under this Agreement shall be provided to Recipient and no copies thereof shall be retained by Provider. (e) Transition Assistance. In preparation for the discontinuation of any Transition Service provided under this Agreement, at Recipient's request, Provider shall, consistent with its obligation to provide Transition Services hereunder and with the cooperation and assistance of Recipient, use commercially reasonable efforts to provide such knowledge transfer services and to take such steps as are reasonably required in order to facilitate a smooth and efficient transition and/or migration of records and responsibilities to Recipient so as to minimize any disruption of services ("Transition Assistance"). Recipient shall cooperate with Provider to allow Provider to complete the Transition Assistance as early as is commercially reasonable to do so. As part of the Transition Assistance, the parties will work together to develop a mutually-agreeable transition plan (the "Transition Plan") setting forth the respective tasks to be accomplished by each party in connection with the orderly transition and a schedule -17- pursuant to which the tasks are to be completed. Such Transition Assistance shall be considered an additional Scheduled Service, and the fees and costs charged by Provider for providing the same shall be set forth in a schedule agreed to by the parties, or, in the absence of agreement of the parties for any particular service, shall be Provider's loaded costs of providing the same, which costs shall be in accordance with the rates and methodologies described in Section 5 hereof. Section 7. Transition Project Management. Each of Provider and Recipient Transition Group shall appoint a Transition Project Manager. Each Transition Project Manager may appoint or designate in writing, directed to the other Transition Project Manager, a person or persons to act in his or her stead on day-to-day matters within various functional areas such as, by way of example, and not in limitation, primary contacts to deal with IT matters, actuarial matters or financial matters. The Transition Project Manager may serve as the primary contact point for his or her respective principal with respect to issues that may arise during the performance of this Agreement; provided, that, (i) except for those duties expressly assigned to the Transition Project Managers hereunder, neither Transition Project Manager, nor any designee of either Transition Project Manager, shall have the authority to bind his or her respective principal and (ii) neither Transition Project Manager, nor any designee of either Transition Project Manager, shall have the authority to change the terms or conditions of this Agreement. Each party's initial Transition Project Manager, along with his or her title and relevant contact information (including business address, email address, telephone number and facsimile number), are identified on Schedule 7(a). Any party may, by notice given to the other party, replace its Transition Project Manager hereunder, provided that notice of such change shall be effective upon receipt. Section 8. Relationships Among the Parties. Nothing in this Agreement shall cause the relationship between Provider and Recipient Transition Group to be deemed to constitute an agency, partnership or joint venture. The terms of this Agreement are not intended to constitute a joint employer for any purpose between any of the parties and their Affiliates. Each of the parties agrees that the provisions of this Agreement as a whole are not intended to, and do not, constitute control of the other party (or any Affiliates thereof) or provide it with the ability to control such other party (or any Affiliates thereof), and each party hereto expressly disclaims any right or power under this Agreement to exercise any power whatsoever over the management or policies of the other (or any Affiliates thereof). Except as otherwise expressly set forth herein, neither Provider nor Recipient Transition Group shall incur any liability with respect to the financial obligations of the other party under this Agreement. Section 9. Compliance With and Changes to Laws and Policies. (a) Compliance with General Laws. Nothing in this Agreement shall oblige either party hereto to act in breach of the requirements of any law, ordinance, rule, regulation or order of any governmental entity applicable to it, including, but not limited to, securities and insurance laws, written policy statements of securities commissions, insurance and other regulatory authorities, and the by-laws, rules, regulations and written policy statements of relevant securities and self-regulatory organizations or order of any governmental entity concerning privacy. -18- (b) Regulatory Matters. Provider shall cooperate with Recipient Transition Group and any regulatory authorities that supervise Recipient Transition Group in connection with meeting any regulatory requirements applicable to entities that provide Transition Services to Recipient. (c) Privacy Policies. (i) Compliance. Recipient shall at all times remain in material compliance with each Provider Privacy Policy and any other Provider internal policies or guidelines provided to Recipient in writing and set forth in Schedule 9(c)(i), except that Recipient shall not be bound by any Privacy Promise (as referenced in Schedule 9(c)(i)) or any other promises made by Provider to non-institutional customers. Provider shall at all times remain in material compliance with each Recipient Privacy Policy and any other Recipient internal policies or guidelines provided to Provider in writing and set forth in Schedule 9(c)(i). (ii) Amendment. During the term of this Agreement, neither Provider nor Recipient will, without the prior written consent of the other party (which shall not be unreasonably withheld or delayed), amend its Privacy Policy except (i) (A) as would not or would not be likely to materially adversely affect Provider's ability to perform the Transition Services and (B) as would not or would not be likely to materially adversely affect Recipient Transition Group's ability to receive and use the Transition Services or (ii) as required by a change in any applicable statute, law, ordinance, rule, regulation or order of any governmental entity concerning privacy or (iii) as is necessary in order to provide a Transition Service. Each of Provider and Recipient shall provide the other party with commercially reasonable prior written notice of any change in any Privacy Policy. Section 10. Inability to Perform Services; Technology Changes. (a) Inability to Perform Services. In the event that Provider is unable to perform all or any portion of the Transition Services as required by this Agreement, or by reason of its failure to act in accordance with Section 2(g), all or any portion of the Designated Services, for any reason for a period that can reasonably be expected to exceed five (5) consecutive Business Days, Provider shall provide notice to Recipient of its inability to perform the services and shall cooperate with Recipient Transition Group in obtaining an alternative means of receiving such services, and the terms of Section 2(a)(iv) shall apply. In addition to any service level credits conferred to Recipient's benefit pursuant to Section 3(d) or any other remedies available under this Agreement, Provider shall be responsible for (i) all costs incurred in restoring the service and (ii) if such service is not restored within a commercially reasonable time, all incremental costs incurred in procuring an alternative provider of such services (in excess of the costs expected to be incurred by Recipient Transition Group for such services under this Agreement), provided, in either case, that such costs for which Provider is responsible shall be reduced, and shall become the responsibility of Recipient, to the extent that the inability of Provider to perform any or a portion of any Transition Service was caused by Recipient. -19- (b) Disaster Recovery. Provider shall maintain security and disaster recovery procedures to protect data owned by Recipient as well as Recipient's networks and systems utilized in providing the Transition Services, all in accordance with commercially reasonable practices. (c) Technology Changes. Each party shall provide written notice to the other of any proposed or implemented Technology Changes that reasonably should be expected to (i) have a material adverse effect on the other party, (ii) have a material adverse effect on the functionality or performance of, or materially decrease the resource efficiency of, one or more Transition Services or Designated Services or (iii) materially increase the cost of Transition Services or Designated Services provided hereunder. Within ten (10) days following the receipt of such written notice, the Transition Project Managers of each party shall meet to negotiate in good faith any appropriate actions to be taken in light of such Technology Change. Such notice shall be given as far in advance of such Technology Change as is practicable. All planned network outages affecting Recipient shall be subject to written notice by Provider, to be given as far in advance of such planned network outages as is practicable. Each party shall be responsible for implementing all changes to its respective computing environment, including changes to programs, manual procedures, job control language statements, distribution parameters, and schedules. Section 11. Covenants and Other Agreements. (a) Compliance with Laws. Each party shall be responsible for complying with all Applicable Laws then in effect pertaining to such party's business and operations and its performance of this Agreement. (b) Non-Infringement. Provider covenants that except for (i) any failure to receive any required third party consents and (ii) any actions taken at the specific request or direction of Recipient Transition Group, its provision of the Transition Services and Designated Services and Recipient's receipt of the Transition Services and Designated Services hereunder will not infringe any trademark, trade name, trade dress or other intellectual property right of any third party. (c) Lack of Harmful Components. Provider covenants that it will utilize commercially available anti-virus software in accordance with industry standards for the purpose of preventing the introduction of any virus, disabling code or other such malware into Recipient's systems or data in the provision of the Transition Services and the Designated Services. (d) Third-Party Contracts and Restrictions. To the extent that (i) the Retained Computer Programs used to provide the Transition Services or Designated Services include software or other technology licensed from third parties, or (ii) the Transition Services or Designated Services include the services of Third Party Vendors or are provided through permitted Subcontractors, it is intended and agreed that the Transition Services and Designated Services provided to Recipient under this Agreement shall be within the scope and on the terms and conditions established by the third-party licensors, vendors or providers. This Agreement is not intended to constitute a sublicense of any of the Retained Computer Programs or technology -20- provided by third-party licensors or to create a commercial service bureau in favor of Recipient or the Recipient Transition Group, but instead is a services agreement between Provider and a former business unit of Provider. In the event that Provider encounters a restriction or objection from a third-party licensor, vendor or provider that prevents Provider, as a practical matter from providing any Transition Service or Designated Service as contemplated by this Agreement, then Provider shall so notify Recipient and the parties will confer to decide upon an alternative solution, which may include seeking necessary consents or licenses, replacing the affected resource, or adopting a work-around. Provider gives no assurance about whether such a restriction or objection can or may arise, but Provider shall be required to (x) implement an alternative means of providing any relevant Transition Services or (y) cooperate with the Retained Employees and Retained Contractors and provide reasonable assistance to Recipient and the Retained Employees and Retained Contractors in the implementation of an alternative means of providing any relevant Designated Services, as applicable, in each case after consulting with Recipient as required by the foregoing sentence. The cost of providing any relevant Transition Service or Designated Service through such alternative means shall be paid by Recipient. To the extent that Provider fails to implement such alternative means of providing such relevant Transition Service for reasons other than Recipient's refusal to pay for the same, unless such failure was caused primarily by the act or omission of Recipient Transition Group, and such failure is the primary cause of Recipient's inability to provide any services in accordance with its obligations under the Administrative Services Agreement, Recipient shall have no liability under the Administrative Services Agreement for its failure to meet its obligations to provide such affected services until such time as the earlier of the following: (A) Provider provides such alternative means of providing the relevant Transition Service to the extent required to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, or (B) Recipient, using commercially reasonable efforts, finds an alternative source for the relevant Transition Service or a work-around sufficient to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, the incremental costs associated with which shall be reimbursed by Provider. Section 12. Dispute Resolution. (a) Resolution by the Parties. If any dispute shall arise between Provider and Recipient Transition Group under this Agreement (excluding any dispute regarding the amount of any TSA Monthly Invoice, as to which the provisions of Section 5(d) shall apply), whether such dispute arises before or after the termination of this Agreement, such dispute shall be submitted for resolution by the parties in accordance with this Section 12(a). In the event of such a dispute, the party raising the problem shall submit notice thereof in writing to Transition Project Manager of the other party. The Transition Project Manager shall be provided access to the relevant notice for purposes of resolving the dispute. If the Transition Project Managers are unable to resolve the dispute within ten (10) days after the dispute has been referred to them (or such longer time period as the Transition Project Managers agree upon in writing), either party shall be free to pursue its rights and remedies hereunder in accordance with Section 22. (b) Relief in Court. Nothing in this Agreement shall prevent the parties hereto from seeking equitable relief (including, without limitation, injunctive relief or specific -21- performance as set forth in Section 30) in a court for any breach or threatened breach of any provision hereof. Section 13. Indemnification. (a) Indemnification by Provider. Provider agrees to indemnify and hold harmless each party in the Recipient Transition Group and their respective directors, officers and employees (collectively, the "Recipient Indemnified Parties") from any and all Losses arising out of or caused by (i) any breach by Provider of any obligation or covenant set forth in this Agreement or in any certificate or other document delivered pursuant hereto, (ii) Provider's or its employees' acts or omissions with respect to the Retained Employees or Retained Contractors, (iii) the acts or omissions of the Retained Employees or Retained Contractors other than such acts or omissions at the request or direction of Recipient Transition Group, (iv) Provider's or any of its Affiliate's responsibilities as employer of the Retained Employees, (v) Provider's or any of its Affiliate's current or former contractual arrangements with any of the Retained Contractors, or (vi) any successful enforcement of this indemnity. (b) Indemnification by Recipient. Recipient agrees to indemnify and hold harmless Provider and its directors, officers and employees (collectively, the "Provider Indemnified Parties") from any and all Losses arising out of or caused by (i) any breach by Recipient of any obligation or covenant set forth in this Agreement or in any certificate or other document delivered pursuant hereto, (ii) Recipient's or its employees' acts or omissions with respect to the Retained Employees or (iii) any successful enforcement of this indemnity. (c) Indemnification Procedures. In the event either Recipient or Provider shall have a claim for indemnity against the other party under the terms of this Agreement with respect to any third-party claim, the parties shall follow the procedures set forth in Section 10.3 of the Asset Purchase Agreement. The parties hereto shall follow the procedures set forth in Section 22 hereof with respect to any other claim for indemnity. (d) Exclusive Remedy. Each party hereto expressly acknowledges that other than as expressly set forth herein, (i) the provisions of this Section 13 shall be the sole and exclusive remedy for all claims, actions, damages, liabilities, costs and expenses caused as a result of any breach by the other party of any covenant set forth in this Agreement or in any certificate or other document delivered pursuant hereto, except that the remedies of injunction and specific performance shall remain available to the parties hereto, and (ii) no party shall be liable or responsible to any other party hereto or its Affiliates for punitive, incidental, consequential or multiplied damages, in accordance with Section 25 hereof, other than for the liable party's fraud, theft, embezzlement or other intentional acts or omissions of bad faith. Section 14. Ownership, Data and Security. (a) Ownership. Each party will, subject to the provisions of the Asset Purchase Agreement, the Technology Transfer and License Agreement and any express license granted under this Agreement, retain all rights in any Computer Programs, ideas, concepts, know-how, development tools, techniques or any other proprietary material or information that it owned or developed prior to the date of -22- this Agreement, or acquires or develops after the date of this Agreement without reference to or use of the intellectual property or proprietary material or information of the other party. All work product created for or delivered to Recipient by Provider (alone or with others) as part of the Transition Services or the Designated Services, together with associated intellectual property rights, shall, unless otherwise indicated in a writing signed by both parties, be owned by Recipient, except that Recipient shall acquire no right thereby in confidential information or trademarks, service marks, or logos of Provider or its Affiliates. Notwithstanding any other provision of this Agreement, all general industry knowledge which either party obtains as a result of the performance of prescribed work may be used by either party without restriction unless and then only to the extent that such activity would disclose the other party's confidential information in violation of the confidentiality obligations of the parties, including pursuant to Section 26 hereof. (b) Recipient Data. All data pertaining to Recipient or its customers processed by Provider or stored in Provider's systems or otherwise in Provider's possession or control as part of the Transition Services or the Designated Services shall be owned by Recipient, shall be used only to carry out this Agreement, and may not be disclosed to anyone except employees, agents, and subcontractors of Provider who have a "need to know" the same in order to further or facilitate the performance of the Transition Services or the Designated Services and who are required to respect the confidentiality thereof. When and as reasonably requested by Recipient (and subject to the rights of Provider and its Affiliates pursuant to the Technology Transfer and License Agreement), Provider shall return to Recipient copies of Recipient's information, data, and files (which information, data and files shall be segregated from that of Provider, at Provider's expense) in such form as Recipient may reasonably request. The parties agree that the confidentiality of all such data is governed by Section 5.7 of the Asset Purchase Agreement and the Confidentiality Agreement. (c) Security. Provider shall maintain substantially the same safeguards as are in use with respect to Provider's data to protect against (i) the accidental or unauthorized deletion, destruction or alteration of Data (as defined in the Asset Purchase Agreement) in Provider's possession or control and (ii) the unauthorized access thereto. Provider shall maintain substantially the same safeguards which are in use with respect to Provider's software to protect against (x) the accidental or unauthorized deletion, destruction or alteration of the Owned Principally-Used Computer Programs and the Licensed Computer Programs in Provider's possession or control and (y) the unauthorized access thereto. If Recipient requests reasonable additional safeguards, Provider shall use commercially reasonable efforts to provide such additional safeguards at rates and upon terms and conditions as mutually agreed to in writing by the parties. Provider shall comply with all requirements of applicable regulatory authorities regarding data retention. Section 15. Force Majeure. (a) General. Subject to Section 15(b), below, neither party shall be liable for any failure or delay in the performance of its obligations (other than payment obligations) under this Agreement to the extent such failure or delay both: -23- (i) is caused by any of the following: acts of war, terrorism, civil riots or rebellions; quarantines, embargoes and other similar unusual governmental action; extraordinary elements of nature or acts of God; and (ii) could not have been prevented by the non-performing party's reasonable precautions or commercially accepted processes, or could not reasonably be circumvented by the non-performing party through the use of substitute services, alternate sources, work around plans or other means by which the requirements of Recipient for services substantially similar to the Transition Services hereunder would be satisfied. (b) Definition. Events meeting both of the criteria set forth in subsections 15(a)(i) and 15(a)(ii) above are referred to individually and collectively as "Force Majeure Events." The parties expressly acknowledge that Force Majeure Events do not include vandalism, the regulatory acts of governmental agencies, labor strikes, or the non performance by third parties or Subcontractors relied on for the delivery of the Transition Services, unless such failure or non-performance by a third party or Subcontractor is itself caused by a Force Majeure Event. (c) Excuse of Performance. Upon the occurrence of a Force Majeure Event, the non-performing party shall be excused from any further performance of the affected obligation(s) (other than payment obligations) for so long as such circumstances prevail, provided that such party continues to attempt to recommence performance to the greatest extent possible without delay. To the extent that Provider (i) fails to provide or fails to timely provide any Transition Service as required under this Agreement, (ii) by reason of its failure to act in accordance with Section 2(g), fails to timely provide all or any portion of the Designated Services, or (iii) fails to meet the applicable standard of service for any Transition Service as set forth herein as a result of a Force Majeure Event, unless such failure was caused primarily by the act or omission of Recipient Transition Group, and such failure is the primary cause of Recipient's inability to provide any services in accordance with its obligations under the Administrative Services Agreement, Recipient shall have no liability under the Administrative Services Agreement for its failure to meet its obligations to provide such affected Administrative Services until such time as the earlier of the following: (A) Provider cures such failure hereunder to the extent required to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, or (B) Recipient, using commercially reasonable efforts, finds an alternative source for such Transition Service or Designated Service or a work-around sufficient to enable Recipient to resume providing such services in accordance with its obligations under the Administrative Services Agreement, the incremental costs associated with which shall be reimbursed by Provider. (d) Disaster Recovery Plan. Notwithstanding any other provision of this Section 15, a Force Majeure Event that results in failure or substantial delay of the performance by Provider of its obligations under this Agreement shall obligate Provider, if appropriate, to implement its disaster recovery plan within the time periods described therein. (e) Termination Upon Force Majeure. If a Force Majeure Event causes a material failure or delay in the performance of any Transition Services for more than thirty (30) -24- consecutive days, Recipient may, at its option, immediately terminate this Agreement without liability to Provider, other than liability for payment of unpaid invoices or for services previously rendered. Section 16. Survival. The provisions of Section 6(b) (Termination of Individual Transition Services or Designated Services), 6(c) (Termination of Agreement), 6(d) (Effect of Termination; Return of Materials), Section 9 (Compliance With and Changes to Law and Policies), Section 13 (Indemnification), this Section 16, Section 17 (Notices), Section 20 (Waivers and Amendments), Section 21 (Exhibits; Schedules), Section 22 (Arbitration), Section 23 (Governing Law and Jurisdiction), Section 25 (Waiver of Jury Trial), Section 26 (Confidentiality), Section 27 (Captions) and Section 30 (Equitable Rights) shall survive the termination or expiration of this Agreement. Section 17. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be delivered personally, sent by registered or certified mail, postage prepaid, by overnight courier with written confirmation of delivery. Any such notice shall be deemed given when so delivered personally, or if mailed, on the date shown on the receipt therefor, or if sent by overnight courier, on the date shown on the written confirmation of delivery. Such notices shall be given to the following address: To Provider: Security Life of Denver Insurance Company Attention: Mark Tullis c/o ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 With a concurrent copy to: B. Scott Burton Corporate General Counsel ING North America Insurance Corporation 5780 Powers Ferry Road NW Atlanta, GA 30327 and David A. Massey, Esq. Sutherland Asbill & Brennan LLP 1275 Pennsylvania Ave., NW Washington, DC 20004-2415 To Recipient: Scottish Re (U.S.) Inc. 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: Nate Gemmiti, Esq. -25- With a copy to: Stephen G. Rooney, Esq. LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, NY 10019 Section 18. Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns and legal representatives. Neither this Agreement, nor any of the rights, interests, or obligations hereunder, may be assigned in whole or in part, by any party without the prior written consent of the other parties hereto and any assignment without such consent shall be null and void; provided, that upon prior written notice to Provider, Recipient may assign to any one or more of its current or after-acquired Affiliates all or any part of its rights, interest or obligations under this Agreement. Notwithstanding the foregoing, Recipient may assign this Agreement in its entirety in connection with a sale of all or substantially all of the Business, without the consent of Provider. Notwithstanding any provision of this Agreement, it is understood for the avoidance of any doubt that in the event a party shall merge or consolidate with another Person or enter into a business combination with a third party, such merger, consolidation or business combination shall not be deemed to be an assignment and, accordingly, no consent of any Person shall be required hereunder. Section 19. Execution in Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission shall be deemed delivery of an originally executed document. Section 20. Waivers and Amendments. Except as otherwise permitted herein, any modification, supplement, or amendment to this Agreement, or any waiver hereunder, shall be effective only if made in writing and signed by the designated officer of each of the parties hereto. No waiver of any provision of this Agreement and no consent to any default under this Agreement shall be effective unless the same shall be in writing and signed by or on behalf of the party against whom such waiver or consent is claimed. No course of dealing or failure of any party to strictly enforce any term, right or condition of this Agreement shall be construed as a waiver of such term, right or condition. Waiver by either party of any default by the other party shall not be deemed a waiver of any other default. Section 21. Exhibits; Schedules. All exhibits and schedules incorporated by referenced in this Agreement shall be deemed incorporated into and shall become part of this Agreement. Section 22. Arbitration (a) Arbitration. After the Closing Date, except as otherwise set forth in Section 5(d) and Section 12, and except with regard to relief pursuant to Section 30, any dispute between Recipient and Provider with reference to the interpretation or performance of this Agreement, whether such dispute arises before or after the termination of this Agreement, shall -26- be decided through negotiation and, if necessary, arbitration as set forth in this Section 22. The parties intend this Section 22 to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C., Section 1) including any amendments to that Act which are subsequently adopted. In the event that either party refuses to submit to arbitration as required by Section 22(a), the other party may request the court specified in Section 23 to compel arbitration in accordance with the Federal Arbitration Act. (b) Procedures. Provider and Recipient intend that any dispute between them arising under this Agreement be resolved without resort to any litigation. Accordingly, Provider and Recipient agree that they will negotiate diligently and in good faith to agree on a mutually satisfactory resolution of any such dispute; provided, however, that if any such dispute cannot be so resolved by them within sixty (60) calendar days (or such longer period as the parties may agree) after commencing such negotiations, Provider and Recipient agree that they will submit such dispute to arbitration in the manner specified in, and such arbitration proceeding will be conducted in accordance with, the Commercial Arbitration Rules of the American Arbitration Association. The arbitration hearing will be before a panel of three disinterested arbitrators, each of whom must be a present or former officer of a life insurance or life reinsurance company familiar with the life reinsurance business, or other professionals with experience in life insurance or reinsurance, provided that such professionals shall not have performed services for either party within the previous five (5) years, and provided further that no arbitrator shall be a former employee of either Provider or any of its Affiliates. Provider and Recipient will each appoint one arbitrator by written notification to the other party within thirty (30) calendar days after the date of the mailing of the notification initiating the arbitration. These two arbitrators will then select the third arbitrator within sixty (60) calendar days after the date of the mailing of the notification initiating arbitration. If either Provider or Recipient fails to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third arbitrator, the president of the American Arbitration Association will appoint the necessary arbitrators within thirty (30) calendar days after the request to do so. The arbitrators shall base their decision on the terms and conditions of this Agreement. However, if the terms and conditions of this Agreement do not explicitly dispose of an issue in dispute between the parties, the arbitrators may base their decision on the customs and practices of the life insurance and life reinsurance industry together with an interpretation of the law. The vote or approval of a majority of the arbitrators will decide any question considered by the arbitrators. The place of arbitration will be determined by the arbitrators. Each decision (including without limitation each award) of the arbitrators will be final and binding on all parties and will be nonappealable, except that (at the request of either Provider or Recipient) any award of the arbitrators may be confirmed (or, if appropriate, vacated) by a judgment entered by the court specified in Section 23. In no event may the arbitrators award punitive or exemplary damages, except for the liable party's fraud, theft, embezzlement or other intentional acts or omissions of bad faith. Each party will be responsible for paying (i) all fees and expenses charged by its respective counsel, accountants, actuaries, and other representatives in conjunction with such arbitration and (ii) one-half of the fees and expenses charged by each arbitrator. -27- Section 23. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into therein, without reference to principles of choice of law or conflicts of laws. Each party hereto irrevocably and unconditionally submits to the exclusive jurisdiction of any State or Federal Court sitting in New York, over any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto agrees that service of any process, summons, notice or document by U.S. registered mail addressed to such party shall be effective service of process for any action, suit or proceeding brought against such party in such court. Each party hereto irrevocably and unconditionally waives any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought in any such court shall be conclusive and binding upon such party and may be enforced in any other courts to whose jurisdiction such party may be subject, by suit upon such judgment. Section 24. Sole Agreement. (a) This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Asset Purchase Agreement, the Related Agreements and the Confidentiality Agreement, including the exhibits, schedules, and other documents delivered pursuant hereto, constitute the entire agreement among the parties hereto and their respective Affiliates with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them with respect thereto. (b) This Agreement is a master agreement and shall be construed as a separate and independent agreement for each and every Transition Service provided under this Agreement. Any specific Transition Service may be subject to termination in accordance with Section 6(b)(i), 6(c)(i)(A) or 6(c)(iii). Any termination of this Agreement in accordance with Section 6(b)(i) or (c) with respect to any particular Transition Service shall not terminate the Agreement with respect to any other Transition Service. Section 25. Waiver of Jury Trial; Multiplied and Punitive Damages. Each of the parties hereto irrevocably waives, with respect to any action filed by either party against the other party (but not as to any action by one party against the other seeking indemnification for a third party claim against the party initiating the action, to the extent that such damages may be recoverable as part of the indemnification by the indemnified party) (i) any and all right to trial by jury, and (ii) any right to punitive, incidental, consequential or multiplied damages, either pursuant to common law or statute, in any legal proceedings arising out of or related to this Agreement or the transactions contemplated hereby, except for the liable party's fraud, theft, embezzlement or other intentional acts or omissions of bad faith. Section 26. Confidentiality. (a) Confidential Information. Each party hereto shall use at least the same standard of care in the protection of Confidential Information of the other party as it uses to protect its own confidential or proprietary information; provided that such Confidential -28- Information shall be protected in at least a reasonable manner. For purposes of this Agreement, "Confidential Information" includes all confidential or proprietary information and documentation of any party hereto, including the terms of this Agreement, including with respect to each party, all of its software (including source code and object code), documentation, data, its customer data, software and confidential information of third parties as to which such party owes a duty of confidentiality, financial information, information relating to the other party's planned or existing computer systems, systems architecture, computer hardware, methods of processing and operational methods, sales, profits, organizational restructuring, new business initiatives, proprietary and confidential information that describes the other party's insurance and financial products (including actuarial calculations, product designs, and how such products are administered and managed), proprietary and confidential information that describes the other party's product strategies or tax interpretations or tax positions or the treatment of any item, all reports, exhibits, and other documentation prepared by any of its Affiliates. Each party hereto shall use the Confidential Information of the other party only in connection with the purposes of this Agreement and shall make such Confidential Information available only to its employees, permitted subcontractors or agents having a "need to know" with respect to such purpose. Each party hereto shall advise its respective employees, permitted subcontractors and agents with access to any Confidential Information of such party's obligations under this Agreement. The obligations in this Section 10.12 will not restrict disclosure by a party pursuant to Applicable Law, or by order or request of any Government Authority, subject to Section 10.12(b) hereof. Confidential Information of a party will not be afforded the protection of this Section if such Confidential Information was (A) developed by the other party independently as shown by its written business records regularly kept, (B) rightfully obtained by the other party without restriction from a third party, (C) publicly available other than through the fault or negligence of the other party, or (D) rightfully in the possession of the other party and not subject to any duty of confidentiality as of the date of this Agreement. (b) Compulsory Disclosure. If any party is requested or required to disclose Confidential Information of the other pursuant to any judicial or administrative process, then such receiving party shall promptly notify the other party to this Agreement in writing of such request or requirement. The party whose Confidential Information is requested or required to be disclosed shall either (i) promptly seek protective relief from such disclosure obligation or (ii) direct the receiving party to comply with such request or requirement. The party in receipt of Confidential Information of the other party shall cooperate with efforts of the other party to maintain the confidentiality of such information or to resist compulsory disclosure thereof, but any costs incurred by the receiving party shall be reimbursed by the other party, except for costs of the receiving party's employees. If, after a reasonable opportunity to seek protective relief, such relief is not obtained by the party whose Confidential Information is subject to discovery or disclosure, or if such party fails to obtain such relief, the receiving party may disclose such portion of such Confidential Information that such party reasonably believes, on the basis of advice of such party's counsel, such party is legally obligated to disclose. (c) Unauthorized Acts. Each party hereto shall (i) notify the other party promptly of any unauthorized possession, use, or knowledge of any Confidential Information by any person which shall become known to it, any attempt by any person to gain possession of Confidential Information without authorization or any attempt to use or acquire knowledge of any Confidential Information without authorization (collectively, "Unauthorized Access"), (ii) -29- promptly furnish to the other party full details of the Unauthorized Access and use reasonable efforts to assist the other party in investigating or preventing the reoccurrence of any Unauthorized Access, (iii) cooperate with the other party in any litigation and investigation against third parties deemed necessary by such party to protect its proprietary rights, and (iv) promptly take all steps necessary to prevent a reoccurrence of any such Unauthorized Access. (d) Injunction. Each party hereto agrees that the breach by the other party of its obligations under this Section would cause significant and irreparable harm to the aggrieved party, which may be difficult to measure with certainty or to compensate through money damages. Each party hereto acknowledges that the aggrieved party shall be entitled, without proof of irreparable harm and without waiving any other right or remedy available to it, to such injunctive and equitable relief as may be deemed proper by a court of competent jurisdiction. Section 27. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 28. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. If any provision of this Agreement is so broad as to be unenforceable, that provision shall be interpreted to be only so broad as is enforceable. Section 29. No Third Party Beneficiaries. Except as otherwise expressly set forth in any provision of this Agreement, nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. For the avoidance of doubt, nothing in this Agreement shall be construed to give any Business Employee, Transition Employee, Retained Employee or former employee of Provider or its Affiliates or any beneficiary thereof of any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. Section 30. Equitable Rights. (a) Non-Performance or Certain Breaches By Provider. Provider acknowledges and agrees that money damages would not be a sufficient remedy for any failure of Provider to provide the services required hereunder in compliance with the terms of this Agreement and that Recipient Transition Group shall be entitled to seek equitable relief, including, without limitation, injunction and specific performance, as a remedy for such non-performance or such breach by Provider and that Provider shall not oppose the granting of such equitable relief, unless such non-performance or breach was caused primarily by the act or omission of Recipient Transition Group. -30- (b) Non-Exclusive Remedy. Such remedy shall not be deemed to be the exclusive remedy for breach of this Agreement, but shall be in addition to the other remedies available to a party under this Agreement. -31- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Mark Tullis ------------------------------------- Name: Mark Tullis Title: President SCOTTISH RE (U.S.), INC. By: /s/ Oscar Scofield ------------------------------------- Name: Oscar Scofield Title: CEO/ President -32- EX-21 21 ex21-1.txt LIST OF SUBSIDIARIES Exhibit 21.1 List of Subsidiaries
- ------------------------------------------------------------ --------------------------------------------------------- Subsidiary Jurisdiction - ------------------------------------------------------------ --------------------------------------------------------- Orkney Holdings LLC Delaware - ------------------------------------------------------------ --------------------------------------------------------- Orkney Re, Inc. South Carolina - ------------------------------------------------------------ --------------------------------------------------------- Scottish Annuity Company (Cayman) Ltd. Cayman Islands - ------------------------------------------------------------ --------------------------------------------------------- Scottish Annuity & Life Holdings (Bermuda) Limited Bermuda - ------------------------------------------------------------ --------------------------------------------------------- Scottish Annuity & Life Insurance Company (Bermuda) Bermuda Limited - ------------------------------------------------------------ --------------------------------------------------------- Scottish Annuity & Life Insurance Company (Cayman) Ltd. Cayman Islands - ------------------------------------------------------------ --------------------------------------------------------- Scottish Annuity & Life International Insurance Company Bermuda (Bermuda) Ltd. - ------------------------------------------------------------ --------------------------------------------------------- Scottish Financial (Luxembourg) S.a.r.l. Luxembourg - ------------------------------------------------------------ --------------------------------------------------------- Scottish Holdings (Barbados) Limited Barbados - ------------------------------------------------------------ --------------------------------------------------------- Scottish Holdings, Inc. Delaware - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re (Dublin) Limited Ireland - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re Holdings Limited United Kingdom - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re Intermediaries (Canada) Limited Canada - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re Life (Bermuda) Limited Bermuda - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re Life Corporation Delaware - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re Limited United Kingdom - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re PCC Limited Guernsey - ------------------------------------------------------------ --------------------------------------------------------- Scottish Re (U.S.), Inc. Delaware - ------------------------------------------------------------ --------------------------------------------------------- Scottish Solutions, LLC North Carolina - ------------------------------------------------------------ --------------------------------------------------------- Tartan Financial (UK) United Kingdom - ------------------------------------------------------------ --------------------------------------------------------- Tartan Holdings (UK) Limited United Kingdom - ------------------------------------------------------------ --------------------------------------------------------- Tartan Wealth Management, Inc. Texas - ------------------------------------------------------------ ---------------------------------------------------------
EX-23.1 22 ex23-1.txt CONSENT OF ERNST & YOUNG LLP Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration statements (Form S-8 No.333-51496 and 333-104389) pertaining to the stock option plans of Scottish Re Group Limited and (Form S-3 No. 333-113030) pertaining to the shelf registration of securities of Scottish Re Group Limited of our reports dated March 15, 2005, with respect to the consolidated financial statements and schedules of Scottish Re Group Limited and management's assessment of the effectiveness of internal control over financial reporting of Scottish Re Group Limited, included in Scottish Re Group Limited's annual Report (Form 10-K) for the year ended December 31, 2004. /s/ ERNST & YOUNG LLP Philadelphia , Pennsylvania March 18, 2005 EX-24.1 23 ex24-1.txt POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of Scottish Re Group Limited, a Cayman Islands company (the "Company"), hereby constitute and appoint Michael C. French, Scott E. Willkomm and Paul Goldean and each of them, the true and lawful attorney or attorneys-in-fact, with the full power of substitution and resubstitution, for the Company, to sign on behalf of the Company and on behalf of the undersigned in his or her capacity as an officer and/or a director of the Company, the Company's Annual Report on Form 10-K for the year ended December 31, 2004, and to sign any or all amendments thereto, to or with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as the undersigned might or could in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have executed this Power of Attorney as of March 18, 2005. /s/ MICHAEL C. FRENCH /s/ MICHAEL AUSTIN /s/ SCOTT E. WILLKOMM --------------------- ------------------ --------------------- Michael C. French Michael Austin Scott E. Willkomm ----------------- -------------- ----------------- /S/ G. WILLIAM CAULFEILD-BROWNE /S/ ROBERT M. CHMELY /S/ HAZEL R. O'LEARY - ------------------------------- -------------------- -------------------- G. William Caulfeild-Browne Robert M. Chmely Hazel R. O'Leary --------------------------- ---------------- ---------------- /S/ WILLIAM SPIEGEL /S/ LORD NORMAN LAMONT /S/ JEAN CLAUDE DAMERVAL ------------------- ---------------------- ------------------------ William Spiegel Lord Norman Lamont Jean Claude Damerval --------------- ------------------ -------------------- EX-31.1 24 ex31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, Scott E. Willkomm, Chief Executive Officer and President of Scottish Re Group Limited certify that: 1. I have reviewed this annual report on Form 10-K of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 18, 2005 /s/ Scott E. Willkomm - --------------------- Scott E. Willkomm Chief Executive Officer and President EX-31.2 25 ex31-2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Elizabeth A. Murphy, Chief Financial Officer of Scottish Re Group Limited certify that: 1. I have reviewed this annual report on Form 10-K of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 18, 2005 /s/ Elizabeth A. Murphy - ----------------------- Elizabeth A. Murphy Chief Financial Officer EX-32.1 26 ex32-1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-K for the annual period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott E. Willkomm, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Scott E. Willkomm - --------------------- Scott E. Willkomm Chief Executive Officer and President March 18, 2005 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 27 ex32-2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-K for the annual period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Elizabeth A. Murphy, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Elizabeth A. Murphy - ----------------------- Elizabeth A. Murphy Chief Financial Officer March 18, 2005 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----