-----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, HsXSBzzr09W+M9TnOJv/78loyeEezG+nvjXc+3Dxwhzk6fEwti+aepHxYKjaaoar zA4DswY4YxhSKVAetFVAWg== 0000914039-97-000112.txt : 19970508 0000914039-97-000112.hdr.sgml : 19970508 ACCESSION NUMBER: 0000914039-97-000112 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRENWICK GROUP INC CENTRAL INDEX KEY: 0000787952 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 061152790 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14737 FILM NUMBER: 97569158 BUSINESS ADDRESS: STREET 1: ONE STATION PL STREET 2: METRO CENTER CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033535500 10-K 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period to . Commission file number 0-14737 TRENWICK GROUP INC. (Exact name of registrant as specified in its charter) Delaware 06-1152790 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Metro Center, One Station Place, Stamford, Connecticut 06902 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 353-5500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange Title of each class on which registered ------------------- ------------------- COMMON STOCK, $.10 PAR VALUE NASDAQ NATIONAL MARKET SYSTEM 6% CONVERTIBLE DEBENTURES DUE DECEMBER 15, 1999 NASDAQ NATIONAL MARKET SYSTEM PREFERRED STOCK PURCHASE RIGHTS
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 10K or any amendment to this Form 10-K. / / The aggregate market value on February 28, 1997 of the voting stock held by non-affiliates of the registrant was $356,141,427 The number of shares outstanding of each of the issuer's classes of common stock as of the close of the period covered by this report: Class Outstanding at February 28, 1997 Common Stock, $.10 par value 7,954,501 Certain information required by Items 1 through 8 of Form 10-K is incorporated by reference into Parts I and II hereof from the registrant's annual report to stockholders for the fiscal year ended December 31, 1996 and the information required by Items 10 through 13 of Form 10-K is incorporated by reference into Part III hereof from the registrant's proxy statement which will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant's fiscal year ended December 31, 1996. ================================================================================ 2 TRENWICK GROUP INC. Table of Contents
Page Item Number - - ---- ------ PART I 1. Business .................................................................. 1 2. Properties ................................................................ 17 3. Legal Proceedings ......................................................... 17 4. Submission of Matters to a Vote of Security Holders ....................... 17 PART II 5. Market for the Corporation's Common Stock and Related Stockholder Matters... 18 6. Selected Financial Data ................................................... 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operation ...................................................... 20 8. Financial Statements and Supplementary Data ............................... 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................................................... 20 PART III 10. Directors and Executive Officers .......................................... 20 11. Executive Compensation .................................................... 20 12. Security Ownership of Certain Beneficial Owners and Management ............ 20 13. Certain Relationships and Related Transactions ............................ 20 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 21
3 PART I ITEM 1. BUSINESS GENERAL BACKGROUND AND HISTORY Trenwick Group Inc. is a holding company incorporated in the state of Delaware in 1985. Through its wholly owned subsidiary, Trenwick America Corporation, a Delaware corporation, Trenwick owns and operates Trenwick America Reinsurance Corporation, (Trenwick America Re), a Connecticut corporation. The term "Trenwick", as used herein, refers to Trenwick America Re in discussions of that company's reinsurance business and refers to Trenwick Group Inc. in all other circumstances. Trenwick America Corporation, which acquired Trenwick America Re in 1983, became a wholly owned subsidiary of Trenwick in 1985 as a result of a corporate restructuring. Trenwick also owns two inactive Bermuda subsidiaries. Trenwick primarily provides reinsurance to insurers of property and casualty risks in the United States. Trenwick writes both treaty and facultative reinsurance. Treaty is divided into conventional treaty and specialty business. Specialty underwriting combines the actuarial analytical methods of treaty underwriting and the individual risk assessment skills of facultative underwriting. Like treaty reinsurance, specialty reinsurance is written for a class of risk in which statistical methods are used to estimate future profitability. Like facultative underwriting, however, specialty underwriting also relies on the analysis of the reinsured's risks themselves as well as insurance policy forms and rates. Trenwick generally obtains all of its business through brokers and reinsurance intermediaries which seek its participation on reinsurance being placed for their customers. Reinsurance is provided both on an excess of loss and quota share basis, which in 1996 amounted to 57% and 43% of its business, respectively. In underwriting reinsurance, Trenwick does not target types of clients, classes of business or types of reinsurance. Rather, it selects transactions based upon the quality of the reinsured, the attractiveness of the reinsured's insurance rates and policy conditions and the adequacy of the proposed reinsurance terms. LINES AND TYPES OF BUSINESS Trenwick's net premiums written for its principal lines of business are set forth in the following table for the periods indicated. 1 4 NET PREMIUMS WRITTEN BY LINES OF BUSINESS (IN THOUSANDS)
1996 1995 1994 -------- -------- -------- Casualty Automobile Liability $ 64,539 $ 61,388 $ 38,323 Errors and Omissions 48,888 50,077 32,707 General Liability 22,519 20,819 17,910 Workers' Compensation 20,502 873 1,079 Medical Malpractice 9,846 6,933 3,245 Products Liability 2,595 3,101 2,966 Other Casualty 10,452 12,731 6,600 -------- -------- -------- Total Casualty 179,341 155,922 102,830 Property 47,023 41,240 36,805 -------- -------- -------- Total $226,364 $197,162 $139,635 ======== ======== ========
The major lines of reinsurance currently written by Trenwick are automobile liability, errors and omissions, general liability and workers' compensation which account for an aggregate of at least 64% of net premiums written in all years indicated. Casualty business increased by 15% as a result of an increase in new casualty business developed through existing and new relationships with various reinsurance brokers. The growth in new casualty business is primarily attributable to an increase in workers compensation as a result of two new contracts. In 1996, the amount of property business underwritten by Trenwick remained constant as a percentage of total net written premiums. In 1996, insurance companies continued to increase their retentions, thereby reducing the amount of reinsurance placed with reinsurers. As a result, errors and omissions, products liability and other casualty lines of business decreased in 1996. In addition, Trenwick declined to renew certain accounts which did not meet it's pricing standards. In 1996, 1995 and 1994, twelve programs underwritten by Trenwick accounted for approximately 49%, 52% and 51%, respectively, of gross premiums written. One ceding company accounted for 15%, 19%, and 14% of gross premiums written for years 1996, 1995 and 1994, respectively. The majority of this business has been in force since 1988 and involves working layer excess of loss automobile liability for trucking risks written by Canal Insurance Company, an established specialist in this line of business. Canal has an A.M. Best Company rating of A+ and statutory capital and surplus at December 31, 1996 in excess of $277 million. During 1996, Trenwick continued its strategic reinsurance agreement with PXRE Reinsurance Company (PXRE Re), assuming approximately 15% of PXRE Re's property business. This program with PXRE Re accounted for approximately 6%, 9% and 12%, respectively, of gross premiums written in years 1996, 1995 and 1994. Trenwick also obtained approximately 10% and 12% of gross premiums written in 1996 from Continental Casualty Company and American International Group, respectively. Trenwick expects to renew these accounts for 1997. While Trenwick believes that the loss of any one of these accounts would have a material adverse effect on premiums written, Trenwick does not believe that such a loss would result in a concurrent material decrease in its earnings. Further, 2 5 Trenwick believes that it would continue to underwrite new business to replace these accounts, in the event that they were non-renewed. The table set forth below shows the distribution of net premiums written by type which classifies the business by type of underwriting methodology used. NET PREMIUMS WRITTEN BY TYPE OF BUSINESS (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- CASUALTY Standard treaty $144,074 64% $108,330 55% $ 61,071 44% Specialty treaty 46,048 20 50,593 26 39,722 28 Facultative 6,404 3 6,035 3 4,149 3 -------- --- -------- --- -------- --- 196,526 87% 164,958 84% 104,942 75% PROPERTY 29,838 13% 32,204 16% 34,693 25% -------- --- -------- --- -------- --- Total $226,364 100% $197,162 100% $139,635 100% ======== === ======== === ======== ===
Treaty Reinsurance Approximately 97% of Trenwick's net premiums written is currently represented by treaty reinsurance including standard treaty, specialty and property business. Specialty business underwritten by Trenwick generally includes specialty coverages and classes such as professional liability, directors' and officers' liability and other excess and surplus lines exposures. Specialty also encompasses reinsurance of business written by managing general agents or alternative risk mechanisms other than insurance companies. Net treaty premiums written increased 15%, 41% and 39% in 1996, 1995 and 1994, respectively. In 1996, Trenwick wrote on a quota share and excess of loss basis an aggregate of 229 treaties, as compared to 222 treaties in 1995 and 250 treaties in 1994. Trenwick's commitment is currently limited to $2,000,000 per account on casualty treaty business and $1,500,000 on property business. Larger commitments are subject to Trenwick's Underwriting Committee referral process. Facultative Reinsurance Facultative writings, consisting entirely of casualty business, currently account for 3% of net premiums written. All facultative business is written on an excess of loss basis. The average gross limit provided by Trenwick is $592,000. Maximum facultative gross capacity per risk is $2,000,000. Trenwick retains the first $500,000 per transaction. In 1996, casualty facultative net premiums written represented by 384 contracts increased 6% when compared to 1995. In 1995 and 1994, casualty facultative net premiums written represented by 318 and 215 contracts increased 45% and 5%, respectively, when compared to 1994 and 1993. MARKETING Trenwick generally obtains all its reinsurance business through reinsurance brokers which represent the ceding company in negotiations for the purchase of reinsurance. The process of effecting a brokered 3 6 reinsurance placement typically begins when a ceding company enlists the aid of a reinsurance broker in structuring a reinsurance program. Often the ceding company and the broker will consult with one or more lead reinsurers as to the pricing and contract terms of the reinsurance protection being sought. Once the ceding company has approved the terms quoted by the lead reinsurer, the broker will offer participations to qualified reinsurers until the program is fully subscribed by reinsurers at terms agreed to by all parties. Trenwick pays such intermediaries or brokers commissions representing negotiated percentages of the premium it writes. These commissions, which currently average 3%, constitute part of Trenwick's total acquisition costs and are included in its underwriting expenses. Brokers do not have the authority to bind Trenwick with respect to reinsurance agreements, nor does Trenwick commit in advance to accept any portion of the business that brokers submit to it. Reinsurance business from any ceding company, whether new or renewal, is subject to acceptance by Trenwick. In 1996, Trenwick's three largest broker sources accounted for 31%, 18% and 12%, respectively, of Trenwick's gross premiums written. In 1995, the three largest broker sources accounted for 34%, 19% and 9%, respectively. These three brokers are among the ten largest brokers in the reinsurance industry. Trenwick's concentration of business through a small number of sources is consistent with the concentration of the property and casualty broker reinsurance market, in which a majority of the business is written through the ten largest brokers. Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on the business and operations of Trenwick. Trenwick does not believe, however, that the loss of such business would have a long-term adverse effect because of Trenwick's competitive position within the broker reinsurance market and the availability of business from other brokers. UNDERWRITING Trenwick's underwriting philosophy emphasizes a transactional approach to underwriting in which any reinsurance transaction for any line of property or casualty business is considered on its own merits. The underwriter's primary objective is to assess the potential for an underwriting profit. The risk assessment process undertaken by Trenwick's underwriters involves a comprehensive analysis of historical data and estimates of future value of loss costs which may not be evident in the historical data. The factors which Trenwick considers include the type of risk, details of the underlying insurance coverage provided, adequacy of pricing using actuarial analysis and the reinsurance terms and conditions. Before it agrees to participate in a transaction, Trenwick frequently conducts underwriting and claims audits of ceding companies to assist it in evaluating the information submitted by the ceding companies. Trenwick's Underwriting Committee, composed of its most senior underwriters and Chief Actuary, is responsible for its underwriting policy and quality standards. The quality control process involves both pre-binding referral of individual transactions and post-binding internal audits of each underwriting department. The referral process provides a three-tiered system of checks and balances to reduce the potential for significant loss. Accounts displaying characteristics specified in Trenwick's Underwriting Policy Manual are subject to successive referral to the Department Manager, Underwriting Committee representatives, and in some cases, the Chief Executive Officer. The quality control process is 4 7 supplemented by conducting periodic internal audits of each underwriting department to ensure compliance with underwriting policies and procedures. COMPETITION Trenwick competes with numerous major international and domestic reinsurance and insurance companies. These competitors, many of which have substantially greater financial and staff resources than Trenwick, include independent reinsurance companies, subsidiaries or affiliates of established insurance companies, reinsurance departments of certain commercial insurance companies and underwriting syndicates. The reinsurance market has two basic segments: reinsurers that primarily obtain their business directly from insurers and those that primarily obtain business through reinsurance intermediaries or brokers. Although Trenwick generally obtains all of its business through reinsurance intermediaries or brokers, and therefore, competes directly with other reinsurers that obtain their business in this way, it also competes indirectly with reinsurers who obtain business directly from primary insurers because Trenwick's brokers must compete with direct reinsurers for business to be offered to Trenwick. Competition in the types of reinsurance business which Trenwick underwrites is based on many factors, including the perceived overall financial strength of the reinsurer, rates charged, other terms and conditions, A.M. Best rating, service offered, speed of service (including claims payment) and perceived technical ability and experience of staff. The number of jurisdictions in which a reinsurer is licensed or authorized to do business is also a factor. Trenwick is licensed or otherwise authorized to conduct reinsurance business in every state and the District of Columbia. The financial security of insurers and reinsurers has emerged as a key issue of the 1990's. To be accepted as a reinsurer by ceding companies and their brokers, a reinsurer must demonstrate higher levels of financial security and solvency than were previously required. Transactions tend to have fewer and larger participants, which may negatively affect the availability of underwriting opportunities. However, ceding companies have become more specialized, which management believes will favor reinsurers such as Trenwick which possess technical underwriting and risk assessment skills. The alternative risk segment of the market has grown, thereby removing some premiums from the traditional property and casualty primary insurance market. Alternative risk mechanisms, which depend more heavily on reinsurance than the traditional companies they have replaced, have created new opportunities for specialized reinsurers. Trenwick's management believes that the reinsurance industry, including the intermediary market, will continue to undergo further consolidation and that size and financial strength will continue to be significant factors in effective competition. Trenwick's statutory surplus was $286 million at December 31, 1996. Based on the most recent information prepared by the Reinsurance Association of America (RAA), this surplus placed Trenwick among the top nineteenth ranked reinsurance companies and the top fourteen reinsurers in the U.S. broker market, as measured by policyholder surplus, of those companies reporting to the RAA. The RAA is an industry organization of professional property and casualty reinsurers which, among other things, compiles data on reinsurers and their reinsurance operations. 5 8 Trenwick is rated "A+ (Superior)," the second-highest classification accorded by A.M. Best Company. A.M. Best Company is an independent insurance industry rating organization. The "A+ (Superior)" rating is assigned to those companies which in A.M. Best Company's opinion have achieved excellent overall performance when compared to the norms of the property and casualty insurance industry and which generally have demonstrated a strong ability to meet their respective policyholder and other contractual obligations. A.M. Best Company reviews its ratings at least annually and there is no assurance that Trenwick will be able to maintain its current rating. Trenwick's Standard & Poor's Insurance Rating Services Claims-Paying Ability Rating is "A+ (Good)". CLAIMS ADMINISTRATION Claims are managed by Trenwick's professional claims staff whose responsibilities include the review of initial loss reports, creation of claim files, determination of whether further investigation is required, establishment and adjustment of case reserves and payment of claims. In addition, the claims staff conducts comprehensive claims audits of both specific claims and overall claims procedures at the offices of selected ceding companies. In certain instances, a claims audit may be performed prior to assuming reinsurance business as part of a comprehensive risk evaluation process. UNPAID CLAIMS AND CLAIMS EXPENSES Insurers and reinsurers establish claims and claims expense reserves representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Claims and claims expense reserves have two components: case reserves, which are reserves for reported claims, and incurred but not reported ("IBNR") reserves, which are reserves for claims not yet reported. Significant periods of time may elapse between the occurrence of an insured claim, the reporting of the claims to the insurer and the subsequent reporting of the claims to the reinsurer, the insurer's payment of that claim, and later payments by the reinsurer. Trenwick first establishes its case reserves for reported claims when it receives notice of the claim. It is Trenwick's policy to establish reserves for reported claims in an amount equal to the greater of the reserve recommended by the ceding company or the claim as estimated by Trenwick's claims personnel. Trenwick periodically conducts investigations to determine if the amount reserved by the ceding company is appropriate or should be adjusted. During the claim settlement period, which may be many years, additional facts regarding individual claims may become known. As Trenwick learns additional facts, it may become necessary to refine and adjust upward or downward the estimated reserves on a claim, and even then the ultimate net reserve may be less than or greater than the revised estimates. Trenwick does not discount any of its reserves for reported or unreported claims in any line of its business for anticipated investment income. Trenwick uses a combination of actuarial methods to determine its IBNR reserves. These methods fall into two general categories: (1) methods by which ultimate claims are estimated based upon historical patterns of reported claim development experienced by Trenwick, as supplemented by reported industry data, and (2) methods in which the level of Trenwick's IBNR claim reserves are established based upon the IBNR claim reserves relative to earned premium of other reinsurers, applied by accident year, line of 6 9 business and type of reinsurance (excess of loss versus quota share) written by Trenwick. Reserve methods implicitly recognize the impact of inflation and other factors affecting claims payments by taking into account changes in historical payment patterns, the volume of business written, and trends in claim frequency and severity as reflected in Trenwick's reported claim activity. Due to the inherent uncertainties of estimating insurance company claim reserves, actual claims and claims expenses may deviate, perhaps substantially, from estimates of Trenwick's reserves reflected in the consolidated financial statements. Management believes that its claim reserve methods are reasonable and prudent and that Trenwick's reserves for claims and claims expenses at December 31, 1996 are adequate. Trenwick's known exposure to environmental claims, including asbestos and pollution liability, is primarily associated with its participation in business written by its predecessor company between 1978 and 1983. Exposure to environmental claims on Trenwick's business written since 1983 is generally limited by exclusions on its own reinsurance contracts and also by exclusions on policies issued by ceding companies. Casualty business written in 1983 and prior is not material to Trenwick's overall book of business. As of December 31, 1996 outstanding claims including incurred but not reported claims for environmental liability were approximately $9.2 million, approximately 2% of Trenwick's total net outstanding reserves. Under Trenwick's current interpretation of policy language, management does not believe that it has a material exposure to environmental claims that requires additional reserves beyond its current estimates. The following table presents an analysis of gross and net unpaid claims and claims expenses and a reconciliation of beginning and ending gross and net unpaid claims and claims expense balances for 1996, 1995 and 1994. The gross unpaid claims and claims expense balances for December 31, 1996 and 1995 are reflected in Trenwick's consolidated balance sheet. The net unpaid claims and claims expense balances are stated on a net basis after deductions for reinsurance recoverable on unpaid claims and claims expenses from retrocessionaires. 7 10 ANALYSIS OF ACTIVITY IN UNPAID CLAIMS AND CLAIMS EXPENSES (IN THOUSANDS)
1996 1995 1994 ---- ---- ---- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Unpaid claims and claims expenses, beginning of year $ 411,874 $327,001 $389,298 $294,008 $354,582 $268,091 Provision for claims and claims expenses: for claims incurred in the current year 161,061 133,755 135,013 115,133 115,348 93,287 for claims incurred in prior years (3,669) (4,439) (23,666) (2,065) (995) (447) --------- -------- -------- -------- -------- -------- Subtotal 157,392 129,316 111,347 113,068 114,353 92,840 --------- -------- -------- -------- -------- -------- Payments for claims and claims expenses: for claims incurred in the current year (22,603) (22,570) (18,849) (18,271) (21,007) (14,623) for claims incurred in prior years (79,486) (46,860) (69,922) (61,804) (58,630) (52,300) --------- -------- -------- -------- -------- -------- Subtotal (102,089) (69,430) (88,771) (80,075) (79,637) (66,923) --------- -------- -------- -------- -------- -------- Unpaid claims and claims expenses, end of year $ 467,177 $386,887 $411,874 $327,001 $389,298 $294,008 ========= ======== ======== ======== ======== ======== Reinsurance recoverable on unpaid claims and claims expenses, end of year $ 80,290 $ 84,873 $ 95,290 ======== ======== ========
8 11 In 1996, Trenwick agreed to commute an aggregate excess of loss reinsurance agreement covering the years 1989 through 1993. As a result of the commutation, Trenwick received a total consideration of $29.7 million representing outstanding reserves of approximately the same amount. The commutation was recorded in 1996 as a paid loss recovery. In 1996, 1995 and 1994, Trenwick recorded a decrease of $4,439,000, $2,065,000, and $447,000, respectively, in estimated net claims for claims occurring in prior accident years. The decrease over the last three years primarily reflects the favorable development of Trenwick's casualty business written primarily between accident years 1987 and 1992, partially offset by unfavorable development in accident years 1993 through 1995. In 1996, Trenwick recorded a decrease of $3,669,000 in estimated gross claims for claims occurring in prior accident years. The following table presents the development of Trenwick's net unpaid claims and claims expenses for 1986 through 1996. The top line of the table shows the net unpaid claims and claims expenses at the balance sheet date for each of the indicated years. This reflects the net estimated amounts of claims and claims expenses for claims arising in that year and in all prior years that are unpaid at the balance sheet date, including claims that had been incurred but not yet reported to Trenwick. The upper portion of the table shows the net cumulative subsequently paid amounts as of successive years with respect to that liability. The middle portion of the table shows the net re-estimated amount of the previously recorded net unpaid claims and claims expenses based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the net re-estimated liability at each December 31 is less (greater) than the prior net liability estimate. The net "Cumulative Redundancy (Deficiency)" depicted in the table for any particular calendar year represents the aggregate change in the initial net estimates over all subsequent calendar years. The lower portion of the table presents a reconciliation of the net unpaid claims and claims expenses as of the end of year with the related gross unpaid claims and claims expenses as of December 31, 1992 through 1996. Additionally, the table presents a reconciliation of the gross re-estimated unpaid claims and claims expenses as of the end of the latest re-estimation year, with separate disclosure of the related re-estimated reinsurance recoverable on unpaid claims and claims expenses. The "gross cumulative redundancy" depicted in the table for the calendar years 1991 through 1996 represents the aggregate change in the initial gross estimates over all subsequent calendar years. 9 12 DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES (in thousands)
1996 1995 1994 1993 1992 1991 1990 1989 ------ -------- -------- -------- -------- -------- -------- -------- Net unpaid claims and claims expenses, end of year $386,887 $327,001 $294,008 $268,091 $266,685 $258,774 $245,105 $214,391 Cumulative amount of net liability paid as of: One year later -- 46,860 61,804 52,300 52,260 44,930 42,234 29,407 Two years later -- -- 81,417 90,382 93,312 80,725 77,183 60,888 Three years later -- -- -- 89,445 118,345 111,225 102,590 84,283 Four years later -- -- -- -- 111,174 127,431 124,129 101,597 Five years later -- -- -- -- -- 116,224 134,657 116,047 Six years later -- -- -- -- -- -- 122,089 124,465 Seven years later -- -- -- -- -- -- -- 110,656 Eight years later -- -- -- -- -- -- -- -- Nine years later -- -- -- -- -- -- -- -- Ten years later -- -- -- -- -- -- -- -- Net liability re-estimated as of: One year later -- 322,562 291,943 267,644 255,379 253,781 238,324 206,724 Two years later -- -- 279,561 263,473 255,379 243,488 233,565 199,864 Three years later -- -- -- 246,367 252,458 243,586 223,417 196,232 Four years later -- -- -- -- 236,009 241,600 224,171 188,052 Five years later -- -- -- -- -- 225,592 223,172 189,148 Six years later -- -- -- -- -- -- 213,327 188,884 Seven years later -- -- -- -- -- -- -- 180,619 Eight years later -- -- -- -- -- -- -- -- Nine years later -- -- -- -- -- -- -- -- Ten years later -- -- -- -- -- -- -- -- Net cumulative redundancy (deficiency) Amount of original liability 4,439 14,447 21,724 30,676 33,182 31,778 33,772 Percentage 1% 5% 8% 12% 13% 13% 16% Gross liability, end of year 467,177 411,874 389,298 354,582 351,897 332,503 Reinsurance recoverable 80,290 84,873 95,290 86,491 85,212 73,729 Net liability, end of year 386,887 327,001 294,008 268,091 266,685 258,774 Gross re-estimated liability-latest 408,205 353,464 310,255 301,714 282,978 Re-estimated recoverable-latest 85,643 73,903 63,888 65,705 57,386 Net re-estimated liability-latest 322,562 279,561 246,367 236,009 225,592 Gross cumulative redundancy 3,669 35,834 44,327 50,183 49,525
1988 1987(1) 1986(1) -------- -------- --------- Net unpaid claims and claims expenses, end of year $169,785 $123,148 $ 99,144 Cumulative amount of net liability paid as of: One year later 19,983 21,086 46,885 Two years later 34,855 32,409 60,636 Three years later 53,243 40,285 67,093 Four years later 67,132 48,307 71,060 Five years later 77,922 53,827 74,390 Six years later 87,397 58,568 76,089 Seven years later 93,109 64,172 77,801 Eight years later 78,032 67,798 79,497 Nine years later -- 53,974 80,418 Ten years later -- -- 66,878 Net liability re-estimated as of: One year later 163,848 123,978 107,025 Two years later 154,646 118,452 106,213 Three years later 150,470 109,536 104,273 Four years later 145,457 106,093 102,507 Five years later 137,426 102,436 101,524 Six years later 137,818 97,304 100,418 Seven years later 138,255 96,900 97,911 Eight years later 133,192 98,125 97,186 Nine years later -- 97,785 100,209 Ten years later -- -- 100,053 Net cumulative redundancy (deficiency) Amount of original liability 36,593 25,363 (909) Percentage 22% 21% (1)% Gross liability, end of year Reinsurance recoverable Net liability, end of year Gross re-estimated liability-latest Re-estimated recoverable-latest Net re-estimated liability-latest Gross cumulative redundancy
(1) Amounts for 1986 and 1987 include claims activity associated with a Bermuda subsidiary, prior to its sale by Trenwick in 1987. 10 13 In evaluating the information in the table above, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, if a claim determined in 1991 to be $150,000 was first reserved in 1986 at $100,000, the $50,000 deficiency (actual claim minus original estimate) would be included in the gross cumulative redundancy (deficiency) in each of the years 1986-1991 shown on the preceding page. This table does not present accident or policy year development data. Conditions and trends that have affected the development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The trend depicted in the table indicates that net unpaid claims and claims expense liability at December 31, 1995 have developed redundantly due to favorable developments for claims occurring between accident years 1987 and 1992, partially offset by unfavorable development in accident years 1993 through 1995. The deficiency shown in the table for the year 1986 reflects adverse development for claims occurring during that period and are widespread throughout the industry. The industry factors which contributed to adverse claim developments during this period included inadequate premium levels and inadequate terms attributable to overly competitive market conditions. Trenwick's exposure to these unfavorable market conditions is limited by the insubstantial amount of premiums it wrote during this period. RETROCESSION AGREEMENTS Reinsurance companies enter into retrocessional agreements for the same reasons insurers seek reinsurance, including reduction of net liability on individual risks, protection against catastrophic losses and maintenance of acceptable ratios. Trenwick has various retrocessional facilities, all of which are on a treaty basis. These retrocessional facilities include one treaty for Trenwick's facultative casualty reinsurance business which applies on a risk or account basis and two for its treaty property business which protect it against multiple claims arising out of a single occurrence or event. As a result of these facilities, Trenwick's maximum retention generally does not exceed $500,000 per occurrence on facultative business and $2,000,000 per occurrence on property catastrophe business. Since 1989, Trenwick has purchased aggregated excess of loss ratio treaties from several reinsurers. These facilities provided Trenwick with a layer of protection against adverse results from primarily casualty business in excess of specified loss ratios. Trenwick remains liable with respect to reinsurance ceded in the event that the retrocessionaire is unable to meet its obligations assumed under the reinsurance agreement. All retrocessionaires must be formally approved by Trenwick's Security Committee comprising of the Chief Executive Officer, as Committee Chairman, and the Chief Financial Officer. The Security Committee re-evaluates the financial condition of Trenwick's retrocessionaires at least annually. The evaluation process involves financial analysis of current audited financial data and comparative analysis of such data in accordance with guidelines established by Trenwick. Business may not be conducted with retrocessionaires who are not currently approved by the Security Committee. Trenwick's principal retrocessionaires domiciled in the United States are Centre Reinsurance Company of New York, Continental Casualty Company, Kemper Reinsurance Company and National Indemnity Company, which are rated A or better by A.M. Best Company. The principal retrocessionaires domiciled outside the United States are syndicates at Lloyds of London and Unionamerica Insurance Company, 11 14 Limited. At December 31, 1996, Trenwick had no material uncollectible amounts due from its retrocessionaires. INVESTMENTS Trenwick's investments comply with the insurance laws of the state of Connecticut, its domiciliary state, and of the other states in which Trenwick is licensed or authorized. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stock, real estate mortgages and real estate. The Investment Committee of Trenwick's Board of Directors oversees investments and sets procedures and guidelines for investment strategy. Trenwick's internal staff manages Trenwick's investments and utilizes the services of an investment adviser. Trenwick's investment strategy focuses on capital preservation and income predictability. This strategy also requires that the risks associated with these objectives are properly managed. Accordingly, the Company emphasizes investment grade fixed maturity investments. At December 31, 1996, 92% of Trenwick's fixed income investments were rated Aa or better and none had a Moody's Investors Service quality rating less than A. The Company's investment strategy permits an allocation for equity securities. At December 31, 1996, 3% of the Company's total investments and cash were invested in common and preferred equities of U.S. corporations. The primary risk associated with these securities is the exposure to daily market fluctuations. Trenwick invests in three types of structured securities, collateralized mortgage obligations (CMO), mortgage-backed securities not backed by U.S. government agencies (non-agency MBS) and asset-backed securities (ABS), each accounting for 12%, 7% and 6%, respectively, of Trenwick's portfolio at December 31, 1996. CMOs consist of planned amortization classes (PACs) which have been constructed with a certain amount of call protection and CMOs that have lost their PAC protection (sometimes called "broken" or "busted" PACs), due to actual prepayments being significantly higher or lower than originally forecast. These agency backed CMOs are not subject to credit risk, as all holdings are backed indirectly or directly by the Federal government or one of its agencies. The material risk inherent to holding these CMOs is prepayment risk, which relates to the timing of cash flows that result from amortization, whether it accelerated, because of lower interest rates and therefore higher than expected prepayments, or decelerated, because of higher interest rates and therefore lower than expected prepayments. Changes in principal repayments could negatively affect investment income due to the timing of the reinvested funds. Non-agency MBSs are constructed primarily from the securitization of mortgages on commercial or residential real estate and, lacking any agency backing, are inherently subject to credit risk. They also have an element of prepayment risk which is contingent on the structure of each security and its underlying collateral. The non-agency MBS issues Trenwick has purchased have a rating of A or better from various Nationally Recognized Statistical Rating Organizations. 12 15 The asset-backed securities owned by Trenwick have primarily credit card, auto and equipment receivables as collateral and are subject also to credit risk. These securities have less cash flow uncertainty than non-agency MBS and CMO issues, because the issuer has the ability to add in new collateral should the asset-backed security experience faster prepayments, or in the event of default on the underlying collateral. The asset-backed securities owned by Trenwick are rated Aaa by Moody's Investors Service as of December 31, 1996. Trenwick also invests in agency pass-through securities which account for 3% of Trenwick's portfolio at December 31, 1996. As with CMOs, these securities are subject to prepayment risk. 13 16 The table below sets forth the distribution of Trenwick's investments at December 31, 1996 by type, maturity and quality rating. INVESTMENTS (DOLLARS IN THOUSANDS)
AVERAGE ESTIMATED MATURITY FAIR AMORTIZED IN YEARS VALUE COST -------- --------- --------- TYPE U.S. government bonds 3.5 $ 91,702 $ 90,421 Tax-exempt bonds(1) 4.9 367,029 360,201 Mortgage-backed and asset-backed securities 9.4 211,228 206,774 Debt securities issued by foreign governments 3.2 3,227 3,156 Public utilities 5.6 2,918 2,803 Corporate securities 4.2 37,774 37,001 Short-term securities .5 120 120 -------- --------- Total fixed maturity investments 6.0 713,998 700,476 Equity securities - 25,959 21,346 Cash and cash equivalents - 14,253 14,253 -------- --------- Total investments and cash $754,210 $ 736,075 ======== ========= MATURITY Due in one year or less .6 $ 64,268 $ 63,899 Due in one year through five years 3.3 314,690 308,687 Due after five years through ten years 6.8 273,802 266,533 Due after ten years 21.6 61,238 61,357 -------- --------- Total fixed maturity investments 6.0 $713,998 $ 700,476 ======== ========== QUALITY (FIXED MATURITY INVESTMENTS) Aaa(2)-U.S. government bonds $ 91,702 $ 90,421 Tax-exempt bonds 325,545 319,998 Mortgage-backed and asset-backed securities 167,701 163,725 Corporate securities 2,964 2,902 -------- --------- 587,912 577,046 -------- --------- Aa(2)-Tax-exempt bonds 37,901 36,833 Mortgage-backed securities 28,592 27,850 Corporate securities 5,178 5,130 -------- --------- 71,671 69,813 -------- --------- A(2)-Tax-exempt bonds 3,583 3,370 Mortgage-backed securities 14,935 15,199 Debt securities issued by foreign governments 3,227 3,156 Public utilities 2,918 2,803 Corporate securities 29,632 28,969 -------- --------- 54,295 53,497 -------- --------- Short-term securities 120 120 -------- --------- Total fixed maturity investments $713,998 $ 700,476 ======== =========
(1) Tax-exempt bonds include $83,515,000 escrowed in U.S. Government Securities, $166,140,000 insured by Municipal Bond Investors Assurance Corporation, Financial Guaranty Insurance Company, AMBAC Indemnity Corporation, or Financial Security Assurance Corporation and $41,895,000 both escrowed and insured. (2) Quality rating as assigned by Moody's Investors Service, Inc. for all except certain mortgage-backed securities not backed by U.S. government agencies which are as assigned by Fitch Investors Service, Standard and Poor's or Duff and Phelps. Ratings are generally assigned upon the issuance of the securities, subject to revision on the basis of ongoing evaluations. 14 17 REGULATION NAIC The National Association of Insurance Commissioners ("NAIC") is an organization which assists state insurance supervisory officials in achieving insurance regulatory objectives, including the maintenance and improvement of state regulation. From time to time various regulatory and legislative changes have been proposed in the insurance industry, some of which could have an effect on reinsurers. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. Trenwick is unable to predict what effect, if any, these developments may have on its operations and financial condition. See Management's Discussion and Analysis of Financial Condition and Results of Operations. RBC The NAIC's initiative to establish minimum capital requirements, referred to as Risk Based Capital ("RBC"), for property and casualty companies was completed and adopted in 1993. This formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. The ratios calculated for Trenwick America Re exceeded all of the RBC trigger points at December 31, 1996. Trenwick believes its capital will continue to exceed these RBC capital and surplus requirements for the foreseeable future. See Management's Discussion and Analysis of Financial Condition and Results of Operations. State Insurance Regulation The premium rates and policy terms of reinsurance agreements generally are not subject to regulation by any government authority. This contrasts with property and casualty insurance where the premium rates and policy terms are generally closely regulated by state insurance departments. As a practical matter, however, the premium rates charged by insurers may place a limit on the rates which can be charged by reinsurers. The regulation and supervision to which Trenwick is subject relates primarily to the standards of solvency that must be met and maintained, licensing requirements for reinsurers, the nature of and limitations on investments, restrictions on the size of risks which may be insured, deposits of securities for the benefit of a reinsured, methods of accounting, periodic examinations of the financial condition and affairs of reinsurers, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes. In general, such regulation is for the protection of the reinsureds, and ultimately, their policyholders rather than their security holders. Trenwick believes that it is in compliance with all such regulations. 15 18 Trenwick America Re is subject to regulation under the insurance statutes and insurance holding company statutes of various states, including Connecticut, the domiciliary state of Trenwick America Re. These laws and regulations vary from state to state, but generally require an insurance holding company, and insurers and reinsurers that are subsidiaries of an insurance holding company, to register with the state regulatory authorities and to file with those authorities certain reports including information concerning their capital structure, ownership, financial condition and general business operations. State laws also require prior notice or regulatory agency approval of direct or indirect changes in control of an insurer, reinsurer or its holding company and of certain significant intercorporate transfers of assets within the holding company structure. An investor who acquires securities representing or convertible into more than 10% of the voting power of the securities of Trenwick would become subject to at least some of such regulations and would be subject to approval by the Connecticut Insurance Commissioner prior to acquiring such shares. Such investor would also be required to file certain notices and reports with the Commissioner prior to such acquisition. Dividends The principal source of cash for the payment of dividends by Trenwick is the receipt of dividends from Trenwick America Re. Under the Connecticut insurance laws and regulations, the maximum amount of shareholder dividends or other distributions that Trenwick America Re may declare or pay to the Company within any twelve month period, without the permission of the Connecticut Insurance Commissioner, is limited to the greater of 10% of policyholder surplus at December 31 of the preceding year, or 100% of net income excluding realized capital gains, for the twelve month period ending December 31 of the preceding year, both determined in accordance with statutory accounting practices. For the purpose of computing the limitation, carryforward provisions apply with respect to net income realized in the two previous calendar years which has not already been paid out as dividends. The maximum amount of dividends which could be paid by Trenwick America Re in 1997 without regulatory approval would be $62,901,000. Investment Limitations Connecticut Law contains rules governing the types and amounts of investments which are permissible for a Connecticut insurer or reinsurer, including Trenwick America Re. These rules are designated to ensure the safety and liquidity of the insurer's investment portfolio. In general, these rules only permit a Connecticut insurer to purchase investments which are interest bearing, interest accruing, entitled to dividends or otherwise income earning and not then in default in any respect, and the insurer must be entitled to receive for its exclusive account and benefit the interest or income accruing thereon. No security or investment is eligible for purchase at a price above its fair value or market value. In addition, these rules require investments by Trenwick to be diversified. Trenwick believes that it is in compliance with all applicable Connecticut insurance laws. 16 19 EMPLOYEES At December 31, 1996, Trenwick employed a total of 71 persons. Trenwick has no employees represented by a labor union and believes that its employee relations are good. ITEM 2. PROPERTIES Trenwick's offices in Stamford, Connecticut are occupied pursuant to a lease covering approximately 27,000 square feet of office space located at Metro Center, One Station Place. Although the lease expires on July 15, 1998, Trenwick has the option to extend and renew the terms of the lease. ITEM 3. LEGAL PROCEEDINGS Trenwick is party to various legal proceedings generally arising in the normal course of its reinsurance business. Trenwick does not believe that the eventual outcome of any such proceeding will have a material effect on its financial condition or business. Trenwick's subsidiaries are regularly engaged in the investigation and the defense of claims arising out of the conduct of their reinsurance business. Pursuant to Trenwick's reinsurance arrangements, disputes between Trenwick America Re and its ceding companies are generally required to be finally settled by arbitration. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 20 PART II ITEM 5. MARKET FOR CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Trenwick Common Stock is listed on the NASDAQ Stock Market under the ticker symbol TREN. There were 134 holders of record and in excess of 1,200 beneficial owners of Common Stock as of February 28, 1997. The other information called for by this item can be found in Note 12 of Notes to the Consolidated Financial Statements of Trenwick on Page 72 of the Annual Report to Stockholders and is incorporated herein by reference. For a description of restrictions on Trenwick's ability to pay dividends, reference is made to Item 1. Business - Regulation, Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 6 of Notes to the Consolidated Financial Statements of Trenwick. 18 21 ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands except per share data) INCOME STATEMENT DATA Net premiums written $226,364 $197,162 $139,635 $101,392 $ 81,883 ======== ======== ======== ======== ======== Net premiums earned $211,069 $177,394 $132,683 $ 93,180 $ 81,831 Net investment income 41,226 36,828 33,932 34,954 30,859 Net realized investment gains (losses) 299 368 (196) 1,842 181 Service fees - - - - 206 -------- -------- -------- -------- -------- Total revenues $252,594 $214,590 $166,419 $129,976 $113,077 ======== ======== ======== ======== ======== Net income $ 33,848 $ 29,841 $ 20,282 $ 23,739 $ 18,539 ======== ======== ======== ======== ======== PER SHARE DATA Primary earnings Net income $ 4.95 $ 4.44 $ 3.04 $ 3.48 $ 2.76 ======== ======== ======== ======== ======== Weighted average shares outstanding 6,832 6,723 6,670 6,831 6,728 ======== ======== ======== ======== ======== Fully diluted earnings (assuming conversion of dilutive convertible securities): Net income $ 4.25 $ 3.80 $ 2.78 $ 3.12 $ 2.75 ======== ======== ======== ======== =-====== Weighted average shares outstanding 8,966 8,960 8,847 8,965 6,746 ======== ======== ======== ======== ======== Dividends $ 1.24 $ 1.12 $ 1.00 $ .86 $ .76 ======== ======== ======== ======== ======== BALANCE SHEET DATA Investments and cash $754,210 $653,704 $551,784 $546,303 $500,359 Total assets 920,804 820,930 727,245 700,407 652,473 Unpaid claims and claims expenses 467,177 411,874 389,298 354,582 351,897 Convertible debentures 103,500 103,500 103,500 103,500 103,500 Total stockholders' equity 265,753 240,776 188,213 206,763 169,373 Shares of common stock outstanding 6,725 6,590 6,440 6,583 6,510 Book value per share $ 39.52 $ 36.54 $ 29.23 $ 31.41 $ 26.02 CERTAIN GAAP FINANCIAL RATIOS Combined ratio 95.8% 95.6% 103.2% 102.5% 112.3% Net premiums written to surplus ratio 0.85:1 0.82:1 0.74:1 0.49:1 0.48:1 Unpaid claims and claims expenses to surplus ratio 1.76:1 1.71:1 2.07:1 1.71:1 2.08:1
The other information called for by this item can be found on Pages 31 through 73 of Trenwick's 1996 Annual Report to Stockholders under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements" and is incorporated herein by reference. 19 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information called for by this item can be found on Pages 31 through 42 of Trenwick's 1996 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item can be found on Pages 44 through 73 of Trenwick's Annual Report to Stockholders and to the items included in Item 14(a) of this report, and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Incorporated by reference to the captions "Board of Directors", "Management", and "Executive Compensation" in the Proxy Statement for the Annual Meeting in 1997 ("Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the caption "Principal Stockholders" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the caption "Certain Relationships and Related Transactions" in the Proxy Statement. 20 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) Documents (1) & (2) The Financial Statements, Schedules and the Report of Independent Accountants on the Financial Statement Schedules, listed in the accompanying index on Page 28, are filed as part of this Report. (3) Exhibits 3.1 Trenwick's Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to Trenwick's Registration Statement on Form S-1, File No. 33-5085. 3.2 Certificate of Amendment of Trenwick's Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.3 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-14737. 3.3 Trenwick's By-laws. Incorporated by reference to Exhibit 3.2 to Trenwick's Registration Statement on Form S-1, File No. 33-5085. 4.1 Rights Agreement dated as of November 2, 1989 between Trenwick and First Chicago Trust Company of New York. Incorporated by reference to Exhibit 4 to Trenwick's Form 8-A dated June 11, 1989, File No. 0-14737. 4.2 (a) Indenture dated as of January 31, 1997, between The Chase Manhattan Bank and Trenwick. (b) Amended and Restated Declaration of Trust of Trenwick Capital Trust I dated as of January 31, 1997. +10.1 Trenwick Incentive Stock Option Plan, as amended through August 3, 1993. Incorporated by reference to Exhibit 10.1 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.2 Incentive Stock Option Agreement between Trenwick and James F. Billett, Jr. Incorporated by reference to Exhibit 10.11 to Trenwick's Registration Statement on Form S-1, File No. 33-5085. 10.3 Trenwick 1987 Stock Incentive Plan, as amended through August 3, 1993. Incorporated by reference to Exhibit 10.5 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. + As required by Item 14, each of Exhibits 10.1 through 10.17 is hereby identified as a management contract or compensatory plan or arrangement. 21 24 10.4 Form of Stock Option Agreement for executive officers (performance options). Incorporated by reference to Exhibit 10.32 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 0-14737. 10.5 Form of Restricted Stock Agreement for executive officers. Incorporated by reference to Exhibit 10.31 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 0-14737. 10.6 Trenwick 1989 Stock Plan, as amended through August 3, 1993. Incorporated by reference to Exhibit 10.8 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.7 Form of Non-qualified Stock Option Agreement for executive officers. Incorporated by reference to Exhibit 10.36 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-14737. 10.8 Trenwick 1993 Stock Option Plan. Incorporated by reference to Exhibit 10.1 to Trenwick's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, File No. 0-14737. 10.9 Form of 1993 Stock Option Plan Non-qualified Stock Option Agreement for executive officers. Incorporated by reference to Exhibit 10.11 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.10 Trenwick 1993 Stock Option Plan for Non-Employee Directors. Incorporated by reference to Exhibit 10.2 to Trenwick's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, File No. 0-14737. 10.11 Trenwick Near Term Cash Bonus Plan. Incorporated by reference to Exhibit 10.10 to Trenwick's Registration Statement on Form S-1, File No. 33-5085. 10.12 Trenwick Unfunded Supplemental Executive Retirement Plan, as amended through December 14, 1993. Incorporated by reference to Exhibit 10.14 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.13 Leased Automobile Policy for executive officers. 10.14 Description of life insurance and long-term disability insurance coverage for executive officers. Incorporated by reference to Exhibit 10.16 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.15 Trenwick Directors Deferred Compensation Plan. Incorporated by reference to Exhibit 10.17 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.16 Description of Trenwick Directors Retirement Plan. Incorporated by reference to Exhibit 10.18 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 22 25 10.17 Commercial Real Estate Lease Agreement between Trenwick and One Station Place, Limited Partnership dated July 15, 1988. Incorporated by reference to Exhibit 10.33 to Trenwick's Annual Report on Form 10-K for year ended December 31, 1988, File No. 0-14737. 10.18 Aggregate Excess of Loss Reinsurance Agreement between Trenwick and National Indemnity Company dated December 31, 1984 and amendment thereto. Incorporated by reference to Exhibit 10.29 to Trenwick's registration statement on Form S-1, File No. 33-5085. 10.19 Automobile Liability First Excess of Loss/Quota Share Reinsurance Agreement between Trenwick and the Canal Insurance Company/Canal Indemnity Company.* 10.20 Interests and Liabilities Agreement between Trenwick and Kemper Reinsurance Group and participants thereon.* 10.21 Aggregate Excess of Loss Ratio Cover between Trenwick and Continental Casualty Company.* 10.22 Property Catastrophe Treaty between Trenwick and numerous reinsurers.* 10.23 Special Catastrophe Excess of Loss Reinsurance Agreement Placement Slip between Trenwick and each of Continental Casualty Company, Zurich Reinsurance Company of New York, Folksamerica Reinsurance Company, and Kemper Reinsurance Company.* 10.24 Property Quota Share Retrocession Placement Slip between Trenwick and each of Toa-Re Insurance Co. (U.K.) Ltd. and Underwriters at Lloyd's.* 10.25 Property Pro Rata Retrocessional Agreement between PXRE Reinsurance Company and Trenwick. Incorporated by reference to Exhibit 10.24 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-14737. * Incorporated by reference to Exhibits 10.40 through and including 10.45 to Amendment No. 1 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1991, filed with the Commission on December 8, 1992, File No. 0-14737. 23 26 10.26 Coinsured Aggregate Excess of Loss Reinsurance Agreement between Trenwick and Centre Reinsurance Company of New York. Incorporated by reference to Exhibit 10.28 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.27 1995 Property Catastrophe Treaty between Trenwick and numerous reinsurers. 10.28 1995 Special Catastrophe Excess of Loss Reinsurance Agreement between Trenwick and Zurich Reinsurance Company of New York and Kemper Reinsurance Company. 10.29 1995 First Facultative Casualty Excess of Loss Reinsurance Agreement between Trenwick and numerous reinsurers. 10.30 1995 First Facultative Excess of Loss Reinsurance Agreement between Trenwick and numerous reinsurers. 10.31 1996 First Facultative Casualty Excess of Loss Reinsurance Agreement between Trenwick and numerous reinsurers. 10.32 1996 Property Catastrophe Excess of Loss Agreement between Trenwick and numerous reinsurers. 10.33 1996 Coinsured Aggregate Excess of Loss Reinsurance Agreement between Trenwick and Centre Reinsurance Company of New York and CNA Re. 10.34 1996 Special Catastrophe Excess of Loss Retrocession Agreement between Tarco and several reinsurers. 11.0 Computation of Earnings Per Share. Reference is made to page 27 of this report. 12.0 Computation of Ratios. 13.0 Trenwick's 1996 Annual Report to Stockholders. Such report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Commission and is not to be deemed "filed" as part of this Form 10-K. 21.0 List of Subsidiaries. 23.0 Consent of Price Waterhouse LLP. 27.0 Financial Data Schedule. 28.0 Information from reports furnished to state insurance regulatory authorities. (B) Reports on Form 8-K None 24 27 SIGNATURES Pursuant to the Requirements of Section 13 or 15(d) of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRENWICK GROUP INC. (Registrant) By JAMES F. BILLETT, JR. --------------------------- James F. Billett, Jr. Chairman, President and Chief Executive Officer Dated: March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - - --------- ----- ---- JAMES F. BILLETT, JR. Chairman of the Board, March 28, 1997 - - ---------------------------- President and Chief James F. Billett, Jr. Executive Officer and Director (Principal Executive Officer) ALAN L. HUNTE Vice President and March 28, 1997 - - ------------------------------- Treasurer (Principal Alan L. Hunte Financial Officer and Accounting Officer) ANTHONY S. BROWN Director March 28, 1997 - - ------------------------------- Anthony S. Brown
25 28
NEIL DUNN Director March 28, 1997 - - ------------------------------- Neil Dunn ALAN R. GRUBER Director March 28, 1997 - - ------------------------------- Alan R. Gruber P. ANTHONY JACOBS Director March 28, 1997 - - ------------------------------- P. Anthony Jacobs HERBERT PALMBERGER Director March 28, 1997 - - ------------------------------- Herbert Palmberger JOSEPH D. SARGENT Director March 28, 1997 - - ------------------------------- Joseph D. Sargent FREDERICK D. WATKINS Director March 28, 1997 - - ------------------------------- Frederick D. Watkins STEPHEN R. WILCOX Director March 28, 1997 - - ------------------------------- Stephen R. Wilcox
26 29 TRENWICK GROUP INC. ITEM 14.(A)(3) - Exhibit 11.0 -- COMPUTATION OF EARNINGS PER SHARE (in thousands, except per share amounts)
Year Ended December 31 ----------------------------------------------------------------- Pro forma 1996 1996 1995 1994 -------------- ---- ---- ---- INCOME AVAILABLE TO COMMON STOCKHOLDERS: Net income (primary) $36,204 $33,848 $29,841 $20,282 ======= Add interest on convertible debentures, net of applicable income taxes 4,228 4,216 4,270 ------- ------- ------- Income available (fully diluted) $38,076 $34,057 $24,552 ======= ======= ======= WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Common shares 7,860 6,671 6,482 6,458 Equivalent shares associated with employee stock options 161 161 241 212 ------- ------- ------- ------- Common and common equivalent shares (primary) 8,021 6,832 6,723 6,670 ======= Additional fully diluted equivalent shares associated with employee stock options - 103 43 Shares associated with debenture conversions 2,134 2,134 2,134 ------- ------- ------- Common and common equivalent shares (fully diluted) 8,966 8,960 8,847 ======= ======= ======= PER SHARE AMOUNTS: Primary $ 4.51 $ 4.95 $ 4.44 $ 3.04 ======= ======= ======= ======= Fully diluted $ 4.25 $ 3.80 $ 2.78 ======= ======= =======
1996 pro forma amounts for net income and weighted average common shares reflect, as of January 1, 1996, the February 20, 1997 debenture conversion by adding back to net income the applicable interest expense, net of income taxes, and increasing the average shares for the shares issued on conversion. 27 30 TRENWICK GROUP INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Pages ----- Financial Statements: Consolidated Balance Sheet at December 31, 1996 and 1995 ............. * Consolidated Statement of Income for the three years ended December 31, 1996...................... * Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1996...................... * Consolidated Statement of Cash Flows for the three years ended December 31, 1996...................... * Notes to Consolidated Financial Statements............................ * Report of Independent Accountants on Consolidated Financial Statements.................................. * Financial Statement Schedules: III - Condensed Financial Information of Registrant ............ S-1/S-2 Report of Independent Accountants on Financial Statement Schedules ......................................................... S-3
* Incorporated by reference to Trenwick's 1996 Annual Report to Stockholders. Schedules other than those listed above are omitted since they are either not required or are not applicable or the information required is presented in the consolidated financial statements, including the notes thereto. 28 31 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
December 31, ------------------- 1996 1995 ---- ---- (in thousands) Assets: Investments in consolidated subsidiaries $346,060 $323,221 Fixed maturity investments available for sale at fair value (amortized cost: $14,793 and $14,786) 14,814 15,027 Cash and cash equivalents 2,964 1,323 Deferred debt issuance costs 986 1,281 Due from consolidated subsidiaries 4,303 3,132 Net deferred income taxes 391 81 Other assets 11 487 -------- -------- Total assets $369,529 $344,552 ======== ======== Liabilities: Convertible debentures $103,500 $103,500 Other liabilities 276 276 -------- -------- Total liabilities 103,776 103,776 Stockholders' equity 265,753 240,776 -------- -------- Total liabilities and stockholders' equity $369,529 $344,552 ======== ========
STATEMENT OF INCOME -- PARENT COMPANY ONLY
Year ended December 31, ---------------------------------- 1996 1995 1994 ---- ---- ---- (in thousands) Revenues: Consolidated subsidiary dividends $ 9,100 $ 9,500 $ 9,400 Net investment income 1,000 940 1,001 Net realized investment gains -- -- 90 ------- ------- ------- Total revenues 10,100 10,440 10,491 Interest and operating expenses 6,504 6,486 6,469 ------- ------- ------- Income before income taxes 3,596 3,954 4,022 Income taxes (1,997) (1,954) (1,738) ------- ------- ------- Income before equity in undistributed income of consolidated subsidiaries 5,593 5,908 5,760 Equity in undistributed income of consolidated subsidiaries 28,255 23,933 14,522 ------- ------- ------- Net income $33,848 $29,841 $20,282 ======= ======= =======
S-1 32 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY
Year ended December 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- (in thousands) Cash flows from operating activities: Dividends and net investment income received $ 10,537 $ 10,436 $ 9,949 Interest and operating expenses paid (5,642) (5,678) (5,827) Income taxes received 2,061 2,116 2,377 -------- -------- -------- Cash provided by operating activities 6,956 6,874 6,499 Cash flows for investing activities: Sales of fixed maturity investments -- -- 5,280 Cash flows for financing activities (5,315) (5,764) (12,294) -------- -------- -------- Change in cash and cash equivalents 1,641 1,110 (515) Cash and cash equivalents, beginning of year 1,323 213 728 -------- -------- -------- Cash and cash equivalents, end of year $ 2,964 $ 1,323 $ 213 ======== ======== ========
S-2 33 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Trenwick Group Inc. Our audits of the consolidated financial statements referred to in our report dated January 27, 1997, appearing on Page 43 of the 1996 Annual Report to Stockholders of Trenwick Group Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14 (a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Price Waterhouse LLP New York, New York January 27, 1997 S-3 EX-4.2.A 2 EXHIBIT 4.2.A 1 EXHIBIT 4.2(a) ================================================================================ --------------- INDENTURE Dated as of January 31, 1997 between TRENWICK GROUP INC. and THE CHASE MANHATTAN BANK, as Trustee --------------- $113,403,000 8.82% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS..................................................................... 1 SECTION 1.01. Definitions........................................................ 1 ARTICLE II. SECURITIES...................................................................... 11 SECTION 2.01. Forms Generally.................................................... 11 SECTION 2.02. Execution and Authentication....................................... 11 SECTION 2.03. Form and Payment................................................... 11 SECTION 2.04. Legends............................................................ 12 SECTION 2.05. Global Security.................................................... 12 SECTION 2.06. Interest........................................................... 13 SECTION 2.07. Transfer and Exchange.............................................. 14 SECTION 2.08. Replacement Securities............................................. 15 SECTION 2.09. Treasury Securities................................................ 16 SECTION 2.10. Temporary Securities............................................... 16 SECTION 2.11. Cancellation....................................................... 16 SECTION 2.12. Defaulted Interest................................................. 17 SECTION 2.13. CUSIP Numbers...................................................... 17 ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY............................................. 18 SECTION 3.01. Payment of Principal, Premium and Interest......................... 18 SECTION 3.02. Offices for Notices and Payments, etc.............................. 18 SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office................. 18 SECTION 3.04. Provision as to Paying Agent....................................... 19 SECTION 3.05. Certificate to Trustee............................................. 19 SECTION 3.06. Compliance with Consolidation Provisions........................... 20 SECTION 3.07. Limitation on Dividends............................................ 20 SECTION 3.08. Covenants as to Trenwick Capital Trust I........................... 21 SECTION 3.09. Payment of Expenses................................................ 21 SECTION 3.10. Payment Upon Resignation or Removal................................ 21 ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE.............. 22 SECTION 4.01. Securityholders' Lists............................................. 22 SECTION 4.02. Preservation and Disclosure of Lists............................... 22 SECTION 4.03. Reports of the Company............................................. 23 SECTION 4.04. Reports by the Trustee............................................. 24
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Page ---- ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT................. 24 SECTION 5.01. Events of Default.................................................. 24 SECTION 5.02. Payment of Securities on Default; Suit Therefor.................... 26 SECTION 5.03. Application of Moneys Collected by Trustee......................... 28 SECTION 5.04. Proceedings by Securityholders..................................... 28 SECTION 5.05. Proceedings by Trustee............................................. 29 SECTION 5.06. Remedies Cumulative and Continuing................................. 29 SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders......................... 30 SECTION 5.08. Notice of Defaults................................................. 30 SECTION 5.09. Undertaking to Pay Costs........................................... 31 SECTION 5.10 Waiver of Stay or Extension Laws................................... 31 SECTION 5.11 Delay or Omission Not Waiver....................................... 31 ARTICLE VI. CONCERNING THE TRUSTEE.......................................................... 32 SECTION 6.01. Duties and Responsibilities of Trustee............................. 32 SECTION 6.02. Reliance on Documents, Opinions, etc............................... 33 SECTION 6.03. No Responsibility for Recitals, etc................................ 34 SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities.................... 34 SECTION 6.05. Moneys to be Held in Trust......................................... 34 SECTION 6.06. Compensation and Expenses of Trustee............................... 35 SECTION 6.07. Officers' Certificate as Evidence.................................. 35 SECTION 6.08. Conflicting Interest of Trustee.................................... 36 SECTION 6.09. Eligibility of Trustee............................................. 36 SECTION 6.10. Resignation or Removal of Trustee.................................. 36 SECTION 6.11. Acceptance by Successor Trustee.................................... 37 SECTION 6.12. Succession by Merger, etc.......................................... 38 SECTION 6.13. Limitation on Rights of Trustee as a Creditor...................... 38 SECTION 6.14. Authenticating Agents.............................................. 38 ARTICLE VII. CONCERNING THE SECURITYHOLDERS.................................................. 39 SECTION 7.01. Action by Securityholders.......................................... 39 SECTION 7.02. Proof of Execution by Securityholders.............................. 40 SECTION 7.03. Who Are Deemed Absolute Owners..................................... 40 SECTION 7.04. Securities Owned by Company Deemed Not Outstanding........................................................ 40 SECTION 7.05. Revocation of Consents; Future Holders Bound....................... 41 ARTICLE VIII. SECURITYHOLDERS' MEETINGS....................................................... 41 SECTION 8.01. Purpose of Meetings................................................ 41 SECTION 8.02. Call of Meetings by Trustee........................................ 42
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Page ---- SECTION 8.03. Call of Meetings by Company or Securityholders..................... 42 SECTION 8.04. Qualifications for Voting.......................................... 42 SECTION 8.05. Regulations........................................................ 42 SECTION 8.06. Voting............................................................. 44 ARTICLE IX. AMENDMENTS...................................................................... 44 SECTION 9.01. Without Consent of Securityholders................................. 44 SECTION 9.02. With Consent of Securityholders.................................... 45 SECTION 9.03. Compliance with Trust Indenture Act of 1939; Effect of Supplemental Indentures............................................ 46 SECTION 9.04. Notation on Securities............................................. 47 SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee.................. 47 ARTICLE X. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE............................... 47 SECTION 10.01. Company May Consolidate, etc., on Certain Terms.................... 47 SECTION 10.02. Successor Corporation to be Substituted for Company................ 48 SECTION 10.03. Opinion of Counsel to be Given Trustee............................. 48 ARTICLE XI. SATISFACTION AND DISCHARGE OF INDENTURE......................................... 48 SECTION 11.01. Discharge of Indenture............................................. 48 SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee......................... 49 SECTION 11.03. Paying Agent to Repay Moneys Held.................................. 49 SECTION 11.04. Return of Unclaimed Moneys......................................... 49 SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligations............................................. 50 SECTION 11.06. Reinstatement...................................................... 51 ARTICLE XII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS................. 51 SECTION 12.01. Indenture and Securities Solely Corporate Obligations.............. 51 ARTICLE XIII. MISCELLANEOUS PROVISIONS........................................................ 52 SECTION 13.01. Successors......................................................... 52 SECTION 13.02. Official Acts by Successor Corporation............................. 52 SECTION 13.03. Surrender of Company Powers........................................ 52 SECTION 13.04. Address for Notices, etc........................................... 52 SECTION 13.05. Governing Law...................................................... 52 SECTION 13.06. Evidence of Compliance with Conditions Precedent................... 52 SECTION 13.07. Business Days...................................................... 53
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Page ---- SECTION 13.08. Trust Indenture Act of 1939 to Control............................. 53 SECTION 13.09. Table of Contents, Headings, etc................................... 53 SECTION 13.10. Execution in Counterparts.......................................... 53 SECTION 13.11. Separability....................................................... 53 SECTION 13.12. Assignment......................................................... 54 SECTION 13.13. Acknowledgment of Rights........................................... 54 ARTICLE XIV. CONDITIONAL RIGHT TO SHORTEN MATURITY; PREPAYMENT OF SECURITIES -- NO SINKING FUND................................................................ 54 SECTION 14.01. Special Event Prepayment........................................... 54 SECTION 14.02. Optional Prepayment by Company..................................... 55 SECTION 14.03. No Sinking Fund.................................................... 55 SECTION 14.04. Notice of Prepayment; Selection of Securities...................... 55 SECTION 14.05. Payment of Securities Called for Prepayment........................ 56 SECTION 14.06. Conditional Right to Shorten Maturity.............................. 56 ARTICLE XV. SUBORDINATION OF SECURITIES..................................................... 57 SECTION 15.01. Agreement to Subordinate........................................... 57 SECTION 15.02. Default on Senior Indebtedness..................................... 57 SECTION 15.03. Liquidation; Dissolution; Bankruptcy............................... 58 SECTION 15.04. Subrogation........................................................ 59 SECTION 15.05. Trustee to Effectuate Subordination................................ 59 SECTION 15.06. Notice by the Company.............................................. 59 SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness.............. 61 SECTION 15.08. Subordination May Not Be Impaired.................................. 61 ARTICLE XVI. EXTENSION OF INTEREST PAYMENT PERIOD............................................ 62 SECTION 16.01. Extension of Interest Payment Period............................... 62 SECTION 16.02. Notice of Extension................................................ 63 EXHIBIT A Form of Security; Trustee's Certificate of Authentication A-1
iv 6 CROSS-REFERENCE TABLE*
SECTION OF TRUST INDENTURE ACT OF 1939, AS AMENDED INDENTURE SECTION - - -------------------- ----------------- 310(a)(1) .......................................... 6.09 (a)(2) .......................................... 6.09 310(a)(3) .......................................... N/A (a)(4) .......................................... N/A 310(a)(5) .......................................... N/A 310(b) .......................................... 6.10, 6.11 310(c) .......................................... N/A 311(a) and (b) .......................................... 6.13 311(c) .......................................... N/A 312(a) .......................................... 4.01, 4.02(a) 312(b) and (c) .......................................... 4.02 313(a) .......................................... 4.04 313(b)(1) .......................................... 4.04 313(b)(2) .......................................... 4.04 313(c) .......................................... 4.04 313(d) .......................................... 4.04 314(a) .......................................... 4.03 314(b) .......................................... N/A 314(c)(1) and (2) .......................................... 6.07 314(c)(3) .......................................... N/A 314(d) .......................................... N/A 314(e) .......................................... 6.07 314(f) .......................................... N/A 315(a)(c) and (d) .......................................... 6.01 315(b) .......................................... 5.08 315(e) .......................................... 5.09 316(a)(1) .......................................... 5.07 316(a)(2) .......................................... N/A 316(a) last sentence .......................................... 2.09 316(b) .......................................... 9.02 317(a) .......................................... 5.05 317(b) .......................................... 6.05 318(a) .......................................... 13.08
- - ------------------ * This Cross-Reference Table does not constitute part of the Indenture as executed and shall not affect the interpretation of any of its terms or provisions. v 7 THIS INDENTURE, dated as of January 31, 1997, between Trenwick Group Inc., a corporation existing under the laws of the State of Delaware (hereinafter sometimes called the "Company"), and The Chase Manhattan Bank, a New York banking corporation, as trustee (hereinafter sometimes called the "Trustee"). W I T N E S S E T H : In consideration of the premises, and the purchase of the Securities (as defined herein) by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities, as follows: ARTICLE I. DEFINITIONS SECTION 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 (as defined below) or which are by reference therein defined in the Securities Act (as defined below), shall (except as herein otherwise expressly provided or unless the context otherwise requires) have the meanings assigned to such terms in the Trust Indenture Act of 1939 and in the Securities Act as in force at the date of this Indenture as originally executed. The following terms have the meanings given to them in the Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii) Property Trustee; (iv) Administrative Trustees; (v) Direct Action; (vi) Purchase Agreement and (vii) Initial Purchaser. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Headings are used for convenience of reference only and do not affect interpretation. The singular includes the plural and vice versa. "Additional Interest" shall have the meaning set forth in the Registration Rights Agreement. "Additional Sums" shall have the meaning set forth in Section 2.06(c). "Adjusted Treasury Rate" shall mean, with respect to any prepayment date pursuant to Section 14.01, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for 8 such prepayment date plus (i) 1.25% if such prepayment date occurs on or prior to February 1, 1998 and (ii) 0.50% in all other cases. "Adverse Tax Consequence" shall have the meaning set forth in the definition of Tax Event. "Affiliate" shall have the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Authenticating Agent" shall mean any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.14. "Bankruptcy Law" shall mean Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" shall mean either the Board of Directors of the Company or any duly authorized committee of the Board of Directors. "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" shall mean, with respect to any series of Securities, any day other than a Saturday or a Sunday or a day on which banking institutions in The City of New York, New York are authorized or required by law or executive order to close. "Capital Securities" shall mean Subordinated Capital Income Securities representing undivided beneficial interests in the assets of Trenwick Capital Trust I which rank pari passu with the Common Securities issued by Trenwick Capital Trust I; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, prepayment or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, prepayment and other payments to which they are entitled. References to "Capital Securities" shall include collectively any Initial Capital Securities and Exchange Capital Securities. "Capital Securities Guarantee" shall mean any guarantee that the Company may enter into with Trenwick Capital Trust I or other Persons, as such guarantee may be modified, amended or supplemented from time to time, that operates directly or indirectly for the benefit of holders of Capital Securities of Trenwick Capital Trust I and shall include an Initial Capital Securities Guarantee and an Exchange Capital Securities Guarantee with respect to the Initial Capital Securities and the Exchange Capital Securities, respectively. "Commission" shall mean the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. 2 9 "Common Securities" shall mean undivided beneficial interests in the assets of Trenwick Capital Trust I which rank pari passu with Capital Securities issued by Trenwick Capital Trust I; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, prepayment or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, prepayment and other payments to which they are entitled. "Common Securities Guarantee" shall mean any guarantee that the Company may enter into with any Person or Persons that operates directly or indirectly for the benefit of holders of Common Securities, as such guarantee may be modified, amended or supplemented from time to time. "Common Stock" shall mean the Common Stock, par value $0.10 per share, of the Company or any other class of stock resulting from changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. "Company" shall mean Trenwick Group Inc., a Delaware corporation, and, subject to the provisions of Article X, shall include its successors and assigns. "Company Request" or "Company Order" shall mean a written request or order signed in the name of the Company by the Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President (however designated), the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. "Comparable Treasury Issue" shall mean the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. "Comparable Treasury Price" shall mean, with respect to any prepayment date pursuant to Section 14.01, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such prepayment date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (A) the average of the Reference Treasury Dealer Quotations for such prepayment date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such Quotations. "Compounded Interest" shall have the meaning set forth in Section 16.01. "Conditional Tax Redemption Event" shall have the meaning set forth in Section 14.06. "Custodian" shall mean any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. 3 10 "Declaration" shall mean the Amended and Restated Declaration of Trust of Trenwick Capital Trust I, dated as of January 31, 1997, among the Trustees (as defined therein) and the Company, as Sponsor, as such Declaration may be modified, amended or supplemented from time to time. "Default" shall mean any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Deferred Interest" shall have the meaning set forth in Section 16.01. "Definitive Securities" shall mean those Securities issued in fully registered certificated form but not Securities issued in global form. "Depositary" shall mean, with respect to Securities of any series, for which the Company shall determine that such Securities will be issued as a Global Security, The Depository Trust Company, New York, New York, another clearing agency, or any successor registered as a clearing agency under the Exchange Act or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to Section 2.05(d). "Dissolution Event" shall mean the liquidation of the Trust pursuant to the Declaration, and the distribution of the Securities held by the Property Trustee to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Declaration. "Event of Default" shall mean any event specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Capital Securities" shall mean 8.82% Capital Securities (liquidation amount $1,000 per security) of Trenwick Capital Trust I, issued pursuant to an Exchange Offer (including any Private Exchange (as defined in the Registration Rights Agreement)). "Exchange Capital Securities Guarantee" shall mean the Capital Securities Guarantee Agreement, issued pursuant to an Exchange Offer (including any Private Exchange (as defined in the Registration Rights Agreement)). "Exchange Offer" shall mean the offer that may be made pursuant to the Registration Rights Agreement (i) by the Company to exchange Exchange Securities for Initial Securities and to exchange an Exchange Capital Securities Guarantee for an Initial Capital Securities Guarantee and (ii) by Trenwick Capital Trust I to exchange Exchange Capital Securities for Initial Capital Securities. "Exchange Securities" shall mean the Company's 8.82% Junior Subordinated Deferrable Interest Debentures due February 1, 2037, issued pursuant to an Exchange Offer (including any Private Exchange (as defined in the Registration Rights Agreement)), as authenticated and issued under this Indenture. "Extension Period" shall have the meaning set forth in Section 16.01. 4 11 "Global Securities" shall mean those Securities issued in global form, and "Global Security" shall mean the Security executed by the Company and delivered by the Trustee to the Depositary or pursuant to the Depositary's instruction, all in accordance with the Indenture, which shall be registered in the name of the Depositary or its nominee. "Indebtedness for Money Borrowed" shall mean any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments. "Indenture" shall mean this instrument as originally executed or as it may from time to time be modified, amended or supplemented by one or more indentures supplemental hereto entered into pursuant to the applicable provision hereof including, for all purposes of this instrument and any supplemental indenture, the provisions of the Trust Indenture Act of 1939 that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Initial Capital Securities" shall mean 8.82% Subordinated Capital Income Securities (liquidation amount $1,000 per security) of Trenwick Capital Trust, as initially issued under the Declaration. "Initial Capital Securities Guarantee" shall mean the Capital Securities Guarantee Agreement, dated as of January 31, 1997, between the Company and The Chase Manhattan Bank, as guarantee trustee. "Initial Securities" shall mean the Company's 8.82% Junior Subordinated Deferrable Interest Debentures due February 1, 2037, as initially authenticated and issued under this Indenture. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended. "Investment Company Event" shall mean that the Company shall have received an opinion of an independent counsel experienced in practice under the Investment Company Act, to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in Investment Company Act Law"), there is more than an insubstantial risk that Trenwick Capital Trust I is or will be considered an "investment company" which is required to be registered under the Investment Company Act, which Change in Investment Company Act Law becomes effective on or after January 31, 1997. "Interest Payment Date" shall have the meaning set forth in Section 2.06. "Non Book-Entry Capital Securities" shall have the meaning set forth in Section 2.05. "Officers" shall mean any of the Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President (however designated), the Secretary or an Assistant Secretary of the Company. 5 12 "Officers' Certificate" shall mean a certificate signed by (i) the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President, the Chief Executive Officer or a Vice President, and (ii) the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, and delivered to the Trustee, which certificate shall comply with the provisions of Section 13.06 hereof. "Opinion of Counsel" shall mean a written opinion of legal counsel who is reasonably acceptable to the Trustee, which opinion shall comply with the provisions of Section 13.06 hereof. "Optional Prepayment Price" shall have the meaning set forth in Section 14.02. "Other Debentures" shall mean only those junior subordinated debentures issued by the Company from time to time and sold to trusts to be established by the Company (if any), which are in each case similar to Trenwick Capital Trust I. "Other Guarantees" shall mean all guarantees to be issued by the Company with respect to capital securities (if any) and issued to other trusts, or to any trustee of such trusts or other entities affiliated with the Company that are financing vehicles of the Company. The term "outstanding" when used with reference to Securities, shall, subject to the provisions of Section 7.04, mean, as of any particular time, all Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except (a) Securities theretofore cancelled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or prepayment of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, that, if such Securities, or portions thereof, are to be prepaid prior to maturity thereof, notice of such prepayment shall have been given as in Article XIV provided or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.08 unless proof satisfactory to the Company and the Trustee is presented that any such Securities are held by bona fide holders in due course. "Person" shall mean any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security shall mean every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under 6 13 Section 2.08 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security. "Prepayment Price" shall mean the Optional Prepayment Price or the Special Event Prepayment Price, as the context requires. The term "principal office of the Trustee", or other similar term, shall mean the principal office of the Trustee, at which at any particular time its corporate trust business shall be administered and which office is, at the time of execution of this Indenture, located at 450 West 33rd Street, New York, New York 10001. "Property Trustee" shall have the same meaning as set forth in the Declaration. "Purchase Agreement" shall mean the Purchase Agreement dated January 28, 1997 among the Company, Trenwick Capital Trust I and the Initial Purchaser as defined therein. "Quotation Agent" shall mean the Reference Treasury Dealer. "Reference Treasury Dealer" shall mean (i) Lehman Brothers Inc. and its successors; provided, however, that if the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer, or (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotations" shall mean, with respect to each Quotation Agent and any prepayment date pursuant to Section 14.01, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted to the Trustee by such Quotation Agent at 5:00 p.m. New York City time, on the third Business Day preceding such prepayment date. "Registration Rights Agreement" shall mean the Registration Rights Agreement, dated as of January 31, 1997, by and among the Company, Trenwick Capital Trust I and the Initial Purchaser, as such agreement may be amended, modified or supplemented from time to time. "Regular Record Date" with respect to the payment of interest installments on the Securities, shall mean the fifteenth day preceding the relevant Interest Payment Date. If a Regular Record Date is not a Business Day, such Regular Record Date shall be deemed to be the next preceding Business Day. "Remaining Life" shall mean the period from the prepayment date pursuant to Section 14.01 to the Stated Maturity. "Responsible Officer," when used with respect to the Trustee, shall mean any officer or assistant officer of the Trustee assigned by the Trustee to administer this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. 7 14 "Restricted Security" shall mean Securities that bear or are required to bear the legends set forth in Exhibit A hereto. "Rule 144A" shall mean Rule 144A under the Securities Act, as such Rule may be amended from time to time, or under any similar rule or regulation hereafter adopted by the Commission. "Securities" shall mean, collectively, the Initial Securities and the Exchange Securities. "Securities Act" shall mean the Securities Act of 1933, as amended. "Securityholder", "holder of Securities", or other similar terms, shall mean any Person in whose name at the time a particular Security is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. "Security Register" shall mean (i) prior to a Dissolution Event, the list of holders kept by a Securities registrar or provided to the Trustee pursuant to Section 4.01, as the case may be and (ii) following a Dissolution Event, any security register maintained by a security registrar for the securities appointed by the Company following the execution of a supplemental indenture providing for transfer procedures as provided for in Section 2.07(a). "Senior Indebtedness" shall mean with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) Indebtedness for Money Borrowed and (B) indebtedness evidenced by securities, notes, debentures, bonds or other similar instruments issued by the Company, (ii) all capital lease obligations of the Company, (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any conditional sale or title retention agreement (but excluding trade accounts payable arising in the ordinary course of business), (iv) all obligations, contingent or otherwise of the Company in respect of any letter of credit, banker's acceptance, security purchase facilities or similar credit transaction, (v) all obligations in respect of interest rate swap, cap or other agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other similar agreements, (vi) all obligations of the type referred to in clauses (i) through (v) above of other persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise and (vii) all obligations of the type referred to in clauses (i) through (vi) above of other persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), except for (1) any such indebtedness that is by its terms subordinated to or pari passu with the Junior Subordinated Debentures and (2) any indebtedness between or among the Company or its affiliates, including all other debt securities and guarantees in respect of those debt securities issued to (a) any other trust affiliated with the Company and similar to Trenwick Capital Trust I or a trustee of such trust and (b) any other trust, or of a trustee of such trust, or of a partnership or other entity affiliated with the Company that is a financing vehicle of the Company (a "financing entity") in connection with the issuance by such a financing entity of preferred securities or other securities that rank pari passu with, or junior to, the Capital Securities. Such Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness. 8 15 "Special Event" shall mean either an Investment Company Event or a Conditional Tax Redemption Event, as the case may be. "Special Event Prepayment Price" shall mean, with respect to any prepayment of the Securities pursuant to Section 14.01 hereof, an amount in cash equal to the greater of (i) 100% of the principal amount to be prepaid or (ii) the sum, as determined by a Quotation Agent, of the present values of the remaining scheduled payments of principal and interest thereon to February 1, 2007, the first day on which any Security is subject to optional prepayment, discounted to the prepayment date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months and, for any period less than 6 months, the actual months elapsed and the actual days elapsed in a partial month in such period) at the Adjusted Treasury Rate plus, in each case, accrued and unpaid interest thereon, including Compounded Interest and Additional Interest, and Additional Sums, if any, to the date of such prepayment. "Stated Maturity" shall mean February 1, 2037, or such other date to which the maturity of the Securities is changed pursuant to the right of the Company to shorten the stated maturity pursuant to the provisions of Section 14.06. "Subsidiary" shall mean with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of whose outstanding partnership or similar interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Tax Event" shall mean the receipt by Trenwick Capital Trust I and the Company of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after January 31, 1997, or, as a result of a final determination, as evidenced by the execution of a Form 870 AD, arising from an audit or examination by the Internal Revenue Service, there is more than an insubstantial risk that (i) Trenwick Capital Trust I is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) Trenwick Capital Trust I is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges (each of the circumstances referred to in clauses (i), (ii) and (iii) being referred to herein as an "Adverse Tax Consequence"). 9 16 "Tax Event Maturity Shortening" shall have the meaning specified in Section 14.06. "Trenwick Capital Trust I" or "Trust" shall mean Trenwick Capital Trust I, a statutory business trust organized under the laws of the State of Delaware for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) effecting the Exchange Offer or filing a Shelf Registration Statement (as defined in the Declaration), (iii) using the proceeds from the sale of Trust Securities to acquire the Junior Subordinated Debentures, (iv) making Distributions (as defined in the Declaration) to holders of the Trust Securities as provided in the Declaration and (v) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Trust Securities). "Trustee" shall mean the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. The term "Trustee" as used with respect to a particular series of the Securities shall mean the trustee with respect to that series. "Trust Indenture Act of 1939" shall mean the Trust Indenture Act of 1939 as in force at the date of execution of this Indenture, except as provided in Section 9.03; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act of 1939" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Securities" shall mean the Capital Securities and the Common Securities, collectively. "U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or prepayable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. 10 17 ARTICLE II. SECURITIES SECTION 2.01. Forms Generally. The Securities and the Trustee's certificate of authentication shall be substantially in the form set forth in Exhibit A hereto, the terms of which are incorporated in and made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject or usage. Each Security shall be dated the date of its authentication. The Securities shall be issued in denominations of $1,000 and integral multiples thereof. SECTION 2.02. Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Security has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Securities shall be substantially as set forth in Exhibit A hereto. The Trustee shall, upon receipt of a Company Order and such other documents as may be required by Section 13.06, authenticate for original issue up to, and the aggregate principal amount of Securities outstanding at any time may not exceed, one hundred thirteen million four hundred three thousand U.S. dollars ($113,403,000) aggregate principal amount of the Securities; except as provided in Sections 2.07, 2.08, 2.10 and 14.05 hereof. The Company Order shall specify the amount of Securities to be authenticated and the date on which such Securities are to be authenticated. The series of Securities to be initially issued hereunder shall be the Initial Securities. SECTION 2.03. Form and Payment. Except as provided in Section 2.05, the Securities shall be issued in fully registered certificated form without interest coupons. Principal of and premium, if any, and interest on the Securities issued in certificated form will be payable, the transfer of such Securities will be registrable and such Securities will be exchangeable for Securities bearing identical terms and provisions at the office or agency of the Company maintained for such purpose under Section 3.02; provided, however, that payment of interest with respect to Securities may be made at the option of the Company (i) by check mailed to the holder at such address as shall appear in the Security Register or (ii) by transfer to an account maintained by the Person entitled thereto, provided, that proper transfer instructions have been received in writing by the relevant record date. Notwithstanding the foregoing, so long as the holder of any Securities is the Property Trustee, the payment of the principal of and premium, if any, and interest (including Compounded Interest and Additional Interest, if any) and any Additional Sums on such Securities held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. 11 18 SECTION 2.04. Legends. (a) Except as permitted by subsection (b) of this Section 2.04 or as otherwise determined by the Company in accordance with applicable law, each Security shall bear the applicable legends relating to restrictions on transfer pursuant to the securities laws in substantially the form set forth on Exhibit A hereto. (b) The Company shall issue and, upon receipt of a Company Order, the Trustee shall authenticate Exchange Securities in exchange for Initial Securities accepted for exchange in the Exchange Offer, which Exchange Securities shall not bear the legends required by subsection (a) above, in each case unless the Trustee is notified in writing that the holder of such Initial Securities is either (A) a broker-dealer who purchased such Initial Securities directly from the Company for resale pursuant to Rule 144A or any other available exemption under the Securities Act, (B) a Person participating in the distribution of the Initial Securities or (C) a Person who is an affiliate (as defined in Rule 144 under the Securities Act) of the Company or unless the Registration Rights Agreement shall require otherwise. SECTION 2.05. Global Security. (a) In connection with a Dissolution Event, (i) if any Capital Securities are held in book-entry form, the global securities representing such Capital Securities shall be presented to the Trustee (if an arrangement with the Depositary has been maintained) by the Property Trustee in exchange for one or more Global Securities (as may be required pursuant to Section 2.07) in an aggregate principal amount equal to the aggregate principal amount of all such outstanding Securities, to be registered in the name of the Depositary, or its nominee, and delivered by the Trustee to the Depositary for crediting to the accounts of its participants pursuant to the instructions of the Administrative Trustees; the Company upon any such presentation shall execute one or more Global Securities in such aggregate principal amount and deliver the same, together with a Company Order, to the Trustee for authentication and delivery in accordance with this Indenture; and payments on the Securities issued as a Global Security will be made to the Depositary; and (ii) if any Capital Securities are held in certificated form, the related Definitive Securities may be presented to the Trustee by the Property Trustee and any Capital Security certificate which represents Capital Securities other than Capital Securities in book-entry form ("Non Book-Entry Capital Securities") will be deemed to represent beneficial interests in Securities presented to the Trustee by the Property Trustee having an aggregate principal amount equal to the aggregate liquidation amount of the Non Book-Entry Capital Securities until such Capital Security certificates are presented to the Security registrar for registration of transfer or reissuance, at which time such Capital Security certificates will be cancelled and a Security, registered in the name of the holder of the Capital Security certificate, with an aggregate principal amount equal to the aggregate liquidation amount of the Capital Security certificate cancelled, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with this Indenture. Upon the issuance of such Securities, Securities with an equivalent aggregate principal amount that were presented by the Property Trustee to the Trustee will be deemed to have been cancelled. 12 19 (b) The Global Securities shall represent the aggregate amount of outstanding Securities from time to time endorsed thereon; provided, that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and prepayments. Any endorsement of a Global Security to reflect the amount of any increase or decrease in the amount of outstanding Securities represented thereby shall be made by the Trustee, in accordance with applicable procedures established by the Depositary. (c) The Global Securities may be transferred, in whole but not in part, only to another nominee of the Depositary, or to a successor Depositary selected or approved by the Company or to a nominee of such successor Depositary. (d) If at any time the Depositary notifies the Company that it is unwilling or unable to continue as Depositary or the Depositary has ceased to be a clearing agency registered under the Exchange Act, and a successor Depositary is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, the Company will execute, and the Trustee, upon written notice from the Company, will authenticate and make available for delivery Definitive Securities, in authorized denominations and in an aggregate principal amount equal to the principal amount of the Global Security in exchange for such Global Security. If there is an Event of Default, the Depositary shall have the right to exchange the Global Securities for Definitive Securities. In addition, the Company may at any time determine that the Securities shall no longer be represented by a Global Security. In the event of such an Event of Default or such a determination, the Company shall execute, and subject to Section 2.07, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and make available for delivery Definitive Securities, in authorized denominations and in an aggregate principal amount equal to the principal amount of the Global Security in exchange for such Global Security. Upon the exchange of the Global Security for such Definitive Securities, in authorized denominations, the Global Security shall be cancelled by the Trustee. Such Definitive Securities issued in exchange for the Global Security shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Securities to the Depositary for delivery to the Persons in whose names such Definitive Securities are so registered. SECTION 2.06. Interest. (a) Each Security will bear interest at the rate of 8.82% per annum (the "Coupon Rate") from the most recent date to which interest has been paid or, if no interest has been paid, from January 31, 1997, until the principal thereof becomes due and payable, and on any overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the Coupon Rate, compounded semi-annually, payable (subject to the provisions of Article XVI) semi-annually in arrears on February 1 and August 1 of each year (each, an "Interest Payment Date") commencing on August 1, 1997, to the Person in whose name such Security or any predecessor Security is registered on the books of the Company, at the close of business on the Regular Record Date for such interest installment. (b) Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than six months, the actual months elapsed and 13 20 the actual days elapsed in a partial month in such period. In the event that any Interest Payment Date falls on a day that is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date. (c) During such time as the Property Trustee is the holder of any Securities, the Company shall pay any additional amounts on the Securities as may be necessary in order that the amount of Distributions then due and payable by Trenwick Capital Trust I on the outstanding Trust Securities shall not be reduced as a result of any additional taxes, duties and other governmental charges to which the Trust has become subject as a result of a Tax Event ("Additional Sums"). SECTION 2.07. Transfer and Exchange. (a) Transfer Restrictions. The Initial Securities, and those Exchange Securities with respect to which any Person described in Section 2.04(b)(A), (B) or (C) is the beneficial owner, may not be transferred except in compliance with any legend contained in Exhibit A unless otherwise determined by the Company in accordance with applicable law. Upon any distribution of the Securities following a Dissolution Event, the Company and the Trustee shall enter into a supplemental indenture pursuant to Section 9.01 to provide for the transfer restrictions and procedures with respect to the Securities substantially similar to those contained in the Declaration to the extent applicable in the circumstances existing at such time. (b) General Provisions Relating to Transfers and Exchanges. To permit registrations of transfers and exchanges, the Company shall execute Definitive Securities and Global Securities at the Trustee's request. All Definitive Securities and Global Securities issued upon any registration of transfer or exchange of Definitive Securities or Global Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Definitive Securities or Global Securities surrendered upon such registration of transfer or exchange. No service charge shall be made to a holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith. The Company shall not be required to (i) issue, register the transfer of or exchange Securities during a period beginning at the opening of business 30 days before the day of mailing of a notice of prepayment or any notice of selection of Securities for prepayment under Article XIV hereof and ending at the close of business on the day of such mailing; or (ii) register the transfer of or exchange any Security so selected for prepayment in whole or in part, except the unprepaid portion of any Security being prepaid in part. Prior to due presentment for the registration of a transfer of any Security, the Trustee, any agent and the Company may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and premium, if any, and interest on such Securities, and neither the Trustee, any agent nor the Company shall be affected by notice to the contrary. 14 21 (c) Exchange of Initial Securities for Exchange Securities. The Initial Securities may be exchanged for Exchange Securities pursuant to the terms of the Exchange Offer. The Trustee shall make the exchange as follows: The Company shall present the Trustee with an Officers' Certificate certifying the following: (i) upon issuance of the Exchange Securities, the transactions contemplated by the Exchange Offer have been consummated; and (ii) the principal amount of Initial Securities properly tendered in the Exchange Offer that are represented by a Global Security and the principal amount of Initial Securities properly tendered in the Exchange Offer that are represented by Definitive Securities, the name of each holder of such Definitive Securities, the principal amount at maturity properly tendered in the Exchange Offer by each such holder and the name and address to which Definitive Securities for Exchange Securities shall be registered and sent for each such holder. The Trustee, upon receipt of (i) such Officers' Certificate, (ii) an Opinion of Counsel (x) to the effect that the Exchange Securities have been registered under Section 5 of the Securities Act and the Indenture, the Declaration and the Capital Securities Guarantee have each been qualified under the Trust Indenture Act of 1939 and (y) with respect to the matters set forth in Section 3(p) of the Registration Rights Agreement and (iii) a Company Order, shall authenticate (A) a Global Security for Exchange Securities in aggregate principal amount equal to the aggregate principal amount of Initial Securities represented by a Global Security indicated in such Officers' Certificate as having been properly tendered and (B) Definitive Securities representing Exchange Securities registered in the names of, and in the principal amounts indicated in, such Officers' Certificate. If the principal amount at Stated Maturity of the Global Security for the Exchange Securities is less than the principal amount at Stated Maturity of the Global Security for the Initial Securities, the Trustee shall make an endorsement on such Global Security for the Initial Securities indicating a reduction in the principal amount at maturity represented thereby. The Trustee shall deliver such Definitive Securities for Exchange Securities to the holders thereof as indicated in such Officers' Certificate. SECTION 2.08. Replacement Securities. (a) If any mutilated Security is surrendered to the Trustee or the Company, or the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Security, the Company shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements for replacements of Securities are met. An indemnity bond must be supplied by the Securityholder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee or any authenticating agent from any loss that any of them may suffer if a Security is replaced. The Company or the Trustee may charge for its expenses in replacing a Security. 15 22 (b) Every replacement Security is an obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Securities duly issued hereunder. (c) The provisions of this Section 2.08 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement of mutilated, destroyed, lost or stolen Securities. SECTION 2.09. Treasury Securities. In determining whether the holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or any Affiliate of the Company shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that the Trustee actually knows to be so owned shall be so considered. SECTION 2.10. Temporary Securities. Pending the preparation of Definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and make available for delivery, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise reproduced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company shall cause Definitive Securities to be prepared without unreasonable delay. The Definitive Securities shall be printed, typewritten, lithographed or engraved, or provided by any combination thereof, or in any other manner permitted by the rules and regulations of any applicable securities exchange, all as determined by the Officers executing such Definitive Securities. After the preparation of Definitive Securities, the temporary Securities shall be exchangeable for Definitive Securities upon surrender of the temporary Securities at the office or agency maintained by the Company for such purpose pursuant to Section 3.02 hereof, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute, and the Trustee shall authenticate and make available for delivery, in exchange therefor the same aggregate principal amount of Definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as Definitive Securities. SECTION 2.11. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy the cancelled Securities in accordance with its normal practices (subject to the record retention requirement of the Exchange Act) unless the Company directs that such cancelled Securities be returned to it. The Company may not issue new Securities to replace Securities that have been prepaid or paid or that have been delivered to the Trustee for cancellation. 16 23 SECTION 2.12. Defaulted Interest. Any interest on any Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the holder on the relevant Regular Record Date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (a) or clause (b) below: (a) The Company may make payment of any Defaulted Interest on Securities to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 30 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest on any Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. SECTION 2.13. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of prepayment as a convenience to Securityholders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a prepayment and that reliance may be placed only on the other identification numbers printed on the Securities, and any such prepayment shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. 17 24 ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of the Securityholders that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on the Securities at the place, at the respective times and in the manner provided herein. Except as provided in Section 2.03, each installment of interest on the Securities may be paid by mailing checks for such interest payable to the order of the Securityholder entitled thereto, as it may appear in the Securities register. The Company further covenants to pay any and all amounts including, without limitation, Additional Interest, if any, on the dates and in the manner required under the Registration Rights Agreement. SECTION 3.02. Offices for Notices and Payments, etc. So long as any of the Securities remains outstanding, the Company will maintain in The City of New York, New York, an office or agency where the Securities may be presented for payment, an office or agency where the Securities may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Securities or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, any such office or agency for all of the above purposes shall be the office or agency of The Chase Manhattan Bank, 450 West 33rd Street, 15th Floor, New York, New York, 10001, Attention: Global Trust Services. In case the Company shall fail to maintain any such office or agency in The City of New York, New York, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the principal corporate trust office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside The City of New York, New York where the Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in the City of New York, New York, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee hereunder. 18 25 SECTION 3.04. Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Securities, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.04, (i) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Securities (whether such sums have been paid to it by the Company or by any other obligor on the Securities) in trust for the benefit of the holders of the Securities; (ii) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Securities) to make any payment of the principal of and premium or interest on the Securities when the same shall be due and payable; and (iii) that it will at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by it as such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest on the Securities, set aside, segregate and hold in trust for the benefit of the holders of the Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or by any other obligor under the Securities) to make any payment of the principal of and premium, if any, or interest on the Securities when the same shall become due and payable. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such Securities by the Trustee or any paying agent hereunder, as required by this Section 3.04, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04. SECTION 3.05. Certificate to Trustee. The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year in each year, commencing with the first fiscal year ending after the date hereof, so long as Securities are outstanding hereunder, an Officers' Certificate, one of the signers of which shall be the principal executive, principal financial or principal accounting officer of the Company, stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any Default by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of 19 26 any such Default and, if so, specifying each such Default of which the signers have knowledge and the nature thereof. SECTION 3.06. Compliance with Consolidation Provisions. The Company will not, while any of the Securities remains outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article X hereof are complied with. SECTION 3.07. Limitation on Dividends. If at any time (i) there shall have occurred any event of which the Company has actual knowledge that (a) is or with the giving of notice or the lapse of time, or both, would constitute an Event of Default and (b) which the Company shall not have taken reasonable steps to cure, (ii) Securities are held by the Property Trustee and the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election of the exercise of its right to extend the interest payment period pursuant to Section 16.01 and any such extension shall be continuing, then the Company will not, and will not permit any Subsidiary to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (which includes common and preferred stock); (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or prepay any debt securities of the Company (including any Other Debentures) that rank pari passu with or junior in right of payment to the Securities; or (iii) make any guarantee payments with respect to any guarantee by the Company of the debt securities of any Subsidiary of the Company (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Securities other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the prepayment or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a direct result of, and only to the extent necessary to avoid the issuance of fractional shares of the Company's capital stock following, a reclassification of the Company's capital stock or the exchange or the conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees or any of the Company's dividend reinvestment plans. 20 27 SECTION 3.08. Covenants as to Trenwick Capital Trust I. In the event Securities are issued to Trenwick Capital Trust I or a trustee of such trust in connection with the issuance of Trust Securities by Trenwick Capital Trust I, for so long as any of such Trust Securities remains outstanding, the Company will (i) directly or indirectly maintain 100% ownership of the Common Securities of Trenwick Capital Trust I; provided, however, that any successor of the Company, permitted pursuant to Article X, may succeed to the Company's ownership of such Common Securities, (ii) use its reasonable efforts to cause Trenwick Capital Trust I (a) to remain a business trust, except in connection with a distribution of Securities, the redemption of all of the Trust Securities of Trenwick Capital Trust I or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, and (b) to continue to be treated as a grantor trust and not as an association taxable as a corporation for United States federal income tax purposes, and (iii) use its reasonable efforts to cause each holder of Trust Securities to be treated as owning an individual beneficial interest in the Securities. SECTION 3.09. Payment of Expenses. In connection with the offering, sale and issuance of the Securities to Trenwick Capital Trust I and in connection with the sale of the Trust Securities by Trenwick Capital Trust I, the Company, in its capacity as borrower with respect to the Securities, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Securities, including commissions to the Initial Purchaser payable pursuant to the Purchase Agreement, fees and expenses in connection with the Exchange Offer or other action to be taken pursuant to the Registration Rights Agreement and compensation of the Trustee in accordance with the provisions of Section 6.06; (b) pay all costs and expenses of Trenwick Capital Trust I (including, but not limited to, costs and expenses relating to the organization of Trenwick Capital Trust I, the offering, sale and issuance of the Trust Securities (including commissions to the Initial Purchaser in connection therewith), the fees and expenses of the Property Trustee and the Delaware Trustee, the costs and expenses relating to the operation of Trenwick Capital Trust I; (c) be primarily and fully liable for any indemnification obligations arising with respect to the Declaration; (d) pay any and all taxes (other than United States withholding taxes attributable to Trenwick Capital Trust I or its assets) and all liabilities, costs and expenses with respect to such taxes of Trenwick Capital Trust I; and (e) pay all other fees, expenses, debts and obligations (other than payments of principal of, and premium, if any, or interest on the Trust Securities) related to Trenwick Capital Trust I. SECTION 3.10. Payment Upon Resignation or Removal. Upon termination of this Indenture or the removal or resignation of the Trustee, unless otherwise stated, the Company shall pay to the Trustee all amounts accrued and owing to 21 28 the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to Section 5.7 of the Declaration, the Company shall pay to the Delaware Trustee or the Property Trustee, as the case may be, all amounts accrued and owing to the date of such termination, removal or resignation. ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01. Securityholders' Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: (a) on a semi-annual basis on each Regular Record Date for the Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders as of such record date; (b) at such other times as the Trustee may request in writing, within 30 Business Days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 Business Days prior to the time such list is furnished, except that no such list need be furnished so long as the Trustee is in possession thereof by reason of its acting as Security registrar. The Company hereby appoints the Trustee as Securities registrar. SECTION 4.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of the Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished. (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities or with holders of all Securities with respect to their rights under this Indenture and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 Business Days after the receipt of such application, at its election, either: 22 29 (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02; or (ii) inform such applicants as to the approximate number of holders of all Securities whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within 5 Business Days after such tender, the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Securities or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 4.03. Reports of the Company. (a) The Company covenants and agrees to file with the Trustee, within 15 Business Days after the date on which the Company files the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and 23 30 reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company covenants and agrees to transmit by mail to all holders of Securities, as the names and addresses of such holders appear upon the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 4.03 as may be required by rules and regulations prescribed from time to time by the Commission. (d) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). (e) So long as is required for an offer or sale of the Securities to qualify for an exemption under Rule 144A under the Securities Act, the Company shall, upon request, provide the information required by clause (d)(4) thereunder to each Holder and to each beneficial owner and prospective purchaser of Securities identified by any holder of Restricted Securities, unless such information is furnished to the Commission pursuant to Section 13 or 15(d) of the Exchange Act. SECTION 4.04. Reports by the Trustee. Within 60 days after May 15 of each year, commencing May 15, 1997, the Trustee shall provide to the holders of the Securities such reports as are required by Section 313 of the Trust Indenture Act of 1939, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act of 1939. The Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act of 1939. ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.01. Events of Default. One or more of the following events of default shall constitute an Event of Default hereunder (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree 24 31 or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest upon any Security or any Other Debentures when it becomes due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms hereof or, in the case of any Other Debenture, the indenture related thereto, shall not constitute a default in the payment of interest for this purpose; or (b) default in the payment of all or any part of the principal of (or premium, if any, on) any Security or any Other Debentures as and when the same shall become due and payable either at maturity, upon prepayment, by declaration of acceleration of maturity or otherwise; or (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in principal amount of the outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or all or substantially all of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or all or substantially all of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due. If an Event of Default with respect to Securities at the time outstanding occurs and is continuing, then in every such case the Trustee or the holders of not less than 25% in principal amount of the Securities at the time outstanding may declare the principal amount of all Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the holders of the outstanding Securities), and upon any such declaration the same shall become immediately due and payable, provided, however, that if an Event of Default specified in any one of paragraphs (d) or (e) of this Section 5.01 occurs, all unpaid principal and accrued interest on the Securities at the time outstanding shall become due and 25 32 payable without any declaration or other act on the part of the Trustee or any holder of the Securities. The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay (A) all matured installments of interest upon all the Securities and the principal of and premium, if any, on any and all Securities which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest specified in the Securities to the date of such payment or deposit) and (B) such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and (ii) any and all Events of Default under the Indenture shall have been cured, waived or otherwise remedied as provided herein, then, in every such case, the holders of a majority in principal amount of the Securities at the time outstanding, by written notice to the Company and to the Trustee, may rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Securities shall continue as though no such proceeding had been taken. SECTION 5.02. Payment of Securities on Default; Suit Therefor. The Company covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Securities as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Securities as and when the same shall have become due and payable, whether at maturity of the Securities or upon prepayment or by declaration of acceleration of maturity or otherwise, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Securities, the whole amount that then shall have become due and payable on all such Securities for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law and, if the Securities are held by Trenwick Capital Trust I or a trustee of such trust, without duplication of any other amounts paid by Trenwick Capital Trust I or a trustee in respect thereof) upon the overdue installments of interest at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. 26 33 In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Securities and collect in the manner provided by law out of the property of the Company or any other obligor on the Securities wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Securities under Title 11, United States Code, or any other applicable law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof in any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express 27 34 trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any holders of the Securities parties to any such proceedings. SECTION 5.03. Application of Moneys Collected by Trustee. Any moneys collected by the Trustee shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of all amounts due to the Trustee under Section 6.06, including the costs and expenses of collection applicable to the Securities and reasonable compensation to the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: In case the principal of the outstanding Securities in respect of which moneys have been collected shall not have become due and be unpaid, to the payment of the amounts then due and unpaid upon Securities for principal of (and premium, if any) and interest on the Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference of priority of any kind, according to the amounts due on such Securities for principal (and premium, if any) and interest, respectively; and Fourth: To the Company. SECTION 5.04. Proceedings by Securityholders. No holder of any Security shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Securities specifying such Event of Default, as hereinbefore provided, and unless also the holders of not less than 25% in principal amount of the Securities at the time outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 90 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, and during such 90 days the holders of a majority in principal amount of the Securities at the time outstanding do not give a direction to the Trustee inconsistent with the request, it being understood and intended, and being expressly 28 35 covenanted by the taker and holder of every Security with every other taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Security to receive payment of the principal of (premium, if any) and interest on such Security, on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Security hereunder it is expressly understood, intended and covenanted by the taker and holder of every Security with every other such taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. The Company and the Trustee acknowledge that pursuant to the Declaration, the holders of Capital Securities are entitled, in the circumstances and subject to the limitations set forth therein, to commence a Direct Action with respect to any Event of Default under this Indenture and the Securities. Without the consent of each holder of Capital Securities then outstanding, the Company shall not take any action that impairs or affects the right of holders of Capital Securities to bring a Direct Action. SECTION 5.05. Proceedings by Trustee. In case an Event of Default occurs with respect to Securities and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.06. Remedies Cumulative and Continuing. Except as provided in the last paragraph of Section 2.08, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Securities, and no delay or omission of the Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall 29 36 be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 5.07. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. The holders of a majority in principal amount of the Securities at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or Responsible Officers, shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the Stated Maturity of the Securities, the holders of a majority in principal amount of the Securities at the time outstanding may on behalf of the holders of all of the Securities waive any past Default or Event of Default and its consequences except a Default (a) in the payment of principal of or premium, if any, or interest on any of the Securities or (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Security affected; provided, however, that if the Securities are held by the Property Trustee, such waiver or modification to such waiver shall not be effective until the holders of a majority in aggregate liquidation amount of Trust Securities shall have consented to such waiver or modification to such waiver; provided, further, that if the consent of the holder of each outstanding Security is required, such waiver shall not be effective until each holder of the Trust Securities shall have consented to such waiver. Upon any such waiver, the Default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Whenever any Default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said Default or Event of Default shall for all purposes of the Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08. Notice of Defaults. The Trustee shall, within 90 days after the occurrence of a Default with respect to the Securities mail to all Securityholders, as the names and addresses of such holders appear upon the Security register, notice of all Defaults known to the Trustee, unless such Defaults shall have been cured before the giving of such notice (the term "Defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in clauses (a), (b), (c), (d) and (e) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of written notice specified in clause (c) of Section 5.01); and provided, that, except in the case of Default in the payment of the principal of or premium, if any, or interest on any of the Securities, the Trustee shall be protected in withholding such notice if and so long as the board of directors of the Trustee, the executive committee thereof, or a trust committee of 30 37 directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders; and provided, further, that in the case of any Default of the character specified in Section 5.01(c), no such notice to Securityholders shall be given until at least 60 days after the occurrence thereof but shall be given within 90 days after such occurrence. SECTION 5.09. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder or group of Securityholders holding in the aggregate more than 10% in principal amount of the Securities outstanding at the time outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security against the Company on or after the same shall have become due and payable. SECTION 5.10 Waiver of Stay or Extension Laws. The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.11 Delay or Omission Not Waiver. No delay or omission of the Trustee or any Securityholder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Securityholders, as the case may be. 31 38 ARTICLE VI. CONCERNING THE TRUSTEE SECTION 6.01. Duties and Responsibilities of Trustee. With respect to the holders of the Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under 32 39 the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. Every portion of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article VI and to the provisions of the Trust Indenture Act of 1939. SECTION 6.02. Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties, and the Trustee need not investigate any fact or matter stated in such document; (b) any request, direction, order or demand of the Company mentioned herein may be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed) and the Trustee shall not be liable for any action taken or suffered or omitted by it hereunder in good faith in reliance on such Officers' Certificate; and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (that has not been cured or waived), to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of a majority in principal amount of the Securities at the time outstanding; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred 33 40 by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care. (h) The Trustee shall not be charged with knowledge of any Default or Event of Default except (i) a Default under Sections 5.01(a) and 5.01(b) of this Indenture (other than with respect to the payment of Additional Interest) or (ii) any Default or Event of Default of which a Responsible Officer shall have actual knowledge thereof or the Trustee shall have received notice thereof in accordance with Section 13.03 hereof from the Company or any Securityholder. SECTION 6.03. No Responsibility for Recitals, etc. The recitals contained herein and in the Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Securities or the proceeds of any Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities. The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Security registrar, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Security registrar. SECTION 6.05. Moneys to be Held in Trust. Subject to the provisions of Section 11.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the President or a Vice President or the Treasurer or an Assistant Treasurer of the Company. 34 41 SECTION 6.06. Compensation and Expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Trustee's compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including reasonable attorney's fees and taxes (other than taxes based on the income of the Trustee) incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustee in its capacity as such, except funds held in trust for the benefit of the holders of particular Securities. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01(d) or Section 5.01(e), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services of the Trustee as provided for herein are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive resignation or removal of the Trustee and the termination of this Indenture. SECTION 6.07. Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof is herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. 35 42 SECTION 6.08. Conflicting Interest of Trustee. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act of 1939, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act of 1939. SECTION 6.09. Eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person permitted to act as trustee by the Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. SECTION 6.10. Resignation or Removal of Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof to the holders of the Securities at their addresses as they shall appear on the Security register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security for at least six months may, subject to the provisions of Section 5.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Security or Securities for at least six months, or 36 43 (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.09, any Securityholder who has been a bona fide holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in principal amount of the Securities at the time outstanding may at any time remove the Trustee and nominate a successor trustee, which shall be deemed appointed as successor trustee unless within 10 days after such nomination the Company objects thereto or if no successor trustee shall have been so appointed and shall have accepted appointment within 30 days after such removal, in which case the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.10 provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11. Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring trustee thereunder. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.06. 37 44 No successor trustee shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09. Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such trustee hereunder to the holders of Securities at their addresses as they shall appear on the Security register. If the Company fails to mail such notice within 10 Business Days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 6.12. Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which the Securities or this Indenture elsewhere provides that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13. Limitation on Rights of Trustee as a Creditor. The Trustee shall comply with Section 311(a) of the Trust Indenture Act of 1939, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act of 1939. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act of 1939 to the extent included therein. SECTION 6.14. Authenticating Agents. There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Securities issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as 38 45 Authenticating Agent, having a combined capital and surplus of at least $50,000,000 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.14 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.14 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.14, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.14, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all Securityholders as the names and addresses of such holders appear on the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company, as borrower, agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII. CONCERNING THE SECURITYHOLDERS SECTION 7.01. Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in principal amount of the Securities at the time outstanding may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Securities voting in favor 39 46 thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 7.02. Proof of Execution by Securityholders. Subject to the provisions of Section 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities shall be proved by the Security Register or by a certificate of the Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03. Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Security registrar may deem the Person in whose name such Security shall be registered upon the Security Register to be, and may treat him as, the absolute owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of and premium, if any, and, subject to Section 2.06, interest on such Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security. SECTION 7.04. Securities Owned by Company Deemed Not Outstanding. In determining whether the holders of the requisite principal amount of Securities at the time outstanding have concurred in any direction, consent or waiver under this Indenture, 40 47 Securities which are owned by the Company or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Securities which the Trustee actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Securities and that the pledgee is not the Company or any such other obligor or person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05. Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in principal amount of the Securities at the time outstanding specified in this Indenture in connection with such action, any holder of a Security (or any Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Securities the holders of which have consented to such action may, by filing written notice with the Trustee at the principal office of the Trustee and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security, and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. ARTICLE VIII. SECURITYHOLDERS' MEETINGS SECTION 8.01. Purpose of Meetings. A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any Default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI; 41 48 (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified principal amount of such Securities at the time outstanding under any other provision of this Indenture or under applicable law. SECTION 8.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Securities at their addresses as they shall appear on the Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03. Call of Meetings by Company or Securityholders. In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in principal amount of the Securities at the time outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in the Borough of Manhattan, The City of New York for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. SECTION 8.04. Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Securities or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05. Regulations. (a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. (b) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the 42 49 meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. (c) Subject to the provisions of Section 8.04, at any meeting each holder of Securities or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. (d) The Persons entitled to vote a majority in principal amount of the outstanding Securities shall constitute a quorum for a meeting of holders of Securities; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the outstanding Securities, the Persons holding or representing such specified percentage in principal amount of the outstanding Securities will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of holders of Securities, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.02, except that such notice need be given only once not less than five days prior the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the outstanding Securities which shall constitute a quorum. (e) Except as limited by the first proviso to the first paragraph of Section 9.02 or any other provision hereof granting rights to holders of Capital Securities, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in principal amount of the outstanding Securities; provided, however, that, except as limited by the first proviso to the first paragraph of Section 9.02 or any other provision hereof granting any rights to holders of Capital Securities, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the outstanding Securities may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of not less than such specified percentage in principal amount of the outstanding Securities. 43 50 (f) Any resolution passed or decision taken at any meeting of holders of Securities duly held in accordance with this Section shall be binding on all the holders of Securities whether or not present or represented at the meeting. SECTION 8.06. Voting. The vote upon any resolution submitted to any meeting of holders of Securities shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. The holders of the Initial Securities and the Exchange Securities shall vote for all purposes as a single class. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE IX. AMENDMENTS SECTION 9.01. Without Consent of Securityholders. The Company and the Trustee may from time to time and at any time amend this Indenture, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article X hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the Securityholders as the Board of Directors and the Trustee shall consider to be for the protection of the Securityholders, and to make the occurrence, or the occurrence and continuance, of a Default in any of such additional covenants, restrictions or conditions a Default or an Event of Default permitting the enforcement of all or any of the remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition, such amendment may provide for a particular period of grace 44 51 after Default (which period may be shorter or longer than that allowed in the case of other Defaults) or may provide for an immediate enforcement upon such Default or may limit the remedies available to the Trustee upon such Default; (c) to provide for the issuance under this Indenture of Securities in coupon form if allowed by law (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with the Securities issued hereunder in fully registered form and to make all appropriate changes for such purpose; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided, that any such action shall not materially adversely affect the interests of the holders of the Securities; (e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities; (f) to make provision for transfer procedures, certification, book-entry provisions, the form of restricted securities legends, if any, to be placed on Securities, and all other matters required pursuant to Section 2.07 or otherwise necessary, desirable or appropriate in connection with the issuance of Securities to holders of Capital Securities in the event of a distribution of Securities by Trenwick Capital Trust I following a Dissolution Event; (g) to qualify or maintain qualification of this Indenture under the Trust Indenture Act of 1939; or (h) to make any change that does not adversely affect the rights of any Securityholder in any material respect. The Trustee is hereby authorized to join with the Company in the execution of any supplemental indenture to effect such amendment, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any amendment to this Indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02. With Consent of Securityholders. (a) With the consent (evidenced as provided in Section 7.01) of the holders of a majority in principal amount of the Securities at the time outstanding, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time amend this Indenture for the purpose of adding any provisions to or changing in any manner or 45 52 eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such amendment shall without the consent of the holders of each Security then outstanding and affected hereby (i) extend the Stated Maturity of any Security, or reduce the rate or extend the time of payment of interest thereon (except as contemplated by Article XVI), or reduce the principal amount thereof, or reduce any amount payable on prepayment thereof, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof, or (ii) reduce the aforesaid percentage of Securities the holders of which are required to consent to any such amendment to this Indenture; provided, however, that if the Securities are held by Trenwick Capital Trust I, such amendment shall not be effective until the holders of a majority in liquidation amount of Trust Securities shall have consented to such amendment; provided, further, that if the consent of the holder of each outstanding Security is required, such amendment shall not be effective until each holder of the Trust Securities shall have consented to such amendment. (b) Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any supplemental indenture affecting such amendment, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. (c) Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. (d) It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03. Compliance with Trust Indenture Act of 1939; Effect of Supplemental. Any supplemental indenture executed pursuant to the provisions of this Article IX shall comply with the Trust Indenture Act of 1939. Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Securities shall thereafter be determined, exercised and enforced hereunder, subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. 46 53 SECTION 9.04. Notation on Securities. Securities authenticated and delivered after the execution of any supplemental indenture affecting such series pursuant to the provisions of this Article IX may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Securities then outstanding. SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee. (a) The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. (b) The Trustee may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof. ARTICLE X. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 10.01. Company May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company, as the case may be), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company or its successor or successors) authorized to acquire and operate the same; provided, that (a) the Company is the surviving Person or the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, conveyance, transfer or lease of property is made is a Person organized and existing under the laws of the United States or any State thereof or the District of Columbia, and (b) upon any such consolidation, merger, sale, conveyance, transfer or lease, the due and punctual payment of the principal of (and premium, if any) and interest on the Securities according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company shall be expressly assumed, by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act of 1939, as then in effect) satisfactory in form to the Trustee executed and delivered to the Trustee by the Person formed by such consolidation, or into which the Company shall have been merged, or by the Person which shall have acquired such property, and (c) after giving effect to such consolidation, 47 54 merger, sale, conveyance, transfer or lease, no Default or Event of Default shall have occurred and be continuing. SECTION 10.02. Successor Corporation to be Substituted for Company. In case of any such consolidation, merger, conveyance or transfer and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of (and premium, if any) and interest on all of the Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor Person shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, and the Company thereupon shall be relieved of any further liability or obligation hereunder or upon the Securities. Such successor Person thereupon may cause to be signed, and may issue either in its own name or in the name of Trenwick Group Inc., any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor Person instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee or the Authenticating Agent for authentication, and any Securities which such successor Person thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. SECTION 10.03. Opinion of Counsel to be Given Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or lease, and any assumption, permitted or required by the terms of this Article X, complies with the provisions of this Article X. ARTICLE XI. SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and not theretofore cancelled, or (b) all the Securities not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for prepayment within one year under arrangements satisfactory to the Trustee for the giving of notice of prepayment, and the Company shall deposit or cause to be deposited with the Trustee, in trust, funds sufficient to pay on the Stated Maturity 48 55 or upon prepayment all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) not theretofore cancelled or delivered to the Trustee for cancellation, including principal (and premium, if any) and interest due or to become due to the Stated Maturity or prepayment date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal (or premium, if any) or interest on the Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.04, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.02, 2.07, 2.08, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof, which shall survive until such Securities shall mature and be paid. Thereafter, Sections 6.06, 6.10 and 11.04 shall survive, and the Trustee, on demand of the Company accompanied by any Officers' Certificate and an Opinion of Counsel, to the effect that all conditions to the satisfaction and discharge of this Indenture have been satisfied, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Securities. SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be Held in Trust by Trustee. Subject to the provisions of Section 11.04, all moneys and U.S. Government Obligations deposited with the Trustee pursuant to Sections 11.01 or 11.05 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Securities for the payment of which such moneys or U.S. Government Obligations have been deposited with the Trustee, of all sums due and to become due thereon for principal (premium, if any) and interest. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 11.05 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the holders of outstanding Securities. SECTION 11.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Securities (other than the Trustee) shall, upon written demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 11.04. Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of (or premium, if any, on) or interest on Securities and not applied but remaining unclaimed by the holders of Securities for two years after the date upon which the principal of (or premium, if any, on) or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Securities shall thereafter look only to the 49 56 Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government Obligations. The Company shall be deemed to have been Discharged (as defined below) from its obligations with respect to the Securities on the 91st day after the applicable conditions set forth below have been satisfied with respect to the Securities: (a) The Company shall have deposited or caused to be deposited irrevocably with the Trustee or the Defeasance Agent (as defined below) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one Business Day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee and the Defeasance Agent, if any, to pay and discharge each installment of principal of (and premium, if any) and interest on the outstanding Securities on the dates such installments of principal, premium or interest are due; (b) if the Securities are then listed on any national securities exchange, the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that the exercise of the option under this Section 11.05 would not cause such Securities to be delisted from such exchange; (c) no Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit; and (d) the Company shall have delivered to the Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that holders of the Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of the exercise of the option under this Section 11.05 and will be subject to United States federal income tax in the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised, and such opinion shall be accompanied by a private letter ruling to that effect received from the United States Internal Revenue Service or a revenue ruling pertaining to a comparable form of transaction to that effect published by the United States Internal Revenue Service. "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Securities and to have satisfied all the obligations under this Indenture relating to the Securities (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (A) the rights of holders of Securities to receive, from the trust fund described in clause (1) above, payment of the principal of (and premium, if any) and the interest on the Securities when such payments are due; (B) the Company's obligations with respect to the Securities under Sections 2.07, 2.08, 5.02 and 11.04; and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder. 50 57 "Defeasance Agent" means another financial institution which is eligible to act as Trustee hereunder and which assumes all of the obligations of the Trustee necessary to enable the Trustee to act hereunder. In the event such a Defeasance Agent is appointed pursuant to this Section, the following conditions shall apply: (a) The Trustee shall have approval rights over the document appointing such Defeasance Agent and the document setting forth such Defeasance Agent's rights and responsibilities; and (b) The Defeasance Agent shall provide verification to the Trustee acknowledging receipt of sufficient money and/or U.S. Government Obligations to meet the applicable conditions set forth in this Section 11.05. SECTION 11.06. Reinstatement. If the Trustee or any Defeasance Agent is unable to apply any money in accordance with Section 11.05 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 11.05 until such time as the Trustee or any Defeasance Agent is permitted to apply all such money in accordance with Section 11.05. ARTICLE XII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal of (or premium, if any) or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, employee or director, as such, past, present or future, of the Company or of any successor Person to the Company, either directly or through the Company, any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. 51 58 ARTICLE XIII. MISCELLANEOUS PROVISIONS SECTION 13.01. Successors. All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. SECTION 13.02. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 13.03. Surrender of Company Powers. The Company by instrument in writing executed by authority of two-thirds (2/3) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company and as to any successor Person. SECTION 13.04. Address for Notices, etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities on the Company may be given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for the purpose) to the Company, Metro Center, One Station Place, Stamford, CT 06902, Attention: Jane T. Wiznitzer, Vice President-Legal Affairs and Secretary. Any notice, direction, request or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, The Chase Manhattan Bank, 450 West 33rd Street, 15th Floor, New York, New York 10001, Attention: Global Trust Services. SECTION 13.05. Governing Law. This Indenture and each Security shall be governed by and construed and interpreted in accordance with the laws of the State of New York, without regard to conflicts of laws principles thereof. SECTION 13.06. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an 52 59 Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. SECTION 13.07. Business Days. In any case where the date of payment of principal of (or premium, if any) or interest on the Securities will not be a Business Day, the payment of such principal of (or premium, if any) or interest on the Securities need not be made on such date but may be made on the next succeeding Business Day, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date. SECTION 13.08. Trust Indenture Act of 1939 to Control. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture which is required to be included in this Indenture by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. SECTION 13.09. Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.10. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 13.11. Separability. In case any one or more of the provisions contained in this Indenture or in the Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Indenture or of the Securities, but this Indenture and the Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. 53 60 SECTION 13.12. Assignment. The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided, that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, the Indenture is binding upon and inures to the benefit of the parties thereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto. SECTION 13.13. Acknowledgment of Rights. The Company acknowledges that, with respect to any Securities held by Trenwick Capital Trust I or a trustee of such trust, if the Property Trustee of such trust fails to enforce its rights under this Indenture as the holder of the Securities held as the assets of Trenwick Capital Trust I, any holder of Capital Securities may institute legal proceedings directly against the Company to enforce such Property Trustee's rights under this Indenture without first instituting any legal proceedings against such Property Trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay principal of (or premium, if any) or interest on the Securities when due, the Company acknowledges that a holder of Capital Securities may directly institute a proceeding for enforcement of payment to such holder of the principal of (or premium, if any) or interest on the Securities having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such holder on or after the respective due date specified in the Securities. ARTICLE XIV. CONDITIONAL RIGHT TO SHORTEN MATURITY; PREPAYMENT OF SECURITIES -- NO SINKING FUND SECTION 14.01. Special Event Prepayment. If a Special Event has occurred and is continuing, then the Company shall have the right, notwithstanding Section 14.02(a) but subject to Section 14.02(b), upon (i) not less than 45 days written notice to the Trustee and (ii) not less than 30 days nor more than 60 days written notice to the Securityholders, to prepay the Securities, in whole (but not in part), at any time within 90 days following the occurrence of such Special Event, at the Special Event Prepayment Price. Following a Special Event, if the Company elects to effect a prepayment, the Company shall take such action as is necessary promptly to determine the Special Event Prepayment Price, including without limitation the appointment by the Company of a Quotation Agent. The Special Event Prepayment Price shall be paid prior to 12:00 noon, New York City time, on the date of such prepayment or such earlier time as the Company determines, provided, that the Company shall deposit with the Trustee an amount sufficient to pay the Special Event Prepayment Price by 10:00 a.m., New York City time, on the date such Special Event Prepayment Price is to be paid. 54 61 SECTION 14.02. Optional Prepayment by Company. (a) Subject to the provisions of this Article XIV, the Company shall have the right to prepay the Securities, in whole or in part, from time to time, on or after February 1, 2007, at the optional prepayment price equal to the outstanding principal amount of the Securities to be prepaid, plus accrued and unpaid interest thereon (including Compounded Interest and Additional Interest, if any) and any Additional Sums to the applicable date of prepayment (the "Optional Prepayment Price"). If the Securities are only partially prepaid pursuant to this Section 14.02, the Securities to be prepaid will be chosen pro rata or by lot or by any other method utilized by the Trustee; provided, that, as to Securities registered as a Global Security at the time of prepayment, the Depositary shall determine, in accordance with its procedures, the principal amount of such Securities held by each beneficial owner of such Securities to be prepaid. The Optional Prepayment Price shall be paid prior to 12:00 noon, New York City time, on the date of such prepayment or at such earlier time as the Company determines, provided, that the Company shall deposit with the Trustee an amount sufficient to pay the Optional Prepayment Price by 10:00 a.m., New York time, on the date such Optional Prepayment Price is to be paid. (b) Notwithstanding the first sentence of Section 14.02(a), upon the entry of an order for dissolution of Trenwick Capital Trust I by a court of competent jurisdiction, the Securities thereafter will be subject to optional prepayment, in whole only, but not in part, on or after February 1, 2007, at the optional prepayment price set forth in Section 14.02(a) and otherwise in accordance with this Article XIV. SECTION 14.03. No Sinking Fund. The Securities are not entitled to the benefit of any sinking fund. SECTION 14.04. Notice of Prepayment; Selection of Securities. In case the Company shall desire to exercise the right to prepay all, or, as the case may be, any part of the Securities in accordance with their terms, it shall fix a date for prepayment and shall mail a notice of such prepayment at least 30 and not more than 60 days prior to the date fixed for prepayment to the holders of Securities so to be prepaid as a whole or in part at their last addresses as the same appear on the Security Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Security designated for prepayment as a whole or in part shall not affect the validity of the proceedings for the prepayment of any other Security. Each such notice of prepayment shall specify the CUSIP number of the Securities to be prepaid, the date fixed for prepayment, the prepayment price at which the Securities are to be prepaid (or the method by which such prepayment price is to be calculated), the place or places of payment that payment will be made upon presentation and surrender of the Securities, that interest accrued to the date fixed for prepayment will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be prepaid will cease to accrue. If less than all the Securities are to be prepaid the notice of prepayment 55 62 shall specify the numbers of the Securities to be prepaid. In case any Security is to be prepaid in part only, the notice of prepayment shall state the portion of the principal amount thereof to be prepaid and shall state that on and after the date fixed for prepayment, upon surrender of such Security, a new Security or Securities in principal amount equal to the unprepaid portion thereof will be issued. Prior to 10:00 a.m., New York City time, on the prepayment date specified in the notice of prepayment given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to prepay on the prepayment date all the Securities so called for prepayment at the appropriate Prepayment Price, together with accrued interest to the date fixed for prepayment. The Company will give the Trustee notice not less than 45 days prior to the prepayment date as to the aggregate principal amount of Securities to be prepaid and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Securities or portions thereof (in integral multiples of $1,000, except as otherwise set forth in the applicable form of Security) to be prepaid. SECTION 14.05. Payment of Securities Called for Prepayment. If notice of prepayment has been given as provided in Section 14.04, the Securities or portions of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable Prepayment Price, together with interest accrued to the date fixed for prepayment (subject to the rights of holders of Securities on the close of business on a Regular Record Date in respect of an Interest Payment Date occurring on or prior to the prepayment date), and on and after said date (unless the Company shall default in the payment of such Securities at the Prepayment Price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for prepayment shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be paid and prepaid by the Company at the applicable Prepayment Price, together with interest accrued thereon to the date fixed for prepayment (subject to the rights of holders of Securities on the close of business on a Regular Record Date in respect of an Interest Payment Date occurring on or prior to the prepayment date). Upon presentation of any Security prepaid in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations, in principal amount equal to the unprepaid portion of the Security so presented. SECTION 14.06. Conditional Right to Shorten Maturity. If a Tax Event occurs, then the Company will have the right, prior to the termination of the Trust, either (i) to shorten the Stated Maturity of the Securities to the minimum extent required, but not to a date earlier than 20 years from the date of original issuance of Securities under this Indenture, such that, in the written opinion of counsel experienced in such matters delivered to the Company, after shortening the Stated Maturity, interest paid on the Securities shall be deductible for federal income tax purposes (the action referred to above being referred to herein as a "Tax Event Maturity Shortening") or (ii) to prepay the Securities. The 56 63 circumstances under which the Company has the right to prepay the Securities in connection with a Tax Event is referred to herein as a "Conditional Tax Redemption Event" and, since a Conditional Tax Redemption Event is deemed to be a Special Event, the Securities shall then be subject to prepayment in accordance with the provisions of Section 14.01. ARTICLE XV. SUBORDINATION OF SECURITIES SECTION 15.01. Agreement to Subordinate. The Company covenants and agrees, and each holder of Securities issued hereunder likewise covenants and agrees, that the Securities shall be issued subject to the provisions of this Article XV; and each holder of a Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of (and premium, if any) and interest on all Securities issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of the Senior Indebtedness, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder. SECTION 15.02. Default on Senior Indebtedness. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness, or in the event that the maturity of any Senior Indebtedness has been accelerated because of a default, or if any judicial proceeding shall be pending with respect to any such default, then, in any case, no payment shall be made by the Company with respect to the principal (including prepayment) of or premium, if any, or interest on the Securities. In the event of the acceleration of the maturity of the Securities, then no payment shall be made by the Company with respect to the principal (including prepayments) of or premium, if any, or interest on the Securities until the holders of all Senior Indebtedness outstanding at the time of such acceleration shall receive payment in full of all amounts due in respect of such Senior Indebtedness (including any amounts due upon acceleration). In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent of the amounts due in respect of such Senior Indebtedness and only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing, within 90 days of such payment, of the amounts then due and owing on such Senior Indebtedness and only the 57 64 amounts specified in such notice to the Trustee shall be paid to the holders of such Senior Indebtedness. SECTION 15.03. Liquidation; Dissolution; Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on account of the principal (and premium, if any) or interest on the Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all amounts in respect of Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, and their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all amounts due in respect of such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Securities to the payment of Senior Indebtedness that may at the time be outstanding, provided, that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such 58 65 reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the sale, conveyance, transfer or lease of its property as an entirety, or substantially as an entirety, to another Person upon the terms and conditions provided for in Article X of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other Person shall, as a part of such consolidation, merger, sale, conveyance, transfer or lease, comply with the conditions stated in Article X of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04. Subrogation. Subject to the payment in full of all amounts due in respect of Senior Indebtedness, the rights of the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Securities, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Securities and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Trustee or the holder of any Security from exercising all remedies otherwise permitted by applicable law upon a Default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled conclusively to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such 59 66 distribution, the holders of Senior Indebtedness and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. SECTION 15.05. Trustee to Effectuate Subordination. Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. SECTION 15.06. Notice by the Company. The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.06 at least three Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within three Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled conclusively to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness of the Company (or a trustee on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee and the Securityholders shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, 60 67 receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06. SECTION 15.08. Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection 61 68 of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. ARTICLE XVI. EXTENSION OF INTEREST PAYMENT PERIOD SECTION 16.01. Extension of Interest Payment Period. (a) So long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period of such Securities for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such extension period (as set forth in Section 16.02(c)) (the "Extension Period"), during which Extension Period no interest shall be due and payable, provided, that no Extension Period may extend beyond the Stated Maturity. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 16.01, will bear interest thereon at the Coupon Rate compounded semi-annually for each semi-annual period of the Extension Period ("Compounded Interest"). At the end of the Extension Period, the Company shall pay all interest accrued and unpaid on the Securities, including any Additional Sums and Compounded Interest (together, "Deferred Interest") that shall be payable to the holders of the Securities in whose names the Securities are registered in the Security Register on the first record date immediately preceding the end of the Extension Period. (b) During any such Extension Period, the Company may not, and may not permit any Subsidiary to, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock (which includes common and preferred stock), (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company (including Other Debentures) that rank pari passu with or junior in right of payment to the Securities or (iii) make any guarantee payments with respect to any guarantee by the Company of the debt securities of any Subsidiary of the Company if such guarantee ranks pari passu with or junior in right of payment to the Securities (other than (a) dividends or distributions in shares of or options, warrants or rights to subscribe for or purchase shares of, common stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the prepayment or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a direct result of, and only to the extent necessary to avoid the issuance of fractional shares of the Company's capital stock following, a reclassification of the Company's capital stock or the exchange or conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of common stock related to the issuance of common stock or rights under any of the Company's benefit plans for its directors, officers or employees or any of the Company's dividend reinvestment plans). None of the Company's Subsidiaries will be prohibited from 62 69 declaring and paying cash distributions with respect to its capital stock or from making payments with respect to its debt securities. (c) Before the termination of any such Extension Period, and so long as no Event of Default has occurred and is continuing, the Company may further defer payments of interest by further extending such period, provided, that such period, together with all such previous and further extensions within such Extension Period, shall not exceed 10 consecutive semi-annual periods, including the first such semi-annual period during such Extension Period, or extend beyond the Stated Maturity. Upon the termination of any Extension Period and the payment of all Deferred Interest then due, the Company may elect to commence a new Extension Period, subject to the foregoing requirements. No interest shall be due and payable during an Extension Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during an Extension Period. SECTION 16.02. Notice of Extension. (a) If the Property Trustee is the only registered holder of the Securities at the time the Company selects an Extension Period, the Company shall give written notice to the Administrative Trustees, the Property Trustee and the Trustee of its selection of such Extension Period at least 5 Business Days before the earlier of (i) the next succeeding date on which distributions on the Trust Securities issued by Trenwick Capital Trust I are payable, or (ii) the date the Trust is required to give notice of the record date, or the date such Distributions are payable, to any national securities exchange or to holders of the Capital Securities issued by the Trust, but in any event at least 5 Business Days before such record date. (b) If the Property Trustee is not the only holder of the Securities at the time the Company selects an Extension Period, the Company shall give the holders of the Securities and the Trustee written notice of its selection of such Extension Period at least 10 Business Days before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Company is required to give notice of the record or payment date of such interest payment to any national securities exchange. (c) The semi-annual period in which any notice is given pursuant to paragraphs (a) or (b) of this Section 16.02 shall be counted as one of the 10 semi-annual periods permitted in the maximum Extension Period permitted under Section 16.01. There is no limitation on the number of times that the Company may elect to begin an Extension Period. The Chase Manhattan Bank hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. 63 70 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. TRENWICK GROUP INC. By: /s/ James F. Billett, Jr. ---------------------------------------- James F. Billett, Jr. Chairman, President and Chief Executive Officer THE CHASE MANHATTAN BANK, as Trustee By: /s/ G. McFarlane ---------------------------------------- G. McFarlane Vice President 71 EXHIBIT A (FORM OF FACE OF SECURITY) [IF THE SECURITY IS A GLOBAL SECURITY, INSERT: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OR A NOMINEE OF THE DEPOSITARY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS (A) THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND (B) ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE 1 72 TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 (A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY, AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE REVERSE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEREE TO THE COMPANY. THE HOLDER OF THIS SECURITY FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE. 2 73 No. ________ CUSIP No. ________ TRENWICK GROUP INC. 8.82% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE DUE FEBRUARY 1, 2037 Trenwick Group Inc., a Delaware corporation (the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ____________________________, or registered assigns, the principal sum of ____________________________________________U.S. dollars ($____________) on February 1, 2037 (the "Stated Maturity"), unless the Stated Maturity is shortened under certain circumstances described herein or this Debenture is previously prepaid, and to pay interest on the outstanding principal amount hereof from January 31, 1997, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, semi-annually (subject to deferral as set forth herein) in arrears on February 1 and August 1 of each year, commencing August 1, 1997, at the rate of 8.82% per annum until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded semi-annually. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months and, for any period less than 6 months, the actual months elapsed and the actual days elapsed in a partial month in such period. In the event that any date on which the principal of (or premium, if any) or interest on this Security is payable is not a Business Day, then payment payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the Regular Record Date for such interest installment, which shall be the 15th day preceding the relevant interest payment date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the holders on such Regular Record Date and may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the holders of Securities not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as maybe required by such exchange, all as more fully provided in the Indenture. The principal of (and premium, if any) and interest on this Security shall be payable at the office or agency of the Trustee maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by (i) check mailed to the holder at such address as shall appear in the Security Register or (ii) by transfer to an account maintained by the Person entitled thereto, provided, that proper written transfer instructions have been received by the relevant record date. 3 74 Notwithstanding the foregoing, so long as the Holder of this Security is the Property Trustee, the payment of the principal of (and premium, if any) and interest on this Security will be made at such place and to such account as may be designated by the Property Trustee. The indebtedness evidenced by this Security is unsecured and, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. By its acceptance hereof, the Holder agrees to be bound by the terms of the Registration Rights Agreement. This Security shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. 4 75 The provisions of this Security are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has caused this instrument to he executed. Dated: __________________ TRENWICK GROUP INC. By:_____________________________ Name: Title: Attest: By:___________________________ Name: Title: 5 76 (FORM OF CERTIFICATE OF AUTHENTICATION) CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee By: ______________________________________ Authorized Officer 6 77 (FORM OF REVERSE OF SECURITY) This Security is one of the Securities of the Company (herein sometimes referred to as the "Securities"), specified in the Indenture, all issued or to be issued under and pursuant to an Indenture, dated as of January 31, 1997 (the "Indenture"), duly executed and delivered between the Company and The Chase Manhattan Bank, as Trustee (the "Trustee"), to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Securities. Upon the occurrence and continuation of a Special Event, the Company shall have the right to prepay this Security in whole (but not in part) at the Special Event Prepayment Price. "Special Event Prepayment Price" shall mean, with respect to any prepayment of the Securities following a Special Event, an amount in cash equal to the greater of (i) 100% of the principal amount to be prepaid or (ii) the sum, as determined by a Quotation Agent, of the present values of the remaining scheduled payments of principal and interest thereon to February 1, 2007, the first day on which this Security is subject to optional prepayment, discounted to the prepayment date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months and, for any period less than 6 months, the actual months elapsed and the actual days elapsed in a partial month in such period) at the Adjusted Treasury Rate, plus, in each case, any accrued and unpaid interest thereon, including Compounded Interest, Additional Interest and Additional Sums, if any, to the date of such prepayment. In addition, the Company shall have the right to prepay this Security, in whole or in part, at any time on or after February 1, 2007 (an "Optional Prepayment"), at the Optional Prepayment Price equal to the principal amount of this Security plus accrued and unpaid interest thereon (including Compounded Interest and Additional Sums, if any) to the applicable date of prepayment. The Special Event Prepayment Price and the Optional Prepayment Price, as the case requires, shall be paid prior to 12:00 noon, New York time, on the date of such prepayment or at such earlier time as the Company determines, provided, that the Company shall deposit with the Trustee an amount sufficient to pay the applicable Prepayment Price by 10:00 a.m., New York City time, on the date such Prepayment Price is to be paid. Any prepayment pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days notice. If the Securities are only partially prepaid by the Company pursuant to an Optional Prepayment, the Securities to be prepaid will be chosen by lot or by any other method utilized by the Trustee; provided, that, as to Securities registered as a Global Security at the time of prepayment, the Depositary shall determine the particular Securities to be prepaid in accordance with its procedures. In the event of prepayment of this Security in part only, a new Security or Securities for the unprepaid portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. If a Tax Event occurs, then the Company will have the right, prior to the termination of the Trust, either (i) to shorten the Stated Maturity of this Security to the minimum extent, but not to a date earlier than 20 years from the date of original issuance of Securities under the Indenture, such that, in the written opinion of counsel experienced in such matters 7 78 delivered to the Company, after shortening the Stated Maturity, interest paid on the Securities shall be deductible for federal income tax purposes or (ii) to prepay the Securities. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Securities may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of a majority in principal amount of the Securities at the time outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such supplemental indenture shall, without the consent of each holder of Securities then outstanding and affected thereby, (i) extend the Stated Maturity of any Securities, or reduce the principal amount thereof, or reduce any amount payable on prepayment thereof, or reduce the rate or extend the time of payment of interest thereon (subject to Article XVI of the Indenture), or make the principal of, or interest or premium on, the Securities payable in any coin or currency other than U.S. dollars, or impair or affect the right of any holder of Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Securities, the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in principal amount of the Securities at the time outstanding affected thereby, on behalf of all of the holders of the Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a Default in the payment of the principal of or premium, if any, or interest on any of the Securities or a Default in respect of any covenant or provision under which the Indenture cannot be modified or amended without the consent of each holder of Securities then outstanding. Any such consent or waiver by the holder of this Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future holders and owners of this Security and of any Security issued in exchange heretofore or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Security at the time and place and at the rate and in the money herein prescribed. As long as no Event of Default has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period of such Securities for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such extension period (an "Extension Period"), during which Extension Period no interest shall be due and payable, provided, that no Extension Period may extend beyond the Stated Maturity of the Securities. At the end of the Extension Period, the Company shall pay all interest then accrued and unpaid, together with deferred interest thereon at the rate specified for the Securities (to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Extension Period, and so long as no Event of Default has occurred and 8 79 is continuing, the Company may further defer payments of interest by further extending such Extension Period, provided, that such Extension Period, together with all such previous and further extensions within such Extension Period, shall not exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, or extend beyond the Stated Maturity of the Securities. Upon the termination of any such Extension Period and the payment of all accrued and unpaid interest and any additional amounts then due, the Company may commence a new Extension Period, subject to the foregoing requirements. The Company has agreed that, if at any time (i) there shall have occurred any event of which the Company has actual knowledge that (a) is, or with the giving of notice or the lapse of time, or both, would be, an Event of Default and (b) in respect of which the Company shall not have taken reasonable steps to cure, (ii) if such Securities are held by Trenwick Capital Trust I, the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election of the exercise of its right to extend the interest payment period and any such extension shall be continuing, then the Company will not, and will not permit any Subsidiary to, (i) declare or pay any dividends or distributions on, or prepay, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock) (which includes common and preferred stock); (ii) make any payment of principal, interest or premium, if any, on or repay or repurchase or prepay any debt securities of the Company that rank pari passu with or junior in right of payment to the Securities; or (iii) make any guarantee payments with respect to any guarantee by the Company of the debt securities or any Subsidiary of the Company if such guarantee ranks pari passu or junior in right of payment to the Securities other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholder rights plan, or the issuance of stock under any such plan in the future, or the prepayment or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a direct result of, and only to the extent necessary to avoid the issuance of fractional shares of the Company's capital stock following, a reclassification of the Company's capital stock or the exchange or the conversion of one class or series of the Company's capital stock for another class or series of the Company's capital stock, (e) the purchase of fractional interests in shares of the Company's capital stock pursuant to the exchange or conversion of such capital stock or the security being exchanged or converted, and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Company's benefit plans for its directors, officers or employees or any of the Company's dividend reinvestment plans. None of the Company's Subsidiaries will be prohibited from declaring and paying cash distributions with respect to its capital stock or from making payments with respect to its debt securities. The Company will have the right at any time to dissolve Trenwick Capital Trust I and cause the Securities to be distributed to the holders of the Trust Securities in liquidation of Trenwick Capital Trust I, subject to the provisions of the Indenture requiring the receipt of certain legal opinions. 9 80 The Securities are issuable only in registered form without coupons in denominations of $1,000.00 and any integral multiple thereof. As provided in the Indenture and subject to the transfer restrictions limitations as may be contained herein and therein from time to time, this Security is transferable by the holder hereof on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Security, the Company, the Trustee, any paying agent and the registrar may deem and treat the holder hereof as the absolute owner hereof (whether or not this Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS THEREOF. 10 81 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Security Certificate to: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Insert assignee's social security or tax identification number) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Insert address and zip code of assignee) and irrevocably appoints ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ agent to transfer this Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: ____________________________ Signature: ________________________ (Sign exactly as your name appears on the other side of this Security Certificate) Signature Guarantee: ___________________________________ _____________________ * Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. 11 82 In connection with any transfer of any of the Securities evidenced by this certificate, the undersigned confirms that such Securities are being: CHECK ONE BOX BELOW (1) / / exchanged for the undersigned's own account without transfer; or (2) / / transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (3) / / transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (4) / / transferred to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act of 1933 that is acquiring the Securities for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act of 1933; or (5) / / transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933; or (6) / / transferred pursuant to an effective registration statement. Unless one of the boxes is checked, the Registrar will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered Holder thereof; provided, however, that if box (3), (4) or (5) is checked, the Registrar may require, prior to registering any such transfer of the Securities such legal opinions, certifications and other information as the Trust has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act; provided, further, that (i) if box 2 is checked, the transferee must also certify that it is a qualified institutional buyer as defined in Rule 144A or (ii) if box (4) is checked, the transferee must also provide to the Registrar a Transferee Letter of Representation in the form attached as Annex A to the Offering Memorandum of the Trust dated January 28, 1997. Date:_____________________ Signature:__________________________ (Sign exactly as your name appears on the other side of this Security Certificate) 12 EX-4.2.B 3 EXHIBIT 4.2.B 1 Exhibit 4.2(b) TRENWICK CAPITAL TRUST I ----------------------------------------- AMENDED AND RESTATED DECLARATION OF TRUST Dated as of January 31, 1997 ----------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE I INTERPRETATION AND DEFINITIONS.................................................... 1 SECTION 1.1 Definitions.........................................................................1 ARTICLE II TRUST INDENTURE ACT.................................................................8 SECTION 2.1 Trust Indenture Act; Application....................................................8 SECTION 2.2 Lists of Holders of Securities......................................................9 SECTION 2.3 Reports by the Property Trustee.....................................................9 SECTION 2.4 Periodic Reports to Property Trustee................................................9 SECTION 2.5 Evidence of Compliance with Conditions Precedent....................................9 SECTION 2.6 Events of Default; Waiver...........................................................9 SECTION 2.7 Event of Default; Notice.......................................................... 11 ARTICLE III ORGANIZATION...................................................................... 11 SECTION 3.1 Name.............................................................................. 11 SECTION 3.2 Office............................................................................ 12 SECTION 3.3 Purpose........................................................................... 12 SECTION 3.4 Authority......................................................................... 12 SECTION 3.5 Title to Property of the Trust.................................................... 12 SECTION 3.6 Powers and Duties of the Administrative Trustees.................................. 12 SECTION 3.7 Prohibition of Actions by the Trust and the Trustees.............................. 15 SECTION 3.8 Powers and Duties of the Property Trustee......................................... 16 SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee....................... 18 SECTION 3.10 Certain Rights of Property Trustee................................................ 19 SECTION 3.11 Delaware Trustee.................................................................. 21 SECTION 3.12 Not Responsible for Recitals or Issuance of Securities............................ 22 SECTION 3.13 Duration of Trust................................................................. 22 SECTION 3.14 Mergers........................................................................... 22 ARTICLE IV SPONSOR........................................................................... 23 SECTION 4.1 Sponsor's Purchase of Common Securities........................................... 23 SECTION 4.2 Responsibilities of the Sponsor................................................... 23 SECTION 4.3 Right to Proceed.................................................................. 24 ARTICLE V TRUSTEES.......................................................................... 24 SECTION 5.1 Number of Trustees; Appointment of Co-Trustee..................................... 24 SECTION 5.2 Delaware Trustee.................................................................. 25 SECTION 5.3 Property Trustee; Eligibility..................................................... 25 SECTION 5.4 Certain Qualifications of Administrative Trustees and Delaware Trustee Generally................................................................. 26
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Page ---- SECTION 5.5 Administrative Trustees........................................................... 26 SECTION 5.6 Delaware Trustee.................................................................. 27 SECTION 5.7 Appointment, Removal and Resignation of Trustees.................................. 27 SECTION 5.8 Vacancies among Trustees.......................................................... 28 SECTION 5.9 Effect of Vacancies............................................................... 28 SECTION 5.10 Meetings.......................................................................... 29 SECTION 5.11 Delegation of Power............................................................... 29 SECTION 5.12 Merger, Conversion, Consolidation or Succession to Business....................... 29 SECTION 5.13 Undertaking for Costs............................................................. 29 ARTICLE VI DISTRIBUTIONS..................................................................... 30 SECTION 6.1 Distributions..................................................................... 30 ARTICLE VII ISSUANCE OF SECURITIES............................................................ 30 SECTION 7.1 General Provisions Regarding Securities........................................... 30 SECTION 7.2 Execution and Authentication...................................................... 31 SECTION 7.3 Form and Dating................................................................... 31 SECTION 7.4 Registrar and Paying Agent........................................................ 33 SECTION 7.5 Paying Agent to Hold Money in Trust............................................... 33 SECTION 7.6 Replacement Securities............................................................ 34 SECTION 7.7 Outstanding Capital Securities.................................................... 34 SECTION 7.8 Capital Securities in Treasury.................................................... 34 SECTION 7.9 Temporary Securities.............................................................. 34 SECTION 7.10 Cancellation...................................................................... 35 SECTION 7.11 CUSIP Numbers..................................................................... 36 ARTICLE VIII DISSOLUTION OF TRUST.............................................................. 36 SECTION 8.1 Dissolution of Trust.............................................................. 36 ARTICLE IX TRANSFER OF INTERESTS............................................................. 37 SECTION 9.1 Transfer of Securities............................................................ 37 SECTION 9.2 Transfer Procedures and Restrictions.............................................. 37 SECTION 9.3 Deemed Security Holders........................................................... 45 SECTION 9.4 Book-Entry Interests.............................................................. 45 SECTION 9.5 Notices to Clearing Agency........................................................ 46 SECTION 9.6 Appointment of Successor Clearing Agency.......................................... 46 ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS................................................................ 46 SECTION 10.1 Liability......................................................................... 46 SECTION 10.2 Exculpation....................................................................... 47
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SECTION 10.3 Fiduciary Duty.................................................................... 47 SECTION 10.4 Indemnification................................................................... 48 SECTION 10.5 Outside Businesses................................................................ 51 ARTICLE XI ACCOUNTING........................................................................ 51 SECTION 11.1 Fiscal Year....................................................................... 51 SECTION 11.2 Certain Accounting Matters........................................................ 52 SECTION 11.3 Banking........................................................................... 52 SECTION 11.4 Withholding....................................................................... 52 ARTICLE XII AMENDMENTS AND MEETINGS........................................................... 53 SECTION 12.1 Amendments........................................................................ 53 SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent.................. 54 ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE.................................................................. 56 SECTION 13.1 Representations and Warranties of Property Trustee................................ 56 ARTICLE XIV REGISTRATION RIGHTS............................................................... 57 SECTION 14.1 Registration Rights Agreement; Additional Interest................................ 57 ARTICLE XV MISCELLANEOUS..................................................................... 59 SECTION 15.1 Notices........................................................................... 59 SECTION 15.2 Governing Law..................................................................... 60 SECTION 15.3 Intention of the Parties.......................................................... 60 SECTION 15.4 Headings.......................................................................... 60 SECTION 15.5 Successors and Assigns............................................................ 60 SECTION 15.6 Partial Invalidity................................................................ 61 SECTION 15.7 Counterparts...................................................................... 61 ANNEX I........................................................................................................ I-1 EXHIBIT A-1................................................................................................... A1-1 EXHIBIT A-2................................................................................................... A2-1
iii 5 CROSS-REFERENCE TABLE*
Section of Trust Indenture Act Section of of 1939, as amended Declaration - - ------------------- ----------- 310(a) ................................................................................... 5.3(a) 310(c) ................................................................................... Inapplicable 311(c) ................................................................................... Inapplicable 312(a) ................................................................................... 2.2(a) 312(b) ................................................................................... 2.2(b) 313 ................................................................................... 2.3 314(a) ................................................................................... 2.4 314(b) ................................................................................... Inapplicable 314(c) ................................................................................... 2.5 314(d) ................................................................................... Inapplicable 314(f) ................................................................................... Inapplicable 315(a) ................................................................................... 3.9(b) 315(c) ................................................................................... 3.9(a) 315(d) ................................................................................... 3.9(a) 316(a) ................................................................................... Annex I 316(c) ................................................................................... 3.6(a)
- - ------------------- * This Cross-Reference Table does not constitute part of the Declaration and shall not affect the interpretation of any of its terms or provisions. iv 6 AMENDED AND RESTATED DECLARATION OF TRUST OF TRENWICK CAPITAL TRUST I AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") dated as of January 31, 1997, among the Trustees (as defined herein) and the Sponsor (as defined herein). WHEREAS, the Delaware Trustee and the Sponsor established Trenwick Capital Trust I (the "Trust"), a statutory business trust formed under the Business Trust Act (as defined herein) pursuant to a Declaration of Trust dated as of January 21, 1997 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on January 21, 1997, for the exclusive purposes of (i) issuing and selling the Trust Securities (as defined herein), (ii) effecting the Exchange Offer or filing a Shelf Registration Statement (each as defined herein), (iii) using the proceeds from the sale of Trust Securities to acquire the Debentures (as defined herein), (iv) making Distributions (as defined herein) to holders of the Trust Securities as provided herein and (v) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Trust Securities); WHEREAS, as of the date hereof, no interests in the Trust have been issued; and WHEREAS, all of the Trustees and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration. NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a business trust under the Business Trust Act and that this Declaration fully amend and restate the Original Declaration so as to constitute the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration. ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1 Definitions. Unless the context otherwise requires: (a) Capitalized terms used in this Declaration but not defined in the preamble above or elsewhere herein have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; 7 (c) all references to "the Declaration" or "this Declaration" are to this Declaration (including Annex I hereto and Exhibit A hereto) as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act (as defined below) has the same meaning when used in this Declaration unless otherwise defined in this Declaration or the context otherwise requires; (f) a term defined in the Indenture (as defined below) has the same meaning when used in this Declaration unless otherwise defined in this Declaration or the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "Additional Interest" means the additional interest referred to in Article XIV. "Administrative Trustee" has the meaning set forth in Section 5.1. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Agent" means any Paying Agent or Registrar. "Authorized Officer" of a Person means any other Person that is authorized to legally bind such former Person. "Book-Entry Interest" means a beneficial interest in a Global Certificate registered in the name of a Clearing Agency or its nominee, ownership and transfers of which shall be maintained and made through book-entries by a Clearing Agency as described in Section 9.4. "Business Day" means any day other than a Saturday or a Sunday or a day on which banking institutions in The City of New York, New York are authorized or required by law or executive order to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time or any successor legislation. "Capital Security Beneficial Owner" means, with respect to a Book-Entry Interest, a Person who is the beneficial owner of such Book-Entry Interest, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Capital Securities" has the meaning specified in Section 7.1(a). 2 8 "Capital Securities Guarantee" means the guarantee agreement dated as of January 31, 1997 of the Sponsor in respect of the Capital Securities, as modified, supplemented or amended from time to time. "Clearing Agency" means an organization registered as a "Clearing Agency" pursuant to Section 17A of the Exchange Act that is acting as depositary for the Capital Securities and in whose name or in the name of a nominee of that organization shall be registered a Global Certificate and which shall undertake to effect book-entry transfers and pledges of the Capital Securities. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means the "Closing Date" under the Purchase Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the United States Securities and Exchange Commission as from time to time constituted, or if any time after the execution of this Declaration such Commission is not existing and performing the duties now assigned to it under applicable Federal securities laws, then the body performing such duties at such time. "Common Securities" has the meaning specified in Section 7.1(a). "Common Securities Guarantee" means the guarantee agreement dated as of January 31, 1997 of the Sponsor in respect of the Common Securities, as modified, supplemented or amended from time to time. "Company Indemnified Person" means (a) any Administrative Trustee; (b) any Affiliate of any Administrative Trustee; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrative Trustee; or (d) any officer, employee or agent of the Trust or its Affiliates. "Compounded Interest" shall have the meaning ascribed to it in the Indenture. "Corporate Trust Office" means the office of the Property Trustee at which the corporate trust business of the Property Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at The Chase Manhattan Bank, 450 West 33rd Street, 15th Floor, New York, New York 10001. "Covered Person" means: (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) an Affiliate of the Trust; and (b) any Holder of Securities. "Debenture Issuer" means Trenwick Group Inc., a Delaware corporation, or any successor entity resulting from any consolidation, amalgamation, merger or other business combination, in its capacity as issuer of the Debentures under the Indenture. 3 9 "Debenture Trustee" means The Chase Manhattan Bank, a New York banking corporation, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means the 8.82% Junior Subordinated Deferrable Interest Debentures due February 1, 2037 of the Debenture Issuer issued pursuant to the Indenture (including, as applicable, those Debentures issued upon consummation of the Exchange Offer). "Default" means an event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Definitive Capital Securities" has the meaning set forth in Section 7.3(c). "Delaware Trustee" has the meaning set forth in Section 5.2. "Direct Action" has the meaning set forth in Section 3.8(e). "Distribution" means a distribution payable to Holders of Securities in accordance with Section 6.1. "DTC" means The Depository Trust Company, the initial Clearing Agency. "Event of Default" in respect of the Securities means an Event of Default (as defined in the Indenture) that has occurred and is continuing in respect of the Debentures. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Exchange Agent" has the meaning set forth in Section 7.4(a). "Exchange Capital Securities" has the meaning set forth in Section 7.1(a). "Exchange Debentures" means the Debentures issued upon consummation of the Exchange Offer (including pursuant to any Private Exchange (as defined in the Registration Rights Agreement)). "Exchange Offer" means the exchange offer (including any Private Exchange (as defined in the Registration Rights Agreement)) contemplated in Section 2(a) of the Registration Rights Agreement. "Fiduciary Indemnified Person" has the meaning set forth in Section 10.4(b). "Global Capital Securities" means the Regulation S Global Capital Securities, the Rule 144A Global Capital Securities and the Unrestricted Global Capital Securities. "Global Certificates" means certificates for Capital Securities registered in the name of a Clearing Agency or its nominee. "Holder" means a Person in whose name a Security is registered, such Person being a beneficial owner within the meaning of the Business Trust Act. 4 10 "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Indenture, dated as of January 31, 1997, between the Debenture Issuer and the Debenture Trustee, as modified, supplemented or amended from time to time. "Initial Capital Securities" means 8.82% Subordinated Capital Income Securities (liquidation amount $1,000 per security) of the Trust issued on the Closing Date. "Initial Debentures" means the Debentures as authenticated and issued under the Indenture on the Closing Date. "Initial Purchaser" means Lehman Brothers Inc. "Investment Company" means an investment company as defined in the Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Legal Action" has the meaning set forth in Section 3.6(a)(vii). "Like Amount" has the meaning set forth in Section 3 of Annex I. "Liquidation Amount" with respect to any Security means the amount designated as such with respect thereto in Section 2(a) of Annex I hereto. "Majority in Liquidation Amount" means, with respect to the Trust Securities, except as provided in the terms of the Capital Securities or by the Trust Indenture Act, Holder(s) of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate Liquidation Amount of all outstanding Securities of the relevant class. "Offering Memorandum" has the meaning set forth in Section 3.6(a). "Officers' Certificate" means, with respect to any Person, a certificate signed by the Chairman, a Vice Chairman, the Chief Executive Officer, the President, a Vice President (however designated), or the Secretary or an Assistant Secretary of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include: (a) a statement that each officer signing the Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Certificate; 5 11 (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of counsel, who may be an employee of the Sponsor, and who shall be acceptable to the Property Trustee. "Participants" has the meaning set forth in Section 7.3(b). "Paying Agent" has the meaning specified in Section 7.4. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Property Trustee" has the meaning set forth in Section 5.3(a). "Property Trustee Account" has the meaning set forth in Section 3.8(c). "Purchase Agreement" means the Purchase Agreement for the initial offering and sale of Capital Securities. "QIBs" means qualified institutional buyers as defined in Rule 144A. "Quorum" means a majority of the Administrative Trustees or, if there are only two Administrative Trustees, both of them. "Registrar" has the meaning set forth in Section 7.4. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of January 31, 1997, by and among the Sponsor, the Trust and the Initial Purchaser, as modified, supplemented or amended from time to time. "Registration Statement" means a registration statement filed under the Securities Act. "Regulation S" means Regulation S under the Securities Act, as such regulation may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Regulation S Global Capital Security" has the meaning set forth in Section 7.3(a). "Related Party" means, with respect to the Sponsor, any direct or indirect wholly owned subsidiary of the Sponsor or any other Person that owns, directly or indirectly, 100% of the outstanding voting securities of the Sponsor. 6 12 "Responsible Officer," when used with respect to the Property Trustee, means any officer of the Property Trustee with direct responsibility for the administration of this Declaration and also means, with respect to a particular corporate trust matter, any other officer of the Property Trustee to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Definitive Capital Securities" has the meaning set forth in Section 7.3(c). "Restricted Capital Security" means a Capital Security required by Section 9.2 to contain a Restricted Securities Legend. "Restricted Securities Legend" has the meaning set forth in Section 9.2. "Rule 3a-5" means Rule 3a-5 under the Investment Company Act, or any successor rule or regulation. "Rule 144" means Rule 144 under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Rule 144A" means Rule 144A under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Rule 144A Global Capital Security" has the meaning set forth in Section 7.3(a). "Securities" or "Trust Securities" means the Common Securities and the Capital Securities (including, as applicable, those Capital Securities issued upon consummation of the Exchange Offer and any Private Exchange (as defined in the Registration Rights Agreement)). "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Securities Guarantees" means the Common Securities Guarantee and the Capital Securities Guarantee. "Shelf Registration Statement" means a "shelf" registration statement of the Sponsor and the Trust as contemplated in Section 2(b) of the Registration Rights Agreement. "Special Event" has the meaning set forth in the Indenture. "Sponsor" means Trenwick Group Inc., a Delaware corporation, or any successor entity resulting from any merger, consolidation, amalgamation or other business combination, in its capacity as sponsor of the Trust. "Successor Delaware Trustee" has the meaning set forth in Section 5.7(a). "Successor Entity" has the meaning set forth in Section 3.14(b). "Successor Property Trustee" has the meaning set forth in Section 5.7(a). "Successor Securities" has the meaning set forth in Section 3.14(b). 7 13 "Super Majority" has the meaning set forth in Section 2.6(a)(ii). "Tax Event Maturity Shortening" has the meaning set forth in the Indenture. "10% in Liquidation Amount" means, with respect to the Trust Securities, except as provided in the terms of the Capital Securities or by the Trust Indenture Act, Holder(s) of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% of the aggregate Liquidation Amount of all outstanding Securities of the relevant class. "Treasury Regulations" means the income tax regulations, including temporary regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee (including the Property Trustee, the Delaware Trustee and each Administrative Trustee), so long as such Person shall continue as trustee in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Unrestricted Global Capital Security" has the meaning set forth in Section 9.2(b). ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If and to the extent that any provision of this Declaration limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (d) The application of the Trust Indenture Act to this Declaration shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. 8 14 SECTION 2.2 Lists of Holders of Securities. (a) Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide the Property Trustee, unless the Property Trustee is Registrar for the Securities, with a list (i) within five days after each record date for payment of Distributions, in such form as the Property Trustee may reasonably require, of the names and addresses of the Holders of the Securities ("List of Holders") as of such record date, provided that neither the Sponsor nor the Administrative Trustees on behalf of the Trust shall be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Property Trustee by the Sponsor and the Administrative Trustees on behalf of the Trust, and (ii) at any other time, within 30 days of receipt by the Trust of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Property Trustee. The Property Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in a List of Holders given to it or which it receives in its capacity as Paying Agent (if acting in such capacity), provided that the Property Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Property Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Property Trustee. Within 60 days after May 15 of each year, commencing May 15, 1997, the Property Trustee shall provide to the Holders of the Capital Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Property Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Property Trustee. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as are required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent provided for in this Declaration that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver. (a) The Holders of a Majority in Liquidation Amount of Capital Securities may, by vote, on behalf of the Holders of all of the Capital Securities, waive any past Event of Default in respect of the Capital Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: 9 15 (i) is not waivable under the Indenture, the Event of Default under the Declaration shall also not be waivable; or (ii) requires the consent or vote of greater than a majority in aggregate principal amount of the holders of the Debentures (a "Super Majority") to be waived under the Indenture, the Event of Default under the Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate Liquidation Amount of the Capital Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The foregoing provisions of this Section 2.6(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such default shall cease to exist, and any Event of Default with respect to the Capital Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Default or an Event of Default with respect to the Capital Securities or impair any right consequent thereon. Any waiver by the Holders of the Capital Securities of an Event of Default with respect to the Capital Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Event of Default with respect to the Common Securities for all purposes of this Declaration without any further act, vote, or consent of the Holders of the Common Securities. (b) The Holders of a Majority in Liquidation Amount of the Common Securities may, by vote, on behalf of the Holders of all of the Common Securities, waive any past Event of Default with respect to the Common Securities and its consequences, provided that, if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the Declaration shall also not be waivable; or (ii) requires the consent or vote of a Super Majority to be waived, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate Liquidation Amount of the Common Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; provided further, each Holder of Common Securities will be deemed to have waived any such Event of Default and all Events of Default with respect to the Common Securities and its consequences if all Events of Default with respect to the Capital Securities have been cured, waived or otherwise eliminated, and until such Events of Default have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the Holders of the Capital Securities and only the Holders of the Capital Securities will have the right to direct the Property Trustee in accordance with the terms of the Securities. The foregoing provisions of this Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Subject to the foregoing provisions of this Section 2.6(b), upon such waiver, any such Default shall cease to exist and any Event of Default with respect to the Common Securities 10 16 arising therefrom shall be deemed to have been cured for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Default or Event of Default with respect to the Common Securities or impair any right consequent thereon. (c) A waiver of an Event of Default under the Indenture by the Property Trustee, at the direction of the Holders of the Capital Securities, constitutes a waiver of the corresponding Event of Default under this Declaration. The foregoing provisions of this Section 2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. SECTION 2.7 Event of Default; Notice. (a) The Property Trustee shall, within 90 days after the occurrence of an Event of Default known to a Responsible Officer of the Property Trustee, transmit by mail, first class postage prepaid, to the Holders, the Administrative Trustees and the Sponsor, notices of all defaults with respect to the Securities actually known to a Responsible Officer of the Property Trustee, unless such defaults have been cured before the giving of such notice (the term "defaults" for the purposes of this Section 2.7(a) being hereby defined to be an Event of Default as defined in the Indenture, not including any periods of grace provided for therein and irrespective of the giving of any notice provided therein). (b) The Sponsor and the Administrative Trustees shall file annually with the Property Trustee a certification as to whether or not they are in compliance with all the conditions and covenants applicable to them under this Declaration. (c) For purposes of this Section 2.7, the Property Trustee shall not be deemed to have knowledge of any Default or Event of Default except: (i) a Default under Sections 5.01(a) and 5.01(b) of the Indenture (other than with respect to the payment of Additional Interest or Compounded Interest); or (ii) any Default or Event of Default as to which the Property Trustee shall have received written notice or of which a Responsible Officer of the Property Trustee charged with the administration of the Declaration shall have actual knowledge. ARTICLE III ORGANIZATION SECTION 3.1 Name. The Trust shall continue to be named "Trenwick Capital Trust I" as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrative Trustees. 11 17 SECTION 3.2 Office. The address of the principal office of the Trust is Trenwick Capital Trust I, c/o Trenwick Group Inc., Metro Center, One Station Place, Stamford, Connecticut 06902. On ten Business Days' prior written notice to the Holders, the Administrative Trustees may designate another principal office. SECTION 3.3 Purpose. The Trust exists for the exclusive purpose of (a) issuing and selling Securities, (b) using the proceeds from the sale of the Securities to acquire the Debentures, (c) making Distributions to Holders of the Securities as herein provided, (d) effecting the Exchange Offer or filing a Shelf Registration Statement, and (e) except as otherwise limited herein, engaging in only those other activities necessary, advisable or incidental thereto. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, mortgage or pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust. SECTION 3.4 Authority. Subject to the limitations provided in this Declaration and to the specific duties of the Property Trustee, the Administrative Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by the Administrative Trustees in accordance with their powers, as set forth in Sections 3.6 and 5.5, shall constitute the act of and serve to bind the Trust and an action taken by the Property Trustee on behalf of the Trust in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. The authority of the Delaware Trustee is set forth in Section 3.11 hereof. SECTION 3.5 Title to Property of the Trust. Except as provided in Section 3.8 with respect to the Debentures and the Property Trustee Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. SECTION 3.6 Powers and Duties of the Administrative Trustees. (a) The Administrative Trustees shall have the exclusive power, duty and authority to cause the Trust to engage in the following activities: (i) to issue and sell the Capital Securities and the Common Securities in accordance with this Declaration; provided, however, that (A) the Trust may issue no more than two series of Capital Securities and no more than one series of Common Securities, (B) there shall be no interests in the Trust other than the Securities, and (C) the issuance of Securities shall be limited to: (x) a simultaneous issuance of both Capital Securities and Common Securities on the Closing Date and (y) the issuance of a second series of Capital Securities upon the consummation of the Exchange Offer. 12 18 (ii) in connection with the issue and sale of the Capital Securities and the Common Securities, and in connection with the Exchange Offer or any Shelf Registration Statement, at the direction of the Sponsor, to: (A) prepare and execute, if necessary, an offering memorandum (the "Offering Memorandum") in preliminary and final form prepared by the Sponsor, in relation to the offering and sale of Initial Capital Securities to QIBs in reliance on Rule 144A under the Securities Act, to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and outside the United States to non-U.S. Persons in offshore transactions complying with Rule 903 or 904 of Regulation S under the Securities Act, and to execute and file with the Commission, at such time as is determined by the Sponsor, any Registration Statement, including any amendment thereto, as contemplated by the Registration Rights Agreement and take such actions as are required to effect the Exchange Offer or any Shelf Registration Statement; (B) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary, to qualify or register all or part of the Capital Securities in any State or foreign jurisdiction in which the Sponsor has determined to qualify or register such Capital Securities for sale; (C) if deemed necessary or advisable by the Sponsor, execute and file an application, prepared by the Sponsor, to the New York Stock Exchange or any other national stock exchange or the Nasdaq Stock Market's National Market for listing or quotation of the Capital Securities; (D) execute and deliver letters, documents, or instruments with DTC and other Clearing Agencies relating to the Capital Securities; (E) if required, execute and file with the Commission a registration statement on Form 8-A, including any amendments thereto, prepared by the Sponsor, relating to the registration of the Capital Securities under Section 12(b) or 12(g) of the Exchange Act; and (F) execute and enter into the Purchase Agreement providing for the sale of the Capital Securities, the Registration Rights Agreement, a subscription agreement providing for the sale of the Common Securities, a subscription agreement providing for the sale of the Debentures and any other agreements regarding the issuance and sale of Securities; (iii) to acquire the Initial Debentures with the proceeds of the sale of the Initial Capital Securities and the Common Securities and to exchange the Initial Debentures for a like principal amount of Exchange Debentures pursuant to the Exchange Offer; provided, however, that the Administrative Trustees shall cause legal title to the Debentures to be held of record in the name of the Property Trustee for the benefit of the Holders of the Capital Securities and the Holders of the Common Securities; (iv) to give the Sponsor and the Property Trustee prompt written notice of the occurrence of a Special Event; 13 19 (v) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Capital Securities and Holders of Common Securities as to such actions and applicable record dates; (vi) to take all actions and perform such duties as may be required of the Administrative Trustees pursuant to the terms of the Securities; (vii) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee has the exclusive power to bring such Legal Action; (viii) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors and consultants, and pay reasonable compensation for such services; (ix) to cause the Trust to comply with the Trust's obligations under this Declaration or the Trust Indenture Act; (x) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Property Trustee, which certificate may be executed by any Administrative Trustee; (xi) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (xii) to act as, or appoint another Person to act as, Registrar and Exchange Agent for the Securities or to appoint a Paying Agent for the Securities as provided in Section 7.4, except for such time as such power to appoint a Paying Agent is vested in the Property Trustee; (xiii) to give prompt written notice to the Property Trustee and to Holders of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture; (xiv) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing; (xv) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created; (xvi) to take any action, not inconsistent with this Declaration or with applicable law, that the Administrative Trustees determine in their discretion to be necessary or desirable in carrying out the activities of the Trust as set out in this Section 3.6, including, but not limited to: 14 20 (A) causing the Trust not to be deemed to be an Investment Company required to be registered under the Investment Company Act; (B) causing the Trust to be classified for United States federal income tax purposes as a grantor trust; (C) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States federal income tax purposes; and (D) taking all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Administrative Trustees, on behalf of the Trust; and (xvii) to take all action necessary to consummate the Exchange Offer or otherwise cause the Capital Securities to be registered pursuant to an effective Registration Statement in accordance with the provisions of the Registration Rights Agreement. (b) The Administrative Trustees must exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Administrative Trustees shall not take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. (c) Subject to this Section 3.6, the Administrative Trustees shall have none of the powers or the authority of the Property Trustee set forth in Section 3.8. (d) Any expenses incurred by the Administrative Trustees pursuant to this Section 3.6 shall be reimbursed by the Sponsor. SECTION 3.7 Prohibition of Actions by the Trust and the Trustees. The Trust shall not, and the Trustees (including the Property Trustee) all in their capacities as such and not in their individual capacities shall not, engage in any activity other than as required or authorized by this Declaration. The Trust shall not: (i) invest any proceeds received by the Property Trustee on behalf of the Trust from holding the Debentures, but shall distribute all such proceeds (excluding "Additional Sums" (as defined in the Indenture), which Additional Sums shall be applied by the Property Trustee as directed by the Administrative Trustees), to Holders of Securities pursuant to the terms of this Declaration and of the Securities; (ii) acquire any assets other than as expressly provided herein; (iii) possess Trust property for other than a Trust purpose; (iv) make any loans or incur any indebtedness other than loans represented by the Debentures; 15 21 (v) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever; (vi) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or (vii) other than as provided in this Declaration or Annex I, (A) direct the time, method and place of conducting any proceeding with respect to any remedy available to the Debenture Trustee, or exercising any right or power conferred upon the Debenture Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, (C) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable, or (D) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, unless the Trust shall have received an Opinion of Counsel experienced in such matters to the effect there is no more than an insubstantial risk that the Trust would not be classified for United States federal income tax purposes as a trust subject to the provisions of Section 671 through 679 of the Code (a "grantor trust") on account of such amendment, modification or termination. SECTION 3.8 Powers and Duties of the Property Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Property Trustee in trust for the benefit of the Holders. The right, title and interest of the Property Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Property Trustee in accordance with Section 5.7. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. (b) The Property Trustee shall not transfer its right, title and interest in the Debentures to the Administrative Trustees or to the Delaware Trustee (if the Property Trustee does not also act as Delaware Trustee). (c) The Property Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Trustee Account") in the name of and under the exclusive control of the Property Trustee on behalf of the Holders and, upon the receipt of payments of funds made in respect of the Debentures held by the Property Trustee, deposit such funds into the Property Trustee Account and make payments to the Holders of the Securities from the Property Trustee Account in accordance with Section 6.1. Funds in the Property Trustee Account shall be held uninvested until disbursed in accordance with this Declaration. The Property Trustee Account shall be an account that is maintained with a banking institution the rating on whose long-term unsecured indebtedness is at least equal to the rating assigned to the Capital Securities by a "nationally recognized statistical rating organization", as that term is defined for purposes of Rule 436(g)(2) under the Securities Act; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Capital Securities and the Common Securities to the extent the Debentures are redeemed or mature; and 16 22 (iii) upon written notice issued by the Administrative Trustees in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of certain events. (d) The Property Trustee shall take all actions and perform such duties as may be specifically required of the Property Trustee pursuant to the terms of the Securities. (e) Subject to Section 3.9(a) and this Section 3.8(e), the Property Trustee shall have the exclusive right to take any Legal Action which arises out of or in connection with an Event of Default of which a Responsible Officer of the Property Trustee has actual knowledge or the Property Trustee's duties and obligations under this Declaration or the Trust Indenture Act so require, and if the Property Trustee shall have failed to take such Legal Action, the foregoing to the contrary notwithstanding, the Holders of the Capital Securities may take such Legal Action, to the same extent as if such Holders of Capital Securities held an aggregate principal amount of Debentures equal to the aggregate Liquidation Amount of such Capital Securities, without first proceeding against the Property Trustee or the Trust; provided, however, that if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay the principal of or premium, if any, or interest on the Debentures on the date such principal, premium, if any, or interest is otherwise payable (or in the case of prepayment on the prepayment date), then, the foregoing to the contrary notwithstanding, a Holder of Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest on the Debentures having a principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such Holder (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Holders of Common Securities will be subrogated to the rights of Holders of Capital Securities to the extent of any payment made by the Debenture Issuer to Holders of Capital Securities in such Direct Action. Except as provided in the preceding sentences, the Holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. The Sponsor hereby covenants that, without the consent of the holders of all the Capital Securities then outstanding, it will not take any action to impair or affect the right of holders of Capital Securities to bring a Direct Action. (f) The Property Trustee shall not resign as a Trustee unless either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of Securities pursuant to the terms of the Securities; or (ii) a Successor Property Trustee has been appointed and has accepted that appointment in accordance with Section 5.7(a). (g) The Property Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if an Event of Default actually known to a Responsible Officer of the Property Trustee occurs and is continuing, the Property Trustee shall, for the benefit of Holders, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to the terms of such Securities. (h) The Property Trustee shall be authorized to undertake any actions set forth in Section 317(a) of the Trust Indenture Act. 17 23 (i) Subject to Section 7.4 hereof, for such time as the Property Trustee is the Paying Agent, the Property Trustee may authorize one or more Persons to act as additional Paying Agents and to pay Distributions, redemption payments or liquidation payments on behalf of the Trust with respect to all Securities and any such Paying Agent shall comply with Section 317(b) of the Trust Indenture Act. Any such additional Paying Agent may be removed by the Property Trustee at any time the Property Trustee remains as Paying Agent and a successor Paying Agent or additional Paying Agents may be (but is not required to be) appointed at any time by the Property Trustee. (j) Subject to this Section 3.8, the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 3.6; provided, however, that if the Administrative Trustees appoint the Property Trustee as Registrar, Exchange Agent or Paying Agent pursuant to Section 3.6(a)(xii), the Property Trustee shall have the power hereunder to serve in any such capacity and perform the duties and obligations related thereto. (k) The Property Trustee must exercise the powers set forth in this Section 3.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Property Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 3.3. SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee. (a) The Property Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and in the Securities and no implied covenants shall be read into this Declaration against the Property Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer of the Property Trustee has actual knowledge, the Property Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent Person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision of this Declaration shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Property Trustee shall be determined solely by the express provisions of this Declaration and of the Securities, and the Property Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration and in the Securities, and no implied covenants or obligations shall be read into this Declaration against the Property Trustee; and (B) in the absence of bad faith on the part of the Property Trustee, the Property Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Property Trustee and conforming to the requirements of this Declaration; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Property Trustee, the Property Trustee shall 18 24 be under a duty to examine the same to determine whether or not they conform to the requirements of this Declaration; (ii) the Property Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (iii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in Liquidation Amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee under the Indenture with respect to the Debentures, or exercising any right or power conferred upon the Property Trustee under this Declaration; (iv) no provision of this Declaration shall require the Property Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Declaration or indemnity reasonably satisfactory to the Property Trustee against such risk or liability is not reasonably assured to it; (v) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Property Trustee Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Declaration, the Business Trust Act and the Trust Indenture Act; (vi) the Property Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Sponsor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Property Trustee Account maintained by the Property Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and (viii) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Sponsor with their respective duties under this Declaration, nor shall the Property Trustee be liable for any default or misconduct of the Administrative Trustees or the Sponsor. SECTION 3.10 Certain Rights of Property Trustee. (a) Subject to the provisions of Section 3.9: (i) the Property Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness 19 25 or other paper or document reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Administrative Trustees contemplated by this Declaration may be sufficiently evidenced by an Officers' Certificate; (iii) whenever in the administration of this Declaration, the Property Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrative Trustees; (iv) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or registration thereof; (v) the Property Trustee may consult with counsel or other experts of its selection and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees. The Property Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (vi) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any Holder, unless such Holder shall have provided to the Property Trustee security and indemnity, reasonably satisfactory to the Property Trustee, against the costs, expenses (including reasonable attorneys' fees and expenses and the expenses of the Property Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Property Trustee; (vii) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Property Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Property Trustee may execute any of the rights or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Property Trustee shall not be required to supervise, nor shall it be responsible for any misconduct or negligence on the part of, any agent or attorney appointed with due care by it hereunder; (ix) any action taken by the Property Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Property Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required 20 26 to inquire as to the authority of the Property Trustee so to act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Property Trustee's or its agent's taking such action; (x) whenever in the administration of this Declaration the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Property Trustee (A) may request written instructions from the Holders of the Securities, which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Securities as would be entitled to direct the Property Trustee under the terms of the Securities in respect of such remedy, right or action, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (C) shall be protected in conclusively relying on or acting in accordance with such instructions; (xi) the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; and (xii) the Property Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Declaration. (b) No provision of this Declaration shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. (c) Whether or not therein expressly so provided, every provision of this Declaration relating to the conduct or affecting the liability of or affording protection to the Property Trustee shall be subject to the provisions of this Section. SECTION 3.11 Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 5.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Administrative Trustees or the Property Trustee described in this Declaration. Except as set forth in Section 5.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. Without limiting the generality of the foregoing, the Delaware Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees, the Property Trustee or the Sponsor with their respective duties under this Declaration, nor shall the Delaware Trustee be liable for any default or misconduct of any of the Administrative Trustees, the Property Trustee or the Sponsor. In the event the Delaware Trustee shall at any time be required to take any action or perform any duty hereunder, the Delaware Trustee shall be entitled to the benefits of Section 3.9(b)(ii)-(viii) and Section 3.10. No implied covenants or obligations shall be read into this Declaration against the Delaware Trustee. 21 27 SECTION 3.12 Not Responsible for Recitals or Issuance of Securities. The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration or the Securities. SECTION 3.13 Duration of Trust. The Trust, unless dissolved pursuant to the provisions of Article VIII hereof, shall have existence up to February 1, 2042. SECTION 3.14 Mergers. (a) The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or sell, convey, transfer or lease its properties and assets as an entirety, or substantially as an entirety, to any Person, except as described in Section 3.14(b) and (c). (b) The Trust may, at the request of the Sponsor as the holder of all the outstanding Common Securities, with the consent of the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees and without the consent of the Holders, the Delaware Trustee or the Property Trustee, merge with or into, consolidate, amalgamate, or be replaced by, or sell, convey, transfer or lease its properties and assets as an entirety, or substantially as an entirety to, a trust organized as such under the laws of any State; provided that: (i) such successor entity (the "Successor Entity") either: (A) expressly assumes all of the obligations of the Trust with respect to the Securities; or (B) substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Securities rank with respect to Distributions and payments upon liquidation, redemption and otherwise; (ii) the Sponsor expressly appoints a trustee of the Successor Entity that possesses the same powers and duties as the Property Trustee with respect to the Debentures; (iii) the Successor Securities are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or other organization on which the Capital Securities are then listed or quoted, if any; (iv) such merger, consolidation, amalgamation, replacement, sale, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) to be downgraded by any two nationally recognized statistical rating organizations; (v) such merger, consolidation, amalgamation, replacement, sale, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the 22 28 Securities (including any Successor Securities) in any material respect (other than any dilution of such Holders' interests in the new entity); (vi) such Successor Entity has a purpose identical to that of the Trust; (vii) prior to such merger, consolidation, amalgamation, replacement, sale, conveyance, transfer or lease, the Sponsor has received an opinion of an independent counsel to the Trust experienced in such matters to the effect that: (A) such merger, consolidation, amalgamation, replacement, sale, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders (including any Successor Securities) in any material respect (other than with respect to any dilution of the Holders' interest in the new entity); and (B) following such merger, consolidation, amalgamation, replacement, sale, conveyance, transfer or lease, neither the Trust nor the Successor Entity will be required to register as an Investment Company; and (viii) the Sponsor or any permitted successor or assignee owns all of the common securities of such Successor Entity and guarantees the obligations of such Successor Entity under the Successor Securities at least to the extent provided by the Capital Securities Guarantee and the Common Securities Guarantee. (c) Notwithstanding Section 3.14(b), the Trust shall not, except with the consent of the Holders of 100% in Liquidation Amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by, or sell, convey, transfer or lease its properties and assets as an entirety, or substantially as an entirety to, any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, sale, conveyance, transfer or lease would cause the Trust or the Successor Entity not to be classified as a grantor trust for United States federal income tax purposes. ARTICLE IV SPONSOR SECTION 4.1 Sponsor's Purchase of Common Securities. On the Closing Date, the Sponsor will purchase all of the Common Securities then issued by the Trust, in a Liquidation Amount equal to at least 3% of the total capital of the Trust, at the same time as the Initial Capital Securities are issued and sold. SECTION 4.2 Responsibilities of the Sponsor. (a) In connection with the issue and sale of the Capital Securities and the Common Securities, the Sponsor shall have the exclusive right and responsibility to engage in the following activities: 23 29 (i) to prepare the Offering Memorandum and to prepare for filing by the Trust with the Commission any Registration Statement, including any amendments thereto, as contemplated by the Registration Rights Agreement (or to delegate such preparation to the Administrative Trustees pursuant to Section 3.6(a)(ii)(A) hereof); (ii) to determine the States and foreign jurisdictions in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Administrative Trustees pursuant to Section 3.6(a)(ii)(B) hereof, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States or foreign jurisdictions; (iii) if deemed necessary or advisable by the Sponsor, to prepare for execution and filing by the Administrative Trustees pursuant to Section 3.6(a)(ii)(C) hereof, an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq Stock Market's National Market for listing or quotation of the Capital Securities; (iv) if required, to prepare for filing by the Administrative Trustees pursuant to Section 3.6(a)(ii)(E) hereof with the Commission a registration statement on Form 8-A relating to the registration of the Capital Securities under Section 12(b) or 12(g) of the Exchange Act, including any amendments thereto; and (v) to negotiate the terms and cause the preparation of the Purchase Agreement and the Registration Rights Agreement providing for the sale and registration, respectively, of the Capital Securities for execution by the Administrative Trustees pursuant to Section 3.6(a)(ii)(F) hereof. SECTION 4.3 Right to Proceed. The Sponsor acknowledges the rights of the Holders of Capital Securities, in the event that a failure of the Trust to pay Distributions on the Capital Securities is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures, to institute a proceeding directly against the Debenture Issuer for enforcement of its payment obligations on the Debentures. ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees; Appointment of Co-Trustee. The number of Trustees initially shall be five (5), and: (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; provided, however, that, 24 30 the number of Trustees shall in no event be less than two (2); provided further that (1) one Trustee, in the case of a natural Person, shall be a Person who is a resident of the State of Delaware or that, if not a natural Person, is an entity which has its principal place of business in the State of Delaware (the "Delaware Trustee"); (2) there shall be at least one Trustee who is an employee or officer of, or is affiliated with the Sponsor (an "Administrative Trustee"); and (3) one Trustee shall be the Property Trustee for so long as this Declaration is required to qualify as an indenture under the Trust Indenture Act, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements. Notwithstanding the above, unless an Event of Default shall have occurred and be continuing, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust's property may at the time be located, the Holders of a Majority in Liquidation Amount of the Common Securities acting as a class at a meeting of the Holders of the Common Securities, and the Administrative Trustees, shall have power at any time or times, to appoint one or more Persons either to act as a co-trustee, jointly with the Property Trustee, of all or any part of the Trust's property, or to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in such capacity any property, title, right or power deemed necessary or desirable, subject to the provisions of this Declaration. In case an Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make any such appointment of a co-trustee. SECTION 5.2 Delaware Trustee. As required by the Business Trust Act, the Delaware Trustee shall be: (a) a natural Person who is a resident of the State of Delaware; or (b) if not a natural Person, an entity which has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law; provided that, if the Property Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Property Trustee may also be the Delaware Trustee in which case Section 3.11 shall have no application. SECTION 5.3 Property Trustee; Eligibility. (a) There shall at all times be one Trustee (the "Property Trustee") which shall act as Property Trustee which shall: (i) not be an Affiliate of the Sponsor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or Person permitted by the Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.3(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. 25 31 (b) If at any time the Property Trustee shall cease to be eligible to so act under Section 5.3(a), the Property Trustee shall immediately resign in the manner and with the effect set forth in Section 5.7(c). (c) If the Property Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Property Trustee and the Holder of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. (d) The Capital Securities Guarantee shall be deemed to be specifically described in this Declaration for purposes of clause (i) of the first provision contained in Section 310(b) of the Trust Indenture Act. (e) The initial Property Trustee shall be: The Chase Manhattan Bank 450 West 33rd Street 15th Floor New York, New York 10001 Attention: Corporate Trustee Administration Department SECTION 5.4 Certain Qualifications of Administrative Trustees and Delaware Trustee Generally. Each Administrative Trustee and the Delaware Trustee (unless the Property Trustee also acts as Delaware Trustee) shall be either a natural Person who is at least 21 years of age or a legal entity otherwise satisfying the provisions of this Declaration that shall act through one or more Authorized Officers. SECTION 5.5 Administrative Trustees. (a) The initial Administrative Trustees shall be: James F. Billett, Jr. Alan L. Hunte Jane T. Wiznitzer (b) Except as expressly set forth in this Declaration and except if a meeting of the Administrative Trustees is called with respect to any matter over which the Administrative Trustees have power to act, any power of the Administrative Trustees may be exercised by, or with the consent of, any one Administrative Trustee. (c) Unless otherwise determined by the Administrative Trustees, and except as otherwise required by the Business Trust Act or applicable law, any Administrative Trustee is authorized to execute on behalf of the Trust any documents which the Administrative Trustees have the power and authority to cause the Trust to execute pursuant to Section 3.6. 26 32 SECTION 5.6 Delaware Trustee. The initial Delaware Trustee shall be: Chase Manhattan Bank Delaware 1201 Market Street Wilmington, Delaware 19801 Attention: Corporate Trustee Administration Department SECTION 5.7 Appointment, Removal and Resignation of Trustees. (a) Subject to Section 5.7(b), any Trustee may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; (ii) in the case of Administrative Trustees, after the issuance of any Securities, by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; (iii) in the case of the Property Trustee and the Delaware Trustee, unless an Event of Default shall have occurred and be continuing after the issuance of any Securities, by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; and (iv) in the case of the Property Trustee and the Delaware Trustee, if an Event of Default shall have occurred and be continuing after the issuance of the Securities, by vote of Holders of a Majority in Liquidation Amount of the Capital Securities voting as a class at a meeting of the Holders of the Capital Securities. The Trustee that acts as Property Trustee shall not be removed in accordance with Section 5.7(a) until a successor Trustee possessing the qualifications to act as Property Trustee under Section 5.3 (a "Successor Property Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Property Trustee and delivered to the Administrative Trustees and the Sponsor. The Trustee that acts as Delaware Trustee shall not be removed in accordance with this Section 5.7(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 5.2 and 5.4 (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the Administrative Trustees and the Sponsor. (b) A Trustee appointed to office shall hold office until his successor shall have been appointed or until his death, removal or resignation. Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing signed by the Trustee and delivered to the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: 27 33 (i) No such resignation or removal of the Trustee that acts as the Property Trustee shall be effective: (A) until a Successor Property Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Property Trustee and delivered to the Trust, the Sponsor and the resigning Property Trustee; or (B) until the assets of the Trust have been completely liquidated and, after complying with the provisions of Section 3808(e) of the Business Trust Act, the proceeds thereof distributed to the holders of the Securities; and (ii) no such resignation or removal of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Sponsor and the resigning Delaware Trustee. (c) The Holders of the Common Securities shall use their best efforts promptly to appoint a Successor Delaware Trustee or Successor Property Trustee, as the case may be, if the Property Trustee or the Delaware Trustee delivers an instrument of resignation in accordance with this Section 5.7. (d) If no Successor Property Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.7 within 30 days after delivery of an instrument of resignation or removal, the Property Trustee or Delaware Trustee resigning or being removed, as applicable, may petition any court of competent jurisdiction for appointment of a Successor Property Trustee or Successor Delaware Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper and appropriate, appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be. (e) No Property Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Property Trustee or Successor Delaware Trustee, as the case may be. SECTION 5.8 Vacancies among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 5.1, or if the number of Trustees is increased pursuant to Section 5.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees, shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 5.7. SECTION 5.9 Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 5.7, the Administrative Trustees in office, regardless of their number, shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Declaration. 28 34 SECTION 5.10 Meetings. If there is more than one Administrative Trustee, meetings of the Administrative Trustees shall be held from time to time as needed upon the call of any Administrative Trustee. Regular meetings of the Administrative Trustees may be held at a time and place fixed by resolution of the Administrative Trustees. Notice of any in-person meeting of the Administrative Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile) not less than 24 hours before such meeting. Notice of any telephonic meeting of the Administrative Trustees or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile) not less than 24 hours before such meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of an Administrative Trustee at a meeting shall constitute a waiver of notice of such meeting except where an Administrative Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Administrative Trustees may be taken at a meeting by vote of a majority of the Administrative Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Administrative Trustees. In the event there is only one Administrative Trustee, any and all action of such Administrative Trustee shall be evidenced by a written consent of such Administrative Trustee. SECTION 5.11 Delegation of Power. (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural Person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 3.6, including any Registration Statement or amendment thereto filed with the Commission, or making any other governmental filing; and (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to officers of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of this Declaration or the Securities. SECTION 5.12 Merger, Conversion, Consolidation or Succession to Business. Any corporation into which any Trustee (excluding any Administrative Trustee that is a natural Person) may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of such Trustee, shall be the successor of such Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 5.13 Undertaking for Costs In any suit for the enforcement of any right or remedy under this Declaration or in any suit against the Property Trustee for any action taken or omitted by it as a Property Trustee, a court in its discretion may require the filing by any party litigant in the suit (other than the Property Trustee) of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, 29 35 including reasonable attorney's fees and expenses, against any party litigant in the suit (other than the Property Trustee), having due regard to the merits and good faith of the claims or defenses made by the party litigant. ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions. Each Holder shall receive Distributions in accordance with the terms of such Holder's Securities. If and to the extent that the Debenture Issuer makes a payment of interest (including Compounded Interest (as defined in the Indenture), Additional Interest, additional Distributions, premium and/or principal on the Debentures held by the Property Trustee or any other payments pursuant to the Registration Rights Agreement with respect to the Debentures held by the Property Trustee (but excluding Additional Sums (as defined in the Indenture), which Additional Sums shall be applied by the Property Trustee as directed by the Administrative Trustees) (the amount of any such payment being a "Payment Amount"), the Property Trustee shall and is directed, to the extent funds are available for that purpose, to make a Distribution of the Payment Amount to Holders in accordance with the respective terms of the Securities held by them. ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities. (a) The Administrative Trustees shall on behalf of the Trust issue one class of Subordinated Capital Income Securities representing undivided beneficial interests in the assets of the Trust, which class may be divided into no more than two series each having such terms as are set forth in Annex I (the "Capital Securities"), and one class of common securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Common Securities"). At such time, if ever, as the Exchange Debentures are issued, the Administrative Trustees shall on behalf of the Trust issue one series of capital securities representing undivided beneficial interests in the Trust having such terms as are set forth in Annex I (the "Exchange Capital Securities") in exchange for the Initial Capital Securities accepted for exchange in the Exchange Offer, which Exchange Capital Securities shall not bear the legends set forth in Section 9.2 unless the Holder of the Initial Capital Securities is either (i) a broker-dealer who purchased such Initial Capital Securities directly from the Trust for resale pursuant to Rule 144A, or any other available exemption, under the Securities Act, (ii) a Person participating in the distribution of the Initial Capital Securities or (iii) a Person who is an affiliate (as defined in Rule 144A) of the Trust or unless the Registration Rights Agreement shall require otherwise. The Trust shall issue no securities or other interests in the assets of the Trust other than the Capital Securities and the Common Securities. The definition of Exchange Capital Securities as used in this Declaration shall be deemed to include any Capital Securities issued in a Private Exchange (as defined in the Registration Rights Agreement), and any Capital Securities issued in a Private Exchange shall be deemed to be of the same series as the Exchange Capital Securities. (b) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (c) Upon receipt of the stated consideration in full, and the subsequent issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non-assessable. 30 36 (d) Every Person, by virtue of having become a Holder or a Capital Security Beneficial Owner in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. SECTION 7.2 Execution and Authentication. (a) The Securities shall be signed on behalf of the Trust by an Administrative Trustee. In case any Administrative Trustee of the Trust who shall have signed any of the Securities shall cease to be such Administrative Trustee before the Securities so signed shall be delivered by the Trust, such Securities nevertheless may be delivered as though the Person who signed such Securities had not ceased to be such Administrative Trustee; and any Securities may be signed on behalf of the Trust by such Persons who, at the actual date of execution of such Security, shall be the Administrative Trustees of the Trust, although at the date of the execution and delivery of the Declaration any such Person was not such an Administrative Trustee. (b) One Administrative Trustee shall sign the Capital Securities for the Trust by manual or facsimile signature. Unless otherwise determined by the Trust, such signature shall, in the case of Common Securities, be a manual signature. (c) A Capital Security shall not be valid until authenticated by the manual signature of an authorized officer of the Property Trustee. The signature shall be conclusive evidence that the Capital Security has been authenticated under this Declaration. (d) Upon a written order of the Trust signed by one Administrative Trustee, the Property Trustee shall authenticate the Capital Securities for original issue. The aggregate number of Capital Securities outstanding at any time shall not exceed the number set forth in Annex I hereto except as provided in Section 7.6. (e) The Property Trustee may appoint an authenticating agent acceptable to the Administrative Trustees to authenticate Capital Securities. An authenticating agent may authenticate Capital Securities whenever the Property Trustee may do so. Each reference in this Declaration to authentication by the Property Trustee includes authentication by such agent. An authenticating agent has the same rights as the Property Trustee to deal with the Sponsor or an Affiliate. SECTION 7.3 Form and Dating. The Capital Securities and the Property Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 and the Common Securities shall be substantially in the form of Exhibit A-2, each of which is hereby incorporated in and expressly made a part of this Declaration. Certificates representing the Securities may be printed, typewritten, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrative Trustees, as evidenced by their execution thereof. The Securities may have letters, CUSIP or other numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange rule, agreements to which the Trust is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Trust). The Trust at the direction of the Sponsor shall furnish any such legend not contained in Exhibit A-1 to the Property Trustee in writing. Each Capital Security shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Securities set forth in Exhibits A-1 and A-2 are part of the terms of this 31 37 Declaration and to the extent applicable, the Property Trustee, Administrative Trustees and the Sponsor, by their execution and delivery of this Declaration, expressly agree to be bound thereby. (a) Global Securities. Securities offered and sold to QIBs in reliance on Rule 144A or offered and sold outside the United States to non-U.S. Persons in offshore transactions in reliance on Regulation S, as provided in the Purchase Agreement, shall be issued in the form of one or more permanent Global Securities in definitive, fully registered form without Distribution coupons with the appropriate global legends and Restricted Securities Legend set forth in Exhibit A-1 hereto (respectively, a "Rule 144A Global Capital Security" or "Regulation S Global Capital Security"), which shall be deposited on behalf of the purchasers of the Capital Securities represented thereby with the Property Trustee, as custodian for the Clearing Agency, and registered in the name of the Clearing Agency or a nominee of the Clearing Agency, duly executed by an Administrative Trustee and authenticated by the Property Trustee as hereinafter provided. The number of Capital Securities represented by the Rule 144A Global Capital Security and the Regulation S Global Capital Security may from time to time be increased or decreased by adjustments made on the records of the Property Trustee and the Clearing Agency or its nominee as hereinafter provided. (b) Book-Entry Provisions. This Section 7.3(b) shall apply only to the Rule 144A Global Capital Securities, the Regulation S Global Capital Securities and such other Capital Securities in global form as may be authorized by the Trust to be deposited with or on behalf of the Clearing Agency. (i) An Administrative Trustee shall execute and the Property Trustee shall authenticate and, in accordance with this Section 7.3, make available for delivery initially one or more Rule 144A Global Capital Securities and one or more Regulation S Global Capital Securities that (A) shall be registered in the name of Cede & Co. or another nominee of such Clearing Agency and (B) shall be delivered by the Property Trustee to such Clearing Agency or pursuant to such Clearing Agency's written instructions or held by the Property Trustee as custodian for the Clearing Agency. (ii) Members of, or participants in, the Clearing Agency ("Participants") shall have no rights under this Declaration with respect to any Rule 144A Global Capital Security or any Regulation S Global Capital Security held on their behalf by the Clearing Agency or by the Property Trustee as the custodian of the Clearing Agency or under such Rule 144A Global Capital Security or such Regulation S Global Capital Security, and the Clearing Agency may be treated by the Trust, the Property Trustee and any agent of the Trust or the Property Trustee as the absolute owner of such Rule 144A Global Capital Security or such Regulation S Global Capital Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Trust, the Property Trustee or any agent of the Trust or the Property Trustee from giving effect to any written certification, proxy or other authorization furnished by the Clearing Agency or impair, as between the Clearing Agency and its Participants, the operation of customary practices of such Clearing Agency governing the exercise of the rights of a holder of a beneficial interest in any Rule 144A Global Capital Security or any Regulation S Global Capital Security. (c) Definitive Capital Securities. Except as provided in Section 7.9, owners of beneficial interests in a Rule 144A Global Capital Security or a Regulation S Global Capital Security will 32 38 not be entitled to receive physical delivery of certificated Capital Securities ("Definitive Capital Securities"). Purchasers of Securities who are "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and did not purchase Capital Securities in reliance on Rule 144A or Regulation S will receive Capital Securities in the form of individual certificates in definitive, fully registered form without Distribution coupons and with the Restricted Securities Legend set forth in Exhibit A-1 hereto ("Restricted Definitive Capital Securities"); provided, however, that upon transfer of such Restricted Definitive Capital Securities to a QIB, such Restricted Definitive Capital Securities will, unless the Rule 144A Global Capital Security has previously been exchanged, be exchanged for an interest in a Rule 144A Global Capital Security pursuant to the provisions of Section 9.2. Restricted Definitive Capital Securities will bear the Restricted Securities Legend set forth on Exhibit A-1 unless removed in accordance with this Section 7.3 or Section 9.2. SECTION 7.4 Registrar and Paying Agent. (a) The Trust shall maintain in The City of New York, (i) an office or agency where Capital Securities may be presented for registration of transfer ("Registrar"), (ii) an office or agency where Capital Securities may be presented for payment ("Paying Agent") and (iii) an office or agency where Securities may be presented for exchange in connection with the Exchange Offer (the "Exchange Agent"). The Registrar shall keep a register of the Capital Securities and of their transfer. The Administrative Trustees shall appoint the Registrar, the Paying Agent and the Exchange Agent and may appoint one or more co-Registrars, one or more additional Paying Agents and one or more additional Exchange Agents in such other locations as they shall determine. The term "Registrar" includes any additional registrar, the term "Paying Agent" includes any additional paying agent and the term "Exchange Agent" includes any additional exchange agent." The Administrative Trustees may change any Registrar or co-Registrar, Paying Agent or Exchange Agent without prior notice to any Holder. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees. The Administrative Trustees shall notify the Property Trustee of the name and address of any Agent not a party to this Declaration. If the Administrative Trustees fail to appoint or maintain another entity as Registrar, Paying Agent or Exchange Agent, the Property Trustee shall act as such. The Trust or any of its Affiliates may act as Paying Agent, Registrar or Exchange Agent. The Trust shall act as Paying Agent and Registrar for the Common Securities. (b) The Administrative Trustees initially appoint the Property Trustee as Registrar and Paying Agent for the Capital Securities. SECTION 7.5 Paying Agent to Hold Money in Trust. The Trust shall require each Paying Agent other than the Property Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Property Trustee all money held by the Paying Agent for the payment of Liquidation Amounts or Distributions on the Securities, and will notify the Property Trustee if there are insufficient funds for such purpose. While any such insufficiency continues or in the event of an Event of Default, the Property Trustee may require a Paying Agent to pay all money held by it to the Property Trustee. The Trust at any time may require a Paying Agent to pay all money held by it to the Property Trustee and to account for any money disbursed by it. Upon payment over to the Property Trustee, the Paying Agent (if other than the Trust or an Affiliate of the Trust) shall have no further liability for the money. If the Trust or the Sponsor or an Affiliate of the Trust or the Sponsor acts as Paying Agent, it shall segregate and hold in a separate trust fund or account for the benefit of the Holders all money held by it as Paying Agent. 33 39 SECTION 7.6 Replacement Securities. If any Holder claims that a Security owned by it has been lost, destroyed or wrongfully taken or if any Security is mutilated and is surrendered to the Trust or in the case of the Capital Securities to the Property Trustee, the Trust shall issue, an Administrative Trustee shall execute and the Property Trustee shall authenticate a replacement Security if the requirements of this Section 7.6 are satisfied. An indemnity bond must be provided by the Holder which, in the judgment of the Property Trustee, is sufficient to protect the Trustees, the Sponsor or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Trust may charge such Holder for its expenses in replacing a Security. Every replacement Security is a substitute beneficial interest in the Trust to the same extent as the original it replaces. SECTION 7.7 Outstanding Capital Securities. (a) The Capital Securities outstanding at any time are all the Capital Securities authenticated by the Property Trustee except for those cancelled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. (b) If a Capital Security is replaced (pursuant to Section 7.6 hereof), it ceases to be outstanding unless the Property Trustee receives proof satisfactory to it that the replaced Capital Security is held by a bona fide purchaser satisfying the conditions of this Declaration, including without limitation the provisions of Article IX hereof. (c) If Capital Securities are considered redeemed, including any and all distributions and liquidation preferences, in accordance with the terms of this Declaration, they cease to be outstanding and Distributions on them shall cease to accumulate. (d) A Capital Security does not cease to be outstanding because one of the Administrative Trustees, the Sponsor or an Affiliate of the Sponsor holds the Security. SECTION 7.8 Capital Securities in Treasury. In determining whether the Holders of the required amount of Securities have concurred in any direction, waiver or consent, Capital Securities owned by the Administrative Trustees, the Sponsor or an Affiliate of the Sponsor, as the case may be, shall be disregarded and deemed not to be outstanding, except that for the purposes of determining whether the Property Trustee shall be fully protected in relying on any such direction, waiver or consent, only Securities which a Responsible Officer of the Property Trustee actually knows are so owned shall be so disregarded. SECTION 7.9 Temporary Securities. (a) Until definitive Securities are ready for delivery, the Administrative Trustees may cause to be prepared and execute, and, in the case of the Capital Securities, the Property Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Administrative Trustees consider appropriate for temporary Securities. Without unreasonable delay, the Administrative Trustees shall prepare and, in the case of the 34 40 Capital Securities, the Property Trustee shall authenticate definitive Securities in exchange for temporary Securities. (b) A Global Capital Security deposited with the Clearing Agency or with the Property Trustee as custodian for the Clearing Agency pursuant to Section 7.3 shall be transferred to the beneficial owners thereof in the form of certificated Capital Securities only if such transfer complies with Section 9.2 and (i) the Clearing Agency notifies the Company that it is unwilling or unable to continue as Clearing Agency for such Global Capital Security or if at any time such Clearing Agency ceases to be a "clearing agency" registered under the Exchange Act and a clearing agency is not appointed by the Sponsor within 90 days of such notice, (ii) a Default or an Event of Default has occurred and is continuing or (iii) the Administrative Trustees in their sole discretion elect to cause the issuance of certificated Capital Securities. (c) Any Global Capital Security that is transferable to the beneficial owners thereof in the form of certificated Capital Securities pursuant to this Section 7.9 shall be surrendered by the Clearing Agency to the Property Trustee located in the City of New York, New York, to be so transferred, in whole or from time to time in part, without charge, and the Property Trustee shall authenticate and make available for delivery, upon such transfer of each portion of such Global Capital Security, an equal aggregate Liquidation Amount of Securities of authorized denominations in the form of certificated Capital Securities. Any portion of a Global Capital Security transferred pursuant to this Section shall be registered in such names as the Clearing Agency shall direct. Any Capital Security in the form of certificated Capital Securities delivered in exchange for an interest in the Restricted Global Capital Security shall, except as otherwise provided by Sections 7.3 and 9.1, bear the Restricted Securities Legend set forth in Exhibit A-1 hereto. (d) Subject to the provisions of Section 7.9(c), the Holder of a Global Capital Security may grant proxies and otherwise authorize any Person, including Participants and Persons that may hold interests through Participants, to take any action which such Holder is entitled to take under this Declaration or the Securities. (e) In the event of the occurrence of any of the events specified in Section 7.9(b), the Administrative Trustees will promptly make available to the Property Trustee a reasonable supply of certificated Capital Securities in fully registered form without Distribution coupons. SECTION 7.10 Cancellation. The Administrative Trustees at any time may deliver Capital Securities to the Property Trustee for cancellation. The Registrar, Paying Agent and Exchange Agent shall forward to the Property Trustee any Capital Securities surrendered to them for registration of transfer, redemption, exchange or payment. The Property Trustee shall promptly cancel all Capital Securities surrendered for registration of transfer, redemption, exchange, payment, replacement or cancellation and shall dispose of canceled Capital Securities in accordance with its customary procedures unless the Administrative Trustees otherwise direct the Property Trustee in writing. The Trust may not issue new Capital Securities to replace Capital Securities that it has redeemed or that have been delivered to the Property Trustee for cancellation or that any Holder has exchanged. 35 41 SECTION 7.11 CUSIP Numbers. The Trust in issuing the Capital Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Property Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders of Capital Securities; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Capital Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Capital Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Sponsor will promptly notify the Property Trustee of any change in the CUSIP numbers. ARTICLE VIII DISSOLUTION OF TRUST SECTION 8.1 Dissolution of Trust. (a) The Trust shall automatically dissolve: (i) upon the bankruptcy of the Sponsor; (ii) upon the filing of a certificate of dissolution or liquidation or its equivalent with respect to the Sponsor; (iii) following the distribution of a Like Amount of the Debentures to the Holders; provided that the Property Trustee has received a written notice from the Sponsor as the holder of all the outstanding Common Securities directing it to terminate the Trust (which direction is at the discretion of the Sponsor, except as provided below); provided, further, that such distribution is conditioned on the Administrative Trustees' receipt of an opinion by independent tax counsel experienced in such matters, which opinion may rely on published rulings of the Internal Revenue Service, to the effect that the Holders will not recognize any gain or loss for United States federal income tax purposes as a result of the dissolution of the Trust and such distribution of a Like Amount of the Debentures; (iv) upon the entry of a decree of judicial dissolution of the Trust by a court of competent jurisdiction; (v) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; (vi) upon the repayment of the Debentures or at such time as no Debentures are outstanding; (vii) the expiration of the term of the Trust provided in Section 3.13; or (viii) following the distribution of a Like Amount of the Debentures to the Holders of the Securities pursuant to the terms thereof upon receipt of a written notice from the Sponsor that 36 42 it intends to effect a Tax Event Maturity Shortening and directing the Administrative Trustees to dissolve the Trust and distribute a Like Amount of the Debentures to the Holders of the Securities. (b) As soon as is practicable after the occurrence of an event referred to in Section 8.1(a) and after satisfaction of all liabilities of the Trust, the Administrative Trustees shall file a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 3.9 and Article X shall survive the dissolution of the Trust. ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities. (a) Subject to this Article IX, Capital Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration. Any transfer or purported transfer of any security not made in accordance with this Declaration shall be null and void. (b) The Sponsor may not transfer the Common Securities, except as set forth in Section 10.01 of the Indenture. (c) The Registrar shall provide for the registration of Securities and of the transfer of Securities, which will be effected without charge except as provided in Section 7.6 hereof, but only upon payment (with such indemnity as the Registrar may require) in respect of any tax or other governmental charges that may be imposed in relation to it. Upon surrender for registration of transfer of any Securities, the Registrar shall cause one or more new Securities to be issued in the name of the designated transferee or transferees. Every Security surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Security surrendered for registration of transfer shall be canceled by the Registrar. A transferee of a Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Security. By acceptance of a Security, each transferee shall be deemed to have agreed to be bound by this Declaration. SECTION 9.2 Transfer Procedures and Restrictions. (a) General. Except as otherwise provided in Section 9.2(c), if Capital Securities are issued upon the registration of transfer, exchange or replacement of Capital Securities bearing the Restricted Securities Legend set forth in Exhibit A-1 hereto, or if a request is made to remove such Restricted Securities Legend on Capital Securities, the Capital Securities so issued shall bear the Restricted Securities Legend, or the Restricted Securities Legend shall not be removed, as the case may be, unless there is delivered to the Trust and the Property Trustee such satisfactory evidence, which shall include an Opinion of Counsel licensed to practice law in the State of New York, as may be reasonably required by the Sponsor, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof are made pursuant to an exception from the registration requirements of the Securities Act or, with respect to Restricted Securities, that such Securities are not "restricted" within the meaning of Rule 144. Upon provision of such satisfactory evidence, the Property 37 43 Trustee, at the written direction of the Administrative Trustees, shall authenticate and deliver Capital Securities that do not bear the legend. (b) Transfers After Effectiveness of a Registration Statement. Upon exchange of any Capital Securities pursuant to a Registration Statement with respect to the Exchange Offer, except as provided in the Registration Rights Agreement or by the terms of the Capital Securities, all requirements pertaining to Securities Act legends on such Capital Securities will cease to apply, and beneficial interests in a Capital Security in global form without legends will be available to transferees of such Capital Securities, upon exchange of the transferring holder's Restricted Definitive Capital Security or directions to transfer such Holder's beneficial interest in the Rule 144A Global Capital Security or the Regulation S Global Capital Security, as the case may be. No such transfer or exchange of a Restricted Definitive Capital Security or of an interest in the Rule 144A Global Capital Security or the Regulation S Global Capital Security shall be effective unless the transferor delivers to the Trust a certificate in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1. Except as otherwise provided in Section 9.2(m), after the effectiveness of a Registration Statement, the Trust shall issue and the Property Trustee, upon a written order of the Trust signed by one Administrative Trustee, shall authenticate a Capital Security in global form without the Restricted Securities Legend (the "Unrestricted Global Capital Security") to deposit with the Clearing Agent to evidence transfers of beneficial interests from the (i) Rule 144A Global Capital Security or the Regulation S Global Capital Security and (ii) Restricted Definitive Capital Securities. (c) Transfer and Exchange of Definitive Capital Securities. When Definitive Capital Securities are presented to the Registrar or co-Registrar: (x) to register the transfer of such Definitive Capital securities or (y) to exchange such Definitive Capital Securities which became mutilated, destroyed, defaced, stolen or lost, for an equal number of Definitive Capital Securities, the Registrar or co-Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Capital Securities surrendered for registration of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Trust and the Registrar or co-Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (ii) in the case of Definitive Capital Securities that are Restricted Definitive Capital Securities: (A) if such Restricted Capital Securities are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Restricted Capital Securities are being delivered to register a transfer: (x) a certification from the transferor in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1, and (y) if the Trust or Registrar so requests, evidence reasonably satisfactory to the Sponsor as to the compliance with the restrictions set forth in the Restricted Securities Legend. 38 44 (d) Restrictions on Transfer of a Definitive Capital Security for a Beneficial Interest in a Global Capital Security. A Definitive Capital Security may not be exchanged for a beneficial interest in a Global Capital Security except upon satisfaction of the requirements set forth below. Upon receipt by the Property Trustee of a Definitive Capital Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Property Trustee, together with: (i) if such Definitive Capital Security is a Restricted Capital Security, a written certificate (in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1); provided, however, that such Definitive Capital Security may only be exchanged for an interest in a Regulation S Global Security where such Definitive Capital Security is being transferred pursuant to Regulation S or Rule 144 (if available); and (ii) whether or not such Definitive Capital Security is a Restricted Capital Security, written instructions directing the Property Trustee to make, or to direct the Clearing Agency to make, an adjustment on its books and records with respect to the appropriate Global Capital Security to reflect an increase in the number of the Capital Securities represented by such Global Capital Security, then the Property Trustee shall cancel such Definitive Capital Security and cause, or direct the Clearing Agency to cause, the aggregate number of Capital Securities represented by the appropriate Global Capital Security to be increased accordingly. If no Global Capital Securities are then outstanding, the Trust shall issue and the Property Trustee shall authenticate, upon written order of any Administrative Trustee, an appropriate number of Capital Securities in global form. (e) Transfer and Exchange of Global Capital Securities. Subject to Section 9.2(f), the transfer and exchange of beneficial interests in Global Capital Securities shall be effected through the Clearing Agency, in accordance with this Declaration (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Clearing Agency therefor. (f) Transfer of a Beneficial Interest in a Global Capital Security for a Definitive Capital Security. (i) Any Person having a beneficial interest in a Global Capital Security may upon request, but only upon 20 days prior notice to the Property Trustee, and if accompanied by the information specified below, exchange such beneficial interest for a Definitive Capital Security representing the same number of Capital Securities. Upon receipt by the Property Trustee from the Clearing Agency or its nominee on behalf of any Person having a beneficial interest in a Global Capital Security of written instructions or such other form of instructions as is customary for the Clearing Agency or the Person designated by the Clearing Agency as having such a beneficial interest in a Restricted Capital Security and a certification from the transferor (in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1), which may be submitted by facsimile, then the Property Trustee will cause the aggregate number of Capital Securities represented by Global Capital Securities to be reduced on its books and records and, following such reduction, the Administrative Trustees will execute and the Property Trustee will authenticate and make available for delivery to the transferee a Definitive Capital Security. (ii) Definitive Capital Securities issued in exchange for a beneficial interest in a Global Capital Security pursuant to this Section 9.2(f) shall be registered in such names and in such 39 45 authorized denominations as the Clearing Agency, pursuant to instructions from its Participants or indirect participants or otherwise, shall instruct the Property Trustee in writing. The Property Trustee shall deliver such Capital Securities to the Persons in whose names such Capital Securities are so registered in accordance with such instructions of the Clearing Agency. (g) Restrictions on Transfer and Exchange of Global Capital Securities. Notwithstanding any other provisions of this Declaration (other than the provisions set forth in subsection (h) of this Section 9.2), a Global Capital Security may not be transferred as a whole except by the Clearing Agency to a nominee of the Clearing Agency or another nominee of the Clearing Agency or by the Clearing Agency or any such nominee to a successor Clearing Agency or a nominee of such successor Clearing Agency. Prior to the expiration of the restricted period, as contemplated by Regulation S, beneficial interests in the Regulation S Global Capital Security may be exchanged for beneficial interests in the Rule 144A Global Capital Security only if such exchange occurs in connection with a transfer of the Capital Securities pursuant to Rule 144A and the transferor first delivers to the Property Trustee a written certificate (in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1) to the effect that the Capital Securities are being transferred to a Person whom the transferor reasonably believes to be a QIB, purchasing for its own account or the account of a QIB in a transaction meeting the requirements of Rule 144A and in accordance with all applicable securities laws of the states of the United States and other jurisdictions. Beneficial interests in the Rule 144A Global Capital Security may be transferred to a Person who takes delivery in the form of an interest in the Regulation S Global Capital Security, whether before or after the expiration of such restricted period, as contemplated by Regulation S, only if the transferor first delivers to the Property Trustee a written certificate (in a form substantially similar to that attached hereto as the "Form of Assignment" in Exhibit A-1) to the effect that such transfer is being made in accordance with Rule 903 or 904 of Regulation S or Rule 144 (if available) and that, if such transfer occurs prior to the expiration of such restricted period, the interest transferred will be held immediately thereafter through Euroclear or CEDEL. (h) Authentication of Definitive Capital Securities. If at any time: (i) there occurs a Default or an Event of Default which is continuing, or (ii) the Administrative Trustees, in their sole discretion, notify the Property Trustee in writing that they elect to cause the issuance of Definitive Capital Securities under this Declaration, then the Administrative Trustees will execute, and the Property Trustee, upon receipt of a written order of the Trust signed by one Administrative Trustee requesting the authentication and delivery of Definitive Capital Securities to the Persons designated by the Trust, will authenticate and make available for delivery Definitive Capital Securities, equal in number to the number of Capital Securities represented by the Global Capital Securities, in exchange for such Global Capital Securities. (i) Legend. (i) Except as permitted by the following paragraph (ii), each Capital Security certificate evidencing the Global Capital Securities and the Definitive Capital Securities (and all Capital 40 46 Securities issued in exchange therefor or substitution thereof, except in the Exchange Offer) shall bear a legend (the "Restricted Securities Legend") in substantially the following form: THE CAPITAL SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 (A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING MEMORANDUM DATED JANUARY 28, 1997. 41 47 THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF REPRESENTS AND ACKNOWLEDGES THAT IT EITHER (A) IS NOT A PLAN SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE INTERNAL REVENUE CODE of 1986, AS AMENDED, AND IS NOT PURCHASING SUCH SECURITIES (OR INTEREST THEREIN) ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY SUCH PLAN OR (B) IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER PTCE 96-23, 95-60, 91-38, 90-1 OR 84-14. THE HOLDER OF THIS CAPITAL SECURITY FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. and in the case of the Regulation S Global Capital Security THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE. (ii) Upon any sale or transfer of a Restricted Capital Security (including any Restricted Capital Security represented by a Global Capital Security) pursuant to an effective Registration Statement under the Securities Act or pursuant to Rule 144 under the Securities Act after such registration statement ceases to be effective: (A) in the case of any Restricted Capital Security that is a Definitive Capital Security, the Registrar, unless otherwise notified in writing, shall permit the Holder thereof to exchange such Restricted Capital Security for a Definitive Capital Security that does not bear the Restricted Securities Legend and rescind any restriction on the transfer of such Restricted Capital Security; and (B) in the case of any Restricted Capital Security that is represented by a Global Capital Security, the Registrar, unless otherwise notified in writing, shall permit the Holder of such Global Capital Security to exchange such Global Capital Security for another Global Capital Security that does not bear the Restricted Securities Legend. (j) Cancellation or Adjustment of Global Capital Security. At such time as all beneficial interests in a Global Capital Security have either been exchanged for Definitive Capital Securities to the extent permitted by this Declaration or redeemed, repurchased or canceled in accordance with the terms of this Declaration, such Global Capital Security shall be canceled by the Property Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Capital Security is exchanged for Definitive Capital Securities, Capital Securities represented by such Global Capital Security shall be reduced and an adjustment shall be made on the books and records of the Property Trustee (if it is then the custodian for such Global Capital Security) with respect to such Global Capital Security, by the Property Trustee or the Securities custodian, to reflect such reduction. 42 48 (k) Obligations with Respect to Transfers and Exchanges of Capital Securities. (i) To permit registrations of transfers and exchanges, the Administrative Trustees shall execute and the Property Trustee shall authenticate Definitive Capital Securities and Global Capital Securities at the Registrar's or co-Registrar's request in accordance with the terms of this Declaration. (ii) Subject to Section 7.6 hereof, registrations of transfers or exchanges will be effected without charge, but only upon payment (with such indemnity as the Trust or the Sponsor may require) in respect of any tax or other governmental charge that may be imposed in relation to it. (iii) The Registrar or co-Registrar shall not be required to register the transfer of or exchange (a) Capital Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Capital Securities for redemption and ending at the close of business on the day of such mailing; or (b) any Capital Security so selected for redemption in whole or in part, except the unredeemed portion of any Capital Security being redeemed in part. (iv) Prior to the due presentation for registration of transfer of any Capital Security, the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-Registrar may deem and treat the Person in whose name a Capital Security is registered as the absolute Holder of such Capital Security for the purpose of receiving Distributions on such Capital Security and for all other purposes whatsoever, and none of the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-Registrar shall be affected by notice to the contrary. (v) All Capital Securities issued upon any registration of transfer or exchange pursuant to the terms of this Declaration shall evidence the same security and shall be entitled to the same benefits under this Declaration as the Capital Securities surrendered upon such registration of transfer or exchange. (l) No Obligation of the Property Trustee. (i) The Property Trustee shall have no responsibility or obligation to any beneficial owner of a Global Capital Security, a Participant in the Clearing Agency or other Person with respect to the accuracy of the records of the Clearing Agency or its nominee or of any Participant thereof, with respect to any ownership interest in the Capital Securities or with respect to the delivery to any Participant, beneficial owner or other Person (other than the Clearing Agency) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Capital Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Capital Securities shall be given or made only to or upon the order of the registered Holders (which shall be the Clearing Agency or its nominee in the case of a Global Capital Security). The rights of beneficial owners in any Global Capital Security shall be exercised only through the Clearing Agency subject to the applicable rules and procedures of the Clearing Agency. The Property Trustee may conclusively rely and shall be fully protected in relying upon information furnished by the Clearing Agency or any agent thereof with respect to its Participants and any beneficial owners. 43 49 (ii) The Property Trustee and Registrar shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Declaration or under applicable law with respect to any transfer of any interest in any Capital Security (including any transfers between or among Clearing Agency Participants or beneficial owners in any Global Capital Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Declaration, and to examine the same to determine substantial compliance as to form with the express requirements hereof. (m) Exchange of Initial Capital Securities for Exchange Capital Securities. The Initial Capital Securities may be exchanged for Exchange Securities pursuant to the terms of the Exchange Offer. The Property Trustee shall make the exchange as follows: (i) The Sponsor shall present the Property Trustee with an Officers' Certificate certifying the following: (A) a Registration Statement with respect to the Exchange Offer has become effective; and (B) the number of Initial Capital Securities properly tendered in the Exchange Offer that are represented by a Global Capital Security and the number of Initial Capital Securities properly tendered in the Exchange Offer that are represented by Definitive Capital Securities, the name of each Holder of such Definitive Capital Securities, the liquidation amount of Capital Securities properly tendered in the Exchange Offer by each such Holder and the name and address to which Definitive Capital Securities for Exchange Capital Securities shall be registered and sent for each such Holder. (ii) The Property Trustee upon receipt of (A) such Officers' Certificate, (B) an Opinion of Counsel (x) to the effect that the Exchange Capital Securities have been registered under Section 5 of the Securities Act and the Indenture, the Declaration and the Capital Securities Guarantee have each been qualified under the Trust Indenture Act and (y) with respect to the matters set forth in Section 3(p) of the Registration Rights Agreement and (C) a Company Order (as defined in the Indenture), shall authenticate (I) a Global Capital Security for Exchange Capital Securities in aggregate liquidation amount equal to the aggregate liquidation amount of Initial Capital Securities represented by a Global Capital Security indicated in such Officers' Certificate as having been properly tendered and (II) Definitive Capital Securities representing Exchange Capital Securities registered in the names of, and in the liquidation amounts indicated in, such Officers' Certificate. (iii) If, upon consummation of the Exchange Offer, less than all the outstanding Initial Capital Securities shall have been properly tendered and not withdrawn, the Property Trustee shall make an endorsement on the Global Capital Security for Initial Capital Securities indicating the reduction in the number and aggregate liquidation amount represented thereby as a result of the Exchange Offer. (iv) The Trust shall deliver such Definitive Capital Securities for Exchange Capital Securities to the Holders thereof as indicated in such Officers' Certificate. 44 50 (n) Minimum Transfers. Initial Capital Securities may only be transferred in minimum blocks of $100,000 aggregate Liquidation Amount until such Initial Capital Securities are registered pursuant to an effective registration statement filed under the Securities Act or become "unrestricted" pursuant to Rule 144 under the Securities Act. (o) ERISA. Securities may not be acquired by any Person who is, or who, in acquiring such Securities is using the assets of, an employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended, or a plan subject to Section 4975 of the Code ("ERISA Plan"), unless the acquisition and holding by the Plan of such Securities is eligible for the exemptive relief available under one of the following class exemptions: (i) Prohibited Transaction Class Exemption 90-1 ("PTCE 90-1"), regarding investments by insurance company pooled separate accounts, (ii) Prohibited Transaction Class Exemption 91-38 ("PTCE 91-38"), regarding investments by bank collective investment funds, (iii) Prohibited Transaction Class Exemption 84-14 ("PTCE 84-14"), regarding transactions effected by qualified professional asset managers, (iv) Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23"), regarding transactions effected by in-house asset managers, or (v) Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60"), regarding investments by insurance company general accounts. Each certificate representing Capital Securities or Exchange Capital Securities, as the case may be, shall bear a legend to the effect that the holder of the Capital Security or the Exchange Capital Security or any interest therein represents and acknowledges that (a) it is not an ERISA Plan and is not purchasing such securities (or interest therein) on behalf of or with "plan assets," of any ERISA Plan or (b) its purchase and holding of the Capital Securities (or interest therein) is eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. To avoid Prohibited Transactions, any ERISA Plan purchasing Capital Securities will be deemed to have directed the Trust to invest in the Debentures and to have appointed the Trustees. SECTION 9.3 Deemed Security Holders. The Trustees may treat the Person in whose name any Security shall be registered on the books and records of the Trust as the sole Holder of such Security for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Security on the part of any Person, whether or not the Trust shall have actual or other notice thereof. SECTION 9.4 Book-Entry Interests. (a) Global Capital Securities shall initially be registered on the books and records of the Trust in the name of Cede & Co., the nominee of the Clearing Agency, and no Capital Security Beneficial Owner will receive a definitive Capital Security Certificate representing such Capital Security Beneficial Owner's interests in such Global Capital Securities, except as provided in Section 9.2. Unless and until definitive, fully registered Capital Securities certificates have been issued to the Capital Security Beneficial Owners pursuant to Section 9.2: (i) the provisions of this Section 9.4 shall be in full force and effect; (ii) the Trust and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Declaration (including the payment of Distributions on the Global Capital Securities and receiving approvals, votes or consents hereunder) as the Holder of the Capital 45 51 Securities and the sole holder of the Global Certificates and shall have no obligation to the Capital Security Beneficial Owners; (iii) to the extent that the provisions of this Section 9.4 conflict with any other provisions of this Declaration, the provisions of this Section 9.4 shall control; and (iv) the rights of the Capital Security Beneficial Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Capital Security Beneficial Owners and the Clearing Agency and/or the Clearing Agency Participants. DTC will make book-entry transfers among the Clearing Agency Participants and receive and transmit payments of Distributions on the Global Certificates to such Clearing Agency Participants. SECTION 9.5 Notices to Clearing Agency. Whenever a notice or other communication to the Capital Security Holders is required under this Declaration, the Trustees shall give all such notices and communications specified herein to be given to the Holders of Global Capital Security to the Clearing Agency, and shall have no notice obligations to the Capital Security Beneficial Owners. SECTION 9.6 Appointment of Successor Clearing Agency. If any Clearing Agency elects to discontinue its services as securities depositary with respect to the Capital Securities the Administrative Trustees may, in their sole discretion, appoint a successor Clearing Agency with respect to such Capital Securities. ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1 Liability. (a) Except as expressly set forth in this Declaration, the Securities Guarantees and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders, which shall be made solely from assets of the Trust; or (ii) required to pay to any Holder any deficit upon dissolution of the Trust or otherwise. (b) The Sponsor shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Capital Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. 46 52 SECTION 10.2 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. SECTION 10.3 Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Property Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between any Covered Persons; or (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. (c) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: 47 53 (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. SECTION 10.4 Indemnification. (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to or otherwise becomes involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to or otherwise becomes involved in any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person, against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 48 54 (iv) Any indemnification under paragraphs (i) and (ii) of this Section 10.4(a) (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Administrative Trustees by a majority vote of a quorum consisting of such Administrative Trustees who were not parties to such action, suit or proceeding, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (v) Expenses (including attorneys' fees and expenses) incurred by a Company Indemnified Person in defending or participating in a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a) shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Debenture Issuer as authorized in this Section 10.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (1) by the Administrative Trustees by a majority vote of a quorum of disinterested Administrative Trustees, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion or (3) the Common Security Holder of the Trust, that, based upon the facts known to the Administrative Trustees, counsel or the Common Security Holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that such Person did not reasonably believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Company Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the disinterested Administrative Trustees, independent legal counsel or Common Security Holder reasonably determine that such Person deliberately breached his duty to the Trust or its Common Security Holders or Capital Security Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 10.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Debenture Issuer or Common Security Holders or Capital Security Holders of the Trust or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 10.4(a) shall be deemed to be provided by a contract between the Sponsor and each Company Indemnified Person who serves in such capacity at any time while this Section 10.4(a) is in effect. Any repeal or modification of this Section 10.4(a) shall not affect any rights or obligations then existing. (vii) The Sponsor or the Trust may purchase and maintain insurance on behalf of any Person who is or was a Company Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Sponsor would have the power to indemnify him against such liability under the provisions of this Section 10.4(a). 49 55 (viii) For purposes of this Section 10.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any Person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 10.4(a) with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 10.4(a) shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a Person. (b) The Sponsor agrees to indemnify the (i) Property Trustee, (ii) the Delaware Trustee, (iii) any Affiliate of the Property Trustee or the Delaware Trustee, and (iv) any officers, directors, shareholders, members, partners, employees' representatives, custodians, nominees or agents of the Property Trustee or the Delaware Trustee (each of the Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any and all loss, liability, damage, claim or expense including taxes (other than taxes based on the income of such Fiduciary Indemnified Person) incurred without gross negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against or investigating any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligation to indemnify as set forth in this Section 10.4(b) shall survive the resignation or removal of the Property Trustee or the Delaware Trustee, as the case may be, and the satisfaction and discharge of this Declaration. (c) Each Indemnified Person shall give prompt notice to each indemnifying party from whom indemnification is to be sought hereunder by such Indemnified Person of any action threatened or commenced against it in respect of which any indemnity is sought hereunder, enclosing a copy of all papers served on, and notices and demands delivered to, such Indemnified Person, if any, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have under this Section 10.4, except to the extent that it is materially prejudiced by such failure. The indemnifying party shall be entitled to assume the defense of any such action or proceeding with counsel reasonably satisfactory to the Indemnified Person who shall not, except with the consent of such Indemnified Person, be counsel to the indemnifying party. Upon assumption by the indemnifying party of the defense of any such action or proceeding, the Indemnified Person shall have the right to participate in such action or proceeding and to retain its own counsel, but the indemnifying party shall not be liable for any legal fees or expenses subsequently incurred by such Indemnified Person in connection with the defense thereof unless (i) the indemnifying party has agreed to pay such fees and expenses, (ii) the indemnifying party shall have failed to employ counsel reasonably satisfactory to the Indemnified Person in a timely manner, or (iii) the Indemnified Person shall have been advised by counsel (who shall not be employed by such Indemnified Person and who shall be reasonably satisfactory to the indemnifying party) that such representation would constitute an actual or potential conflict of interests for counsel selected by the indemnifying party. The indemnifying party shall not consent to the terms of any compromise or settlement of any action defended by the indemnifying party in accordance with the foregoing without the prior consent of the Indemnified Person, and the Indemnified Person shall not consent to the terms of any compromise or settlement of any action being defended by the indemnifying party in accordance with the 50 56 foregoing without the prior consent of the indemnifying party. Notwithstanding the immediately preceding sentence, if at any time an Indemnified Person shall have requested an indemnifying party to reimburse the Indemnified Person for fees and expenses of counsel as contemplated above, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than thirty Business Days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. (d) The Sponsor agrees to pay the Property Trustee and the Delaware Trustee, from time to time, such compensation for all services rendered by the Property Trustee and the Delaware Trustee hereunder as may be mutually agreed upon in writing by the Sponsor and the Property Trustee or the Delaware Trustee, as the case may be, and, except as otherwise expressly provided herein, to reimburse the Property Trustee and the Delaware Trustee upon its or their request for all reasonable expenses, disbursements and advances incurred or made by the Property Trustee or the Delaware Trustee, as the case may be, in accordance with the provisions of this Declaration, except any such expense, disbursement or advance as may be attributable to its or their negligence or bad faith. SECTION 10.5 Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders of Securities shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. No Covered Person, the Sponsor, the Delaware Trustee, or the Property Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Property Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year. The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. 51 57 SECTION 11.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Administrative Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books of account and the records of the Trust shall be examined by and reported upon as of the end of each Fiscal Year of the Trust by a firm of independent certified accountants selected by the Administrative Trustees. (b) The Administrative Trustees shall cause to be prepared and delivered to the Property Trustee and to each of the Holders of Securities, within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss for such Fiscal Year prepared in accordance with generally accepted accounting principles. (c) The Administrative Trustees shall cause to be duly prepared and delivered to each of the Holders of Securities, any annual United States federal income tax information statement, required by the Code, containing such information with regard to the Securities held by each Holder as is required and at such time as is required by the Code and the Treasury Regulations. (d) The Administrative Trustees shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Trust with any state or local taxing authority. SECTION 11.3 Banking. The Trust shall maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Property Trustee shall be made directly to the Property Trustee Account and no other funds of the Trust shall be deposited in the Property Trustee Account. The sole signatories for such accounts shall be designated by the Administrative Trustees; provided, however, that the Property Trustee shall designate the signatories for the Property Trustee Account. SECTION 11.4 Withholding. The Trust and the Administrative Trustees shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrative Trustees shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to Distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claimed over-withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount 52 58 required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments. (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by: (i) the Administrative Trustees (or if there are more than two Administrative Trustees a majority of the Administrative Trustees); (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee; and (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee. (b) No amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless, in the case of any proposed amendment, the Property Trustee shall have first received an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); (ii) unless, in the case of any proposed amendment which affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee shall have first received: (A) an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); (B) an Opinion of Counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (C) an Opinion of counsel complying with Section 3.7(vii) hereof, provided, however, that the Property Trustee shall not be required to sign any such amendment until it is furnished an Opinion of Counsel to the effect that such amendment will not: (1) cause the Trust to fail to continue to be classified for purposes of United States federal income taxation as a grantor trust; 53 59 (2) reduce or otherwise adversely affect the powers of the Property Trustee in contravention of the Trust Indenture Act; or (3) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act. (c) At such time after the Trust has issued any Securities that remain outstanding, any amendment that would adversely affect the rights, privileges or preferences of any Holder of Securities may be effected only with such additional requirements as may be set forth in the terms of such Securities; (d) Sections 3.14 (c) and 9.1(b), this Section 12.1 and the last sentence of Section 3.8(e) shall not be amended without the consent of all of the Holders of the Securities; (e) Article IV shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities, and; (f) The rights of the Holders of the Common Securities under Article V to increase or decrease the number of, and appoint and remove Trustees, shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities; and (g) Notwithstanding Section 12.1(c), this Declaration may be amended by the Property Trustee, the Administrative Trustees and the Sponsor without the consent of the Holders of the Securities to: (i) cure any ambiguity, correct or supplement any provision in this Declaration that may be inconsistent with any other provision of this Declaration or to make any other provisions with respect to matters or questions arising under this Declaration which shall not be inconsistent with the other provisions of the Declaration; (ii) to modify, eliminate or add to any provisions of this Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; or (iii) to qualify or maintain qualification of this Declaration of Trust under the Trust Indenture Act; provided, however, that in each case, such action shall not adversely affect in any material respect the interests of the Holders of the Securities. Any amendments of this Declaration shall become effective when notice thereof is sent to the Holders of the Securities. SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent. (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrative Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Capital Securities are listed or 54 60 admitted for trading. The Administrative Trustees shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in Liquidation Amount of such class of Securities. Such direction shall be given by delivering to the Administrative Trustees one or more notices in a writing stating that the signing Holders wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders calling a meeting shall specify in writing the Security Certificates held by the Holders exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders: (i) notice of any such meeting shall be given to all the Holders having a right to vote thereat at least seven days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders is permitted or required under this Declaration or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders. Any action that may be taken at a meeting of the Holders may be taken without a meeting if a consent or consents in writing setting forth the action so taken is signed by the Holders owning not less than the minimum amount of Securities in Liquidation Amount that would be necessary to authorize or take such action at a meeting at which all Holders having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders entitled to vote who have not consented in writing. The Administrative Trustees may specify that any written ballot submitted to the Holder for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrative Trustees; (ii) each Holder may authorize any Person to act for it by proxy on all matters in which a Holder is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders were stockholders of a Delaware corporation; (iii) each meeting of the Holders shall be conducted by the Administrative Trustees or by such other Person that the Administrative Trustees may designate; and (iv) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Capital Securities are then listed or trading, otherwise provides, the Administrative Trustees, in their sole discretion, shall establish all other provisions relating to meetings of Holders, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. 55 61 ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Property Trustee. The Trustee that acts as initial Property Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Property Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee that: (a) The Property Trustee is a New York banking corporation with trust powers and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) The execution, delivery and performance by the Property Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Property Trustee. This Declaration has been duly executed and delivered by the Property Trustee and constitutes a legal, valid and binding obligation of the Property Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) The execution, delivery and performance of this Declaration by the Property Trustee does not conflict with or constitute a breach of the charter or by-laws of the Property Trustee; and (d) No consent, approval or authorization of, or registration with or notice to, any New York or federal banking authority is required for the execution, delivery and performance by the Property Trustee of this Declaration. SECTION 13.2 Representations and Warranties of Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) The Delaware Trustee is duly organized, validly existing and in good standing under the laws of the State of Delaware, with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) The execution, delivery and performance by the Delaware Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Delaware Trustee. This Declaration has been duly executed and delivered by the Delaware Trustee and constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and 56 62 other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) The execution, delivery and performance of this Declaration by the Delaware Trustee does not conflict with or constitute a breach of the charter or by-laws of the Delaware Trustee; (d) The Delaware Trustee is a natural Person who is a resident of the State of Delaware or, if not a natural Person, an entity which has its principal place of business in the State of Delaware; and (e) No consent, approval or authorization of, or registration with or notice to, any Delaware or federal banking authority is required for the execution, delivery or performance by the Delaware Trustee of this Declaration. ARTICLE XIV REGISTRATION RIGHTS SECTION 14.1 Registration Rights Agreement; Additional Interest. (a) The Holders of the Capital Securities, the Debentures and the Capital Securities Guarantee (collectively, the "Registrable Securities") are entitled to the benefits of the Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the Sponsor and the Trust have agreed for the benefit of the Holders of Registrable Securities that: (i) they will, at the Sponsor's cost, within 150 days after January 28, 1997, the date of the Offering Memorandum, file a registration statement (the "Exchange Registration Statement") relating to an Exchange Offer pursuant to which each issuer of such respective Registrable Securities would issue amounts of such Registrable Securities as are accepted in the Exchange Offer which shall be identical in all respects to those exchanged, except they will have been registered under the Securities Act and (except as set forth in the Registration Rights Agreement) will no longer be subject to transfer restrictions under the Securities Act or the $100,000 minimum aggregate principal or liquidation amount transfer restriction and, if required pursuant to the terms of the Registration Rights Agreement, file a Shelf Registration Statement with the Commission with respect to resales of the Registrable Securities, (ii) they will use their best efforts to cause such Exchange Registration Statement and/or Shelf Registration Statement, as the case requires, to be declared effective by the Commission within 180 days after the date of the Offering Memorandum and (iii) they will use their best efforts to maintain the Shelf Registration Statement, if any, continuously effective under the Securities Act until the third anniversary of the effectiveness of the Shelf Registration Statement or such earlier date as is provided in the Registration Rights Agreement (the "Effectiveness Period"). All references herein to such Registrable Securities shall be deemed to include, as the context may require, the Registrable Securities into which such Securities have been exchanged pursuant to the Exchange Registration ("Exchange Securities") and all reference to numbers or amounts of such Securities shall be deemed to include, as the context may require, such Exchange Securities. (b) If (i) (A) neither the Exchange Offer Registration Statement nor a Shelf Registration Statement is filed with the Commission on or prior to the 150th day after the date of the Offering Memorandum, or (B) notwithstanding that the Debenture Issuer and the Trust have consummated or will consummate an Exchange Offer, the Debenture Issuer and the Trust are required to file 57 63 a Shelf Registration Statement and such Shelf Registration Statement is not filed on or prior to the date required by the Registration Rights Agreement, then commencing on the day after either such required filing date, Additional Interest shall accrue on the principal amount of the Debentures affected thereby, and additional Distributions shall accumulate on the Liquidation Amount of the Capital Securities affected thereby, at a rate of 0.25% per annum; or (ii) (A) neither the Exchange Offer Registration Statement nor a Shelf Registration Statement is declared effective by the Commission on or prior to the 180th day after the date of the Offering Memorandum or (B) notwithstanding that the Debenture Issuer and the Trust have consummated or will consummate an Exchange Offer, the Debenture Issuer and the Trust are required to file a Shelf Registration Statement and such Shelf Registration Statement is not declared effective by the Commission on or prior to the 180th day after the date of the Offering Memorandum, then, commencing on the 181st day after the date of the Offering Memorandum. Additional Interest shall accrue on the principal amount of the Debentures affected thereby, and additional Distributions shall accumulate on the Liquidation Amount of the Capital Securities affected thereby, at a rate of 0.25% per annum; or (iii) (A) the Trust has not exchanged Exchange Capital Securities for all Capital Securities or the Debenture Issuer has not exchanged Exchange Guarantees or Exchange Subordinated Debentures for all Guarantees or Subordinated Debentures validly tendered in accordance with the terms of the Exchange Offer on or prior to the 30th day after the date on which the Exchange Offer Registration Statement was declared effective or (B) if applicable, the Shelf Registration Statement has been declared effective and such Shelf Registration Statement ceases to be effective at any time prior to the third anniversary of the Closing Date or such shorter period as may be referred to in Rule 144(k) under the Securities Act (other than after such time as all Capital Securities have been disposed of thereunder or otherwise cease to be Registrable Securities), then Additional Interest shall accrue on the principal amount of the Debentures affected thereby, and additional Distributions shall accumulate on the Liquidation Amount of the Capital Securities affected thereby, at a rate of 0.25% per annum commencing on (x) the 31st day after such effective date, in the case of (A) above, or (y) the day such Shelf Registration Statement ceases to be effective in the case of (B) above; provided, however, that neither the Additional Interest rate on the Debentures, nor the additional Distributions rate on the Liquidation Amount of the Capital Securities, may exceed in the aggregate 0.25% per annum; provided, further, however, that (1) upon the filing of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of Section 14.1(b)(i)), (2) upon the effectiveness of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of Section 14.1(b)(ii)), or (3) upon the exchange of Exchange Capital Securities, Exchange Guarantees and Exchange Subordinated Debentures for all Capital Securities, Guarantees and Subordinated Debentures tendered (in the case of Section 14.1(b)(iii)(A)), or upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of Section 14.1(b)(iii)(B)), Additional Interest on the Debentures, and additional Distributions on the Liquidation Amount of the Capital Securities as a result of this Section 14.1(b) (or the relevant subclause thereof), as the case may be, shall cease to accumulate. (c) Any amounts of Additional Interest and additional Distributions due pursuant to Sections 14.1(b)(i), (ii) or (iii) above will be payable in cash on February 1 and August 1 of each year to the Holders on the fifteenth day preceding the relevant Distribution date; provided, however, that the payment of such amounts may be deferred during any Extension Period. 58 64 ARTICLE XV MISCELLANEOUS SECTION 15.1 Notices. (a) All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered, certified or first class mail, as follows: (i) if given to the Trust, in care of the mailing address set forth below (or such other address as the Trust may give notice of to the Property Trustee, the Delaware Trustee and the Holders): Trenwick Capital Trust I c/o Trenwick Group Inc. Metro Center One Station Place Stamford, Connecticut 06902 Attention: Chief Financial Officer Telecopy: (203) 353-5544 (ii) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as Delaware Trustee may give notice of to the Holders): Chase Manhattan Bank Delaware 1201 Market Street Wilmington, Delaware 19801 Attention: Corporate Trustee Administration Department Telecopy: (302) 984-4889 (iii) if given to the Property Trustee, at the Property Trustee's mailing address set forth below (or such other address as the Property Trustee may give notice of to the Holders): The Chase Manhattan Bank Global Trust Services 450 West 33rd Street 15th Floor New York, New York 10001 Attention: Corporate Trustee Administration Department Telecopy: (212) 946-8158 (iv) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice to the Property Trustee and the Trust): 59 65 Trenwick Group Inc. Metro Center One Station Place Stamford, Connecticut 06902 Attention: Jayne T. Wiznitzer, Esq. Vice President - Legal Affairs and Secretary Telecopy: (203) 353-5544 (v) if given to any other Holder, at the address set forth on the books and records of the Trust. (b) All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by registered, certified or first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 15.2 Governing Law. This Declaration and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws; provided, however, that the provisions of 12 Del. C. Sections 3540 and 3561 shall not apply, and, to the fullest extent possible, it is the intent of the parties hereto the compensation payable to any Trustee not be subject to review by any Court whether pursuant to 12 Del. C. Section 3560 or otherwise. SECTION 15.3 Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. SECTION 15.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 15.5 Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. 60 66 SECTION 15.6 Partial Invalidity. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby and shall remain in full force and effect and may be enforced in accordance with the provisions hereof. SECTION 15.7 Counterparts. This Declaration may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 61 67 IN WITNESS WHEREOF, the undersigned have caused this Amended and Restated Declaration of Trust to be duly executed as of the day and year first above written. /s/ James F. Billett, Jr. --------------------------------------- James F. Billett, Jr., not in his individual capacity but solely in his capacity as Administrative Trustee /s/ Alan L. Hunte --------------------------------------- Alan L. Hunte, not in his individual capacity but solely in his capacity as Administrative Trustee /s/ Jane T. Wiznitzer --------------------------------------- Jane T. Wiznitzer, not in her individual capacity but solely in her capacity as Administrative Trustee CHASE MANHATTAN BANK DELAWARE, not in its individual capacity but solely in its capacity as Delaware Trustee By: /s/ John J. Cashin ------------------------------------- Name: John J. Cashin Title: Senior Trust Officer THE CHASE MANHATTAN BANK, not in its individual capacity but solely in its capacity as Property Trustee By: /s/ G. McFarlane ------------------------------------- Name: G. McFarlane Title: Vice President TRENWICK GROUP INC., as Sponsor By: /s/ James F. Billett, Jr. ------------------------------------- Name: James F. Billett, Jr. Title: Chairman, President and Chief Executive Officer 68 ANNEX I TERMS OF 8.82% CAPITAL SECURITIES 8.82% COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust, dated as of January 31, 1997 among Trenwick Group Inc., as Sponsor, the Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank Delaware, as Delaware Trustee, and the Administrative Trustees named therein (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities and the Common Securities (collectively, the "Securities") are set out below and supplement the other rights and obligations of Holders of Securities contained in the Declaration (each capitalized term used but not defined herein has the meaning set forth in the Declaration or, if not defined in such Declaration, as defined in the Indenture. 1. Designation and Number. (a) Capital Securities. One hundred ten thousand (110,000) Subordinated Capital Income Securities of the Trust, with an aggregate Liquidation Amount (as defined in Section 2 hereof) of one hundred ten million U.S. dollars ($110,000,000), and with a Liquidation Amount of $1,000 per Security, are hereby designated for the purposes of identification only as "8.82% Subordinated Capital Income Securities" (the "Capital Securities"). Upon consummation of the Exchange Offer a second series of the Capital Securities may be issued which shall be identical in all respects to the series of Capital Securities issued on the Closing Date except that such Capital Securities (the "Exchange Capital Securities") will not be subject to (i) the transfer restrictions under the Securities Act contained in the series of Capital Securities issued on the Closing Date (except Capital Securities issued pursuant to a Private Exchange (as defined in the Registration Rights Agreement), which may be subject to such restrictions, but which shall be deemed to be of the same series as the Exchange Capital Securities), (ii) the $100,000 minimum Liquidation Amount transfer restriction set forth in Section 9.2(n) of the Declaration or (iii) any increase in the Distribution rate thereon under the Registration Rights Agreement. The certificates evidencing the Capital Securities to be issued on the Closing Date shall be substantially in the form of Exhibit A-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange or quotation system on which the Capital Securities are listed or quoted. (b) Common Securities. Three thousand four hundred three (3,403) Common Securities of the Trust with an aggregate Liquidation Amount with respect to the assets of the Trust of three million four hundred three thousand U.S. dollars ($3,403,000) and a Liquidation Amount with respect to the assets of the Trust of $1,000 per security, are hereby designated for the purposes of identification only as "8.82% Common Securities" (the "Common Securities"). The certificates evidencing the Common Securities shall be substantially in the form of Exhibit A-2 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. 2. Distributions. (a) Subject to Section 9 hereof, Distributions payable on each Security will be fixed at a rate per annum of 8.82% (the "Coupon Rate") of the Liquidation Amount of $1,000 per Security (the "Liquidation Amount"), such rate being the rate of interest payable on the Debentures to be held by the I-1 69 Property Trustee. Distributions not due during an Extension Period (including the first semi-annual period during such period) in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions," as used herein, includes distributions of any such interest (including Compounded Interest and Additional Interest, if any) unless otherwise stated but does not include Additional Sums. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds on hand legally available therefor. (b) Subject to Section 9 hereof, Distributions on the Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from January 31, 1997, and will be payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 1997, except as otherwise described below. The amount of Distributions payable for any period will be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than 6 months, the actual months elapsed and the actual days elapsed in a partial month in such period. If any date on which Distributions are payable on the Securities is not a Business Day, then payment of the Distribution payable on such date shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date (each date on which Distributions are payable in accordance with the foregoing, a "Distribution Date"). So long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive semi-annual periods, including the first semi-annual period during such period (each an "Extension Period"), provided that no Extension Period shall extend beyond the Stated Maturity of the Debentures. Upon any such election, Distributions will be deferred during such Extension Period. Notwithstanding such deferral, Distributions to which Holders of Securities are entitled shall continue to accumulate additional Distributions thereon (to the extent permitted by applicable law but not at a rate greater than the rate at which interest is then accruing on the Debentures) at the Coupon Rate compounded semi-annually from the relevant Distribution Dates during any such Extension Period. Prior to the expiration of any Extension Period and so long as no Event of Default has occurred and is continuing under the Indebenture, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, or extend beyond the Stated Maturity of the Debentures. Upon the expiration of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. (c) Subject to Section 9 hereof, Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Trust on the fifteenth day preceding the relevant Distribution Date. Subject to any applicable laws and regulations and the provisions of the Declaration, each such payment in respect of the Capital Securities will be made as follows: (i) if the Capital Securities are held in global form by a Clearing Agency (or its nominee), in accordance with the procedures of the Clearing Agency; and (ii) if the Capital Securities are held in definitive form, by check mailed to the address of the Holder thereof as reflected in the records of the Registrar unless otherwise agreed by the Trust. The relevant record dates for the Common Securities shall be the same as the record dates for the Capital Securities. Distributions payable on any Securities that are not punctually paid on any Distribution Date will cease to be payable to the Holder on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Securities are registered I-2 70 on the special record date or other specified date applicable to the Debentures determined in accordance with the Indenture. (d) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed on a Pro Rata basis as set forth Section 8 hereof among the Holders of the Securities, except as otherwise required by Section 9 hereof. 3. Liquidation Distribution Upon Dissolution. In the event of any dissolution or termination of the Trust, or the Sponsor otherwise gives notice of its election to liquidate the Trust pursuant to Section 8.1(a)(iii) of the Declaration, the Trust shall be liquidated by the Administrative Trustees as expeditiously as the Administrative Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, and subject to Section 9 hereof, to the Holders of the Securities a Like Amount (as defined below) of the Debentures, unless such distribution is determined by the Property Trustee not to be practicable, in which event such Holders will be entitled to receive out of the assets of the Trust legally available for distribution to Holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the aggregate of the Liquidation Amount of $1,000 per Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). "Like Amount" means (i) with respect to a redemption of the Securities, Securities having a Liquidation Amount equal to the principal amount of Debentures to be paid in accordance with their terms and (ii) with respect to a distribution of Debentures upon the liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Securities of the Holder to whom such Debentures are distributed. If, upon any such liquidation, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets on hand legally available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Securities shall be paid on a Pro Rata basis as set forth in Section 8 hereof among the Holders of the Securities, except as otherwise required by Section 9 hereof. 4. Redemption and Distribution. (a) Upon the repayment of the Debentures on the Stated Maturity thereof or prepayment thereof (in whole or in part) prior thereto in accordance with the terms thereof, the proceeds from such repayment or prepayment shall be simultaneously applied by the Property Trustee (subject to the Property Trustee having received not less than 45 days written notice to the repayment date or prepayment date) to redeem a Like Amount of the Securities at a redemption price equal to (i) in the case of the repayment of the Debentures on the Stated Maturity, the Maturity Redemption Price (as defined below), (ii) in the case of the optional prepayment of the Debentures upon the occurrence and continuation of a Special Event, the Special Event Redemption Price (as defined below) and (iii) in the case of the optional prepayment of the Debentures other than as a result of the occurrence and continuance of a Special Event, the Optional Redemption Price (as defined below). The Maturity Redemption Price, the Special Event Redemption Price and the Optional Redemption Price are referred to collectively as the "Redemption Price." I-3 71 (b) (i) The "Maturity Redemption Price," with respect to a redemption of Securities, shall mean an amount equal to the principal of and accrued interest on the Debentures as of the Stated Maturity thereof. (ii) "Special Event Redemption Price" shall mean a price equal to the greater of (i) 100% of the Liquidation Amount of Securities to be redeemed or (ii) the sum, as determined by a Quotation Agent (as defined in the Indenture), of the present values of the remaining scheduled payments of principal and interest on the Debentures to February 1, 2007 (the first date on which the Debentures are subject to optional prepayment), discounted to the prepayment date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months and, for any period less than 6 months, the actual months elapsed and the actual days elapsed in a partial month in such period) at the Adjusted Treasury Rate (as defined in the Indenture), plus, in each case, accumulated and unpaid Distributions thereon, if any, to the date of such prepayment. (iii) "Optional Redemption Price" shall mean a price equal to the outstanding principal amount of the Debentures to be redeemed, plus accrued interest thereon to the date of prepayment. (c) On and from the date fixed by the Administrative Trustees for any distribution of Debentures and liquidation of the Trust and subject to Section 9 hereof: (i) the Securities will no longer be deemed to be outstanding, (ii) each Holder of Securities will receive a registered certificate or certificates representing the Debentures to be delivered upon such distribution and (iii) Securities will be deemed to represent beneficial interests in a Like Amount of Debentures, and bearing accrued and unpaid interest in an amount equal to the accumulated and unpaid Distributions on such Securities, until such Securities are presented to the Administrative Trustee or their agent for cancellation and such Debentures are transferred to the Holders of such Securities. (d) The Trust may not redeem fewer than all the outstanding Securities unless all accumulated and unpaid Distributions have been paid on all Securities for all semi-annual Distribution periods that expire on or before the date of redemption. (e) The procedure with respect to redemptions or distributions of Debentures shall be as follows: (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") will be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for repayment or prepayment of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(e)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of Securities at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Securities are to be redeemed, the Securities to be redeemed shall be allocated on a Pro Rata basis as set forth in Section 8 hereof among the Holders of Securities, except as otherwise required by Section 9 hereof, it being understood that, in I-4 72 respect of Capital Securities registered in the name of and held of record by a Clearing Agency or its nominee, the distribution of the proceeds of such redemption will be made to the Clearing Agency and disbursed by such Clearing Agency in accordance with the procedures applied by such agency or nominee. (iii) If Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice, such notice shall be irrevocable and (A) with respect to Capital Securities registered in the name of or held of record by a Clearing Agency or its nominee, by 12:00 noon, New York City time, on the redemption date, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the related maturity or prepayment of the Debentures by 10:00 a.m., New York City time, on the Stated Maturity of the Debentures or the date of prepayment, as the case may be, the Property Trustee or the Paying Agent will pay to the Clearing Agency or its nominee funds sufficient to pay the applicable Redemption Price with respect to such Capital Securities, and (B) with respect to Capital Securities issued in certificated form and Common Securities, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the related maturity or prepayment of the Debentures, the Property Trustee or the Paying Agent will pay the relevant Redemption Price to the Holders of such Securities against presentation to the Registrar of the certificates therefor. If a Redemption/Distribution Notice shall have been given and funds deposited with the Property Trustee to pay the Redemption Price (including all unpaid Distributions) with respect to the Securities called for redemption, then immediately prior to the close of business on the redemption date, Distributions will cease to accumulate on the Securities so called for redemption and all rights of Holders of such Securities so called for redemption will cease, except the right of the Holders of such Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Securities shall cease to be outstanding. (iv) Payment of accumulated and unpaid Distributions on the redemption date of any Securities will be subject to the rights of Holders of such Securities on the close of business on a regular record date in respect of a Distribution Date occurring on or prior to such Redemption Date. (v) Neither the Administrative Trustees nor the Trust shall be required to register or cause to be registered the transfer of (A) any Securities beginning on the opening of business 15 days before the day of mailing of a Redemption/Distribution Notice or (B) any Securities selected for redemption (except the unredeemed portion of any Security being redeemed). If any date fixed for redemption of Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Property Trustee or the Paying Agent or by the Sponsor as guarantor pursuant to the relevant Securities Guarantee, or the date fixed for redemption, Distributions on such Securities will continue to accumulate from such redemption date to the actual date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. (vi) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), the Sponsor or any of its Affiliates may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement. I-5 73 5. Voting Rights - Capital Securities. (a) Except as provided under Sections 5(b) and 7 hereof and as otherwise required by law and the Declaration, the Holders of the Capital Securities will have no voting rights. (b) So long as any Debentures are held by the Property Trustee for the benefit of the Holders of the Trust Securities, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on such Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 5.07 of the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in Liquidation Amount of all outstanding Capital Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Capital Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Capital Securities except by subsequent vote of such Holders. The Property Trustee shall notify each Holder of Capital Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Capital Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an Opinion of Counsel experienced in such matters to the effect there is no more than an insubstantial risk that the Trust would not be classified for United States federal income tax purposes as a trust subject to the provisions of Sections 671 through 679 of the Code (a "grantor trust") on account of such action. The foregoing provisions of this Section 5(b) shall be in lieu of Sections 316(a)(1)(A) and (B) of the Trust Indenture Act, and such Sections 316(a)(1)(A) and (B) are hereby expressly excluded from this Trust Agreement. (c) If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on any due date (including any Interest Payment Date or prepayment date or Stated Maturity of the Debenture), then a Holder of Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Common Securities Holders will be subrogated to the rights of the Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to the Holders of Capital Securities in such Direct Action. Except as provided in the second preceding sentence, the Holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. (d) Any required approval of Holders of Capital Securities may be given at a separate meeting of Holders of Capital Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Administrative Trustees will cause a notice of any meeting at which Holders of Capital Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Capital Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consent. I-6 74 (e) No vote or consent of the Holders of the Capital Securities will be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. (f) Notwithstanding that Holders of Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. (g) If a Debenture Event of Default has occurred and is continuing, the Property Trustee and the Delaware Trustee may be removed at such time by the Holders of a Majority in Liquidation Amount of the outstanding Capital Securities. In no event will the Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrative Trustees, which voting rights are vested exclusively in the Sponsor as the Holder of all the Common Securities. No resignation or removal of a Trustee and no appointment of a successor trustee shall be effective until the acceptance of appointment by the successor trustee in accordance with the provisions of the Declaration. 6. Voting Rights - Common Securities. (a) Except as provided under Sections 6(b), 6(c), and 7 and as otherwise required by law and the Declaration, the Holders of the Common Securities will have no voting rights. (b) Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by the Holder of the Common Securities. No resignation or removal of a Trustee and no appointment of a successor trustee shall be effective until the acceptance of appointment by the successor trustee in accordance with the provisions of the Declaration. (c) So long as any Debentures are held by the Property Trustee for the benefit of the Holders of the Trust Securities, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or execute any trust or power conferred on such Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 5.07 of the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in Liquidation Amount of all outstanding Common Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Common Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Common Securities except by subsequent vote of such Holders. The Property Trustee shall notify each Holder of Common Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Common Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an Opinion of Counsel experienced in such matters to the effect there is no more than an insubstantial risk that the Trust would not be classified for United States federal income tax purposes as a trust subject to the provisions of Sections 671 through 679 of the Code (a "grantor trust") on account of such action. The foregoing provisions of this Section 6(c) shall be in lieu of Sections 316(a)(1)(A) and (B) of the Trust Indenture Act, and such Sections 316(a)(1)(A) and (B) are hereby expressly excluded from this Trust Agreement. I-7 75 (d) If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on the due date (including any Interest Payment Date or prepayment date or Stated Maturity of the Debenture), then a Holder of Common Securities may institute a Direct Action for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Common Securities Holders will be subrogated to the rights of the Holders of Capital Securities to the extent of any payment made by the Debenture Issuer to Holders of Common Securities in such Direct Action. Except as provided in the second preceding sentence, the Holders of Common Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. (e) Any required approval of Holders of Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Administrative Trustees will cause a notice of any meeting at which Holders of Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. (f) No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. 7. Amendments to Declaration and Indenture. In addition to the requirements set out in Section 12.1 of the Declaration, the Declaration may be amended from time to time by the Sponsor as the Holder of all of the outstanding Common Securities, the Property Trustee and the Administrative Trustees, without the consent of the Holders of the Securities (i) to cure any ambiguity, correct or supplement any provisions in the Declaration that may be inconsistent with any other provisions, or to make any other provisions with respect to matters or questions arising under the Declaration which shall not be inconsistent with the other provisions of the Declaration, (ii) to modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act, or (iii) to qualify or maintain qualification of the Declaration under the Trust Indenture Act; provided, however, that in each case, such action shall not adversely affect in any material respect the interests of any Holder of Securities. Any amendments of the Declaration pursuant to the foregoing shall become effective when notice thereof is sent to the Holders of the Securities. The Declaration also may be amended by the Trustees and the Sponsor as the Holder of all the outstanding Common Securities (i) with the consent of Holders representing a Majority in Liquidation Amount of all outstanding Securities and (ii) upon receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status as an Investment Company under the Investment Company Act; provided that, without the consent of each Holder of Securities, the Declaration may not be amended to (i) change the amount or timing of any Distribution I-8 76 on the Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Securities as of a specified date or (ii) restrict the right of a Holder of Securities to institute suit for the enforcement of any such payment on or after such date. 8. Pro Rata. A reference in these terms of the Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder of Securities according to the aggregate Liquidation Amount of the Securities held by the relevant Holder in relation to the aggregate Liquidation Amount of all Securities outstanding unless, in relation to a payment, an Event of Default under the Declaration has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Capital Securities pro rata according to the aggregate Liquidation Amount of Capital Securities held by the relevant Holder relative to the aggregate Liquidation Amount of all Capital Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of Common Securities pro rata according to the aggregate Liquidation Amount of Common Securities held by the relevant Holder relative to the aggregate Liquidation Amount of all Common Securities outstanding. 9. Ranking. The Capital Securities rank pari passu with the Common Securities and payment thereon shall be made Pro Rata with the Common Securities, except that, if an Event of Default under the Declaration occurs and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the Holders of the Capital Securities shall be paid in full the Distributions, Redemption Price, Liquidation Distribution and other payments to which they are entitled at such time. 10. Acceptance of Securities Guarantee and Indenture. Each Holder of Capital Securities and Common Securities, by the acceptance thereof, agrees to the provisions of the Capital Securities Guarantee and the Common Securities Guarantee, respectively, including the subordination provisions therein and to the provisions of the Indenture. 11. No Preemptive Rights. The Holders of the Securities shall have no preemptive rights to subscribe for any additional securities. 12. Additional Interest. If the Debenture Issuer fails to comply with its obligations under the Registration Rights Agreement or if the Exchange Offer Registration Statement (as defined in the Registration Rights Agreement) or the Shelf Registration Statement (as defined in the Registration Rights Agreement) fails to become effective, then Additional Interest shall accrue on the principal amount of the Debentures affected thereby, and additional Distributions shall accumulate on the Liquidation Amount of the Trust Securities affected thereby, each at a rate of 0.25% per annum as more fully set forth in Article XIV of the Declaration. I-9 77 13. Miscellaneous. These terms constitute a part of the Declaration. The Sponsor will provide a copy of the Declaration, the Capital Securities Guarantee or the Common Securities Guarantee (as may be appropriate), and the Indenture (including any supplemental indenture) to a Holder without charge on written request to the Sponsor at its principal place of business. I-10 78 EXHIBIT A-1 FORM OF CAPITAL SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] [IF THIS GLOBAL SECURITY IS A GLOBAL CAPITAL SECURITY, INSERT: THIS CAPITAL SECURITY IS A GLOBAL CAPITAL SECURITY WITHIN THE MEANING OF THE DECLARATION HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (THE "CLEARING AGENCY") OR A NOMINEE OF THE CLEARING AGENCY. THIS CAPITAL SECURITY IS EXCHANGEABLE FOR CAPITAL SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE CLEARING AGENCY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE DECLARATION AND NO TRANSFER OF THIS CAPITAL SECURITY (OTHER THAN A TRANSFER OF THIS CAPITAL SECURITY AS A WHOLE BY THE CLEARING AGENCY TO A NOMINEE OF THE CLEARING AGENCY OR BY A NOMINEE OF THE CLEARING AGENCY TO THE CLEARING AGENCY OR ANOTHER NOMINEE OF THE CLEARING AGENCY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.] [IF THIS GLOBAL SECURITY IS A GLOBAL SECURITY, INSERT: UNLESS THIS CAPITAL SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) TO THE TRUST OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CAPITAL SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY AND ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] THE CAPITAL SECURITY REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM A1-1 79 NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 (A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F), TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING MEMORANDUM DATED JANUARY 28, 1997. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF REPRESENTS AND ACKNOWLEDGES THAT IT EITHER (A) IS NOT A PLAN SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND IS NOT PURCHASING SUCH SECURITIES (OR INTEREST THEREIN) ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY SUCH PLAN OR (B) IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER PTCE 96-23, 95-60, 91-38, 90-1 OR 84-14. THE CAPITAL SECURITIES WILL BE ISSUED, AND UNTIL REGISTERED UNDER THE SECURITIES ACT MAY BE TRANSFERRED, ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 (100 CAPITAL SECURITIES). ANY TRANSFER OF CAPITAL SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH CAPITAL SECURITIES FOR ANY PURPOSE, INCLUDING BUT NOT LIMITED TO THE RECEIPT OF DISTRIBUTIONS ON SUCH CAPITAL SECURITIES, AND SUCH TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH CAPITAL SECURITIES. THE HOLDER OF THIS CAPITAL SECURITY FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. [IF A GLOBAL SECURITY IS A REGULATION S GLOBAL SECURITY, INSERT: THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE.] A1-2 80 Certificate No. _________ No. of Capital Securities ________ CUSIP NO. _______________ Certificate Evidencing Subordinated Capital Income Securities of TRENWICK CAPITAL TRUST I 8.82% Subordinated Capital Income Securities (Liquidation Amount $1,000 per Capital Security) TRENWICK CAPITAL TRUST I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that _____________________________ (the "Holder") is the registered owner of __________________ Subordinated Capital Income Securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the 8.82% Subordinated Capital Income Securities (Liquidation Amount $1,000 per Capital Security) (the "Capital Securities"). The Capital Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed, in proper form for transfer and otherwise complying with the terms and conditions of the Declaration (as hereinafter defined). The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities represented hereby are set forth herein, on the reverse hereof and in the provisions of the Amended and Restated Declaration of Trust dated as of January 31, 1997, among Trenwick Group Inc., as Sponsor, The Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank Delaware, as Delaware Trustee, and the Administrative Trustees named therein, as the same may be amended from time to time (the "Declaration"), and shall in all respects be subject to the provisions thereof, including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration. Each capitalized term used but not defined herein or in any legend form or certificate hereon shall have the meaning given it in the Declaration. The Sponsor will provide a copy of the Declaration, the Capital Securities Guarantee and the Indenture to any Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Capital Securities Guarantee to the extent provided therein. By its acceptance hereof, the Holder agrees (i) to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of indirect beneficial ownership in the Debentures and (ii) to be bound by the terms of the Registration Rights Agreement. A1-3 81 IN WITNESS WHEREOF, the Trust has duly executed this certificate. Dated: ____________, 1997 TRENWICK CAPITAL TRUST I By: ------------------------------------- [Name] Not in his individual capacity but solely in his capacity as Administrative Trustee PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Capital Securities referred to in the within-mentioned Declaration. THE CHASE MANHATTAN BANK, as Property Trustee By: ------------------------------------- Authorized Officer A1-4 82 [FORM OF REVERSE OF SECURITY] Distributions payable on each Capital Security will be fixed at a rate per annum of 8.82% (the "Coupon Rate") of the Liquidation Amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions not due during an Extension Period (including the first semi-annual period during such period) in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions," as used herein, includes such cash distributions and any such interest payable (including Compounded Interest and Additional Interest, if any) unless otherwise stated but does not include Additional Sums. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Trust has funds on hand legally available therefor. Distributions on the Capital Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from January 31, 1997 and will be payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 1997, except as otherwise described below and in the Declaration. Distributions will be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than 6 months, the actual months elapsed and the actual days elapsed in a partial month in such period. As long as no Event of Default has occurred and is continuing, the Debenture Issuer has the right under the Indenture, at any time and from time to time during the term of the Debentures, to defer payments of interest by extending the interest payment period on the Debentures for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such extension period (an "Extension Period"), during which Extension Period no interest shall be due and payable, provided that no Extension Period shall extend beyond the Stated Maturity of the Debentures. Upon any such election, semi-annual Distributions on the Capital Securities will be deferred by the Trust during the term of the Extension Period. Distributions will continue to accumulate interest thereon (to the extent permitted by applicable law, but not exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Before the termination of any such Extension Period, and as long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer may further extend such Extension Period, provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 10 consecutive semi-annual periods or extend beyond the Stated Maturity of the Debentures. Payments of Distributions that have accumulated during any Extension Period will be payable to Holders as they appear on the books and records of the Trust on the record date for the first scheduled Distribution payment date following the expiration of such Extension Period. Upon the expiration of any Extension Period and the payment of all accrued and unpaid interest and any additional amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. The Administrative Trustees shall, at the direction of the Sponsor, at any time dissolve the Trust and cause the Debentures to be distributed to the holders of the Securities in liquidation of the Trust or, simultaneously with any redemption of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. The Capital Securities shall be redeemable as provided in the Declaration. A1-5 83 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: ---------------------------- Signature: ------------------------------------------- (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee: ----------------------------------------------------------- - - ------------------------ * Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. A1-6 84 [Include the following if the Capital Security bears a Restricted Capital Securities Legend] In connection with any transfer of any of the Capital Securities evidenced by this certificate, the undersigned confirms that such Capital Securities are being: CHECK ONE BOX BELOW (1) / / exchanged for the undersigned's own account without transfer; or (2) / / transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (3) / / transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (4) / / transferred to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act of 1933 that is acquiring the Capital Securities for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act of 1933; or (5) / / transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933; or (6) / / transferred pursuant to an effective registration statement. Unless one of the boxes is checked, the Registrar will refuse to register any of the Capital Securities evidenced by this certificate in the name of any person other than the registered Holder thereof; provided, however, that if box (3), (4) or (5) is checked, the Registrar may require, prior to registering any such transfer of the Capital Securities such legal opinions, certifications and other information as the Trust has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act; provided, further, that (i) if box 2 is checked, the transferee must also certify that it is a qualified institutional buyer as defined in Rule 144A or (ii) if box (4) is checked, the transferee must also provide to the Registrar a Transferee Letter of Representation in the form attached as Annex A to the Offering Memorandum of the Trust dated January 28, 1997. Date:_____________________ Signature:__________________________ (Sign exactly as your name appears on the other side of this Capital Security Certificate) A1-7 85 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS COMMON SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS COMMON SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO OFFER, SELL OR OTHERWISE TRANSFER THIS COMMON SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS COMMON SECURITY (OR ANY PREDECESSOR OF THIS COMMON SECURITY) EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS COMMON SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 (A) (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS COMMON SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING MEMORANDUM OF THE TRUST DATED JANUARY 28, 1997. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS COMMON SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. A2-1 86 Certificate No. No. of Common Securities: ____________ Certificate Evidencing Common Securities of TRENWICK CAPITAL TRUST I 8.82% Common Securities (Liquidation Amount $1,000 per Common Security) TRENWICK CAPITAL TRUST I, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that Trenwick Group Inc. (the "Holder") is the registered owner of ________________ common securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the 8.82% Common Securities (Liquidation Amount $1,000 per Common Security) (the "Common Securities"). The Common Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed, in proper form for transfer and otherwise complying with the terms and conditions of the Declaration (as hereinafter defined). The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are set forth herein, on the reverse hereof and in the Amended and Restated Declaration of Trust of the Trust dated as of January 31, 1997, among Trenwick Group Inc., as Sponsor, The Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank Delaware, as Delaware Trustee, and the Administrative Trustees named therein, as the same may be amended from time to time (the "Declaration"), and shall in all respects be subject to the provisions thereof, including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration. Each capitalized term used but not defined herein or in any legend, form or certificate hereon shall have the meaning given it in the Declaration. The Sponsor will provide a copy of the Declaration, the Common Securities Guarantee and the Indenture (including any supplemental indenture) to any Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Common Securities Guarantee to the extent provided therein. By its acceptance hereof, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Debentures. IN WITNESS WHEREOF, the Trust has executed this certificate this _____ day of ___________, 1997. TRENWICK CAPITAL TRUST I By: _____________________________________ [Name] Not in his individual capacity but solely in his capacity as Administrative Trustee A2-2 87 [FORM OF REVERSE OF SECURITY] Distributions payable on each Common Security will be fixed at a rate per annum of 8.82% (the "Coupon Rate") of the Liquidation Amount of $1,000 per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions not due during an Extension Period (including the first semi-annual period during such period) in arrears for more than one semi-annual period will bear interest thereon compounded semiannually at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions", as used herein, includes such cash distributions and any such interest payable (including Compounded Interest and Additional Interest, if any) unless otherwise stated but does not include Additional Sums. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Trust has funds available therefor. Distributions on the Common Securities will be cumulative, will accrue from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from January 31, 1997 and will be payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 1997, except as otherwise described below and in the Declaration. Distributions will be computed on the basis of a 360-day year consisting of twelve 30 day months and, for any period less than 6 months, the actual months elapsed and the actual days elapsed in a partial month in such period. As long as no Event of Default has occurred and is continuing, the Debenture Issuer has the right under the Indenture, at any time and from time to time during the term of the Debentures, to defer payments of interest by extending the interest payment period on the Debentures for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such extension period (an "Extension Period"), during which Extension Period no interest shall be due and payable, provided that no Extension Period shall extend beyond the Stated Maturity of the Debentures. Upon any such election, semi-annual Distributions on the Common Securities will be deferred by the Trust during the term of the Extension Period. Distributions will continue to accumulate interest thereon (to the extent permitted by applicable law, but not exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Before the termination of any such Extension Period, the Debenture Issuer may further extend such Extension Period and as long as no Event of Default has occurred and is continuing under the Indenture, provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not exceed 10 consecutive semi-annual periods or extend beyond the Stated Maturity of the Debentures. Payments of Distributions that have accumulated during any Extension Period will be payable to Holders as they appear on the books and records of the Trust on the record date for the first scheduled Distribution payment date following the expiration of such Extension Period. Upon the expiration of any Extension Period and the payment of all accrued and unpaid interest and any additional amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. The Administrative Trustees shall, at the direction of the Sponsor, at any time dissolve the Trust and cause the Debentures to be distributed to the holders of the Securities in liquidation of the Trust or, simultaneously with any redemption of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. The Common Securities rank junior to the Capital Securities in certain circumstances as set forth in the Declaration. The Common Securities shall be redeemable as provided in the Declaration. A2-3 88 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Common Security Certificate to: - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- agent to transfer this Common Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: ----------------------- Signature: --------------------------------------------------- (Sign exactly as your name appears on the other side of this Common Security Certificate) Signature Guarantee: ----------------------------------------------------------- - - --------------------- * Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities and Exchange Act of 1934, as amended. A2-4 89 In connection with any transfer of any of the Common Securities evidenced by this certificate, the undersigned confirms that such Common Securities are being: CHECK ONE BOX BELOW (1) / / exchanged for the undersigned's own account without transfer; or (2) / / transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (3) / / transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (4) / / transferred to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring the Preferred Security for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act; or (5) / / transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933; or (6) / / transferred pursuant to an effective registration statement Unless one of the boxes is checked, the Registrar will refuse to register any of the Common Securities evidenced by this certificate in the name of any person other than the registered Holder thereof; provided, however, that if box (3), (4) or (5) is checked, the Registrar may require, prior to registering any such transfer of the Common Securities such legal opinions, certifications and other information as the Trust has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act; provided, further, that (i) if box 2 is checked, the transferee must also certify that it is a qualified institutional buyer as defined in Rule 144A or (ii) if box 4 is checked, the transferee must also provide a Transferee Representation Letter in the form attached as Annex A to the Offering Memorandum of the Trust, dated January 28, 1997. Date:_______________________ Signature:______________________________ (Sign exactly as your name appears on the other side of this Common Security Certificate) A2-5 EX-10.13 4 EXHIBIT 10.13 1 EXHIBIT 10.13 CORPORATE ADMINISTRATION COMPANY VEHICLE LEASING POLICY The Company provides leased vehicles, equipped with cellular phones if desired, to employees of Executive Vice President status (or equivalent) and above. Other individuals may be entitled to leased vehicles upon approval of the Chief Executive Officer. Corporate Administration's responsibilities and related procedures regarding the policy are as follows: LEASE ADMINISTRATION 1. Once the individual has selected their vehicle and negotiated the leasing terms, a Credit Application is prepared by the Corporate Manager, and a lease is drawn up. The lease is then given to the Chairman/Chief Executive Officer or the Corporate Manager for execution. 2. A check request for the down payment is prepared and forwarded with the lease and related documentation to Corporate Accounting for processing. License, taxes and up front costs shall not exceed $6,000, exclusive of refundable amounts. Monthly lease payments shall not exceed $550. 3. The Corporate Manager provides Human Resources with a copy of the lease with the odometer reading for their Benefits file. INSURANCE 1. The leased vehicles are incorporated into Trenwick Group Inc.'s inforce Business Automobile insurance policy that is issued through Willis Corroon. 2. The Corporate Manager contacts Don Herington at Willis Corroon (212) 837-0819 and provides him with vehicle information, i.e., VIN number, make, model, engine size, garage location. Willis Corroon will prepare and forward Insurance I.D. cards. Cards are to be kept in the vehicles at all times. 2 Company Vehicle Leasing Policy Page Two VEHICLE REGISTRATION 1. Corporate Administration is also responsible for the registration of the vehicle at the DMV Department, if the dealership does not provide this service. Insurance I.D. Cards are required for registration. Place the Registration documentation in the vehicles upon receipt. 2. The annual emissions testing is also handled through Corporate Administration. The insurance I.D. Card, Registration and $10 cash are required at the time of testing. The money is obtained from Petty Cash through the Receptionist. MAINTENANCE At the request of the individual driver, appointment pick-ups and drop-offs of vehicles for scheduled vehicle maintenance, (i.e., oil changes, tune ups, tire rotations, etc.) are coordinated by Corporate Administration at the respective dealerships. EQUIPMENT The removal/replacement/installation of cellular telephones into leased vehicles is coordinated by Corporate Administration. The Corporate Manager contacts Connecticut Telephone, 810 Post Road, Fairfield (203) 256-8100 to schedule on-site appointments for any of these services. LeasingV/g/rmd 13 MARCH 1997 EX-10.31 5 EXHIBIT 10.31 1 EXHIBIT 10.31 INDEX to the FIRST CASUALTY RETROCESSIONAL EXCESS OF LOSS REINSURANCE AGREEMENT
Page Number ----------- ACCESS TO RECORDS - ARTICLE XX 10 AMENDMENTS AND ALTERATIONS - ARTICLE XXI 10 AMOUNT OF COVER AND RETENTION - ARTICLE V 3 ARBITRATION - ARTICLE XXIII 11 BUSINESS COVERED - ARTICLE I 1 COSTS - ARTICLE XI 6 CURRENCY - ARTICLE XIX 9 EXCESS OF ORIGINAL POLICY LIMITS - ARTICLE VI 3 ERRORS AND OMISSIONS - ARTICLE XIII 7 EXCLUSIONS - ARTICLE III 1 EXTRA CONTRACTUAL OBLIGATIONS - ARTICLE VII 4 FEDERAL EXCISE TAX - ARTICLE XVI 8 INSOLVENCY - ARTICLE XXII 10 INTERMEDIARY - ARTICLE XXV 12 LETTER OF CREDIT - ARTICLE XVIII 8 LIABILITY OF THE RETROCESSIONAIRE - ARTICLE IV 2 NET RETAINED LINES - ARTICLE IX 5 NOTICE OF LOSS AND LOSS SETTLEMENTS - ARTICLE XII 6 OFFSET - ARTICLE XVII 8 PREMIUM - ARTICLE XIV 7 REINSTATEMENT - ARTICLE XV 8 SERVICE OF SUIT - ARTICLE XXIV 11 TERM AND CANCELLATION - ARTICLE VIII 4 TERRITORY - ARTICLE II 1 ULTIMATE NET LOSS - ARTICLE X 5
GUY CARPENTER & COMPANY (CANADA) LIMITED 2 FIRST CASUALTY RETROCESSIONAL EXCESS OF LOSS REINSURANCE AGREEMENT between TRENWICK AMERICA REINSURANCE CORPORATION (hereinafter referred to as the "COMPANY") and the Retrocessionaires Subscribing to the Interests and Liabilities Agreements to which this Agreement is attached (hereinafter referred to as the "RETROCESSIONAIRE") ARTICLE I BUSINESS COVERED This Agreement is to indemnify the COMPANY, as set forth in Article V - AMOUNT OF COVER AND RETENTION, in respect of the excess liability which may accrue to the COMPANY under all reinsurance binders, acceptances, cover notes, certificates or policies (hereinafter referred to as "Policies") underwritten by the COMPANY and classified by the COMPANY as casualty facultative business. ARTICLE II TERRITORY This Agreement shall apply wherever the COMPANY's policies apply. ARTICLE III EXCLUSIONS This Agreement does not apply to and specifically excludes: 1. Business classified by the COMPANY as Surety. 2. Business classified by the COMPANY as Insolvency and Financial Guarantee. 3. Business classified by the COMPANY as Aviation. 4. Business classified by the COMPANY as Credit Insurance. 5. War Risk. 6. Loss or liability excluded by the "Nuclear Incident Exclusion Clause - Liability Reinsurance - USA" attached hereto. 7. Loss or liability excluded by the "Nuclear Incident Exclusion Clause - Liability Reinsurance - Canada" attached hereto. -1- GUY CARPENTER & COMPANY (CANADA) LIMITED 3 EXCLUSIONS (Continued) 8. Business classified by the COMPANY as Directors and Officers Liability. 9. Business classified by the COMPANY as Securities Exchange Act Liability. 10, Class I Railroads. 11. Surplus Relief. 12. Funding plans. 13. Business classified by the COMPANY as Ocean Marine. This exclusion, however, shall not apply with respect to the legal liability arising out of the ownership, operation, use of or navigation of ships or vessels: A. Classified as yachts, small pleasurecraft or sports fishing vessels: or B. Operating exclusively in inland and/or coastal waters. 14. Aggregate Stop Loss Business. Nevertheless, in the event the COMPANY becomes liable for a risk excluded above without its knowledge, either by an existing insured extending its operations, automatic provisions of policy or as imposed by law, or by inadvertent acceptance, this Agreement shall apply in respect of such risk but only until discovery by the COMPANY and, pending cancellation of such risk, for a period of ten (10) days in addition to the time permitted for cancellation in the COMPANY's reinsurance policy, such total period not to exceed 120 days in all. As respects casualty reinsurance accepted under this Agreement, if the insured's main operations are not excluded hereunder, exclusions listed above shall not apply provided such operations or perils are incidental to the insured's main operation. The COMPANY shall be the sole judge of the meaning of the word "incidental". ARTICLE IV LIABILITY OF THE RETROCESSIONAIRE The liability of the RETROCESSIONAIRE, subject always to the terms and conditions of this Agreement, shall begin and end simultaneously with that of the COMPANY and shall be subject otherwise to the same general and special stipulations, clauses, waivers and modifications of the COMPANY's policies and any endorsements thereon. -2- GUY CARPENTER & COMPANY (CANADA) LIMITED 4 ARTICLE V AMOUNT OF COVER AND RETENTION No claim shall be made under this Agreement unless and until the COMPANY shall have first sustained, as a result of any one occurrence, and/or in the aggregate where applicable, an amount in excess of $500,000 Ultimate Net Loss each original insured each casualty line, and the RETROCESSIONAIRE shall be liable for the amount in excess of $500,000 Ultimate Net Loss, each such occurrence each casualty line, and/or in the aggregate where applicable, in respect of each insured; but the sum recoverable shall not exceed $1,500,000 Ultimate Net Loss each such occurrence each casualty line, and/or in the aggregate where applicable, in respect of each original insured. It is agreed that the RETROCESSIONAIRE shall follow the definitions contained in the policies issued by the COMPANY concerning any references made herein to the term "occurrence". Notwithstanding the foregoing, it is further understood and agreed that within any contract year the COMPANY shall retain, as a deductible, aggregate loss that would otherwise be recoverable hereunder, equal to 3% of the COMPANY'S Gross Net Written Premium Income, withheld for each contract year. However, the sum recoverable by the COMPANY hereunder within any one contract year shall not exceed an earned to incurred loss ratio of 275.0% for each contract year or $10,000,000, whichever is greater. The COMPANY is permitted to arrange share or surplus reinsurance in respect of any occurrence provided that such reinsurance shall inure to the benefit of the COMPANY and/or the RETROCESSIONAIRE. It is further understood that the COMPANY is permitted to have share reinsurance on a ground up basis for special accounts which will be underwritten outside the scope of this Agreement. ARTICLE VI EXCESS OF ORIGINAL POLICY LIMITS This Agreement shall protect the COMPANY, within the limits hereof, in connection with any loss in excess of the limit of its original policy, such loss in excess of the limit having been incurred because of failure by it to settle within the policy limit or by reason of alleged or actual negligence or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its Insured or Reinsured or in the preparation or prosecution of an appeal consequent upon such action. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the COMPANY acting individually or collectively or in collusion with a member of the Board of Directors or a corporate officer or a partner of any other corporation or partnership. -3- GUY CARPENTER & COMPANY (CANADA) LIMITED 5 EXCESS OF POLICY LIMITS (Continued) This Agreement shall further protect the COMPANY in connection with any punitive damages for which the COMPANY may be required to pay. For the purposes of this Article, the date of the excess policy limits loss is deemed to be the date of the original loss that gave rise to the excess policy limits award provided herein. ARTICLE VII EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the COMPANY within the limits hereon, where the ultimate net loss includes any extra contractual obligations. The term "extra contractual obligations" is defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of but not limited to the following: failure by the COMPANY to settle within the contract limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any extra contractual obligation is incurred by the COMPANY shall be deemed, in all circumstances, to be the date of the original disaster and/or casualty. However, this Article shall not apply where the loss has been incurred due to fraud by a member of the Board of Directors or a corporate officer of the COMPANY acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. ARTICLE VIII TERM AND CANCELLATION This Agreement shall apply to new and renewal policies of the COMPANY becoming effective on and after 1st January, 1996. This Agreement shall continue in force until cancelled by either party at any lst January upon one hundred and twenty (120) days prior written notice to the other party. In the event of such cancellation, the liability of the RETROCESSIONAIRE with respect to policies in effect on the date of cancellation shall continue until the expiration, cancellation, or next anniversary date of each such policy, whichever occurs first; but in no event shall the period of run-off exceed twelve (12) months plus odd time. Odd time is defined as an additional twelve (12) months. Notwithstanding the foregoing, the COMPANY, by giving one hundred and twenty (120) days prior written notice to the RETROCESSIONAIRE at any lst January, may elect to terminate this Agreement and shall have the option to commute all future liabilities of the RETROCESSIONAIRE. -4- GUY CARPENTER & COMPANY (CANADA) LIMITED 6 TERM AND CANCELLATION (Continued) Alternatively, the COMPANY shall have the option to take back the in force business at the expiry date hereof with return of unearned Reinsurance Premium hereunder. Furthermore, Contrary to ARTICLE V - AMOUNT OF COVER AND RETENTION the COMPANY shall retain an amount of 3% of the earned Gross Net Written Premium Income rather than 3% of the Gross Net Written Premium Income and the dollar maximum recoverable will be reduced pro rata by the percentage that unearned Gross Net Written Premium Income bears to the Gross Net Written Premium Income. If this Agreement shall terminate while a loss covered hereunder is in progress, it is agreed that, subject to the other conditions of this Agreement, the RETROCESSIONAIRE shall indemnify the COMPANY as if the entire loss had occurred during the term of this Agreement, provided the loss covered hereunder started before the time of termination. ARTICLE IX NET RETAINED LINES This Agreement applies only to that portion of any reinsurance which the COMPANY retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Agreement attaches, only loss or losses in respect of that portion of any reinsurances which the COMPANY retains net for its own account shall be included. The amount of the RETROCESSIONAIRE's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the COMPANY to collect from any other RETROCESSIONAIRE, whether specific or general, any amount which may have become due from them, whether such inability arises from the insolvency of such other RETROCESSIONAIRE or otherwise. ARTICLE X ULTIMATE NET LOSS The term "ultimate net loss" shall mean the sum actually paid by the COMPANY (including 80% of any Extra Contractual Obligations as defined in Article VII and 80% of any loss in Excess of Original Policy Limits as defined in Article VI) in settlement of losses or liability under its reinsurance policies after making deductions for all recoveries, all salvages and all claims upon other reinsurances whether collected or not and shall not include adjustment expenses arising from the settlement of losses except for settlement of claims where the original policy or reinsurance agreement includes such expense within the limit of indemnity. -5- GUY CARPENTER & COMPANY (CANADA) LIMITED 7 ULTIMATE NET LOSS (Continued) All salvages, recoveries, or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. These amounts shall be applied in the inverse order to which liability applies. Nothing in this Article shall be construed to mean that losses under this Agreement are not recoverable until the COMPANY's ultimate net loss has been ascertained. ARTICLE XI COSTS In the event of a loss arising to which the RETROCESSIONAIRE hereon may be liable to contribute, the RETROCESSIONAIRE shall contribute to the adjustment costs incurred by the COMPANY in the ratio that its proportion of the loss as finally settled bears to the total of the whole amount of such ultimate net loss. Adjustment costs shall exclude all office expenses of the COMPANY, all expenses for salaried employees and general retainer fees for counsel normally paid by the COMPANY. ARTICLE XII NOTICE OF LOSS AND LOSS SETTLEMENTS In the event of an occurrence which in the COMPANY's opinion is likely to give rise to a claim hereunder, prompt notice thereof shall BE given to the RETROCESSIONAIRE through Guy Carpenter and Company (Canada) Limited, 200 King Street West, Suite 1806, P.O. BOX 64, Toronto, Ontario, Canada M5H 3T4. All loss settlements made by the COMPANY, provided the same are within the terms of this Agreement, shall be unconditionally binding upon the RETROCESSIONAIRE and amounts failing to the share of the RETROCESSIONAIRE shall be immediately payable by it upon reasonable evidence of the amount paid or to be paid being presented to the RETROCESSIONAIRE. The RETROCESSIONAIRE shall not be relieved of liability by reason of an error or accidental omission by the COMPANY in reporting a loss or claim, provided such error or omission is rectified within a reasonable time period after discovery. THIS AGREEMENT SHALL COVER LOSSES RESULTING FROM RISKS ATTACHING IN EACH CONTRACT YEAR THAT THIS REINSURANCE IS in FORCE. NOTWITHSTANDING THE ABOVE PARAGRAPH, ALL LOSSES OR CLAIMS WITH RESPECT TO GENERAL LIABILITY BUSINESS WRITTEN ON AN OCCURRENCE BASIS AND REPORTED TO TRENWICK AMERICA (REGARDLESS OF THE COMPANY'S OPINION OF THE LIKELIHOOD OF A CLAIM HEREUNDER), SHALL BE REPORTED WITH FULL PARTICULARS BY THE COMPANY TO THE RETROCESSIONAIRE WITHIN FIVE YEARS. NO LIABILITY SHALL ATTACH HEREUNDER FOR ANY LOSS OR CLAIM NOT REPORTED WITHIN THIS PERIOD. -6- GUY CARPENTER & COMPANY (CANADA) LIMITED 8 ARTICLE XIII ERRORS AND OMISSIONS Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, provided such delay, omission or error is rectified within a reasonable time after discovery. Nevertheless, the Article shall not apply with respect to loss reports rendered to the RETROCESSIONAIRE beyond the period required to afford coverage in accordance with paragraph three, Article XII - NOTICE OF LOSS AND LOSS SETTLEMENTS. ARTICLE XIV PREMIUM An Annual Deposit Premium of $918,000 shall be paid in respect of each annual period in which this Agreement is in force, by the COMPANY to the RETROCESSIONAIRE in quarterly installments in arrears as follows:
First Quarter $183,600 Second Quarter $183,600 Third Quarter $275,400 Fourth Quarter $275,400
Within 60 days after the end of each calendar quarter the COMPANY shall report to the RETROCESSIONAIRE its actual Gross Net Written Premium Income for each quarter. The Reinsurance Premium shall be calculated by the COMPANY by applying a gross cession rate of 20%, less the 3% rate withheld as an aggregate loss deductible, as outlined in Article V - AMOUNT OF COVER AND RETENTION, for a net cession rate of 17% to be applied to the Gross Net Written Premium Income for each quarter. Should the Reinsurance Premium so calculated exceed the accumulated Deposit Premium already paid, then the COMPANY shall remit the balance due to the RETROCESSIONAIRE within sixty days from the end of the relevant quarter. However, should the final Reinsurance Premium so calculated be less than the premium already paid, but only after the Gross Net Written Premium Income has fully developed, then the RETROCESSIONAIRE shall remit the balance due to the COMPANY immediately upon receipt of the report. This reinsurance premium due the RETROCESSIONAIRE will continue to be adjusted after 31st December, 1996 subject to the calculations described in the above paragraph. The term "Gross Net Written Premium Income" shall mean the written premiums on business covered under this Agreement, less cancellations and returns and less any premiums paid for reinsurance, recoveries under which would inure to the RETROCESSIONAIRE's benefit. -7- GUY CARPENTER & COMPANY (CANADA) LIMITED 9 ARTICLE XV REINSTATEMENT In the event of any claim arising or payments made under this Agreement, the indemnity provided hereby shall be automatically reinstated to the original amount without the payment of any additional premium. ARTICLE XVI FEDERAL EXCISE TAX (This clause applies only to those RETROCESSIONAIRES who are domiciled outside of the United States of America with the exception of RETROCESSIONAIRES at Lloyd's of London and any other RETROCESSIONAIRES who may be exempt from Federal Excise Tax.) The RETROCESSIONAIRE agrees to the deduction of Federal Excise Tax from all premium payable hereon, but only to the extent that such premium is subject to Federal Excise Tax. In the event that a return premium becomes due hereunder, the RETROCESSIONAIRE will deduct the statutorily prescribed percentage from the amount of the return and the COMPANY or its agent may take steps to recover the tax from the United States Government. ARTICLE XVII OFFSET The COMPANY and the RETROCESSIONAIRE may offset any balances, whether with respect to premiums, commissions, claims, losses, loss expenses, salvage or any other amounts due from one party to the other in any period in which this Agreement is in force. ARTICLE XVIII LETTER OF CREDIT (This clause applies only to those RETROCESSIONAIRES who cannot qualify for credit by any state having jurisdiction over the COMPANY's loss reserves.) As regards policies or bonds issued by the COMPANY and coming within the scope of this Agreement, it is agreed that if the COMPANY cannot receive full regulatory credit for the RETROCESSIONAIRE'S portion of any loss (including allocated loss adjustment expenses), premium, as agreed, and/or unearned Reinsurance Premium reserves (if any) required by law because of the regulatory status of the RETROCESSIONAIRE in any jurisdiction within the United States, then the COMPANY shall forward to the RETROCESSIONAIRE a statement specifying the RETROCESSIONAIRE'S portion of such reserves. Upon receipt of such statement, the RETROCESSIONAIRE agrees that it shall promptly provide the COMPANY with a clean, unconditional and irrevocable Letter of Credit with a minimum term of one year and issued by any bank acceptable to the governmental authority having jurisdiction over the -8- GUY CARPENTER & COMPANY (CANADA) LIMITED 10 LETTER OF CREDIT (Continued) COMPANY'S loss reserves in an amount equal to RETROCESSIONAIRE'S proportion of said loss reserves. The COMPANY and the RETROCESSIONAIRE agree that the Letter of Credit provided by the RETROCESSIONAIRE under this provision may be drawn upon at any time, notwithstanding any other provisions in this Agreement, and that the COMPANY or its successors in interest shall use and apply any amounts which it may draw upon such Letter of Credit for the following purposes only: (a) To pay the RETROCESSIONAIRE'S portion or to reimburse itself for the RETROCESSIONAIRE'S portion of any liability for loss or unearned Reinsurance Premium (if any) or any other amount due the COMPANY hereunder; (b) To make refund of any sum which is in excess of the actual amount required to pay the RETROCESSIONAIRE'S portion of any liability for loss or unearned Reinsurance Premium (if any) or any other amount due hereunder- The bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the COMPANY or the disposition of funds withdrawn, except to assure that withdrawals are made only upon the order of properly authorized representatives of the COMPANY. The rights and obligations of the COMPANY and the RETROCESSIONAIRE, as set forth in this Article, shall not be diminished in any manner whatsoever by the insolvency of any party hereto. ARTICLE XIX CURRENCY All accounts shall be rendered and payments made in United States dollars. For the purpose of converting foreign currency into United States dollars, the rates of exchange shall be the rates stipulated from time to time by the Treasurer of the COMPANY in accordance with the mean rates of exchange ruling in New York, New York and used within the COMPANY as the basis of all currency transactions. Notwithstanding the above, the COMPANY shall be obligated: 1. In the event of blocked currencies, to notify the RETROCESSIONAIRE of their existence and to adjust subsequent accounts to reflect exchange rates realized when currencies become unblocked. 2. In the event of significant changes in exchange rates between recording dates of premium and collection thereof to notify the RETROCESSIONAIRE and adjust subsequent accounts accordingly. -9- GUY CARPENTER & COMPANY (CANADA) LIMITED 11 CURRENCY (Continued) 3. In the administration of the two preceding paragraphs to deal impartially with any such adjustment. ARTICLE XX ACCESS TO RECORDS The RETROCESSIONAIRE or its duly accredited representatives shall have the right after providing reasonable notice to examine the books and records of the COMPANY at all reasonable times for the purpose of obtaining information concerning this Agreement or the subject matter thereof. ARTICLE XXI AMENDMENTS AND ALTERATIONS It is hereby understood and agreed that any amendments and/or alterations to this Agreement that are mutually agreed upon, either by addendum or by correspondence, shall be automatically binding on the parties hereto and shall be considered to form an integral part hereof. ARTICLE XXII INSOLVENCY In the event of the insolvency of the COMPANY, recoveries hereunder shall be payable directly to the COMPANY, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the COMPANY without diminution because of the insolvency of the COMPANY or because the liquidator, receiver, conservator or statutory successor of the COMPANY had failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator, or statutory successor of the COMPANY shall give written notice to the RETROCESSIONAIRE of the pendency of a claim against the COMPANY indicating the policy or bond reinsured which claim would involve a possible liability on the part of the RETROCESSIONAIRE within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, 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 that it may deem available to the COMPANY or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the RETROCESSIONAIRE shall be chargeable, subject to the approval of the court, against the COMPANY as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the COMPANY solely as a result of the defense undertaken by the RETROCESSIONAIRE. -10- GUY CARPENTER & COMPANY (CANADA) LIMITED 12 INSOLVENCY (Continued) Where two or more RETROCESSIONAIRES on this Agreement are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the COMPANY. ARTICLE XXIII ARBITRATION Any difference of opinion between the COMPANY and a RETROCESSIONAIRE with respect to the interpretation of this Agreement or the performance of the obligations under this Agreement shall be submitted to arbitration. Each party shall select an arbitrator within thirty (30) days after written request for arbitration has been received from the party requesting arbitration. If either party refuses or neglects to appoint an arbitrator within thirty (30) days after receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators. The two arbitrators shall select a third arbitrator within ten (10) days after both have been appointed. Should the arbitrators fail to agree on a third arbitrator, then the third arbitrator shall be selected pursuant to the commercial arbitration rules of the American Arbitration Association. The arbitrators shall be officials or former officials of other insurance or reinsurance companies. The decision in writing of any two arbitrators, when filed with the parties hereto, shall be final and binding on both parties. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration proceedings are to be governed by the rules of the American Arbitration Association and the New York State arbitration law. The arbitration is to take place in New York, New York unless another location is mutually agreed upon between the COMPANY and the RETROCESSIONAIRE. ARTICLE XXIV SERVICE OF SUIT (Applies only to those RETROCESSIONAIRES who are domiciled outside the United States of America.) In the event of the failure of the RETROCESSIONAIRES to pay any amount claimed to be due hereunder, or to comply with any other terms or provisions of this Agreement, the RETROCESSIONAIRES, at the request of the COMPANY, will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction, and all matters arising hereunder shall be determined in accordance with the law and practice of such court. The RETROCESSIONAIRES shall, within thirty (30) days after demanded by the COMPANY, designate an agent for the service of process and upon default in so designating an agent, the RETROCESSIONAIRES agree and hereby designate the Registrar of Companies to be their duly authorized agent and true and lawful attorney to accept service of process on behalf of the RETROCESSIONAIRES in any such suit and upon the request of the -11- GUY CARPENTER & COMPANY (CANADA) LIMITED 13 SERVICE OF SUIT (Continued) COMPANY to give a written undertaking to the COMPANY that it will enter a general appearance upon the RETROCESSIONAIRES' behalf in the event such a suit be instituted. ARTICLE XXV INTERMEDIARY Guy Carpenter & Company (Canada) Limited is hereby recognized as the intermediary negotiating this Agreement for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expenses, salvages, and loss settlements) relating thereto shall be transmitted to the COMPANY or the RETROCESSIONAIRE through Guy Carpenter & Company (Canada), Limited, 200 King Street West, Suite 1806, P.O. Box 64, Toronto, Ontario, Canada M5H 3T4. Payments by the COMPANY to the intermediary shall be deemed to constitute payment to the RETROCESSIONAIRE. Payments by the RETROCESSIONAIRE to the intermediary shall be deemed to constitute payment to the COMPANY only to the extent that such payments are actually received by the COMPANY. -12- GUY CARPENTER & COMPANY (CANADA) LIMITED 14 NUCLEAR INCIDENT EXCLUSION CLAUSE LIABILITY - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the COMPANY as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the COMPANY, whether new, renewal or replacement, of the following classes, namely, Personal Liability Farmers Liability Storekeepers Liability which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: - Limited Exclusion Provision. This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the COMPANY, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include from their inception dates and thereafter, the following provision: - Broad Exclusion Provision. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act: nor GUY CARPENTER & COMPANY (CANADA) LIMITED 15 NUCLEAR INCIDENT EXCLUSION CLAUSE LIABILITY - REINSURANCE - CANADA (Continued) (b) to bodily injury or property damage with respect to which an Insured under this policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive. toxic, explosive, or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means": (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; GUY CARPENTER & COMPANY (CANADA) LIMITED 16 NUCLEAR INCIDENT EXCLUSION CLAUSE LIABILITY - REINSURANCE - CANADA (Continued) (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. GUY CARPENTER & COMPANY (CANADA) LIMITED 17 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Continued) Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverage, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): Broad Exclusion Provision* It is agreed that the policy does not apply: I. Under any Liability Coverage, to (injury, sickness, disease, death or destruction** (bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to (immediate medical or surgical relief** (first aid to expenses incurred with respect to (bodily injury, sickness, disease or death** (bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to (injury, sickness, disease, death or destruction** (bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or GUY CARPENTER & COMPANY (CANADA) LIMITED 18 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Continued) (c) the (injury, sickness, disease, death or destruction** (bodily injury or property damage arising out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to (injury to or destruction of property at such nuclear facility** (property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "hazardous properties" include radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or by-product material: "source material", "special nuclear material", and "by-product material" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing by-product material and (2) resulting from the operation by any person or organization of any nuclear facility included within th definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations: "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; (With respect to injury to or destruction of property, the word "injury" or "destruction"** ("property damage" includes all forms of radioactive contamination of property. (includes all forms of radioactive contamination of property** GUY CARPENTER & COMPANY (CANADA) LIMITED 19 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (1) This Agreement does not cover any loss or liability accruing to the COMPANY as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this Agreement all the original policies of the COMPANY (new, renewal and replacement) of the classes specified in Clause 11 of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): Limited Exclusion Provision* I. It is agreed that the policy does not apply under any liability coverage, to (injury, sickness, disease, death or destruction** (bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after lst May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies or policies or combination policies of a similar nature, issued by the COMPANY on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this Agreement the original liability policies of the COMPANY (new, renewal and replacement) affording the following coverages: GUY CARPENTER & COMPANY (CANADA) LIMITED 20 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (Continued) V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the COMPANY on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the COMPANY in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada. *NOTE: The words preceding the double asterisk in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. GUY CARPENTER & COMPANY (CANADA) LIMITED EX-10.32 6 EXHIBIT 10.32 1 EXHIBIT 10.32 TRENWICK AMERICA REINSURANCE CORPORATION FIRST LAYER PROPERTY CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT AR 1570-96 (1996 AGREEMENT YEAR) 2 FIRST LAYER PROPERTY CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT ARTICLE PAGE ------- ---- COVERAGE I 2 TERM II 3 EXTENDED TERMINATION III 3 TERRITORY IV 4 EXCLUSIONS V 4 DEFINITIONS VI 7 RETENTION AND LIMIT VII 8 REINSTATEMENT VIII 8 NET RETAINED LIABILITY IX 9 RATE AND PREMIUM X 9 EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY XI 10 REPORTS AND REMITTANCES XII 11 RESERVES AND LETTERS OF CREDIT XIII 12 LOSS NOTICES AND SETTLEMENTS XIV 14 OFFSET XV 15 SALVAGE AND SUBROGATION XVI 15 WARRANTY XVII 16 DELAYS, ERRORS, OR OMISSIONS XVIII 16 AMENDMENTS XIX 17 ACCESS TO RECORDS XX 17 INSOLVENCY XXI 17 ARBITRATION XXIII 19 TAXES XXIII 20 FEDERAL EXCISE TAX XXIV 20 CURRENCY XXV 21 SERVICE OF SUIT XXVI 21 INTERMEDIARY XXVII 23 1 3 FIRST LAYER PROPERTY CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT THIS AGREEMENT is made and entered into by and between TRENWICK AMERICA REINSURANCE CORPORATION, a Connecticut corporation (hereinafter called the "Retrocedent") of the one part, and the various Retrocessionaires as identified by the Interests and Liabilities Agreements attaching to and forming part of this Agreement (hereinafter called the "Retrocessionaires") of the other part. WITNESSETH: That in consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinbelow set forth, the parties hereto agree as follows: ARTICLE I COVERAGE The Retrocessionaires will indemnify the Retrocedent, subject to the limits set forth in the Retention and Limit Article for any loss or losses occurring during the term of this Agreement under all original contracts underwritten by the Retrocedent and classified by the Retrocedent as: PROPERTY REINSURANCE BUSINESS ASSUMED, INCLUDING THE PROPERTY PORTIONS OF MULTI-LINE BUSINESS AND WORKERS COMPENSATION AND/OR EMPLOYERS LIABILITY LOSSES ARISING FROM ONE OR MORE OF THE FOLLOWING PERILS: FIRE, LIGHTNING, EXPLOSION, STRUCTURAL COLLAPSE, WINDSTORM, HAIL, FLOOD, SEISMIC ACTIVITY, VOLCANIC ERUPTION, COLLISION, RIOTS AND STRIKES, CIVIL COMMOTION, OR MALICIOUS MISCHIEF, AND ANY PHYSICAL DAMAGE AND/OR CONSEQUENTIAL LOSS COVERAGE CONTINGENT THEREON EFFECTED BY AN INSURED ON BEHALF OF ANOTHER PARTY. 2 4 All reinsurance for which the Retrocessionaires will be obligated by virtue of this Agreement will be subject to the same terms, conditions, interpretations, waivers, modifications, and alterations as the respective original contracts of the Retrocedent to which this Agreement applies. Nothing herein will in any manner create any obligations or establish any rights against the Retrocessionaires in favor of any third parties or any persons not parties to this Agreement except as provided in the Insolvency Article. ARTICLE II TERM This Agreement will apply to all losses occurring during the 12-month term incepting at 12:01 a.m. Eastern Standard Time on January 1, 1996. Notwithstanding the expiration of this Agreement as hereinabove provided, its provisions will continue to apply to all unfinished business hereunder to the end that all obligations and liabilities incurred by each party hereunder will be fully performed and discharged. ARTICLE III EXTENDED TERMINATION Should this Agreement expire while a loss occurrence covered hereunder is in progress, subject to the other conditions of this Agreement, the Retrocessionaires will indemnify the Retrocedent as if the entire loss occurrence had arisen during the term of this Agreement, and provided that no part of said loss occurrence is claimed against any renewal of this Agreement. 3 5 ARTICLE IV TERRITORY The territorial limits of this Agreement will include the United States of America, the District of Columbia, Canada, and incidental locations elsewhere. ARTICLE V EXCLUSIONS No reinsurance indemnity will be afforded under this Agreement for: A. Loss or damage directly caused by war and/or civil war, but this exclusion will not apply to business written in accordance with the Market War and/or Civil War Exclusion Agreement. B. Any loss or liability accruing to the Retrocedent directly or indirectly and whether as insurer or reinsurer from any pool of insurers or reinsurers formed for the purposes of covering Atomic or Nuclear Energy Risks. C. Nuclear risks as defined in the following: 1. Nuclear Incident Exclusion Clause -- Physical Damage -Reinsurance (U.S.A.) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. 2. Nuclear Incident Exclusion Clause -- Physical Damage -Reinsurance (Canada) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. 3. Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994) (Worldwide Excluding U.S.A. & Canada) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. 4 6 4. Nuclear Incident Exclusion Clauses -- Physical Damage and Liability (Boiler and Machinery Policies) -- Reinsurance (U.S.A. and Canada) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. D. Financial Guarantee, Insolvency, or Credit Business. E. Fidelity and Surety. F. Reinsurance of Coastal Pools when written as such. G. Life business, other than Accidental Death and Dismemberment. H. Aviation, Aerospace, and Satellite business. I. Casualty business, except as set forth in the Coverage Article. J. Hail damage to growing or standing crops. K. Banking or Funding Plans. L. Target Risks as excluded in the Retrocedent's original contracts or the original policies of the Retrocedent's reinsureds. M. Loss or liability excluded by the Insolvency Funds Exclusion Clause attached to this Agreement. N. Reinsurance assumed on an excess of loss and/or pro rata reinsurance basis issued in the name of and for the account of a Lloyd's Syndicate or of an insurance or reinsurance company, whether such liability is accepted either directly or under any form of reinsurance from other insurers and/or reinsurers, and all such liability is excluded from the protection of this Reinsurance and cannot be taken into account in arriving at the amount in the excess of which this Reinsurance attaches or the ultimate net loss sustained by the Retrocedent. O. All losses sustained by the Retrocedent howsoever and wheresoever arising including all Business Interruption, Consequential Loss and/or other contingent losses proximately caused by a peril insured in respect of the Retrocedent's exposures from: 1. All marine business when written as such; however, not to exclude such exposures if they emanate from a multi-line insurance contract and/or policy. 5 7 2. All Offshore exposures arising from business of any description connected with the oil and/or gas and/or sulphur and/or uranium exploration and production industries in all their phases and including all associated support and/or service industries. "Offshore" will be defined as: (a) That area encompassing locations covered by oceans or seas in which the water ebbs and flows and/or (b) Other navigable waters or waterways which will mean any water which is in fact navigable by ships or vessels, whether or not the tide ebbs and flows there, and whether or not there is a public right of navigation on that water. P. Losses in respect of overhead transmission and distribution lines and their supporting structures other than those on or within 500 feet of the insured premises; however, public utilities extension and/or suppliers extension and/or contingent business interruption coverages are not subject to this exclusion, provided that these are not part of a transmitter's or distributor's policy. Q. Auto Collision. The exclusions set forth above will not apply where the Retrocedent is obliged to provide coverage by reason of membership in any state plan, pool, facility, joint underwriting association or similar involuntary participation. The Retrocedent may submit to the Retrocessionaires, for special acceptance hereunder, business not covered by this Agreement. If said business is accepted by the Retrocessionaires, it will be subject to the terms of this Agreement, except as such terms are modified by such acceptance. 6 8 ARTICLE VI DEFINITIONS The following words and phrases used in this Agreement will have the indicated meanings: A. "Original contracts" as used in this Agreement will mean any and all policies, binders, certificates, acceptances, contracts, or agreements of reinsurance, whether written or oral. B. "Net written premium" as used in this Agreement will mean 100% of the gross written premium on property business and 5% of the gross written premium on Workers Compensation and Employers Liability business both the subject of and accounted for during the term of this Agreement, less returned premiums, and less premiums paid for reinsurance, recoveries under which inure to the benefit of this Agreement. C. "Loss occurrence" as used in this Agreement will mean all losses arising out of or following one event. As regards aggregate and/or stop loss original contracts assumed by the Retrocedent, the proportion of such loss or losses that forms part of the Retrocedent's ultimate net loss under this Agreement will be the proportion of the whole aggregate recovery that the original reinsured's individual catastrophe loss bears to its total losses used in arriving at aggregate excess recoveries. D. "Ultimate net loss" as used in this Agreement will mean the actual loss or losses sustained by the Retrocedent both as regards the original contracts and this Agreement, including 100% of any extra contractual obligations and/or excess limits liabilities incurred by any original reinsured and 80% of any extra contractual obligations and/or excess limits liabilities incurred by the Retrocedent, on its net retained liability after making deductions for all recoveries, salvages, and all reinsurance (other than underlying reinsurance) whether collectible or not. Ultimate net loss will cover loss expense incurred by the Retrocedent (both as regards the original contracts and this Agreement) and arising from the settlement of claims, including interest and court costs incurred in investigation, adjustment, and litigation and a pro rata share of salaries and expenses of the field adjusters of the original reinsured and the Retrocedent while adjusting such claims, and expenses of other employees of the original reinsured and the Retrocedent who have been temporarily diverted from their normal and customary duties as a result of such claims. However, both salaries of other employees and office expenses of the original reinsured and Retrocedent will be excluded. All salvages, recoveries, or reinsurance payments received subsequent to any 7 9 loss settlement hereunder will be applied as if received prior to the settlement, and all necessary adjustments will be made by the parties hereto. Nothing in this definition, however, should be construed to mean that losses under this Agreement are not recoverable until the Retrocedent's ultimate net loss has been ascertained. ARTICLE VII RETENTION AND LIMIT No claim will be made hereunder unless the Retrocedent has first sustained an ultimate net, loss in excess of $4,000,000 each and every loss occurrence. The Retrocessionaires will then be liable for the amount of ultimate net loss in excess of $4,000,000 each and every loss occurrence, but the limit of liability of the Retrocessionaires will not exceed $6,000,000 with respect to each and every loss occurrence. ARTICLE VIII REINSTATEMENT In the event that all or any portion of the reinsurance under this Agreement is exhausted by loss, the amount so exhausted will be reinstated from the time of occurrence of such loss. The Retrocessionaires' liability will not exceed $6,000,000 in respect of each and every loss occurrence nor $12,000,000 during the 12-month term of this Agreement. For each amount so reinstated, the Retrocedent win pay an additional premium based upon the pro rata amount of the reinstatement only. The provisional reinstatement premium, based on the minimum and deposit premium and finally adjusted as set forth in 8 10 the Rate and Premium Article, will be paid by the Retrocedent at the time of the reinstatement. ARTICLE IX NET RETAINED LIABILITY In computing the amount or amounts in excess of which this Agreement attaches, only a loss or losses in respect to that portion of any reinsurance that the Retrocedent retains net for its own account will be included. The amount of the Retrocessionaires' liability hereunder with respect to any loss or losses will not be increased by the inability of the Retrocedent to collect from any other Retrocessionaires any amounts that may have become due from them, whether such inability arises from the insolvency of such Retrocessionaires or otherwise. ARTICLE X RATE AND PREMIUM For the term of this Agreement, there will be a minimum and deposit premium hereon of $1,500,000, payable in equal semi-annual installments of $750,000 on January I and July 1. At Agreement expiration, the Retrocedent will adjust the minimum and deposit premium against a rate of 90% of the net written premium (excluding any reinstatement premium) for business classified by the Retrocedent as catastrophe business and 7.7% of the net written premium (excluding any reinstatement premium) for all other business covered hereunder. 9 11 ARTICLE XI EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY This Agreement will extend to cover losses arising from claims related extra contractual obligations and/or excess limits liabilities whether incurred by the original reinsured or the Retrocedent in accordance with the percent factors as set forth in the ultimate net loss definition. "Extra contractual obligations" as used in this Agreement will mean those liabilities not covered under any other provision of this Agreement, which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure to settle within the policy limit, by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action. "Excess limits liabilities" as used in this Agreement will mean damages payable in excess of the original reinsured's policy limit as a result of alleged or actual negligence, fraud, or bad faith in failing to settle and/or rejecting a settlement within the policy limit, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action. Excess limits liabilities will mean any amounts for which the original reinsured or the Retrocedent would have been contractually liable to pay had it not been for the limits of the original policy. There will be no recovery hereunder for an extra contractual obligation and/or excess limits liability loss that has been incurred due to fraud committed by a member of 10 12 the board of directors or a corporate officer of an original reinsured or the Retrocedent, acting individually, collectively, or in collusion with a member of the board of directors, a corporate officer, or a partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of an original reinsured or the Retrocedent. The date on which any extra contractual obligation and/or excess limits liability is incurred by an original reinsured or the Retrocedent will be deemed, in all circumstances, to be the date of the related occurrence under the original policy. Nothing in this Article will be construed to create a separate or distinct loss occurrence apart from the original covered loss occurrence that gave rise to the extra contractual obligations and/or excess limits liabilities discussed in the preceding paragraphs. In no event will the total limit of liability of the Retrocessionaires exceed their applicable limit of liability as set forth in the Retention and Limit Article. ARTICLE XII REPORTS AND REMITTANCES Within 60 days of the close of each quarter, the Retrocedent will furnish the Retrocessionaires with a report of reinsurance premium due them for that annual period. Such report will show and properly segregate the Retrocedent's premium to which the reinsurance rate applies as well as contain such other information as may be required by the Retrocessionaires for completion of their NAIC annual statements. Within 60 days of Agreement expiration, the premium due the Retrocessionaires will be balanced against the 11 13 minimum and deposit premium set forth in the Rate and Premium Article, and any balance shown to be due the Retrocessionaires will be remitted with said annual report. Any balance shown to be due the Retrocedent will be paid within 30 days following receipt of the annual report by the Retrocessionaires. ARTICLE XIII RESERVES AND LETTERS OF CREDIT (This Article is only applicable to those Retrocessionaires who cannot qualify for credit by each state or governmental authority having jurisdiction over the Retrocedent's loss reserves.) As regards original contracts issued by the Retrocedent coming within the scope of this Agreement, the Retrocedent agrees that, when it files with the Insurance Department or sets up on its books reserves for known losses that have been reported to the Retrocessionaires (including loss and loss expense paid by the Retrocedent but not recovered from the Retrocessionaires and loss and loss expense reported and outstanding), which it is required by law to set up, it will forward to the Retrocessionaires a statement showing the proportion of such loss reserves applicable to them. The Retrocessionaires hereby agree that they will apply for and secure delivery to the Retrocedent of a clean, irrevocable, and unconditional Letter of Credit, dated on or before December 31 of the year in which the request is made, and issued by Citibank, N.A. (or another member of the Federal Reserve System) or any bank approved for use by the NAIC Securities Valuation Office, and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Retrocedent's reserves in an amount equal to the Retrocessionaires' 12 14 proportion of such reserves as shown in the statement prepared by the Retrocedent. Under no circumstances will any amount relating to reserves in respect of Incurred But Not Reported losses be included in the amount of the Letter of Credit. The Letter of Credit will be issued for a period of not less than one year, and will be automatically extended for one year from its date of expiration or any future expiration date unless 30 days prior to any expiration date the issuing bank notifies the Retrocedent by registered mail that it elects not to consider the Letter of Credit extended for any additional period. An issuing bank, not a member of the Federal Reserve System or not chartered in the state of domicile of the Retrocedent, will provide 60 days notice to the Retrocedent prior to any expiration in the event of nonextension. Notwithstanding any other provisions of this Agreement, the Retrocedent or its court-appointed successor in interest may draw upon such credit at any time without diminution because of the insolvency of the Retrocedent or of any Retrocessionaire for one or more of the following purposes only: A. To pay the Retrocessionaire's share or to reimburse the Retrocedent for the Retrocessionaire's share of any loss reinsured by this Agreement, which has not been otherwise paid. B. To make refund of any sum in excess of the actual amount required to pay the Retrocessionaire's share of any liability reinsured by this Agreement. C. In the event of nonextension of the Letter of Credit as provided for above, to establish deposit of the Retrocessionaire's share of reserves for losses under this Agreement. Such cash deposit will be held in an interest bearing account separate from the Retrocedent's other assets, and interest thereon will accrue to the benefit of the Retrocessionaires. The issuing bank will have no responsibility whatsoever in connection with the propriety of withdrawals made by the Retrocedent or the disposition of funds withdrawn, 13 15 except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Retrocedent. At annual intervals, or more frequently as agreed but never more frequently than semi-annually, the Retrocedent will prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Retrocessionaires' share of reserves for losses. If the statement shows that the Retrocessionaires' share of such reserves exceeds the balance of credit as of the statement date, the Retrocessionaires will, within 30 days after receipt of notice of such excess, secure delivery to the Retrocedent of an amendment of the Letter of Credit, increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Retrocessionaires' share of such reserves is less than the balance of credit as of the statement date, the Retrocedent will, within 30 days after receipt of written request from the Retrocessionaires, release such excess credit by agreeing to secure an amendment to the Letter of Credit, reducing the amount of credit available by the amount of such excess credit. ARTICLE XIV LOSS NOTICES AND SETTLEMENTS The Retrocedent will advise the Retrocessionaires promptly of all losses that, in the opinion of the Retrocedent, appear to involve the Retrocessionaires under this Agreement and of all subsequent developments pertaining thereto that, in the opinion of the Retrocedent, may materially affect them as well. Inadvertent omission in dispatching the aforementioned notices will in no way affect the obligation of the Retrocessionaires 14 16 under this Agreement, providing the Retrocedent informs the Retrocessionaires of such omission promptly upon discovery. The Retrocedent will have the right to settle all claims under this Agreement. The loss settlements of the original reinsured, provided they are within the terms of the original contracts, and the loss settlements of the Retrocedent, provided they are within the terms of this Agreement, will be unconditionally binding on the Retrocessionaires in proportion to their participation in this Agreement. Amounts due the Retrocedent hereunder in the settlement of loss and loss expense will be payable by the Retrocessionaires immediately upon being furnished by the Retrocedent with reasonable evidence of the amount paid or to be paid in excess of the Retrocedent's ultimate net loss retention as set forth in the Retention and Limit Article, by reason of any one loss occurrence. ARTICLE XV OFFSET The Retrocedent and each Retrocessionaire hereunder will be entitled to deduct from amounts due the other party under this Agreement any amounts due itself from the other party under this Agreement. ARTICLE XVI SALVAGE AND SUBROGATION The Retrocessionaires will be credited with their share of salvage and/or subrogation (i.e., reimbursement obtained or recovery made by the Retrocedent less 15 17 expense incurred in obtaining such reimbursement or making such recovery) pertaining to the claims and settlements involving reinsurance hereunder. Salvage and/or subrogation will always be used to reimburse the excess Retrocessionaires (and the Retrocedent if it carries a portion of the excess coverage net) in the reverse order of their participation in said loss before being used in any way to reimburse the Retrocedent for the loss within its primary retention. If salvage and/or subrogation is insufficient to cover the expense incurred in its recovery, the net expense (after deduction of the amount recovered, if any) will be added to ultimate net loss as will loss expense incurred by the Retrocedent prior to any reimbursement for salvage and/or subrogation. ARTICLE XVII WARRANTY It is hereby warranted that no claim will be paid hereunder unless two or more original risks are involved in the same loss occurrence. It is further warranted that the Retrocedent will retain 5% net and unreinsured. ARTICLE XVIII DELAYS, ERRORS, OR OMISSIONS Inadvertent delays, errors, or omissions made in connection with this Agreement or any transaction hereunder will not relieve either party from any liability that would have attached had such delay, error, or omission not occurred, provided always that such error 16 18 or omission is rectified immediately upon discovery. The liability of the Retrocessionaires under this Agreement will in no event exceed the limits specified in the Retention and Limit Article, nor will the Retrocessionaires' liability be extended to cover any risks, perils, or classes of insurance excluded herein except as set forth in the Exclusions Article. ARTICLE XIX AMENDMENTS This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the Retrocedent and the Retrocessionaires by addenda hereto, which will then constitute a part of this Agreement. ARTICLE XX ACCESS TO RECORDS Provided that the Retrocedent has been given reasonable notice, the Retrocessionaires will have the right to inspect at any reasonable time, through their designated representatives, all records of the Retrocedent that pertain in any way to this Agreement. ARTICLE XXI INSOLVENCY In the event of the Retrocedent's insolvency, the reinsurance under this Agreement will be payable by the Retrocessionaires directly to the Retrocedent, its liquidator, 17 19 receiver, conservator, or statutory successor, on the basis of the Retrocedent's liability under the original contracts without diminution because of the Retrocedent's insolvency or because the liquidator, receiver, conservator, or statutory successor of the Retrocedent has failed to pay all or a portion of any claims, subject however, to the right of the Retrocessionaires to offset from such funds due hereunder, any sums that may be payable to it by said insolvent Retrocedent in accordance with the Offset Article. As a condition precedent to the Retrocessionaires' foregoing obligation, however, the liquidator, receiver, conservator, or statutory successor of the Retrocedent will give written notice of the pendency of a claim against the insolvent Retrocedent on the original contract or contracts reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Retrocessionaires may investigate such claim and interpose, at their own expense, in the proceeding where such claim is to be adjudicated, any defense that they may deem available to the Retrocedent, its liquidator, receiver, conservator, or statutory successor. The expense thus incurred by the Retrocessionaires will be chargeable against the Retrocedent, subject to court approval, as part of the expense of conservation or liquidation to the extent that such proportionate share of the benefit will accrue to the Retrocedent solely as a result of the defense undertaken by the Retrocessionaires. Where two or more Retrocessionaires are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense will be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Retrocedent. 18 20 ARTICLE XXII ARBITRATION In the event of any arbitration between the Retrocedent and its original reinsureds under the terms of any original contract, the Retrocessionaires agree unreservedly to abide by the result of such arbitration. If any dispute will arise between the parties to this Agreement with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, whether such dispute arises before or after termination of this Agreement, such dispute, upon the written request of either party, will be submitted to three arbitrators, one to be chosen by each party, and the third by the two so chosen. If either party refuses or neglects to appoint an arbitrator within thirty days after the receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators. If the two arbitrators fail to agree in the selection of a third arbitrator within thirty days of their appointment, the third arbitrator will be selected from a panel of three names to be supplied by the Insurance Arbitration Forums. If the two arbitrators cannot mutually agree on the arbitrator to be chosen from this panel, each party to the arbitration will have the right to reject one member of the panel. This rejection process will be sequential, with the right of first rejection to be decided by a toss of a coin. All arbitrators will be active or retired disinterested officers of insurance or reinsurance companies not under the control of either party to this Agreement. The arbitrators will interpret this Agreement as an honorable engagement and not as merely a legal obligation. The arbitrators will adopt their own rules and procedures. 19 21 They will make their award with a view of effecting the general purpose of this Agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. Each party will submit its case to its arbitrator within thirty days of the appointment of the third arbitrator. The decision in writing of any two arbitrators, when filed with the parties hereto, will be final and binding on both parties. Judgment may be entered upon the final decision of the arbitrators in any court having jurisdiction. Each party will bear the expense of its own arbitrator and will jointly and equally bear with the other party the expense of the third arbitrator and of the arbitration. Said arbitration will take place in the City in which the Retrocedent's Head Office is located unless some other place is mutually agreed upon by the parties to this Agreement. ARTICLE XXIII TAXES The Retrocedent will pay all taxes (except Federal Excise Tax) on premiums reported to the Retrocessionaires on this Agreement. ARTICLE XXIV FEDERAL EXCISE TAX (This Article applies to Retrocessionaires domiciled outside the United States of America, excepting Lloyd's London Underwriters and other Retrocessionaires exempt from Federal Excise Tax.) The Retrocessionaires will allow for the purpose of paying Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of 20 22 the Internal Revenue Service Code) to the extent such premium is subject to such tax. In the event of any return of premium, the Retrocessionaires will deduct the aforesaid percentage from the return premium payable hereon and the Retrocedent or its agent will recover such tax from the United States Government. ARTICLE XXV CURRENCY The use of the sign "$" in this Agreement is in reference to United States of America Dollars. Therefore, premiums due the Retrocessionaires and loss payments due the Retrocedent hereunder will be in United States of America Dollars. ARTICLE XXVI SERVICE OF SUIT (This Article applies to those Retrocessionaires domiciled outside the United States of America as well as those Retrocessionaires unauthorized in the Retrocedent's state of domicile. This Article is not intended to conflict with or override the parties' obligation to arbitrate their disputes in accordance with the Arbitration Article.) In the event of the failure of any Retrocessionaire hereon to pay any amount claimed to be due hereunder, the Retrocessionaire, at the request of the Retrocedent, will submit to the jurisdiction of A Court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Retrocessionaire's right to commence an action in any Court of competent jurisdiction in 21 23 the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any state in the United States. Service of process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, or another party specifically designated in the applicable Interests and Liabilities Agreement attached hereto. In any suit instituted against it upon this Agreement, the Retrocessionaire will abide by the final decision of such Court or of any Appellate Court in the event of an appeal. The above named are authorized and directed to accept service of process on behalf of the Retrocessionaire in any such suit and/or upon the request of the Retrocedent to give a written undertaking to the Retrocedent that they will enter a general appearance upon the Retrocessionaire's behalf in the event such a suit is instituted. Further, pursuant to any statute of any state, territory, or district of the United States that makes provision therefor, the Retrocessionaire hereby designates the Superintendent, Commissioner, or Director of Insurance or other officer specified for that purpose in the statute (or his successor or successors in office) 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 Retrocedent or any beneficiary hereunder arising out of this Agreement, and hereby designates the above named as the person to whom the said officer is authorized to mail such process or a true copy thereof. 22 24 ARTICLE XXVII INTERMEDIARY Aon Re Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (including but not limited to notices, statements, premiums, return premiums, commissions, taxes, losses, loss expenses, salvages, and loss settlements) relating thereto will be transmitted to the Retrocedent or the Retrocessionaires through Aon Re Inc., 123 N. Wacker Drive, Chicago, Illinois 60606. Payments by the Retrocedent to the Intermediary will be deemed payment to the Retrocessionaires. Payments by the Retrocessionaires to the Intermediary will be deemed payment to the Retrocedent only to the extent that such payments are actually received by the Retrocedent. 23 25 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note. - Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 26 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA 1. This Agreement does not cover any loss or liability accruing to the Reinsured directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (a) Nuclear reactor power plants including all auxiliary property on the site, or (b) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or (c) Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or (d) Installations other than those listed in (c) above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs 1 and 2 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3 shall not operate: (a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act or by any law amendatory thereof. 7. Reinsured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. 8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer caused: (a) by any nuclear incident as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensuing loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; (b) by contamination by radioactive material. NOTE: Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, paragraph 8 of this clause shall only apply to all original contracts of the Reinsured whether new, renewal or replacement which become effective on or after December 31, 1992. 27 NUCLEAR ENERGY RISKS EXCLUSION CLAUSE REINSURANCE (1994) WORLDWIDE EXCLUDING U.S.A. & CANADA) This agreement shall exclude Nuclear Energy Risks whether such risks are written directly and or by way of reinsurance and/or via Pools and/or Associations. For all purposes of this agreement Nuclear Energy Risks shall mean all first party and/or third party insurances or reinsurances ??????? Workers' Compensation and Employers' Liability in respect of: (I) All Property on the site of a nuclear power station. Nuclear Reactors, reactor buildings and plant and equipment therein on any site other than a nuclear power station. (II) All Property on any site (including but not limited to the sites referred to in (1) above) used or having been used for: (a) The generation of nuclear energy; or (b) The Production, Use or Storage or Nuclear Material. (III) Any other Property eligible for insurance by the relevant local Nuclear Insurance Pool and/or Association but only to the extent of the requirements of that local Pool and/or Association. (IV) The supply of goods and services to any of the sites, described in (I) to (III) above, unless such insurances or reinsurances shall exclude the perils or irradiation and contamination by Nuclear Material. Except as undernoted, Nuclear Energy Risks shall not include:- (i) Any insurance or reinsurance in respect of the construction or erection or installation or replacement or repair or maintenance or decommissioning of Property as described in (I) to (III) above (including contractors, plant and equipment): (ii) Any Machinery Breakdown or other Engineering insurance or reinsurance not coming within the scope of (i) above; Provided always that such insurance or reinsurance shall exclude the perils of irradiation and contamination by Nuclear Material. However, the above exemption shall not extend to:- (1) The provision of any insurance or reinsurance whatsoever in respect of:- (a) Nuclear Material: (b) Any Property in the High Radioactivity Zone or Area of any Nuclear Installation as from the introduction of Nuclear Material or - for reactor installations - as from fuel loading or first criticality where so agreed with the relevant local Nuclear Insurance Pool and/or Association. (2) The provision of any insurance or reinsurance for the undernoted perils: - -- Fire, lightning, explosion; -- Earthquake; -- Aircraft and other aerial devices or articles dropped therefrom; -- Irradiation and radioactive contamination; -- Any other peril insured by the relevant local Nuclear Insurance Pool and/or Association. In respect of any other Property not specified in (1) above which directly involves the Production, Use or Storage of Nuclear Material as from the introduction of Nuclear Material into such Property. 28 Definitions "NUCLEAR MATERIAL" means:- (i) Nuclear fuels other than natural uranium and depleted uranium, capable of producing energy by a self-sustaining chain process of nuclear fusion outside a NUCLEAR REACTOR either alone or in combination with some other material, and (ii) Radioactive Products or Waste "RADIOACTIVE PRODUCTS OR WASTE" means any radioactive material produced in, or any material made radioactive by exposure to the radiation incidental to the production or utilisation of nuclear fuel, but does not include radioisotopes which have reached the final stage of fabrication so as to be usable for any scientific, medical, agricultural, commercial or industrial purpose. "NUCLEAR INSTALLATION" means: (i) Any NUCLEAR REACTOR: (ii) Any factory using nuclear fuel for the production of NUCLEAR MATERIAL, or any factory for the processing of NUCLEAR MATERIAL, including any factory for the reprocessing of irradiated nuclear fuel; and (iii) Any facility where NUCLEAR MATERIAL is stored, other than storage incidental to the carriage of such material. "NUCLEAR REACTOR" means any structure containing nuclear fuel in such an arrangement that a self-sustaining chain process of nuclear fission can occur therein without an additional source of neutrons. "PRODUCTION, USE OR STORAGE OF NUCLEAR MATERIAL" means the production, manufacture, enrichment, conditioning, processing, reprocessing, use, storage, handling and disposal of Nuclear Material. "PROPERTY" shall mean all land, buildings, structures, plant, equipment, vehicles, contents (including but not limited to liquids and gases) and all materials of whatever description whether fixed or not. "HIGH RADIOACTIVITY ZONE OR AREA" means:- (i) For nuclear power stations and Nuclear Reactors, the vessel or structure which immediately contains the core (including its supports and shrouding) and all the contents thereof, the fuel elements, the control rods and the irradiated fuel store; and (ii) For a non-reactor Nuclear Installation, any area where the level of radioactivity requires the provision of a biological shield. 29 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY (BOILER AND MACHINERY POLICIES) - REINSURANCE - U.S.A (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall be deemed to include the following provisions of this paragraph; This Policy does not apply to "loss," whether it be direct or indirect, proximate or remote (a) from an Accident caused directly or indirectly by nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled; or (b) from nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, caused directly or indirectly by, contributed to or aggravated by an Accident. (3) However, it is agreed that loss arising out of the use of Radioactive Isotopes in any form is not hereby excluded from reinsurance protection. (4) Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured effective on or before 30th April, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 30th April, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply, (b) with respect to any risk located in Canada policies issued by the Reassured effective on or before 30th June, 1958, shall be free from the application of the other provisions of this Clause until expiry date of 30th June, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. 30 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY (BOILER AND MACHINERY POLICIES) - REINSURANCE - U.S.A (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall be deemed to include the following provisions of this paragraph; This Policy does not apply to "loss," whether it be direct or indirect, proximate or remote (a) from an Accident caused directly or indirectly by nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled; or (b) from nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, caused directly or indirectly by, contributed to or aggravated by an Accident. (3) However, it is agreed that loss arising out of the use of Radioactive Isotopes in any form is not hereby excluded from reinsurance protection. (4) Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that all policies issued by the Reassured effective on or before 31st December, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. 31 INSOLVENCY FUNDS EXCLUSIONS CLAUSE This Agreement excludes all liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, plan, pool, association, fund, or other arrangement, howsoever denominated, established, or governed that provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. EX-10.33 7 EXHIBIT 10.33 1 PAGE 2 EXHIBIT 10.33 ARTICLE PAGE #
1. BUSINESS COVERED 3 2. TERM 3 3. TERRITORY 4 4. RETENTION, REINSURER'S SHARE AND LIMIT 4 5. LOSS SETTLEMENTS 6 6. REINSURANCE PREMIUM 6 7. ADDITIONAL PREMIUM 7 8. EXPERIENCE ACCOUNT 7 9. REINSURER'S MARGIN 8 10. FUNDS WITHHELD 8 11. COMMUTATION 10 12. REPORTS AND REMITTANCES 11 13. TAXES 12 14. COVENANTS OF THE REINSURED 12 15. DEFINITIONS 13 16. ULTIMATE NET LOSS 13 17. NET RETAINED LINES 14 18. RIGHT OF OFFSET 14 19. ERRORS AND OMISSIONS 15 20. CURRENCY 15 21. EXTRA CONTRACTUAL OBLIGATIONS 15 22. EXCESS OF ORIGINAL POLICY LIMITS LOSS 16 23. ARBITRATION 17 24. ACCESS TO RECORDS 18 25. INSOLVENCY 18 26. GOVERNING LAW 19 27. SERVICE OF SUIT 19 28. AMENDMENTS AND ALTERATIONS 20 29. ASSIGNMENT 20 30. NO THIRD PARTY RIGHTS 20 31. NO IMPLIED WAIVER 20 32. SECURITY 20 33. MERGERS AND ACQUISITIONS 21 34. INTERMEDIARY 21
BALIS & CO., INC. 2 Page 3 ARTICLE 1 - BUSINESS COVERED In consideration of the premium to be paid by the Reinsured and subject to the terms, conditions, exclusions and limits hereafter set forth, the Reinsurer agrees to indemnify the Reinsured on an aggregate excess of loss basis for the Reinsurer's Share of Ultimate Net Loss that the Reinsured has incurred as a result of losses occurring during the Term of this Agreement as respects the Reinsured's contracts, agreements and other evidence of reinsurance in respect of all casualty reinsurance assumed business entered into by the Reinsured (the "POLICIES"), but specifically excluding the following business: - - - finite risk reinsurance - - - pollution liability when written by the Reinsured as a named peril, but excluding first party cleanup - - - policyholder dividends - - - nuclear incidents: in accordance with the attached Nuclear Incident Exclusion Clauses: a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A. and Canada; b. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A. and Canada; C. Nuclear Incident Exclusion Clause - Physical Damage and Liability (Boiler and Machinery Policies) - Reinsurance - U.S.A. and Canada; d. Nuclear Energy Risks Exclusion Clause - Reinsurance - Worldwide excluding U.S.A. and Canada. - - - war risks (in accordance with the attached War Risk Exclusion Clause) - - - insolvency and guarantee funds (in accordance with the attached Insolvency And Guarantee Funds Exclusion Clause) - - - residual market assessments, second injury fund assessments, rehabilitation assessments, and any other similar type assessments - - - financial guarantee business - - - loss portfolio transfers ARTICLE 2 - TERM The term (the "TERM") of this Agreement shall commence at 12:01 a.m., Eastern Standard Time, January 1, 1996 (the "EFFECTIVE DATE") and shall remain in force until the earlier of 11:59 p.m., Eastern Standard Time, December 31, 1996 or the date of cancellation (the "EXPIRATION DATE"). BALIS & CO., INC. 3 Page 4 This Agreement may not be canceled by the Reinsured. The Reinsurer shall have the right to cancel this Agreement as provided for in the articles entitled "COVENANTS OF THE REINSURED", "MERGERS AND ACQUISITIONS", or "RIGHT OF OFFSET" and as provided for below: In the event that the Reinsured fails to pay the Reinsurance Premium and/or the Additional Premium, if any, within 15 days of the date such premium is due, the Reinsurer shall notify the Reinsured in writing via registered mail of the overdue amounts. In the event that the Reinsured does not remit the overdue amounts to the Reinsurer within 15 days of receiving such notification from the Reinsurer, the Reinsurer shall have the right to immediately cancel this Agreement by mailing the Reinsured a written notice of cancellation and the Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be immediately reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) as of the date of cancellation. The mailing of such notice shall be sufficient notice and the effective date of cancellation shall be the date the notice of cancellation was posted. In the event that the Reinsured fails to pay a Reinsurance Premium and/or an Additional Premium, if any, that is due after the Expiration Date of this Agreement within 15 days of the date such premium is due, the Reinsurer shall notify the Reinsured in writing via registered mail of the overdue amounts. In the event that the Reinsured does not remit the overdue amounts to the Reinsurer within 15 days of receiving such notification from the Reinsurer, the Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall immediately and without further notice be reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative). ARTICLE 3 - TERRITORY This Agreement shall apply only to losses occurring in the United States of America, Canada and Europe. ARTICLE 4 - RETENTION, REINSURER'S SHARE AND LIMIT 1) LIMIT A: The Reinsurer agrees to indemnify the Reinsured for the Reinsurer's Share of the amount of the Reinsured's aggregate Ultimate Net Loss that is in excess of 63% of the Net Subject Earned Premium. The "REINSURER'S SHARE" under Limit A shall be determined as follows: If the Ultimate Net Loss is less than 63% of the Net Subject Earned Premium, the Reinsurer's Share under Limit A shall equal zero, otherwise, the Reinsurer's Share under Limit A shall equal the lesser of (1) "A" divided by "B" or (2) 100%, BALIS & CO., INC. 4 Page 5 Where: "A" is equal to 195.0% of the Reinsurance Premium paid, plus the lesser of (1) the amount of Ultimate Net Loss incurred from Clash losses, or (2) $7 million; and "B" is equal to the amount of Ultimate Net Loss in excess of 63% of the Net Subject Earned Premium. UNDER NO CIRCUMSTANCES SHALL THE REINSURER'S AGGREGATE LIMIT OF LIABILITY FOR ULTIMATE NET LOSS UNDER THIS LIMIT A EXCEED 195.0% OF THE REINSURANCE PREMIUM PAID, PLUS $7 MILLION. 2) LIMIT B: The Reinsurer agrees to indemnify the Reinsured for the Reinsurer's Share of the amount of the Reinsured's aggregate Ultimate Net Loss that is in excess of 90% of the Net Subject Earned Premium. The "REINSURER'S SHARE" under Limit B shall be determined as follows: If the Ultimate Net Loss is less than 90% of the Net Subject Earned Premium, the Reinsurer's Share under Limit B shall equal zero, otherwise, the Reinsurer's Share under Limit B shall be equal to the lesser of (1) "C" divided by "D" or (2) "E", Where: "C" is equal to 25% of the Reinsurance Premium paid; and "D" is equal to the amount of Ultimate Net Loss in excess of 90% of the Net Subject Earned Premium; and "E" is equal to 100% less the Reinsurer's Share under Limit A calculated above. UNDER NO CIRCUMSTANCES SHALL THE REINSURER'S AGGREGATE LIMIT OF LIABILITY FOR ULTIMATE NET LOSS UNDER THIS LIMIT B EXCEED 25% OF THE REINSURANCE PREMIUM PAID. 3) TOTAL AGGREGATE LIMIT: Notwithstanding the Reinsurer's obligations under Limit A and Limit B above, the Reinsurer's maximum aggregate limit of liability for Ultimate Net Loss under this Agreement shall be subject to a maximum aggregate limit (the "TOTAL AGGREGATE LIMIT") equal to the lesser of: BALIS & CO., INC. 5 Page 6 (1) 220.0% of Reinsurance Premium paid, plus the lesser of (1) the amount of Ultimate Net Loss incurred from Clash losses, or (2) $7 million; or (2) $45.0 million plus the amount of Ultimate Net loss covered under Limit A that exceeds 195.0% of the Reinsurance Premium paid. Notwithstanding the foregoing, the Total Aggregate Limit of liability hereunder is further subject to adjustment as provided for in the articles entitled "TERM", "COVENANTS OF THE REINSURED" or "RIGHT OF OFFSET". UNDER NO CIRCUMSTANCES SHALL THE TOTAL LIABILITY OF THE REINSURER UNDER OR RELATED TO THIS AGREEMENT EXCEED THE TOTAL AGGREGATE LIMIT. ARTICLE 5 - LOSS SETTLEMENTS The Reinsurer agrees to pay the Reinsured the amounts of Ultimate Net Loss due hereunder and paid by the Reinsured (or payable by the Reinsured in case of insolvency in accordance with the article entitled "INSOLVENCY") quarterly in arrears and payment will be due within sixty (60) days following receipt and verification of an account statement submitted by the Reinsured to the Reinsurer. Ultimate Net Loss payments due by the Reinsurer in accordance with the provisions herein shall first be paid by way of offset against the Funds Withheld Balance until such account is exhausted. Notwithstanding any provision to the contrary contained herein, and except for the articles entitled "EXTRA CONTRACTUAL OBLIGATIONS" and "EXCESS OF ORIGINAL POLICY LIMITS", coverage under this Agreement is expressly limited to claims or losses arising under the Reinsured's Policies; provided, however, that such claims or losses are within the terms, conditions and limitations of the original policies and within the terms, conditions and limitations of this Agreement. ARTICLE 6 - REINSURANCE PREMIUM Subject to the article entitled "FUNDS WITHHELD", the Reinsured shall pay to the Reinsurer a premium (the "REINSURANCE PREMIUM") equal to 7.5% of the projected Subject Earned Premium, payable in equal quarterly installments in advance, subject to a maximum Reinsurance Premium of $23,076,923. Within thirty (30) days following the end of each calendar quarter the Reinsured shall make appropriate adjustments for the amount by which 7.5% of the Subject Earned Premium for that calendar quarter exceeds or is less than the amounts previously paid by the Reinsured for that calendar quarter. BALIS & CO., INC. 6 Page 7 ARTICLE 7 - ADDITIONAL PREMIUM Subject to the article entitled "FUNDS WITHHELD", the Reinsured shall pay to the Reinsurer an additional premium (the "Additional Premium") equal to 65% of the Ultimate Net Loss, covered under Limit A, in excess of 195% of the Reinsurance Premium paid, subject to a maximum Additional Premium equal to $4.55 million, and such Additional Premium shall be paid to the Reinsurer with the applicable quarterly Ultimate Net Loss report as indicated in the article entitled "REPORTS AND REMITTANCES". Within thirty (30) days following the end of each calendar quarter the Reinsured shall make appropriate adjustments for the amount by which 65% of the Ultimate Net Loss, covered under Limit A that is in excess of 195.0% of the Reinsurance Premium paid to date, exceeds or is less than the amounts of Additional Premiums previously paid by the Reinsured. ARTICLE 8 - EXPERIENCE ACCOUNT A notional account (the "EXPERIENCE ACCOUNT") shall be calculated by the Reinsurer from the Effective Date of this Agreement and maintained until there is a complete and final release of all of the Reinsurer's obligations to the Reinsured under this Agreement. The balance of the Experience Account (the "EXPERIENCE ACCOUNT BALANCE") as of any December 31st shall be defined as: (1) 100% of the Reinsurance Premium and Additional Premium, if any, received by the Reinsurer (or Funds Withheld in accordance with the article entitled "FUNDS WITHHELD"), less (2) the Reinsurer's Margin paid to the Reinsurer, less (3) 100% of Ultimate Net Loss paid (or offset) by the Reinsurer, plus (4) the Cumulative Experience Account Investment Credit. The Reinsurance Premium, and Additional Premium, if any, shall be credited to the Experience Account on the day said monies are received by the Reinsurer's designated bank, or credited to the Funds Withheld Balance in accordance with the article entitled "FUNDS WITHHELD", as the case may be. The Ultimate Net Loss due from the Reinsurer shall be charged against the Experience Account on the day said monies are received by the Reinsured's designated bank, or offset against the Funds Withheld Balance in accordance with the article entitled "FUNDS WITHHELD", as the case may be, and further subject to the article entitled "REPORTS AND REMITTANCES". BALIS & CO., INC. 7 Page 8 For the purpose of calculating the balance of the Experience Account, the Reinsurer's Margin shall be deemed to be deducted in proportion to and at the same time as the crediting to the Experience Account of the Reinsurance Premium. The Experience Account investment credit (the "EXPERIENCE ACCOUNT INVESTMENT CREDIT") for each calendar year shall equal the average daily balance of the Experience Account for that calendar year (or portion thereof), determined as if the Reinsurance Premium and Additional Premium, if any, as finally computed were paid on January 1, 1996, multiplied by 7% (or the pro-rata portion thereof). The cumulative Experience Account Investment Credit (the "CUMULATIVE EXPERIENCE ACCOUNT INVESTMENT CREDIT") shall be equal to the sum of the Experience Account Investment Credit for each calendar year, or portion thereof, since the Effective Date of this Agreement. ARTICLE 9 - REINSURER'S MARGIN The Reinsurer's margin (the "REINSURER'S MARGIN") shall be equal to 8.5% of the Reinsurance Premium payable under this Agreement. ARTICLE 10 - FUNDS WITHHELD Subject to the terms herein, the Reinsured shall retain the Reinsurance Premium and Additional Premium, if any, due hereunder on a funds withheld basis, provided however, that the Reinsurer's Margin shall be paid in cash to the Reinsurer and shall not be affected by the terms of this "Funds Withheld" article. The amount of such withheld Reinsurance Premium, net of Reinsurer's Margin, and Additional Premium, if any, shall be called "FUNDS WITHHELD". In consideration of the Reinsurer agreeing to the Funds Withheld, the Reinsured agrees (i) to calculate a notional Funds Withheld account from the Effective Date of this Agreement until there is a complete and final release of all of the Reinsurer's obligations to the Reinsured under this Agreement and (ii) that the Funds Withheld Balance may be set off by the Reinsurer against liability of any nature whatsoever (whether then contingent, due and payable, or in the future becoming due) that the Reinsurer may then have, or in the future may have under this Agreement and (iii) that such setoff shall occur as a condition precedent to any payments by the Reinsurer hereunder. The balance of the Funds Withheld account (the "FUNDS WITHHELD BALANCE") as of any December 31st shall be defined as: (1) 100% of the Reinsurance Premium and Additional Premium, if any, due hereunder, less (2) the Reinsurer's Margin paid to the Reinsurer, less (3) 100% of Ultimate Net Loss paid (or offset) by the Reinsurer, plus (4) the Cumulative Funds Withheld Investment Credit. BALIS & CO., INC. 8 Page 9 The Reinsurance Premium, and Additional Premium, if any, shall be credited to the Funds Withheld Balance on the date such monies are payable. The Ultimate Net Loss due from the Reinsurer shall be charged against the Funds Withheld Balance on the date such monies are due and further subject to article entitled "REPORTS AND REMITTANCES". For the purpose of calculating the balance of the Funds Withheld Account, the Reinsurer's Margin shall be deemed to be deducted in proportion to and at the same time as the crediting to the Funds Withheld Account of the Reinsurance Premium. The Funds Withheld investment credit (the "FUNDS WITHHELD INVESTMENT CREDIT") for each calendar year shall equal the average daily balance of the Funds Withheld Balance for that calendar year (or portion thereof), determined as if the Reinsurance Premium and Additional Premium, if any, as finally computed was paid on January 1, 1996, multiplied by 9% (or the pro-rata portion thereof). The cumulative Funds Withheld Investment Credit (the "CUMULATIVE FUNDS WITHHELD INVESTMENT CREDIT") shall be equal to sum of the Funds Withheld Investment Credit for each calendar year, or portion thereof, since the Effective Date of this Agreement. The Reinsured promises to pay to the Reinsurer the Funds Withheld Balance immediately upon the sooner of: 1) commutation of this Agreement, 2) an Event of Default, or 3) December 31, 2010. The Reinsured shall not have the right to prepay all or a part of the Funds Withheld Balance without the Reinsurer's express written consent. The following shall be defined as "EVENTS OF DEFAULT" and the whole of the Funds Withheld Balance shall, upon demand of the Reinsurer, become immediately due and payable, together with all accrued interest and other unpaid sums owing in relation thereto: (1) Payment Defaults The Reinsured fails to make any payment under this Agreement when due and in the manner therein provided, except where the Reinsurer receives the overdue payment within fifteen business days of the non-payment; (2) Executions Creditors attach or take possession of or distress, execution, sequestration, seizure, attachment or other equivalent or analogous process is levied or enforced upon or sued out against any material amount of the Reinsured's assets; or BALIS & CO., INC. 9 Page 10 (3) Insolvency The Reinsured commences a proceeding or proceedings are commenced against it seeking dissolution, winding-up, liquidation, administration, reorganization, suspension or compromise of payments or other relief under any applicable bankruptcy, insolvency or other similar law or seeking the appointment of an administrator or a trustee, receiver, manager, receiver-manager, liquidator, custodian, curator or other similar official of it or any substantial part of the Reinsured's assets, or the Reinsured consents to any such relief (including any bankruptcy petition) or appointment in involuntary proceedings taken against it, or makes a bulk sale of its assets or a general assignment or proposal for the benefit of creditors, or fails or admits its inability to pay its debts as they become due, or suspends or ceases or threatens to suspend or cease carrying on business; or it takes any action in furtherance of any of the foregoing. ARTICLE 11 - COMMUTATION Subject to the terms of this article, the Reinsured may, at its sole option, commute this Agreement at any December 31st, beginning on December 31, 2000, subject to ninety (90) days prior written notice by the Reinsured to the Reinsurer by registered or certified mail. If the Reinsured elects to commute this Agreement, the Reinsured shall pay to the Reinsurer as a condition precedent to the commutation the Funds Withheld Balance as of the date of commutation of this Agreement and the Reinsurer shall pay to the Reinsured the following amounts within sixty (60) business days of the date of commutation: (1) Commuted Value of Ceded Unpaid Ultimate Net Loss If, at the time of commutation, the Ceded Unpaid Ultimate Net Loss is less than or equal to the balance in the Experience Account, the Reinsurer agrees to pay all Ceded Unpaid Ultimate Net Loss at the amount valued by the Reinsured. If, at the time of commutation, the Ceded Unpaid Ultimate Net Loss is greater than the balance in the Experience Account, the Ceded Unpaid Ultimate Net Loss shall be commuted at a present value amount to be mutually agreed. If the present value amount of the Ceded Unpaid Ultimate Net Loss cannot be mutually agreed by the Reinsured and the Reinsurer, then a mutually acceptable independent third party actuary shall be called upon to make an independent estimation of the present value amount of the Ceded Unpaid Ultimate Net Loss (the cost of which shall be shared equally by the Reinsured and Reinsurer). If the actuary's estimation is acceptable to both Reinsurer and Reinsured, then this Agreement shall be commuted at the value as estimated by the actuary. If the actuary's value is unacceptable to either the Reinsured or the Reinsurer, or if the parties cannot agree on the selection of the actuary, then the Agreement will not be commuted at that time. (2) Premium Refund BALIS & CO., INC. 10 Page 11 (2) Premium Refund Upon commutation under (1) above, the Reinsurer shall pay to the Reinsured a "PREMIUM REFUND" equal to the positive balance, if any, of the Experience Account after deducting the value of the commuted Ceded Unpaid Ultimate Net Loss as per (1) above. Payment of the Ceded Unpaid Ultimate Net Loss and Premium Refund, if any, by the Reinsurer as described above shall constitute a complete and final release of the Reinsurer in respect of any and all of the Reinsurer's obligations of any nature whatsoever to the Reinsured under or related to this Agreement. ARTICLE 12 - REPORTS AND REMITTANCES 1. The Reinsured shall furnish to the Reinsurer within fifteen (15) days prior to the close of the calendar quarter an estimate of the amount of Ultimate Net Loss ceded under this Agreement as of the close of that calendar quarter, including a separate estimate of the amount of Ultimate Net Loss incurred from Clash losses. 2. The Reinsured shall furnish to the Reinsurer within thirty (30) days after the close of each calendar quarter: (a) quarterly account of Subject Earned Premium segregated by line of business (and for the total of all lines). (b) quarterly accounts of paid and unpaid Ultimate Net Loss segregated by line of business (and for the total of all lines of business). (c) a reconciliation of the Funds Withheld Balance from inception to the close of the most recent preceding calendar quarter. 3. The Reinsured shall furnish to the Reinsurer within thirty (30) days after the end of each calendar quarter, quarterly accounts of paid Ultimate Net Loss ceded under this Agreement which are due to be paid by the Reinsurer to the Reinsured. As respects the Funds Withheld Balance, Ultimate Net Loss amounts shall be deemed to be paid as of the date the Reinsurer agrees to the amount to be paid and such agreement shall be made within sixty (60) days after receipt of this account. 4. The Reinsured shall furnish to the Reinsurer within one hundred twenty (120) days after the close of each calendar year annual paid projections of Ultimate Net Loss, including Allocated Loss Adjustment Expense, segregated by line of business. 5. The Reinsurer shall furnish to the Reinsured within thirty (30) days after the close of each quarter a reconciliation of the Experience Account from inception to the close of the most recent preceding calendar quarter. BALIS & CO., INC. 11 Page 12 6. All amounts due and payable under this Agreement shall be remitted directly by wire transfer between the Reinsured and the Reinsurer with notice to the Intermediary, unless such amounts are withheld by the Reinsured in accordance with the Funds Withheld provision of this Agreement. 7. Any late payments by either party shall accrue interest at a rate equal to the greater of 1% per month, compounded semi-annually, or the yield on the one year United States Treasury Bill existent on the first business day after the previous January 1st, as published in the Wall Street Journal, plus 250 basis points. ARTICLE 13 - TAXES The Reinsured shall pay all taxes of any nature associated with this Agreement and undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or the District of Columbia. Provided, however, that this Article shall not impose any liability on the Reinsured for any income, capital gains, profits or other similar taxes payable by the Reinsurer in respect of its operations or this Agreement. ARTICLE 14 - COVENANTS OF THE REINSURED The Reinsured agrees not to change claims handling procedures, loss reserving process, levels of ceding commissions in its underlying contracts, or the levels of reinsurance protection in any manner from that in effect at the inception of this Agreement which materially affects this Agreement or the obligations of the parties hereunder, unless the Reinsured has received the prior written approval of the Reinsurer to such changes, such approval not to be unreasonably withheld. In the event that the Reinsured does not adhere to these Covenants, the Reinsurer shall have the right to immediately cancel this Agreement by mailing the Reinsured a written notice of cancellation and the remaining unpaid Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be immediately reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) as of the date of cancellation. The mailing of such notice shall be sufficient notice and the effective date of cancellation shall be the date the notice of cancellation was posted. In the event that the Reinsurer learns about a violation of these Covenants after the Expiration Date of this Agreement, the remaining unpaid Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) upon written notice by the Reinsurer to the Reinsured by registered or certified mail. BALIS & CO., INC. 12 Page 13 Notwithstanding the foregoing, the remedy to the Reinsurer in the event of a breach by the Reinsured of any of the foregoing covenants may not be invoked unless the Reinsurer is called upon to pay Ultimate Net Loss under this Agreement which is in excess of the Funds Withheld Balance. ARTICLE 15 - DEFINITIONS All words and phrases that have a capitalized initial letter in this Agreement have a special meaning which is either introduced in certain Articles or which is defined below and which shall include the plural as well as the singular. "AGREEMENT" means this agreement as the same may be amended from time to time in accordance with the terms hereof and all instruments supplemental hereto or in amendment or confirmation hereof; additionally, the expressions "herein", "hereof", "hereto", "above", "below" and similar expressions used in any paragraph, subparagraph, section or article of this Agreement shall refer to this Agreement and not to that paragraph, subparagraph, section or article only, unless otherwise expressly provided. "CEDED UNPAID ULTIMATE NET LOSS" shall mean the cumulative Ultimate Net Loss ceded under this Agreement by the Reinsured from the Effective Date less cumulative Ultimate Net Loss paid (or offset) under this Agreement by the Reinsurer to the Reinsured from the Effective Date. "SUBJECT EARNED PREMIUM" shall mean gross premiums earned on all casualty business in-force, written or renewed by the Reinsured during the Term of this Agreement less return premiums less premiums ceded for all reinsurance which would inure to the benefit of the Reinsurer under this Agreement. For purposes of this Agreement, the projected Subject Earned Premium is equal to $223 million. "NET SUBJECT EARNED PREMIUM" shall mean Subject Earned Premium less Reinsurance Premium ceded to the Reinsurer under this Agreement. "CLASH" loss shall mean the Reinsured's Ultimate Net Loss, as defined herein, that is triggered by clash losses as classified by the Reinsured in accordance with the Reinsured's underwriting guidelines. ARTICLE 16 - ULTIMATE NET LOSS "ULTIMATE NET LOSS" shall mean the actual loss incurred by the Reinsured and Allocated Loss Adjustment Expense ("ALAE") on Business Covered on the Reinsured's Net Retained Lines, and shall include 80% of the amounts of any Extra Contractual Obligations and 80% of the amounts of any Excess of Original Policy Limits after making deductions for all recoveries, salvages, subrogations and all claims on inuring reinsurance, whether collectible or not. BALIS & CO., INC. 13 Page 14 ALAE shall mean all legal expenses and other expenses (including interest accruing before and/or after entry of judgment) incurred by the Reinsured in connection with the investigation, adjustment, settlement or litigation of claims or losses, including salaries and expenses of the Reinsured's field employees while adjusting such claims or losses and expenses of the Reinsured's officials incurred in connection with claims or losses. However, salaries of the Reinsured's officials or normal overhead charges such as rent, postal, lighting, cleaning, heating, etc. shall not be included. All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto, provided always that nothing in this clause shall be construed to mean that Ultimate Net Loss under this Agreement are not recoverable until the Reinsured's Ultimate Net Loss has been ascertained. The Ultimate Net Loss, as determined by the Reinsured, is subject to agreement by the Reinsurer. If the Reinsurer disagrees with the Ultimate Net Loss determined by the Reinsured and the Reinsurer is called upon to pay Ultimate Net Loss under this Agreement, a mutually agreed upon independent national actuarial firm shall be engaged to evaluate the Ultimate Net Loss covered under this Agreement and such evaluation shall be subject to the confines of the Ultimate Net Loss determined by the Reinsured and the Ultimate Net Loss determined by the Reinsurer and shall be binding. Such cost to be shared equally by the Reinsured and the Reinsurer. If the parties fail to agree on the selection of an independent national actuarial firm each of them shall name two, of whom the other shall decline one, and the decision shall be made by drawing lots. ARTICLE 17 - NET RETAINED LINES This Agreement applies only to that portion of any policy which the Reinsured retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of the Retentions, only loss or losses in respect of that portion of any policy which the Reinsured retains net for its own account shall be included. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Reinsured to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. ARTICLE 18 - RIGHT OF OFFSET The Reinsured and the Reinsurer may offset any balance or amount due from one party to the other under this Agreement or any other contract heretofore or hereafter entered into between the Reinsured and the Reinsurer, whether acting as assuming reinsurer or ceding company or in any other capacity. BALIS & CO., INC. 14 Page 15 In extension and not in limitation to the above, the Reinsurer shall have an absolute right to offset any amounts due to the Reinsured against the Funds Withheld Balance. In the event that this right of offset between the Reinsured and the Reinsurer is specifically disallowed or judged to be unenforceable by any court of competent jurisdiction, arbitration panel or regulatory body then all amounts in the Funds Withheld Balance shall immediately become due and payable in full. If the Funds Withheld Balance is not remitted to the Reinsurer within fifteen (15) days, the Reinsurer shall have the option to immediately cancel this Agreement by mailing the Reinsured a written notice of cancellation and the remaining unpaid Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be immediately reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) as of the date of cancellation. The mailing of such notice shall be sufficient notice and the effective date of cancellation shall be the date the notice of cancellation was posted. In the event that the Reinsured fails to remit to the Reinsurer the Funds Withheld Balance that is due and payable in accordance with the provisions in this article after the Expiration Date of this Agreement within 15 days of the date such payment is due, the Reinsurer shall notify the Reinsured in writing via registered mail of the overdue amounts. In the event that the Reinsured does not remit the overdue amounts to the Reinsurer within 15 days of receiving such notification from the Reinsurer, the remaining unpaid Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be immediately reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) without further notice. ARTICLE 19 - ERRORS AND OMISSIONS Any omission or error by either party to this Agreement will not relieve either party of liability hereunder, provided such act, omission, or error is not prejudicial to the other party and is rectified promptly upon discovery by the responsible party. ARTICLE 20 - CURRENCY The provisions of this Agreement involving dollar designated amounts are expressed in United States currency and all payments shall be made in this currency. ARTICLE 21 - EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall indemnify the Reinsured within the limits hereof, where the Ultimate Net Loss includes 80% of any Extra Contractual Obligations. BALIS & CO., INC. 15 Page 16 "Extra Contractual Obligations" are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on Business Covered hereunder, such liabilities arising because of, but not limited to the failure by the Reinsured to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Reinsured shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence. However, this Article shall not apply and there shall be no recovery hereunder where the loss has been incurred due to the fraud by a member of the Board of Directors, a corporate officer, or a supervisory employee of the Reinsured acting individually or collectively or in collusion with a member of the Board of Directors, a corporate officer, supervisory employee or partner of any (other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of the Reinsured. ARTICLE 22 - EXCESS OF ORIGINAL POLICY LIMITS LOSS This Agreement shall indemnify the Reinsured, within the limits hereof, where the Ultimate Net Loss includes 80% of any Excess of Original Policy Limits Loss. "Excess of Original Policy Limits Loss" shall mean any loss of the Reinsured in excess of the limit of its original policy, such loss in excess of the limit having been incurred because of failure by it to settle within the policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. However, this Article shall not apply and there shall be no recovery hereunder where the loss has been incurred due to the fraud by a member of the Board of Directors, a corporate officer, or a supervisory employee of the Reinsured acting individually or collectively or in collusion with a member of the Board of Directors, a corporate officer, supervisory employee or partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of the Reinsured. For the purposes of this Article, the word "loss" shall mean any amounts for which the Reinsured would have been contractually liable to pay had it not been for the limit of the original policy. BALIS & CO., INC. 16 Page 17 ARTICLE 23 - ARBITRATION Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration must be in writing and sent certified or registered mail, return receipt requested. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator (the "Umpire") who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the Umpire within thirty (30) days of their appointment, the two arbitrators shall request the American Arbitration Association ("AAA") to provide a list of possible Umpires with the qualifications set forth in this Article and the parties shall then mutually agree upon an Umpire from this list. If the parties are unable to agree upon the Umpire within thirty (30) days of the receipt of the AAA list or if the AAA fails to provide such a list within thirty (30) days of the request, either party may apply to the United States Federal Court for the Southern District of New York to appoint an Umpire with those qualifications. The Umpire shall promptly notify in writing all parties to the arbitration of his selection. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies or Underwriters at Lloyd's of London. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in New York, New York, but the venue may be changed when deemed by the panel to be in the best interest of the arbitration proceeding. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of New York. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. To the extent, and only to the extent, that the provisions of this Agreement are ambiguous or unclear, the panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business. The panel shall render its decision within sixty (60) days following the termination of hearings, which decision shall be in writing, stating the reasons thereof. Judgment upon the award may be entered in any court having jurisdiction thereof. BALIS & CO. INC. 17 Page 18 Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. ARTICLE 24 - ACCESS TO RECORDS The Reinsurer or its duly appointed representatives shall have free access to the books, records and papers of the Reinsured or its agents at all reasonable times during the continuance of this Agreement or any liability hereunder, for the purpose of obtaining information concerning this Agreement or the subject matter thereof. ARTICLE 25 - INSOLVENCY In the event of the insolvency of the Reinsured, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Reinsured under Policy or Policies reinsured without diminution because of the insolvency of the Reinsured, to the Reinsured or to its liquidator, receiver, or statutory successor except as provided by Section 4118(a) of the New York Insurance Law or except when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Reinsured and when the Reinsurer with the consent of the direct insured or insureds has assumed such Policy obligations of the Reinsured as direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Reinsured so such payees. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Reinsured shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Reinsured on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Reinsured or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Reinsured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reinsured solely as a result of the defense undertaken by the Reinsurer. When two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the insolvent Reinsured. BALIS & CO. INC. 18 Page 19 Should any party hereto be placed in rehabilitation or liquidation or should a rehabilitator, liquidator, receiver, conservator or other person or entity of similar capacity be appointed as respects such party, all amounts due any of the parties hereto whether by reason of premiums, losses or otherwise under this Agreement or any other contract(s) of reinsurance heretofore or hereafter entered into between the parties (whether or not any such contract(s) be assumed or ceded) shall at all times be subject to the right of offset at any time and from time to time, and upon the exercise of same, only the net balance shall be due and payable in accordance with Section 7427 of the Insurance Law of the State of New York to the extent such statute or any other applicable law, statute or regulation governing such offset shall apply. ARTICLE 26 - GOVERNING LAW This Agreement shall be interpreted and governed by the laws of the State of New York without regard to its principles of choice of law. ARTICLE 27 - SERVICE OF SUIT (This Article only applies to reinsurers domiciled outside of the United States and/or unauthorized in any state, territory, or district of the United States having jurisdiction over the Reinsured). It is agreed that in the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder or to perform any other obligation under the Agreement, the Reinsurer, at the request of the Reinsured, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. It is further agreed that service of process in such suit may be made upon Willkie Farr and Gallagher, One Citicorp Center, 47th Floor, New York, New York, 10022, and that in any suit instituted, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Reinsured to give a written undertaking to the Reinsured that they will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. BALIS & CO. INC. 19 Page 20 Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereon hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, 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 Reinsured or any beneficiary hereunder arising out of this Agreement of reinsurance, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. The foregoing is not intended to conflict with or override the obligation of the parties hereto to arbitrate their disputes as provided in the Arbitration clause. ARTICLE 28 - AMENDMENTS AND ALTERATIONS This Agreement may be changed, altered or amended as the parties may agree, provided such change, alteration or amendment is evidenced in writing or by endorsement executed by the Reinsured and the Reinsurer. ARTICLE 29 - ASSIGNMENT Except as expressly provided otherwise in the article entitled "INSOLVENCY", neither party may assign or transfer any rights, interests or obligations under this Agreement to any person or entity without the written consent of the other party and any effort to so assign such rights, interests or obligations without the consent of the other party shall be null and void. ARTICLE 30 - NO THIRD PARTY RIGHTS This Agreement is solely between the Reinsured and the Reinsurer, and in no instance shall any other party have any rights under this Agreement except as expressly provided otherwise in the Insolvency Article. ARTICLE 31 - NO IMPLIED WAIVER The failure of any party to enforce any of the provisions herein shall not be construed to be a waiver of the right of such party to enforce any such provision. ARTICLE 32 - SECURITY If the Reinsurer's surplus falls below $40 million, the Reinsured may require the Reinsurer to post a "clean", unconditional, evergreen and irrevocable Letter of Credit or to provide a reinsurance trust fund issued by a bank acceptable to the Reinsured in favor of the Reinsured in an amount up to the excess of the Ceded Unpaid Ultimate Net Loss over the Funds Withheld Balance. BALIS & CO. INC. 20 Page 21 ARTICLE 33 - MERGERS AND ACQUISITIONS It is understood and agreed that if at any time during the Term of this Agreement the Reinsured acquires (by acquisition, reinsurance of or renewal of) any other insurance or reinsurance company or individual or groups of individual book(s) of business of any other insurance or reinsurance company that comprises not more than ten (10) percent (whether individually or in the aggregate with respect to related transactions or parties) of Subject Earned Premium, such company or book(s) of business will be covered hereunder, provided that written notice is given to the Reinsurer of any such newly affiliated company or book(s) of business as soon as practicable with full particulars as to how such affiliation is likely to affect this Agreement. If such acquisition, as defined above, comprises more than ten (10) percent (whether individually or in the aggregate with respect to related transactions or parties)) of Subject Earned Premium, such company or book(s) of business will be covered hereunder provided that prior written notice of such transaction is given to the Reinsurer with full particulars as to how such transaction is likely to affect this Agreement, and the Reinsurer agrees in its sole discretion in writing that this Agreement applies to such acquired insurance or reinsurance company or book(s) of business. In the event that the Reinsured merges with another company at any time during the Term of this Agreement, this Agreement shall survive such merger and the surviving entity shall be covered hereunder provided that prior written notice of such transaction is given to the Reinsurer with full particulars as to how such transaction is likely to affect this Agreement, and the Reinsurer agrees in its sole discretion in writing that this Agreement applies to such surviving entity. ARTICLE 34 - INTERMEDIARY Balis & Co., Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (including but not limited to notices and statements) relating to this Agreement shall be transmitted to the Reinsured through Balis & Co., Inc., Two Logan Square, Philadelphia, PA 19103-2772. All amounts due under this Agreement (including but not limited to Reinsurance Premium and Ultimate Net Loss) shall be remitted directly by wire transfer between the Reinsured and the Reinsurer with notice to the Intermediary. BALIS & CO. INC. 21 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (Wherever the word "Reassured" appears in this Clause, it shall be deemed to read "Reassured", "Reinsured", "Company", or whatever other word is employed throughout the text of the reinsurance agreement to which this Clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in clause II of this paragraph (2) from the time specified in clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply, under any liability coverage, to injury, sickness, disease, death or destruction bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof. BALIS & CO., INC. 22 Page 2 (3) Except for those classes of policies specified in clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Products Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief first aid, to expenses incurred with respect to bodily injury, sickness, disease or death bodily injury BALIS & CO., INC. 23 Page 3 resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage, to injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property threat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL", "SPECIAL NUCLEAR MATERIAL", and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof, "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, BALIS & CO., INC. 24 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Reinsurance all the original liability contracts of the Reassured, whether new, renewal or replacement, of the following classes, namely, Personal Liability, Farmers Liability, Storekeepers Liability, which become effective on or after 31st December, 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: - Limited Exclusion Provision. This Policy does not apply to bodily injury or property damage with respect to which an Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Reinsurance all the original liability contracts of the Reassured, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December, 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: - Broad Exclusion Provision. It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; nor (b) to bodily injury or property damage with respect to which an Insured under this policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; nor (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: BALIS & CO., INC. 25 (i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (ii) the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be usable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage, BALIS & CO., INC. 26 NMA 1979 (11/10/84) NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company", "Reinsured", "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Agreement" shall be understood to mean "Agreement", "Contract", "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" shall be understood to mean "Reinsurers", "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. BALIS & CO., INC. 27 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE (Wherever the word "Reassured" appears in this Clause, it shall be deemed to read "Reassured", "Reinsured", "Company", or whatever other word is employed throughout the text of the reinsurance agreement to which this clause is attached to designate the company or companies reinsured.) (1) This reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. (2) Without in any way restricting the operation of paragraph (1) of this Clause, this reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. (3) Without in any way restricting the operation of paragraphs (1) and (2) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January, 1960, this subparagraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraphs (1), (2) and (3) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. BALIS & CO., INC. 28 (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. (6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any Law amendatory thereof (7) The Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. BALIS & CO., INC. 29 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA 1. This Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1 of this clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (1) Nuclear reactor power plants including all auxiliary property on the site, or (2) Any other nuclear reactor, installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or (3) Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or (4) Installations other than those listed in (3) above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1 and 2 of this clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3 shall not operate. (a) where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of this clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to the primary hazard. 6. The term "prescribed substances" shall have the meaning given it by the Atomic Energy Control Act or by any law amendatory thereof. BALIS & CO., INC. 30 Page 2 7. The Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. 8. Without in any way restricting the operation of paragraphs 1,2,3 and 4 of this clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer caused: (1) by any nuclear incident as defined in The Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensuing loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; (2) by contamination by radioactive material. NOTE: - Without in any way restricting the operation of paragraph 1,2,3 and 4 of this clause, paragraph 8 of this clause shall only apply to all original contracts of the Reassured whether new, renewal or replacement which become effective on or after December 31, 1992. NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company", "Reinsured", "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Contract" shall be understood to mean "Agreement", "Contract", "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" shall be understood to mean "Reinsurers", "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. BALIS & CO., INC. 31 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY (BOILER AND MACHINERY POLICIES) - REINSURANCE (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall be deemed to include the following provisions of this paragraph: This policy does not apply to "loss", whether it be direct or indirect, proximate or remote (a) from an Accident caused directly or indirectly by nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled; or (b) from nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, caused directly or indirectly by, contributed to or aggravated by an Accident. (3) However, it is agreed that loss arising out of the use of Radioactive Isotopes in any form is not hereby excluded from reinsurance protection. (4) Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured effective on or before 30th April, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 30th April, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada, policies issued by the Reassured effective on or before 30th June, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 30th June, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. BALIS & CO., INC. 32 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY (BOILER AND MACHINERY POLICIES) - REINSURANCE - CANADA (1) This Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this Reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall be deemed to include the following provisions of this paragraph; This Policy does not apply to loss, whether it be direct or indirect, proximate or remote (a) from an Accident caused directly or indirectly by nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled; or (b) from nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, caused directly or indirectly by, contributed to or aggravated by an Accident. (3) However, it is agreed that loss arising out of the use of Radioactive Isotopes in any form is not hereby excluded from reinsurance protection. (4) Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that policies issued by the Reassured effective on or before 31st December, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company", "Reinsured", "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Agreement" shall be understood to mean "Agreement", "Contract", "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" shall be understood to mean "Reinsurers", "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. BALIS & CO. INC. 33 NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) (1984) (Worldwide excluding U.S.A. & Canada) This agreement shall exclude Nuclear Energy Risks whether such risks are written directly and/or by way of reinsurance and/or via Pools and/or Associations. For all purposes of this agreement, Nuclear Energy Risks shall be defined as all first party and/or third party insurances (other than Workers' Compensation and Employers' Liability) in respect of: I. Nuclear reactors and nuclear power stations or plant II. Any other premises or facilities whatsoever related to or concerned with (a) the production of nuclear energy or (b) the production of storage or handling of nuclear fuel or nuclear waste III. Any other premises or facilities eligible for insurance by any local Nuclear Pool and/or Associations, but only to the extent of the requirements of the local Pool and/or Association, it being the intention always that Reinsurers shall follow the fortunes of the Reinsured insofar as the Reinsured complies with the requirements of any such local Pool and/or Association. However, this exclusion shall not apply (a) to any insurance or reinsurance in respect of the construction, erection or installation of buildings, plant and other property (including contractor's plant and equipment used in connection therewith): (i) for the storage of nuclear fuel -- prior to the commencement of storage (ii) as regards reactor installations -- prior to the commencement of loading of nuclear fuel into the reactor, or prior to the initial criticality, depending on the commencement of the insurance or reinsurance of the relevant local Nuclear Pool and/or Association (b) to a Machinery Breakdown or other Engineering insurance or reinsurance not coming within the scope of (a) above, nor affording coverage in the "high radioactivity" zone. N.M.A. 1975 (8/12/83) Form approved by Lloyd's Underwriters' Non-Marine Association. 05/10/89 BALIS & CO. INC. 34 WAR RISKS EXCLUSION CLAUSE As regards interest which at time of loss or damage are on shore, no Liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising fifty States of the Union and the District of Columbia, its territories and possessions, including the Panama Canal Zone and the Commonwealth of Puerto Rico and including Bridges between the United States of America and Mexico provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under original policies, endorsements or binders containing a standard war or hostilities or warlike operations exclusion clause. Nevertheless, this clause shall not be construed to apply to loss or damage occasioned by Riots, Strikes, Civil Commotion, Vandalism, Malicious Damage, including acts committed by agents of any government, party or faction engaged in war, hostilities or other warlike operation, provided such agents are acting secretly and not in connection with any operations of military or naval armed forces in the country where the interest insured is situated. BALIS & CO. INC. 35 INSOLVENCY FUNDS EXCLUSION CLAUSE This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency find, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed; which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by an competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. NOTE: Wherever used herein the terms: "Company" Shall be understood to mean "Company", "Reinsured", "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Contract" Shall be understood to mean "Agreement", "Contract", "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" Shall be understood to mean "Reinsurers", "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. BALIS & CO. INC. EX-10.34 8 EXHIBIT 10.34 1 EXHIBIT 10.34 SPECIAL CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT ARTICLE PAGE COVERAGE I 2 TERM AND CANCELLATION II 3 EXTENDED TERMINATION III 3 TERRITORY IV 4 EXCLUSIONS V 4 DEFINITIONS VI 7 LIMIT VII 8 NET RETAINED LIABILITY VIII 8 PREMIUM IX 9 CONTINGENT PROFIT COMMISSION X 10 EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY XI 11 REPORTS AND REMITTANCES XII 13 RESERVES AND LETTERS OF CREDIT XIII 13 LOSS NOTICES AND SETTLEMENTS XIV 16 OFFSET XV 16 SALVAGE AND SUBROGATION XVI 17 DELAYS, ERRORS, OR OMISSIONS XVII 17 AMENDMENTS XVIII 18 ACCESS TO RECORDS XIX 18 INSOLVENCY XX 18 ARBITRATION XXI 20 TAXES XXII 21 FEDERAL EXCISE TAX XXIII 22 CURRENCY XXIV 22 SERVICE OF SUIT XXV 23 INTERMEDIARY XXVI 24 2 SPECIAL CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT THIS AGREEMENT is made and entered into by and between TRENWICK AMERICA REINSURANCE CORPORATION, a Connecticut corporation (hereinafter called the "Retrocedent") of the one part, and the various Retrocessionaires as identified by the Interests and Liabilities Agreements attaching to and forming a part of this Agreement (hereinafter called the "Retrocessionaires") of the other part. WITNESSETH: That in consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinbelow set forth, the parties hereto agree as follows: ARTICLE I COVERAGE The Retrocessionaires will indemnify the Retrocedent, subject to the limits set forth in the Limit Article for any loss or losses occurring on or after inception of this Agreement under all original contracts underwritten by the Retrocedent and classified by the Retrocedent as: PROPERTY REINSURANCE BUSINESS ASSUMED, INCLUDING THE PROPERTY PORTIONS OF MULTI-LINE BUSINESS AND WORKERS COMPENSATION AND/OR EMPLOYERS LIABILITY LOSSES ARISING FROM ONE OR MORE OF THE FOLLOWING PERILS: FIRE, LIGHTNING, EXPLOSION, STRUCTURAL COLLAPSE, WINDSTORM, HAIL, FLOOD, SEISMIC ACTIVITY, VOLCANIC ERUPTION, COLLISION, RIOTS AND STRIKES, CIVIL COMMOTION, OR MALICIOUS MISCHIEF, AND ANY PHYSICAL DAMAGE AND/OR CONSEQUENTIAL LOSS COVERAGE CONTINGENT THEREON EFFECTED BY AN INSURED ON BEHALF OF ANOTHER PARTY. 2 3 All reinsurance for which the Retrocessionaires will be obligated by virtue of this Agreement will be subject to the same terms, conditions, interpretations, waivers, modifications, and alterations as the respective original contracts of the Retrocedent to which this Agreement applies, except as modified herein. Nothing herein will in any manner create any obligations or establish any rights against the Retrocessionaires in favor of any third parties or any persons not parties to this Agreement except as provided in the Insolvency Article. ARTICLE II TERM AND CANCELLATION This Agreement will apply to all losses occurring on or after 12:01 a.m. Eastern Standard Time on January 1, 1996, and will remain in full force and effect until 12:01 a.m. Eastern Standard Time on January 1, 1999. This Agreement may be canceled any January 1 by either party giving at least 60 days prior notice by certified or registered mail to the other party. During any such period of notice, the Retrocessionaires will remain bound by the terms of this Agreement; however, the Retrocessionaires will not be liable for any losses occurring on or after the cancellation or expiration date. ARTICLE III EXTENDED TERMINATION Should this Agreement expire while a loss occurrence covered hereunder is in progress, subject to the other conditions of this Agreement, the Retrocessionaires will 3 4 indemnify the Retrocedent as if the entire loss occurrence had arisen during the term of this Agreement, and provided that no part of said loss occurrence is claimed against any renewal of this Agreement. ARTICLE IV TERRITORY The territorial limits of this Agreement will include the United States of America, the District of Columbia, Canada, and incidental locations elsewhere. ARTICLE V EXCLUSIONS No reinsurance indemnity will be afforded under this Agreement for: A. Loss or damage directly caused by war and/or civil war, but this exclusion will not apply to business written in accordance with the Market War and/or Civil War Exclusion Agreement. B. Any loss or liability accruing to the Retrocedent directly or indirectly and whether as insurer or reinsurer from any pool of insurers or reinsurers formed for the purposes of covering Atomic or Nuclear Energy Risks. C. Nuclear risks as defined in the following: 1. Nuclear Incident Exclusion Clause -- Physical Damage -- Reinsurance (U.S.A.) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. 2. Nuclear Incident Exclusion Clause -- Physical Damage -- Reinsurance (Canada) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. 4 5 3. Nuclear Energy Risks Exclusion Clause (1994) (Reinsurance) (Worldwide Excluding U.S.A. & Canada) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. 4. Nuclear Incident Exclusion Clause -- Physical Damage and Liability (Boiler and Machinery Policies) -- Reinsurance (U.S.A.) and (Canada) attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. D. Financial Guarantee, Insolvency, or Credit Business. E. Fidelity and Surety. F. Reinsurance of Coastal Pools when written as such. G. Life business, other than Accidental Death and Dismemberment. H. Aviation, Aerospace, and Satellite business. I. Casualty business, except as set forth in the Coverage Article. J. Hail damage to growing or standing crops. K. Banking or Funding Plans. L. Target Risks as excluded in the Retrocedent's original contracts or the original policies of the Retrocedent's reinsureds. M. Loss or liability excluded by the Insolvency Funds Exclusion Clause attached to this Agreement. N. Reinsurance assumed on an excess of loss and/or pro rata reinsurance basis issued in the name of and for the account of a Lloyd's Syndicate or of an insurance or reinsurance company, whether such liability is accepted either directly or under any form of reinsurance from other insurers and/or reinsurers, and all such liability is excluded from the protection of this reinsurance and cannot be taken into account in arriving at the amount in the excess of which this reinsurance attaches. The Retrocedent will be the sole judge as to which insurance or reinsurance companies come within the scope of this definition. O. All losses sustained by the Retrocedent howsoever and wheresoever arising including all Business Interruption, Consequential Loss and/or other 5 6 contingent losses proximately caused by a peril insured in respect of the Retrocedent's exposures from: 1. All marine business when written as such, however not to exclude such exposures if they emanate from a multi-line insurance contract and/or policy. 2. All Offshore exposures arising from business of any description connected with the oil and/or gas and/or sulphur and/or uranium exploration and production industries in all their phases and including all associated support and/or service industries. "Offshore" will be defined as: a. That area encompassing locations covered by oceans or seas in which the water ebbs and flows and/or b. Other navigable waters or waterways which will mean any water which is in fact navigable by ships or vessels, whether or not the tide ebbs and flows there, and whether or not there is a public right of navigation on that water. P. Losses in respect of overhead transmission and distribution lines and their supporting structures other than those on or within 500 feet of the insured premises; however, public utilities extension and/or suppliers extension and/or contingent business interruption coverages are not subject to this exclusion, provided that these are not part of a transmitter's or distributor's policy. The exclusions set forth above will not apply where the Retrocedent is obliged to provide coverage by reason of membership in any state plan, pool, facility, joint underwriting association or similar involuntary participation. The Retrocedent may submit to the Retrocessionaires, for special acceptance hereunder, business not covered by this Agreement. If said business is accepted by the Retrocessionaires, it will be subject to the terms of this Agreement, except as such terms are modified by such acceptance. 6 7 ARTICLE VI DEFINITIONS The following words and phrases used in this Agreement will have the indicated meanings: A. "Original contracts" as used in this Agreement will mean any and all policies, binders, certificates, acceptances, contracts, or agreements of reinsurance, whether written or oral. B. "Loss occurrence" as used in this Agreement will mean all losses arising out of or following one event. As regards aggregate and/or stop loss original contracts assumed by the Retrocedent, the proportion of such loss or losses that forms part of the Retrocedent's ultimate net loss under this Agreement will be the proportion of the whole aggregate recovery that the original reinsured's individual catastrophe loss bears to its total losses used in arriving at aggregate excess recoveries. C. "Ultimate net loss" as used in this Agreement will mean the actual loss or losses sustained by the Retrocedent both as regards the original contracts and this Agreement, including 100% of any claims related extra contractual obligations and/or excess limits liabilities incurred by any original reinsured and 80% of any claims related extra contractual obligations and/or excess limits liabilities incurred by the Retrocedent, on its net retained liability after making deductions for all recoveries, salvages, and all reinsurance (other than underlying reinsurance) whether collectible or not. Ultimate net loss will cover loss expense incurred by the Retrocedent (both as regards the original contracts and this Agreement) and arising from the settlement of claims, including interest and court costs incurred in investigation, adjustment, and litigation and a pro rata share of salaries and expenses of the field adjusters of the original reinsured and the Retrocedent while adjusting such claims, and expenses of other employees of the original reinsured and the Retrocedent who have been temporarily diverted from their normal and customary duties as a result of such claims. However, both salaries of other employees and office expenses of the original reinsured and Retrocedent will be excluded. All salvages, recoveries, or reinsurance payments received subsequent to any loss settlement hereunder will be applied as if received prior to the settlement, and all necessary adjustments will be made by the parties hereto. Nothing in this definition, however, should be construed to mean that losses under this Agreement are not recoverable until the Retrocedent's ultimate net loss has been ascertained. 7 8 D. "Agreement year" as used in this Agreement will mean a period of 12 consecutive months, commencing with the inception of this Agreement, or any anniversary thereof ARTICLE VII LIMIT The Retrocessionaires will be liable for up to $8,000,000 of the amount of ultimate net loss incurred by the Retrocedent during the term of this Agreement, subject to no more than $4,000,000 any one Agreement year in respect of any loss or losses on the Retrocedent's net retained liability as follows:
Retrocedent's Catastrophe Layer Net ------------------------------- --- 100% of $2,000,000 Excess of $ 2,000,000 $2,000,000 100% of $2,000,000 Excess of $10,000,000 $2,000,000.
The structure of the limit for the second and subsequent Agreement years will be mutually agreed upon at the commencement of each Agreement year. ARTICLE VIII NET RETAINED LIABILITY In computing the amount or amounts in excess of which this Agreement attaches, only a loss or losses in respect to that portion of any reinsurance that the Retrocedent retains net for its own account will be included. The amount of the Retrocessionaires' liability hereunder with respect to any loss or losses will not be increased by the inability of the Retrocedent to collect from any other retrocessionaires any amounts that may have become due from them, whether such inability arises from the insolvency of such retrocessionaires or otherwise. 8 9 ARTICLE IX PREMIUM For the first Agreement year, there will be a deposit premium of $1,450,000, payable in equal quarterly installments of $362,500 on January 1, 1996, April 1, 1996, July 1, 1996, and October 1, 1996. For the second Agreement year, there will be a deposit premium of $1,450,000, payable in equal quarterly installments of $362,500 on January 1, 1997, April 1, 1997, July 1, 1997, and October 1, 1997. At January 1, 1997, the Retrocedent will also pay an additional premium equal to 33% of losses incurred during the first Agreement year. For the third Agreement year, there will be a deposit premium of $1,450,000, payable in equal quarterly installments of $362,500 on January 1, 1998, April 1, 1998, July 1, 1998, and October 1, 1998. At January 1, 1998, the Retrocedent will also pay an additional premium equal to 100% of losses incurred during the first two Agreement years, less previously paid additional premium. At January 1, 1999, the Retrocedent will pay a final additional premium of 100% of losses incurred during the three-year term of this Agreement, less previously paid additional premium, subject, however, to a maximum additional premium payment for the entire three-year term of $2,544,500. In no event, however, will the total premium paid as deposit premium and additional premium exceed $6,894,500 for the entire three-year term of this Agreement. 9 10 All premiums due hereunder will be payable by wire transfer and will be received by the Retrocessionaires within 30 days of inception of this Agreement and within 30 days of each calendar quarter thereafter. ARTICLE X CONTINGENT PROFIT COMMISSION The Retrocessionaires will allow the Retrocedent a contingent profit commission of 100% of the net profit of this Agreement. "Net profit" as used herein is the earned reinsurance premium as in A. below, less reinsurance losses as in B. below: A. "Earned reinsurance premium" is 85% of the deposit premium and 100% of any additional premium. B. "Reinsurance losses" are the Retrocessionaires' portion of payments (including loss expense) made on losses occurring during the adjustment period, plus the Retrocedent's estimate of the Retrocessionaires' portion of the reserve for outstanding losses (including loss expenses) occurring during said period. The adjustment period will extend from January 1, 1996 through and including December 31, 1998. If, by reason of cancellation of this Agreement, the adjustment period is less than three years, it will be subject to adjustment as if it were a complete adjustment period. The contingent profit commission will be computed and a statement forwarded to the Retrocessionaires within 30 days following expiration or early cancellation. Upon verification of amount due, the Retrocessionaires will immediately pay the Retrocedent. Notwithstanding expiration or early cancellation of this Agreement, annual computations for the adjustment period will continue to be made until all accounts relating to income and outgo for the adjustment period have been closed. If an incurred loss is 10 11 reported in the Agreement year preceding an adjustment, the Retrocedent has an additional 60 days to recalculate the contingent profit commission. In the event that reinsurance losses used in any contingent profit commission computation are found to have been over- or under-estimated by subsequent developments, then either party on an annual basis may request a revision of previous computations to reflect such developments. The Retrocedent will refund to the Retrocessionaires, or the Retrocessionaires will pay the Retrocedent, whatever amount is due as a result of the revision. Such revision may be requested even though this Agreement has expired or been terminated prior to the time of such request. ARTICLE XI EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY This Agreement will extend to cover losses arising from claims related extra contractual obligations and/or excess limits liabilities whether incurred by the original reinsured or the Retrocedent in accordance with the percent factors as set forth in the ultimate net loss definition. "Extra contractual obligations" as used in this Agreement will mean those liabilities not covered under any other provision of this Agreement, which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure to settle within the policy limit, by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action. 11 12 "Excess limits liabilities" as used in this Agreement will mean damages payable in excess of the original reinsured's policy limit as a result of alleged or actual negligence, fraud, or bad faith in failing to settle and/or rejecting a settlement within the policy limit, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action. Excess limits liabilities will mean any amounts for which the original reinsured or the Retrocedent would have been contractually liable to pay had it not been for the limits of the original policy. There will be no recovery hereunder for an extra contractual obligation and/or excess limits liability loss that has been incurred due to fraud committed by a member of the board of directors or a corporate officer of an original reinsured or the Retrocedent, acting individually, collectively, or in collusion with a member of the board of directors, a corporate officer, or a partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of an original reinsured or the Retrocedent. The date on which any extra contractual obligation and/or excess limits liability is incurred by an original reinsured or the Retrocedent will be deemed, in all circumstances, to be the date of the related occurrence under the original policy. Nothing in this Article will be construed to create a separate or distinct loss occurrence apart from the original covered loss occurrence that gave rise to the extra contractual obligations and/or excess limits liabilities discussed in the preceding paragraphs. In no event will the total limit of liability of the Retrocessionaires exceed their applicable limit of liability as set forth in the Limit Article. 12 13 ARTICLE XII REPORTS AND RENUTTANCES As soon as possible following the end of each Agreement year, the Retrocedent will furnish the Retrocessionaires with a report of reinsurance premium due them for that period. Such report will contain such other information as may be required by the Retrocessionaires for completion of their NAIC annual statements. The premium due the Retrocessionaires will be balanced against amounts previously paid as set forth in the Premium Article, and any balance shown to be due the Retrocessionaires will be remitted with said annual report. ARTICLE XIII RESERVES AND LETTERS OF CREDIT (This Article is only applicable to those Retrocessionaires who cannot qualify for credit by each state or governmental authority having jurisdiction over the Retrocedent's loss reserves.) As regards original contracts issued by the Retrocedent coming within the scope of this Agreement, the Retrocedent agrees that, when it files with the Insurance Department or sets up on its books reserves for known losses that have been reported to the Retrocessionaires (including loss and loss expense paid by the Retrocedent but not recovered from the Retrocessionaires and loss and loss expense reported and outstanding), which it is required by law to set up, it will forward to the Retrocessionaires a statement showing the proportion of such loss reserves applicable to them. The Retrocessionaires hereby agree that they will apply for and secure delivery to the Retrocedent of a clean, 13 14 irrevocable, and unconditional Letter of Credit, dated on or before December 31 of the year in which the request is made, and issued by Citibank, N.A. (or another member of the Federal Reserve System) or any bank approved for use by the NAIC Securities Valuation Office, and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Retrocedent's reserves in an amount equal to that Retrocessionaire's proportion of such reserves as shown in the statement prepared by the Retrocedent. Under no circumstances will any amount relating to reserves in respect of Incurred But Not Reported losses be included in the amount of the Letter of Credit. The Letter of Credit will be issued for a period of not less than one year, and will be automatically extended for one year from its date of expiration or any future expiration date unless 30 days prior to any expiration date the issuing bank notifies the Retrocedent by registered mail that it elects not to consider the Letter of Credit extended for any additional period. An issuing bank, not a member of the Federal Reserve System or not chartered in the state of domicile of the Retrocedent, will provide 60 days notice to the Retrocedent prior to any expiration in the event of nonextension. Notwithstanding any other provisions of this Agreement, the Retrocedent or its court-appointed successor in interest may draw upon such credit at any time without diminution because of the insolvency of the Retrocedent or of any Retrocessionaire for one or more of the following purposes only: A. To pay the Retrocessionaire's share or to reimburse the Retrocedent for the Retrocessionaire's share of any loss reinsured by this Agreement, which has not been otherwise paid. B. To make refund of any sum in excess of the actual amount required to pay the Retrocessionaire's share of any liability reinsured by this Agreement. 14 15 C. In the event of nonextension of the Letter of Credit as provided for above, to establish deposit of the Retrocessionaire's share of reserves for losses under this Agreement. Such cash deposit will be held in an interest bearing account separate from the Retrocedent's other assets, and interest thereon will accrue to the benefit of the Retrocessionaires. The issuing bank will have no responsibility whatsoever in connection with the propriety of withdrawals made by the Retrocedent or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Retrocedent. At annual intervals, or more frequently as agreed but never more frequently than semi-annually, the Retrocedent will prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Retrocessionaires' share of reserves for losses. If the statement shows that the Retrocessionaires' share of such reserves exceeds the balance of credit as of the statement date, the Retrocessionaires will, within 30 days after receipt of notice of such excess, secure delivery to the Retrocedent of an amendment of the Letter of Credit, increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Retrocessionaires' share of such reserves is less than the balance of credit as of the statement date, the Retrocedent will, within 30 days after receipt of written request from the Retrocessionaires, release such excess credit by agreeing to secure an amendment to the Letter of Credit, reducing the amount of credit available by the amount of such excess credit. 15 16 ARTICLE XIV LOSS NOTICES AND SETTLEMENTS The Retrocedent will advise the Retrocessionaires promptly of all losses that, in the opinion of the Retrocedent, appear to involve the Retrocessionaires under this Agreement and of all subsequent developments pertaining thereto that, in the opinion of the Retrocedent, may materially affect them as well. Inadvertent ornission in dispatching the aforementioned notices will in no way affect the obligation of the Retrocessionaires under this Agreement, providing the Retrocedent informs the Retrocessionaires of such ornission promptly upon discovery. The Retrocedent will have the right to settle all claims under this Agreement. The loss settlements of the original reinsured, provided they are within the terms of the original contracts, and the loss settlements of the Retrocedent, provided they are within the terms of this Agreement, will be unconditionally binding on the Retrocessionaires in proportion to their participation in this Agreement. Amounts due the Retrocedent hereunder in the settlement of ultimate net loss will be payable by the Retrocessionaires immediately upon reasonable evidence of the amount paid or to be paid being furnished by the Retrocedent. ARTICLE XV OFFSET The Retrocedent and each Retrocessionaire hereunder will be entitled to deduct from amounts due the other party under this Agreement any amounts due itself from the other party under this Agreement. 16 17 ARTICLE XVI SALVAGE AND SUBROGATION The Retrocessionaires will be credited with their share of salvage and/or subrogation, less recovery expense, pertaining to the claims and settlements involving reinsurance hereunder. Salvage and/or subrogation will always be used to reimburse the Retrocessionaires in the reverse order of their participation (including the Retrocedent's pro rata share in excess layers) in said loss before being used in any way to reimburse the Retrocedent for the loss as set forth in the Limit Article. If salvage and/or subrogation is insufficient to cover the expense incurred in its recovery, the net expense (after deduction of the amount recovered, if any) will be added to ultimate net loss as will loss expense incurred by the Retrocedent prior to any reimbursement for salvage and/or subrogation. ARTICLE XVII DELAYS, ERRORS, OR OMSSIONS Inadvertent delays, errors, or omissions made in connection with this Agreement or any transaction hereunder will not relieve either party from any liability that would have attached had such delay, error, or omission not occurred, provided always that such error or omission is rectified immediately upon discovery. The liability of the Retrocessionaires under this Agreement will in no event exceed the limits specified in the Limit Article, nor 17 18 will the Retrocessionaires' liability be extended to cover any risks, perils, or classes of insurance excluded herein except as set forth in the Exclusions Article. ARTICLE XVIII AMENDMENTS This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the Retrocedent and the Retrocessionaires by addenda hereto, which will then constitute a part of this Agreement. ARTICLE XIX ACCESS TO RECORDS Provided that the Retrocedent has been given reasonable notice, the Retrocessionaires will have the right to inspect at any reasonable time, through their designated representatives, all records of the Retrocedent that pertain in any way to this Agreement. ARTICLE XX INSOLVENCY In the event of the Retrocedent's insolvency, the reinsurance under this Agreement will be payable by the Retrocessionaires directly to the Retrocedent, its liquidator, receiver, conservator, or statutory successor, on the basis of the Retrocedent's liability 18 19 under the original contracts without diminution because of the Retrocedent's insolvency or because the liquidator, receiver, conservator, or statutory successor of the Retrocedent has failed to pay all or a portion of any claims, subject however, to the right of the Retrocessionaires to offset from such funds due hereunder, any sums that may be payable to it by said insolvent Retrocedent in accordance with the Offset Article. The liquidator, receiver, conservator, or statutory successor of the Retrocedent will give written notice of the pendency of a claim against the insolvent Retrocedent on the original contract or contracts reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Retrocessionaires may investigate such claim and interpose, at their own expense, in the proceeding where such claim is to be adjudicated, any defense that they may deem available to the Retrocedent, its liquidator, receiver, conservator, or statutory successor. The expense thus incurred by the Retrocessionaires will be chargeable against the Retrocedent, subject to court approval, as part of the expense of conservation or liquidation to the extent that such proportionate share of the benefit will accrue to the Retrocedent solely as a result of the defense undertaken by the Retrocessionaires. Where two or more Retrocessionaires are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense will be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Retrocedent. 19 20 ARTICLE XM ARBITRATION In the event of any arbitration between the Retrocedent and its original reinsureds under the terms of any original contract, the Retrocessionaires agree unreservedly to abide by the result of such arbitration. If any dispute will arise between the parties to this Agreement with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, whether such dispute arises before or after termination of this Agreement, such dispute, upon the written request of either party, will be submitted to three arbitrators, one to be chosen by each party, and the third by the two so chosen. If either party refuses or neglects to appoint an arbitrator within thirty days after the receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators. If the two arbitrators fail to agree in the selection of a third arbitrator within thirty days of their appointment, the third arbitrator will be selected from a panel of three names to be supplied by the Insurance Arbitration Forums. If the two arbitrators cannot mutually agree on the arbitrator to be chosen from this panel, each party to the arbitration will have the right to reject one member of the panel. This rejection process will be sequential, with the right of first rejection to be decided by a toss of a coin. All arbitrators will be active or retired disinterested officers of insurance or reinsurance companies not under the control of either party to this Agreement. The arbitrators will interpret this Agreement as an honorable engagement and not as merely a legal obligation. The arbitrators will adopt their own rules and procedures. 20 21 They will make their award with a view of effecting the general purpose of this Agreement in a reasonable manner rather than in accordance with a literal interpretation of the language. Each party will submit its case to its arbitrator within thirty days of the appointment of the third arbitrator. The decision in writing of any two arbitrators, when filed with the parties hereto, will be final and binding on both parties. Judgment may be entered upon the final decision of the arbitrators in any court having jurisdiction. Each party will bear the expense of its own arbitrator and will jointly and equally bear with the other party the expense of the third arbitrator and of the arbitration. Said arbitration will take place in the City in which the Retrocedent's Head Office is located unless some other place is mutually agreed upon by the parties to this Agreement. ARTICLE XXII TAXES The Retrocedent will pay all taxes (except Federal Excise Tax) on premiums reported to the Retrocessionaires on this Agreement. 21 22 ARTICLE XXIII FEDERAL EXCISE TAX (This Article applies to Retrocessionaires domiciled outside the United States of America, excepting Lloyd's London Underwriters and other Retrocessionaires exempt from Federal Excise Tax.) The Retrocessionaires will allow for the purpose of paying Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Service Code) to the extent such premium is subject to such tax. In the event of any return of premium, the Retrocessionaires will deduct the aforesaid percentage from the return premium payable hereon and the Retrocedent or its agent will recover such tax from the United States Government. ARTICLE XXIV CURRENCY The use of the sign "$" in this Agreement is in reference to United States of America Dollars. Therefore, premiums due the Retrocessionaires and loss payments due the Retrocedent hereunder will be in United States of America Dollars. 22 23 ARTICLE XXV SERVICE OF SUIT (This Article applies to those Retrocessionaires domiciled outside the United States of America as well as those Retrocessionaires unauthorized in the Retrocedent's state of domicile. This Article is not intended to conflict with or override the parties' obligation to arbitrate their disputes in accordance with the Arbitration Article.) In the event of the failure of any Retrocessionaire hereon to pay any amount claimed to be due hereunder, the Retrocessionaire, at the request of the Retrocedent, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Retrocessionaire's right to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Service of process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, or another party specifically designated in the applicable Interests and Liabilities Agreement attached hereto. In any suit instituted against it upon this Agreement, the Retrocessionaire will abide by the flnal decision of such court or of any appellate court in the event of an appeal. The above-named are authorized and directed to accept service of process on behalf of the Retrocessionaire in any such suit and/or upon the request of the Retrocedent to give a written undertaking to the Retrocedent that they will enter a general appearance upon the Retrocessionaire's behalf in the event such a suit is instituted. 23 24 Further, pursuant to any statute of any state, territory, or district of the United States that makes provision therefor, the Retrocessionaire hereby designates the Superintendent, Commissioner, or Director of Insurance or other officer specified for that purpose in the statute (or his successor or successors in office) 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 Retrocedent or any beneficiary hereunder arising out of this Agreement, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. ARTICLE XXVI INTERMEDIARY Aon Re Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. Correspondence regarding Agreement terms, including provisional notice of cancellation (if applicable), will be transmitted through Aon Re Inc., Two World Trade Center, New York, New York 10048. All statements for premiums, return premiums, commissions, taxes, losses, loss expense, salvages, and loss settlements will be transmitted through Aon Re Inc., 123 North Wacker Drive, Chicago, Illinois 60606. Payments by the Retrocedent to Aon Re Inc. will be deemed payment to the Retrocessionaires. Payments by the Retrocessionaires to Aon Re Inc. will be deemed payment to the Retrocedent only to the extent that such payments are actually received by the Retrocedent. 24 25 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note - Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 26 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY (BOILER AND MACHINERY POLICIES) - REINSURANCE - U.S.A. (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall be deemed to include the following provisions of this paragraph; This policy does not apply to "loss," whether it be direct or indirect, proximate or remote. (a) from an Accident caused directly or indirectly by nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled; or (b) from nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, caused directly or indirectly by, contributed to or aggravated by an Accident. (3) However, it is agreed that loss arising out of the use of Radioactive Isotopes in any form is not hereby excluded from reinsurance protection. (4) Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured effective on or before 30th April, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 30th April, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured effective on or before 30th June, 1958, shall be free from the application of the other provisions of this Clause until expiry date of 30th June, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. 27 NUCLEAR INCIDENT EXCLUSION CLAUSE -- PHYSICAL DAMAGE AND LIABILITY (BOILER AND MACHINERY POLICIES) -- REINSURANCE -- CANADA (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall be deemed to include the following provisions of this paragraph; This Policy does not apply to "loss," whether it be direct or indirect, proximate or remote (a) from an Accident caused directly or indirectly by nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled; or (b) from nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, caused directly or indirectly by, contributed to or aggravated by an Accident. (3) However, it is agreed that loss arising out of the use of Radioactive Isotopes in any form is not hereby excluded from reinsurance protection. (4) Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that policies issued by the Reassured effective on or before 31st December, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. 28 INSOLVENCY FUNDS EXCLUSIONS CLAUSE This Agreement excludes all liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, plan, pool, association, fund, or other arrangement, howsoever denominated, established, or governed that provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. 29 NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) (WORLDWIDE EXCLUDING U.S.A. & CANADA) This agreement shall exclude Nuclear Energy Risks whether such risks are written directly and/or by way of reinsurance and/or via Pools and/or Associations. For all purposes of this agreement Nuclear Energy Risks shall be defined as all first party and/or third party insurances (other than Workers' Compensation and/or Employers' Liability) in respect of. i) nuclear reactors and nuclear power stations or plant. ii) any other premises or facilities whatsoever related to or concerned with: a) the production of nuclear energy; or b) the production or storage or handling of nuclear fuel or nuclear waste. iii) Any other premises or facilities eligible for insurance by any local Nuclear Pool and/or Association but only to the extent of the requirements of the local Pool and/or Association, it being the intention always that Reinsurers shall follow the fortunes of the Company insofar as the Company complies with the requirements of any such local Pool and/or Association. However, this Exclusion shall not apply: a) to any insurance or reinsurance in respect of the construction, erection or installation of buildings, plant and other property (including contractor's plant and equipment used in connection therewith): i) for the storage of nuclear fuel - prior to the commencement of storage; ii) as regards reactor installations - prior to the commencement of loading of nuclear fuel into the reactor, or prior to the initial criticality, depending on the commencement of the insurance or reinsurance of the relevant local Nuclear Pool and/or Association. b) to any Machinery Breakdown or other Engineering insurance or reinsurance not coming within the scope of (a) above, nor affording coverage in the "high radioactivity" zone. 30 1. This Agreement does not cover any loss or liability accruing to the Reinsured directly or indirectly, and whether as Insurer or Reinsurer from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (a) Nuclear reactor power plants including all auxiliary property on the site, or (b) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or (c) Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or (d) Installations other than those listed in (c) above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1 and 2 of the clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3 shall not operate: (a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act or by any law amendatory thereof. 7. Reinsured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. 8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer caused: (a) by any nuclear incident as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensuing loss or damage which results directly from fire, lighting or explosion of natural, coal or manufactured gas; (b) by contamination by radioactive material. NOTE: Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, paragraph 8 of this clause shall only apply to all original contracts of the Reinsured whether new, renewal or replacement which become effective on or after December 31, 1992. EX-12 9 EXHIBIT 12 1 Exhibit 12.0 TRENWICK GROUP INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
Year Ended December 31, ------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ----- ---- ---- Net Income $33,848 $29,841 $20,282 $23,739 $18,539 Income Taxes 9,980 8,572 2,753 4,220 925 SUBTOTAL 43,828 38,413 23,035 27,959 19,464 FIXED CHAGRES: Interest Expense 6,503 6,496 6,469 6,454 1,688 Deferred Debt Issuance Costs 294 276 260 244 -- Office Space & Equipment Rental 323 309 316 251 240 Total Fixed Charges 7,120 7,081 7,045 6,949 1,908 Earnings before Income Taxes and Fixed Charges $50,948 $45,494 $30,080 $34,908 $21,372 Ratio of Earnings to Fixed Charges 7.2 6.4 4.3 5.0 11.2
EX-13 10 EXHIBIT 13 1 What differentiates Trenwick from other companies...is the combination of the level of our talent and the way we've organized and leveraged it. 2 TRENWICK GROUP INC. Trenwick Group Inc. is a publicly traded holding company whose principal subsidiary, Trenwick America Reinsurance Corporation (Trenwick America Re), underwrites reinsurance. Trenwick America Re reinsures property and casualty risks primarily written by U.S. insurance companies. Substantially all of Trenwick America Re's business is produced by reinsurance brokers. The bulk of the business underwritten is treaty, including standard and specialty business. Trenwick America Re also underwrites facultative reinsurance. Trenwick America Re is domiciled in Connecticut and is licensed, authorized or approved to write reinsurance in all 50 states and the District of Columbia. It had statutory surplus of approximately $286 million as of December 31, 1996. Based on the most recent information prepared by the Reinsurance Association of America (RAA), there are over 50 active U.S. property/casualty reinsurers. Trenwick America Re ranked nineteenth among professional reinsurers at year-end 1996 when measured in terms of capital and surplus. By the same measure, Trenwick America Re ranked fourteenth among brokerage market reinsurers. Among independent reinsurers, those companies neither owned by nor affiliated with large U.S. or foreign insurance or financial institutions, Trenwick America Re ranked fourth. Trenwick America Re is rated A+ (Superior) by A.M. Best Company, an industry-recognized rating organization. Trenwick America Re is one of only six brokerage market reinsurers to hold this rating, the highest currently awarded to any company in the brokerage segment. In 1996, Standard & Poor's Insurance Rating Services upgraded Trenwick America Re's Claims-Paying Ability Rating to A+ (Good). 1 3 FULLY DILUTED EARNINGS PER SHARE [BAR GRAPH] BOOK VALUE PER SHARE [BAR GRAPH] 2 4 FIVE YEAR SUMMARY
Year ended December 31, 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------------ (in thousands except per share data) INCOME STATEMENT DATA - - ------------------------------------------------------------------------------------------------------------------ Net premiums written $226,364 $197,162 $139,635 $101,392 $ 81,883 - - ------------------------------------------------------------------------------------------------------------------ Net investment income 41,226 36,828 33,932 34,954 30,859 - - ------------------------------------------------------------------------------------------------------------------ Net income 33,848 29,841 20,282 23,739 18,539 - - ------------------------------------------------------------------------------------------------------------------ GAAP combined ratio 95.8% 95.6% 103.2% 102.5% 112.3% - - ------------------------------------------------------------------------------------------------------------------ PER SHARE DATA - - ------------------------------------------------------------------------------------------------------------------ Net income per share - - ------------------------------------------------------------------------------------------------------------------ Primary $ 4.95 $ 4.44 $ 3.04 $ 3.48 $ 2.76 - - ------------------------------------------------------------------------------------------------------------------ Fully diluted 4.25 3.80 2.78 3.12 2.75 - - ------------------------------------------------------------------------------------------------------------------ Dividends per share 1.24 1.12 1.00 .86 .76 - - ------------------------------------------------------------------------------------------------------------------ Book value per share 39.52 36.54 29.23 31.41 26.02 - - ------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA - - ------------------------------------------------------------------------------------------------------------------ Total assets $920,804 $820,930 $727,245 $700,407 $652,473 - - ------------------------------------------------------------------------------------------------------------------ Investments and cash 754,210 653,704 551,784 546,303 500,359 - - ------------------------------------------------------------------------------------------------------------------ Unpaid claims and claims expenses 467,177 411,874 389,298 354,582 351,897 - - ------------------------------------------------------------------------------------------------------------------ Convertible debentures 103,500 103,500 103,500 103,500 103,500 - - ------------------------------------------------------------------------------------------------------------------ Stockholders' equity 265,753 240,776 188,213 206,763 169,373 - - ------------------------------------------------------------------------------------------------------------------ Shares of common stock outstanding 6,725 6,590 6,440 6,583 6,510 - - ------------------------------------------------------------------------------------------------------------------
3 5 CHAIRMAN'S LETTER [PHOTO OF JAMES F. BILLETT, JR, CHAIRMAN] DEAR FELLOW STOCKHOLDER: Once again, I'm pleased to report that Trenwick Group Inc.'s operating performance was excellent last year. The highlights included record earnings of $4.25 per share and double-digit premium and EPS growth of 15% and 12%, respectively. The Company reported record operating cash flows of $110.5 million and growth in investment income of 12%. In addition, we achieved a superior combined ratio of 95.8%, and Trenwick's ROE of 13.4% once again exceeded our hurdle of twice the risk-free rate by better than 100 basis points. All of this was difficult to accomplish in a marketplace that was oversaturated with capital and where demand for reinsurance shrank appreciably. We continued to prosper because we have an abundance of the industry's only scarce resource - talented people. I'll expand on our advantage and address our focus on this resource throughout my letter. 5 6 Notwithstanding our strong operating performance, Trenwick's shares underperformed the market in 1996. A negative return of 15.6% for the year, including dividends, was far below my expectations. The property/casualty insurance business, of which the reinsurance industry is a subset, also underperformed the overall market and, excluding the pricey take-outs of National Re (by General Re) and American Re (by Munich Re), the reinsurance segment underperformed the market, too. By design, there is a relatively high level of inside ownership, including restricted stock and stock options, at Trenwick. This feature distinguishes us from other companies in our industry. I've always believed it's fundamental to align the interests of management and key employees with those of stockholders. Sharing the wealth is generally the theme, but sharing the pain, from time to time, is a real character builder. Disappointing share performance in 1996 had a tangible impact on the fortunes of our key people. Our longer term total return to stockholders had been top tier (e.g., through 1995, 21.26% compounded over five years), but last year's reversal of that trend got everyone's attention. While we can't directly control the price of our stock, we've recently taken some steps which I believe will result in a higher correlation between the consistently fine operating performance of the Company and its valuation in the market. In January 1997, we successfully completed a $110 million private offering of 8.82% Subordinated Capital Income Securities with a 40 year maturity. Substantially all 6 7 the proceeds of this financing were to be used to redeem Trenwick's outstanding convertible debentures, to the extent holders of the debentures didn't exercise their right to convert them into Trenwick common stock. In February 1997, we called our outstanding convertible debentures, redeemed $45.8 million and issued 1.2 million shares of Trenwick common stock to those debenture-holders who elected conversion. The combined result of these two undertakings was accretive to stockholders. Trenwick, in effect, repurchased 944,741 shares at a price of $49.75 per share with funds provided by opportunistic long-term financing at a competitive fixed interest rate. Because less than 100% of the debentureholders redeemed their debentures, Trenwick now has investments and cash at the holding company level in excess of $75 million available for general corporate purposes, including business expansion and share repurchases. In addition, the Company's debt to total capitalization ratio improved to 25% from 28%. In March 1997, Trenwick's Board approved a 3-for-2 stock split, the first in our history. The distribution will be paid on April 15, 1997 to stockholders of record on March 18, 1997. As a result of the conversion of nearly 56% of the Company's convertible debentures and the subsequent stock split, the float in Trenwick shares will increase to 11.9 million shares from 6.7 million shares, improving liquidity for stockholders. Also in March 1997, Trenwick's Board of Directors increased the Company's thirty-seventh consecutive quarterly dividend by 16% over the prior quarter. 7 8 The financial engineering discussed above is consistent with our historical comprehensive approach to running the business for the benefit of stockholders. Capital management is one of several tools we've previously employed to build value. We faced many challenges as a growth company in a maturing industry last year. Price competition and consolidation in the underlying property/casualty insurance business squeezed reinsurance margins and generally reduced demand for reinsurance. While our premium growth exceeded comparable reinsurance industry growth rates, our rate of growth declined to 15% from 41% in 1995 and 38% in 1994. I expect our rate of growth to remain in double digits in 1997, but to be lower than last year's rate. Strategic hiring is another important tool we use to build value. We grew at a faster pace in 1996 than the rest of the pack because of our investment in additional talent in 1995, which I wrote to you about in some detail last year. The experienced team we acquired caused our core casualty treaty business to increase at a net rate of 20%, including both voluntary and involuntary shrinkage in our renewal business. This investment delivered immediate returns last year and will improve our longer term prospects, as well. Our initiatives toward new strategic hires in 1996 were either unsuccessful or incomplete. We're in the market, as I write, to attract talented individuals or teams of individuals who are prepared to trade their 8 9 intellectual assets or proprietary skills and relationships for a seat at Trenwick's collaborative management table and a stake in the incremental value they contribute. I want to increase our already disproportionate share of this scarce resource. I believe it's the lowest risk/highest return consolidation strategy in our industry. For the past few years, I've written to you about our tactic of engaging in strategic alliances. We've defined strategic alliances as reinsurance relationships with reinsurance market leaders in lines of business where we don't have expertise, or don't have current plans to build the infrastructure necessary to compete successfully as a leader in those lines ourselves. Call it the "join'em rather than fight'em" approach. As a rule of thumb, we believe strategic alliances must be long-term in intent, quota share in form and have the potential to contribute $1 per share (pre-split) in GAAP earnings within 36 months. In 1996, we celebrated the fourth successive year of our very profitable strategic alliance with PXRE Re. In addition, we entered into two new strategic alliances last year; one with Transatlantic Reinsurance Company and another with Duncanson & Holt, a wholly-owned subsidiary of UNUM Corporation. Details of these new partnerships are outlined in the 1996 Operations Review in this Annual Report. In 1996, strategic alliances accounted for 9% of Trenwick's net premiums. I expect our three fully operational alliances will represent 12% of our net writings in 1997. 9 10 There is a common thread that connects our predilection for strategic hiring and strategic alliances: talented people. Whether we acquire them or ally with them, I believe they're the key ingredient for profitable long-term growth. We also looked to build value last year through continued efforts on the merger/acquisition front. We had several discussions, none of which developed into a feasible plan. As with the other value-building tools we use, we remain open to discussions with potential partners who need the strengths or structure we bring and who offer an opportunity for us to build more value jointly than independently. We believe the best opportunities for expediting growth in value are with organizations whose talents are complementary to our own. While I believe there is a dearth of talented people in our industry, I don't mean to suggest that we're the only company that has any. What differentiates Trenwick from other companies, however, is the combination of the level of our talent and the way we've organized and leveraged it. Frankly, not one of us is totally capable of performing all functions at the highest skill level. But, we've designed a unique series of integrated marketing, underwriting and operational processes that interface our best talents at their respective strongest points. The result is a better answer for all constituencies. For long-term stockholders, Trenwick's systematic and multidimensional approach to the business, its unim- 10 11 peachable balance sheet and its superior track record represents more than a safe haven in uncertain times. Trenwick is a company that's growing deliberately, both by acquiring talented people and by creating an environment where those talents can produce real gains. Before I close, I'd like to ask that you remember Donald E. Chisholm, a director of Trenwick since 1995 and a member of the Board's Compensation Committee since 1996. Don died on March 1, 1997 after an extended illness. He was 58 years old. While his tenure at Trenwick was far too brief, his experience in the industry was considerable. In over three decades of service, Don was associated with three reinsurance companies in addition to ours, one as a founder and two as Chief Executive. Don had a wry sense of humor and was a wily negotiator and loyal friend. I'll miss his savvy advice and good company. I'll write to you throughout the year to discuss our plans and results. I'll be available at our Annual Meeting in May or at other mutually convenient times to answer your questions or receive your input. /s/ James F. Billett, Jr. James F. Billett, Jr. Chairman, President and Chief Executive Officer 11 12 1996 OPERATIONS REVIEW [PHOTO OF Left to Right Paul Feldsher, Stephen H. Binet, Robert A. Giambo, James F. Billett, Jr., James E. Roberts, Alan L. Hunte] Trenwick increased net written premiums to $226.4 million in 1996, despite a softening of market conditions. This increase represents the Company's fourth consecutive year of premium growth. Although changes in the reinsurance environment slowed the rate of premium growth to 15% from the previous year's 41% pace, Trenwick succeeded in surpassing the domestic reinsurance industry's overall premium growth rate of 4.5% for the year. The property and casualty industry, of which reinsurance is a part, struggled through the eighth year of prolonged price competition. Lower rates, broadened coverage and an abundance of capacity were evident in most lines of insurance. Some ceding companies sought to sustain growth by buying less reinsurance and retaining more premium. Others, challenged by shrinking margins 13 13 and fierce competition, pushed for reductions in their reinsurance costs through rate decreases or higher ceding commissions on the reinsurance they continued to place. In mid-year, Lloyd's of London successfully completed its Reconstruction and Renewal plan, ending several years of uncertainty over its ability to continue as a viable market. As new sources of capital rushed to enter Lloyd's, its underwriters embarked on an aggressive attempt to recapture business, including specialty reinsurance business, that had fled the London market in favor of domestic reinsurers. The increasingly competitive climate was a significant factor in prolonging the consolidation of the reinsurance industry which began in the early 1990's. Eleven reinsurance companies were acquired, merged or withdrew from the U.S. market in 1996. While the previous restructuring of the business had been confined to the brokerage segment of the market, the most recent wave of activity breached the direct segment. Two of the six U.S. direct reinsurers were acquired in 1996. A third underwent a major capital and structural reorganization. Continued attrition in the industry, including disruption in the direct segment, created openings for those broker market reinsurers with the credentials to meet reinsurance buyers' increasingly stringent financial criteria. Trenwick, with statutory surplus of approximately $286 million at the end of 1996, an A+ (Superior) rating from A.M. Best Company and an A+ (Good) Claims-Paying Ability Rating from Standard & Poor's Insurance Rating Services, was well qualified to benefit from those opportunities. 14 14 In 1996, Trenwick worked to grow its premium writings by solidifying its relationships within the reinsurance brokerage community and by enhancing its reputation as a significant participant in lower-layer casualty placements. Trenwick added a substantial number of new casualty accounts and created incremental growth by entering into new strategic alliances with market leaders in product lines in which it did not materially participate. The Company also worked to further boost productivity, strengthening its ability to compete even more efficiently in an increasingly difficult environment. OPERATIONS For the fourth straight year, Trenwick performed at a record level of productivity. While overhead costs rose $1.6 million, including the first full year of expenses associated with the addition of a team of senior underwriters in mid-1995, net earned premiums grew by $33.7 million and the overhead ratio (calculated by dividing underwriting expenses by net earned premium) declined by 6%. Through attrition, the number of people employed by Trenwick declined 4% during 1996 as the Company remained committed to rethinking positions rather than replacing them. The Company also continued its efforts to maximize the average premium associated with each transaction. Net written premiums expanded by 15% while the number of treaty casualty contracts, which account for most of Trenwick's business, shrank by 2%. 15 15 One component of the Company's ability to write and process more business with a relatively stable head count has been a continuous review of its information and support systems. In 1996, Trenwick concluded a company-wide upgrade of computer hardware and software. During the year, the Information Systems Department also initiated and completed an extensive project to address the "Millennium Problem" involving recognition of the year 2000 by all the Company's software, a task many companies have not yet tackled, without disrupting operations and with minimal use of outside assistance. The revenue per employee and overhead ratio graphs below further illustrate Trenwick's consistent progress in controlling costs and infrastructure. The ability to significantly expand its business while utilizing existing resources, which Trenwick has cultivated over the last five years, is an increasingly valuable skill in an environment where profit margins are under increasing pressure. REVENUE PER EMPLOYEE OVERHEAD RATIO (in thousands) [BAR GRAPH] [BAR GRAPH] 16 16 UNDERWRITING Trenwick's underwriting methodology combines transactional analysis with a formal control process. Underwriters review transactions from a broad spectrum of classes and lines of business. Their decision to participate or decline is based on an assessment of the profit potential of the individual transaction rather than on a predetermined profile of the Company's overall portfolio. Overlying the transactional review is a formal system of collaborative referrals, actuarial reviews and audits that evaluates the Company's underwriting practices, ensures that exposures are properly identified and guards against significant losses. A committee composed of the Company's senior underwriters and its chief actuary periodically reviews underwriting policy and monitors accumulations and concentrations of risk in both the property and casualty segments of Trenwick's business. As market conditions softened during 1996, Trenwick continued to measure individual transactions against a standard of current or reasonably foreseeable underwriting profit - i.e. premium that exceeds projected claims and expenses. Consequently, Trenwick was willing to participate in less than half the transactions offered to it in 1996, and the Company withdrew from a number of renewal accounts that did not offer the prospect of underwriting profitability. Statutory combined ratio for 1996 rose nominally to 95.7% from 95.5% in 1995, assisted by favorable development in prior years' reserves, the absence of major catastrophes which would have impacted Trenwick primarily through its strategic alliance with PXRE Reinsurance Company (PXRE Re), and the prudent purchase of outgoing reinsurance to protect results in a declining market. 17 17 Trenwick underwrites three types of business. Facultative is underwritten on a risk-by-risk basis where Trenwick applies its own pricing to the individual exposure. Treaty is divided into standard treaty business and specialty treaty business. Standard treaty involves blocks of risks where the class of business or the size and longevity of the account generate sufficient data for analysis by a variety of actuarial techniques. Specialty treaty business also entails grouping multiple risks, but generally involves classes or coverages which are less statistically predictable. Trenwick underwrites this business with a hybrid methodology combining quantitative tests with a more detailed examination of the original risks, rates and coverages within the block of business. In April 1993, shortly after Trenwick initiated the controlled growth strategy it continues to pursue, the Company embarked on a strategic alliance with PXRE Re. By aligning with a leader in property catastrophe reinsurance with a worldwide spread of business, Trenwick was able to immediately benefit from the rise in catastrophe rates that followed Hurricane Andrew in 1992 and augment its own expertise in an area of the business in which it was a minor participant. Trenwick and PXRE Re continued as strategic partners through 1996. Although property catastrophe rates have drifted downward since 1993 and PXRE Re has responded by reducing its premium writings, Trenwick continued to derive significant profits from the relationship. Trenwick added to the premium it underwrites on its own behalf by forging two additional strategic alliances in 1996. Early in the year, Trenwick brought additional capacity to the expertise provided by Transatlantic 18 18 Reinsurance Company (Transatlantic Re), the recognized domestic leader in reinsurance of health care professional liability. This type of specialty reinsurance generally involves large limits, and those reinsurers with significant capacity enjoy commensurate pricing advantages. In October, Trenwick entered into a partnership with Duncanson & Holt (D&H), a wholly-owned subsidiary of UNUM Corporation. Duncanson & Holt, which functions as an underwriting manager for a number of pools and reinsurance facilities, is the largest provider of accident and health reinsurance in the United States. Trenwick assumes a portion of the reinsurance from a broad base of the business underwritten by Duncanson & Holt. In addition, the Company allows D&H to issue reinsurance in Trenwick's name to those D&H property and casualty clients who feel more comfortable buying from a reinsurer in the same segment of the industry, like Trenwick, than from life reinsurers who constitute the majority of the participants in D&H's syndicated facilities. Both of these new strategic alliances extended Trenwick's activities into areas in which it did not previously participate. Because of the accounting provisions that characterize reinsurance transactions, only a portion of the annualized premiums associated with the Transatlantic relationship was reported in 1996. Premiums and fees derived from the Duncanson & Holt alliance, which began in the fourth quarter, will not be reflected until 1997. 19 19 The table below compares Trenwick's total net premiums written, including premiums from the PXRE Re and Transatlantic alliances, by type of business for the last two years:
(in thousands) 1996 1995 - - ------------------------------------------------------------------------------------- CASUALTY - - ------------------------------------------------------------------------------------- Standard Treaty $144,074 $108,330 - - ------------------------------------------------------------------------------------- Specialty Treaty 46,048 50,593 - - ------------------------------------------------------------------------------------- Facultative 6,404 6,035 - - ------------------------------------------------------------------------------------- 196,526 164,958 - - ------------------------------------------------------------------------------------- PROPERTY 29,838 32,204 - - ------------------------------------------------------------------------------------- TOTAL $226,364 $197,162 - - -------------------------------------------------------------------------------------
The 19% increase in casualty premiums was the result of a 62% rise in new business over 1995 and a 3% advance in renewal premiums. Trenwick added 48 new treaty casualty accounts in 1996, causing new casualty premiums to surge. The influx in new business reflects the momentum of the Company's marketing program, augmented by the success of a team of four senior underwriters, who joined the Company during 1995, in attracting incremental business to Trenwick. Specialty renewal business was adversely impacted by the decision of several large ceding companies to buy less reinsurance on maturing programs where sufficient data now allows the ceding company to predict future results with a higher degree of certainty. For the past four years, Trenwick has lobbied for larger shares on selected existing casualty accounts. The Company boosted its participations on 30 treaty transactions in 1994 and 26 in 1995. Over time, Trenwick's 20 20 ability to garner greater shares of existing transactions diminishes as buyers consolidate their placements among a handful of high quality incumbent reinsurers. Expanding limits of some reinsurance programs and continuing attrition among reinsurers afforded a number of opportunities in 1996, and Trenwick broadened its participation on 20 renewal accounts during the year. However, the effect of these larger shares on the level of 1996 renewal premiums was essentially offset by increased retentions by ceding companies, Trenwick's withdrawal from several renewals which did not meet its underwriting criteria and the difficulties experienced by many insurance company cedants as they struggled to maintain market share in the face of fierce competition. Consequently, continuing casualty business increased by only 3% over 1995. Trenwick increased its facultative premiums by 6% in 1996. Competition in this commodity line closely mirrored the contentious conditions prevalent in the general insurance market. The Company continued to focus its facultative activities in the lower layers of commercial auto liability. Trenwick applies its own pricing to this type of business and can quickly select from a large number of submissions, increasing the likelihood of profitability. Facultative business is exclusively casualty and constitutes approximately 3% of Trenwick's net premiums. In the absence of large natural disasters producing significant losses to the U.S. reinsurance market in 1996, property reinsurance rates continued their downward slide. Guy Carpenter & Co., a leading reinsurance brokerage firm, recently estimated the reduction in property reinsurance costs at approximately 17%. As a result, Trenwick's total property premiums, including those obtained from its 21 21 partnership with PXRE Re, dropped 7% to $29.8 million. The Company quoted only 13% of new transactions offered to it and added only two new accounts over the year. The graphs below display the distribution of the types and lines of business that comprised Trenwick's underwriting portfolio at the end of 1996: 1996 NET PREMIUMS WRITTEN BY TYPE [PIE CHART]
Standard Treaty Casualty 63.7% Facultative 2.8% Treaty Property 13.2% Specialty Treaty Casualty 20.3%
1996 NET PREMIUMS WRITTEN BY LINE [PIE CHART]
Property 20.8% Medical Malpractice 4.3% Products Liability 1.1% Workers' Compensation 9.1% Miscellaneous 4.6% Auto Liability 28.5% General Liability 10.0% Errors & Omissions 21.6%
22 22 By type of business, casualty represented 87% of total net written premiums in 1996, up from 84% in 1995, reflecting deteriorating property pricing. By line of business, auto liability and errors and omissions liability for professionals each showed small proportional decreases but totaled slightly more than half of Trenwick's business. Medical malpractice rose from 3.5% of the portfolio in 1995 to 4.3% in 1996 directly as a result of the new strategic alliance with Transatlantic Re. Workers' compensation, which had been negligible in prior years, jumped to a 9.1% share in 1996. This business was derived from several new transactions with regional writers of this line. Like the bulk of Trenwick's casualty business, the Company participated in lower layers of these reinsurance placements. The combination of relatively low attachment points, narrow reinsurance limits and the characteristics of lines such as workers' compensation and auto liability allows for more meaningful actuarial analysis and generally produces more stable and predictable results than more volatile types of reinsurance. New casualty business represented approximately one third of Trenwick's total premiums in 1996. Because of the time required for premium to flow through the pipeline between insurance company and reinsurer, new casualty premiums first recorded in any given year include premiums from accounts first written up to two years before. The growth in 1996 new casualty was the cumulative product of several years of controlled expansion. The senior underwriters who joined the Company in mid-1995 from Re Capital Corporation, which was acquired by another reinsurer, created new opportunities for Trenwick on accounts which were already familiar to them and were a major factor in fueling the premium pipeline. 23 23 Included in the new business attracted by the ex-Re Capital underwriters were several large transactions with regional or smaller ceding companies. Business from these sources, which are generally more reinsurance dependent than larger companies, more than offset business lost to increased retentions by multinational cedants. Smaller ceding companies often buy quota share, or proportional, reinsurance. While the level of quota share business increased somewhat from 1995, more than half of Trenwick's 1996 premiums were written on an excess of loss basis. Excess business affords reinsurers direct control of the reinsurance pricing for any transaction and some degree of insulation from competitive conditions in the underlying insurance market. The way in which reinsurance is bought and distributed is in the midst of a dramatic transformation. Buyers have concentrated their placements within a small group of top-tier trading partners that often includes a mix of direct and broker market reinsurers. Consolidation among brokers has created large, well-integrated intermediaries which are becoming increasingly adept at generating reinsurance opportunities from related retail insurance operations or underwriting managers farther down the distribution chain. 24 24 The goal of Trenwick's marketing effort has been to establish the Company among the handful of broker markets considered for the most desirable transactions. Recently, several broker market reinsurers have attempted to short-circuit the distribution system by establishing or acquiring insurance subsidiaries. Trenwick chooses not to compete with its clients and relies on independent reinsurance intermediaries to supply its business from non-related sources. In 1996, Trenwick realigned its systematic marketing process, magnifying its focus on cementing or creating relationships with those individual brokers who handle or have access to desirable business. Trenwick's underwriters spent a record total of 882 working days making 449 personal visits updating market and account intelligence, ensuring the broadest possible selection of new business opportunities and positioning the Company at the top of the list for additional shares of desirable transactions. In the last four years, Trenwick has secured a position in the top tier of broker market reinsurers and as a market of choice for lower-layer casualty business. In 1996, Trenwick expanded its business in size as well as scope, and worked both smarter and harder to exploit opportunities created by an evolving distribution system. Despite turbulent market conditions, Trenwick successfully leveraged relationships into growth and expertise into earnings. 25 25 INVESTMENTS Trenwick manages its fixed-income portfolio using an investment process that matches the duration of a segregated portion of the Company's invested assets to the duration of its expected liabilities. The balance of the Company's invested assets are managed to maximize overall yield within the constraints of Trenwick's conservative investment guidelines. The process allows for better management of the risks on both sides of the balance sheet. During 1996, the performance of Trenwick's investment portfolio met its objectives, both in terms of investment yield, credit quality and diversification. Since 1994, the Company's improved risk management capabilities have enabled it to reduce the potential volatility of its fixed-income securities primarily through additional diversification. Greater emphasis has also been given to investments with minimal call risk to further reduce the impact lower interest rates might have on the portfolio's overall performance. The investment climate in 1996 posed several challenges for the Company. Maintaining the Company's objectives of a conservatively run portfolio while at the same time producing consistent growth in income was increasingly difficult given current relatively low interest rates, lack of adequate supply of acceptable securities and the highly competitive insurance and reinsurance market. 26 26 Declining underwriting margins often require companies to revisit their investment guidelines to explore ways of generating additional income. Such changes in portfolio strategy can result in an unacceptable level of investment risk. Trenwick's investment guidelines remained unchanged in 1996. These guidelines allowed Trenwick to continue to employ conservative investment strategies which better balance issues such as liquidity, credit risk, interest rate risk and volatility. In 1996, net investment income increased 12% to $41.2 million compared to $36.8 million in 1995, primarily as a result of the sustained growth in Trenwick's invested asset base. After-tax investment income was $32.1 million versus $28.9 million. Despite the rising interest rate environment, as evidenced by an increase of 83 basis points in the five-year treasury yield, the overall pre-tax investment yield declined by 20 basis points, as a result of lower reinvestment rates on maturities. As of year-end 1995, the Company had net unrealized gains in its portfolio of $26.7 million. At year-end 1996, the Company had unrealized gains in its portfolio of $18.1 million, a decrease in the fair value of the Company's invested assets of $8.6 million, primarily attributable to lower interest rates. This decline of $5.6 million after-tax, or $.83 per share, reduced the overall increase in the Company's book value during 1996. 27 27 Trenwick's fixed-income investment portfolio consisted entirely of investment grade securities, with 92% having a quality rating of Aa or better. The following graphs illustrate the composition of Trenwick's investment portfolio and the quality of its fixed-income investments as of December 31, 1996: INVESTMENT ASSET ALLOCATION [PIE CHART]
Corporate Securities 5.0% Other 6.1% U.S. Government Bonds 12.2% Mortgage & Asset-backed Securities 28.0% Tax-exempt Bonds 48.7%
ASSET QUALITY RATINGS [PIE CHART]
A 7.6% Aa 10.0% Aaa 82.4%
28 28 REPORT OF MANAGEMENT The management of Trenwick is responsible for the 1996 consolidated financial statements and all other information presented in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP), determined by management to be appropriate, and include amounts based on management's informed estimates and judgements. Financial information presented elsewhere in this Annual Report is consistent with the consolidated financial statements. The appropriateness of data underlying such financial information is monitored through internal accounting controls, independent accountants and the Board of Directors acting through an Audit Committee. Trenwick maintains a system of internal accounting controls designed to reasonably assure the integrity and reliability of financial reporting and to provide reasonable assurance to management and the Board of Directors that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly. The system of internal accounting controls is supported by the selection and training of qualified personnel, by the appropriate division of responsibilities and by written policies and procedures. The Audit Committee of the Board of Directors is composed solely of outside directors who oversee management's financial reporting responsibilities. The Committee is responsible for recommending to the Board of Directors the appointment of the independent accountants, which is subject to the ratification of stockholders. The Committee 29 29 meets periodically with management and the independent accountants to review reports of management and the independent accountants regarding accounting policies and practices, audit results and internal accounting controls. The Committee has direct access to the independent accountants and meets with them without management present to discuss the results of the audit. The 1996 consolidated financial statements have been audited by Trenwick's independent accountants, Price Waterhouse LLP, in accordance with generally accepted auditing standards and have been reviewed by the Audit Committee of the Board of Directors. This audit by Price Waterhouse LLP includes an evaluation of the internal control structure to the extent necessary to determine the audit procedures required to express their opinion on the consolidated financial statements. /s/James F. Billett, Jr. - - ------------------------ James F. Billett, Jr. Chairman, President and Chief Executive Officer 30 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDUSTRY OVERVIEW The property and casualty reinsurance industry is currently in its eighth consecutive year of soft market conditions. Despite the record level of catastrophes since 1989 and the continued strengthening of reserves for exposure to environmental and asbestos losses, there has been little overall rate improvement in the reinsurance environment. Competition has, in fact, increased in recent years as a result of the ability of companies to raise additional capital through public and other financing, the use of both traditional and non-traditional reinsurance products and realized gains on invested assets. These factors have mitigated any positive impact which may have occurred from the decline in the number of reinsurance companies through withdrawal or acquisition. The remaining companies are larger, offer significantly more capacity to ceding companies and have greater access to capital through capital markets or their parent organizations. Further, Lloyd's of London has rebounded from a period of uncertainty and is now aggressively competitive. The result is an oversupply of capacity in the reinsurance industry, which is more than capable of writing the current level of domestic premiums. In 1996, domestic premiums as reported by the RAA amounted to $18.9 billion, an increase of 4.5% compared to $18.1 billion in 1995. During this period of soft market conditions, Trenwick has taken advantage of both the availability of capital in the financial markets and new opportunities in the business. In 1992, Trenwick raised additional capital through a convertible debt offering, thereby increasing its capacity for underwriting risks and positioning the Company to take advantage of market opportunities. Having written 31 31 a majority of its business since 1986, Trenwick has not had to materially strengthen its reserves for any exposure to environmental or asbestos claims, enabling the Company to focus all of its resources on the development of future business. Over the following several years, Trenwick implemented several strategic initiatives which enabled it to increase its premium writings during the current soft market. These included increased participations in renewal business through increased marketing efforts as reinsurance buyers consolidated their business within a smaller number of higher quality reinsurers such as Trenwick. This result was augmented by the hiring of a team of senior underwriters in 1995 from a company purchased by another reinsurer. Trenwick also initiated several strategic alliances as an entry into lines of business not then written by the Company. Partners in these alliances include PXRE Re, a leader in property catastrophe reinsurance, Transatlantic Re, a leading reinsurer in healthcare professional liability and Duncanson & Holt (a wholly-owned subsidiary of UNUM Corporation), the largest provider of accident and health reinsurance in the United States. As a result of these initiatives, Trenwick has established itself as one of the leading broker market reinsurers in the United States. Trenwick America Re is rated A+ (Superior) by A.M. Best Company, the highest rating assigned to any broker segment reinsurer, and is assigned a Claims-Paying Ability Rating of A+ (Good) by Standard & Poor's. RESULTS OF OPERATIONS Premiums In 1996, Trenwick reported net premiums written of $226.4 million, a 15% increase over 1995. This compares to a 41% increase in net premiums written in 1995 over 1994. The growth in premium volume in 1996 resulted from a 19% increase in casualty business, which represents 87% of the Company's business. This growth was partially offset by a 7% decrease in property business, including property catastrophe business written pursuant to the Company's strategic reinsurance agreement with PXRE Re. The increase in casualty business is attributable to an increase in new casualty business. This business was developed primarily by the senior underwriting executives 32 32 hired in 1995 through existing and new relationships with various reinsurance brokers. New casualty business, representing 33% of total premium writings in 1996, increased 62% over 1995. Continuing casualty business, which consists of increases in participations in renewal transactions and growth in the original business written by ceding companies, representing 54% of total premium writings in 1996, increased 3% in 1996 over 1995. In 1996, insurance companies continued to increase their retentions, thereby reducing the amount of reinsurance placed with reinsurers. This reduction has primarily affected the Company's specialty business and reduced the overall rate of growth in casualty business. In addition, the Company declined to renew certain accounts which did not meet its pricing standards. Property business, which represented 13% of total premium writings in 1996, decreased as a result of continued price deterioration experienced throughout the year. During 1995, Trenwick modified its process of estimating premiums from ceding companies, resulting in an increase in accruals for unreported premiums written at December 31, 1996 of $15.1 million as compared to 1995, and an increase of $16.6 million in 1995 over 1994. These estimated premiums did not materially affect the Company's earnings either in 1996 or 1995. The following table sets forth gross premiums written, net premiums written and net premiums earned for the periods indicated:
(in thousands) 1996 1995 1994 Gross premiums written $ 247,358 $ 214,336 $ 153,834 Ceded premiums written (20,994) (17,174) (14,199) Net premiums written $ 226,364 $ 197,162 $ 139,635 Net premiums earned $ 211,069 $ 177,394 $ 132,683
33 33 Underwriting Expenses The combined ratio is one means of measuring the profitability of a property and casualty reinsurance company. The combined ratio reflects underwriting experience, but does not reflect income from investments or provisions for income taxes. A combined ratio below 100% indicates profitable underwriting, and a combined ratio exceeding 100% indicates unprofitable underwriting. Although a reinsurer may have unprofitable underwriting results, the reinsurer may still be profitable because of investment income earned on its accumulated invested assets. In 1996 and 1995, Trenwick recorded an underwriting profit of $8.8 million and $7.7 million, respectively, compared to an underwriting loss in 1994 of $4.2 million. The following table sets forth Trenwick's combined ratios and the components thereof calculated on a GAAP basis for the periods indicated, together with Trenwick America Re's combined ratios calculated on a statutory basis:
1996 1995 1994 Claims and claims expense ratio 61.3% 63.7% 70.0% Expense ratio Policy acquisition expense ratio 27.8 24.8 25.5 Underwriting expense ratio 6.7 7.1 7.7 Total expense ratio 34.5 31.9 33.2 Combined ratio 95.8% 95.6% 103.2% Trenwick America Re statutory combined ratio 95.7% 95.5% 103.1%
The most significant underwriting cost affecting a reinsurance company's underwriting result is represented by its claims and claims expense ratio, which is the ratio of incurred claims and claims adjustment expenses to net earned premiums. The claims and claims expense ratio is a function of estimates of claims associated with business written in the current period and changes in estimates of claims on business written in prior periods. As indicated in the preceding table, Trenwick's claims 34 34 and claims expense ratio improved in 1996 and 1995 compared to 1994, reflecting the lack of any material adverse impact from property catastrophe claims in 1996 or 1995. In 1994, catastrophe claims included $9.4 million from the Northridge Earthquake in Southern California, which added 7.1 percentage points to the claims and claims expense ratio. The effect of this catastrophe on the Company's claims ratio was partially mitigated by a general improvement in its other property business. Trenwick's property premium writings, including catastrophe business associated with PXRE Re, amounted to $29.8 million, $32.2 million and $34.7 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, estimates of prior accident year claims were reduced by approximately $4.4 million, $2.1 million and $450,000, respectively. The reduction over the last three years primarily reflects the favorable development of Trenwick's casualty business between accident years 1987 and 1992, partially offset by unfavorable development in accident years 1993 through 1995. Trenwick's expense ratio, which is the ratio of policy acquisition costs and underwriting expenses to net earned premiums as determined in accordance with GAAP, increased in 1996 to 34.5% as compared to 31.9% in 1995 and 33.2% in 1994. Policy acquisition costs, which include brokerage and ceding commissions, vary directly with premium volume and are subject to changes in the mix of business. Trenwick writes business on both an excess of loss and quota share basis. Quota share business generally carries higher ceding commissions than excess of loss business. In 1996, quota share business increased to 43% of total premium writings as compared to approximately 35% for 1995 and 1994. Therefore, the policy acquisition expense ratio increased in 1996 and fluctuated nominally from 1994 to 1995. Underwriting expenses, which generally do not vary with premium volume, were approximately $14.2 million, $12.6 million and $10.3 million in 1996, 1995 and 1994, respectively. Increased expenses in 1996 and 35 35 1995 included costs associated with the addition of a five person underwriting team in May 1995. The underwriting expense ratio, however, decreased .4 of a percentage point in 1996 compared to 1995 and .6 of a percentage point in 1995 as a result of the increase in premium writings. Trenwick America Re's statutory combined ratios for 1996, 1995 and 1994, provided in the preceding table, were 8.1, 15.6 and 3.6 percentage points better, respectively, than the weighted average statutory combined ratios for all reinsurance companies that reported their results to the RAA in those periods. The statutory combined ratios for this group of reinsurance companies in 1996, 1995 and 1994 were 103.8%, 111.1% and 106.7%, respectively. The statutory combined ratios as reported to the RAA by those companies, including Trenwick America Re, which primarily accept business from brokers, for 1996, 1995 and 1994 were 107.6%, 106.9% and 108.9%, respectively. Investment Income Net investment income in 1996 of $41.2 million increased 12% compared to net investment income of $36.8 million in 1995. Net investment income in 1995 increased 9% compared to net investment income of $33.9 million in 1994. Pre-tax yields on invested assets, excluding equity securities, declined to 6.3% in 1996 from 6.5% in both 1995 and 1994. This decline resulted primarily from the reinvestment of approximately $63 million and $56 million of maturities in 1996 and 1995, respectively, at lower interest rates. In 1996, maturities included $24 million in principal repayments associated with Trenwick's portfolio of structured and agency pass-through securities compared to $18 million in 1995. As a result of the stabilization of interest rates and a trend toward purchasing structured securities with less prepayment risk, principal repayments are expected to remain similar in 1997. Investment income is expected to increase in 1997 as the Company's invested asset base grows along with 36 36 an increase in operating cash flow. During 1996, the Company sold approximately $19 million of U.S. government and agency securities and reinvested the proceeds primarily in structured securities in order to increase the overall yield of the portfolio. Additionally, approximately $3 million of structured securities were sold to reduce exposure to possible downgrade and credit risk. Operating Results Trenwick's consolidated net income in 1996 was $33.8 million or $4.95 per share compared to $29.8 million or $4.44 per share in 1995. Trenwick's consolidated net income was $20.3 million or $3.04 per share in 1994. Fully diluted earnings per share were $4.25 in 1996, $3.80 in 1995 and $2.78 in 1994. Consolidated net income in 1994 included after-tax claims of $9.4 million associated with the 1994 Northridge Earthquake. Included in Trenwick's net income were after-tax realized investment gains of $194,000 or $.03 per share and $239,000 or $.04 per share in 1996 and 1995, respectively, and losses of $129,000 or $.02 per share in 1994. INVESTMENTS At December 31, 1996, Trenwick had investments and cash of $754.2 million, an increase of 15% compared to investments and cash of $653.7 million at December 31, 1995. This increase resulted principally from cash provided by operations reduced by dividends paid to stockholders. Operating cash flow included $29.7 million received in December 1996 for the commutation of a reinsurance agreement covering the years 1989 through 1993. All fixed maturity and equity investments are classified as "available for sale" and reported at fair value, with the 37 37 unrealized gain or loss, net of tax, reported in a separate component of stockholders' equity. Since December 31, 1995, the market value of the Company's fixed-income and equity investments decreased approximately $8.6 million. In 1995, Trenwick's investments and cash increased by $101.9 million or approximately 18% when compared to 1994. That increase resulted principally from cash provided by operations and the increase in the unrealized appreciation of its fixed-income and equity portfolio, reduced by dividends paid to stockholders. The average maturity of fixed maturity investments at December 31, 1996 was 6.0 years compared to 5.6 years at December 31, 1995. During 1996, the proceeds from sales and maturities of taxable and tax-exempt securities of $93.1 million, together with cash provided by operations, were invested primarily in taxable securities consisting of mortgage-backed securities of $41 million, asset-backed securities of $24 million, U.S. government securities of $18 million, preferred stock of $12 million and corporate bonds of $5 million. The proceeds were also used to invest in $87 million of tax-exempt securities. Fixed-income securities were invested in the average maturity range of between two to fifteen years. During 1995, the proceeds from sales and maturities of taxable and tax-exempt securities of $99.5 million, together with cash provided by operations, were invested primarily in taxable securities consisting of mortgage-backed securities of $44 million, asset-backed securities of $28 million and corporate bonds of $10 million. The proceeds were also used to invest in $78 million of tax-exempt securities. The Company's investment policy requires that certain fixed-income investments be maintained in an amount equal to the discounted present value of net reinsurance liabilities. The policy also requires that additional fixed-income investments be maintained in an amount equal to approximately 10 percent of total reserve liabilities to ensure adequate liquidity in the event of a significant change in estimated payments. At December 31, 1996, the fixed-income investments held under this policy had the same average maturity of approximately 4.1 years as that established for such liabilities. 38 38 LIQUIDITY AND CAPITAL RESOURCES Trenwick is a holding company whose principal asset is its investment in the common stock of Trenwick America Re. As a holding company, Trenwick's principal source of funds consists of permissible dividends and tax allocation payments from Trenwick America Re and investment income on Trenwick's fixed-income portfolio. Trenwick's principal uses of cash are dividends to its stockholders and servicing its debt obligations. Trenwick America Re receives cash from premiums, investment income and proceeds from sales and maturities of portfolio investments and utilizes cash to pay claims, purchase its own reinsurance protections, meet operating and capital expenses and purchase fixed-income and equity securities. Cash provided by operating activities of $110.5 million in 1996 increased approximately 64% as compared to $67.4 million in 1995. In 1996, Trenwick agreed to commute an aggregate excess of loss retrocessional agreement covering the years 1989 through 1993. As a result of the commutation, Trenwick received a total consideration of $29.7 million representing outstanding reserves of approximately the same amount. The commutation was recorded in 1996 as a paid loss recovery. In addition, cash provided by operating activities in 1996 also increased as a result of an overall increase in premium writings. In 1995, cash provided by operating activities increased by 11% from $60.8 million in 1994. The increases in cash provided by operating activities in 1994 and 1995 are attributable to increases in net premium writings. As evidenced by the increase over the last three years, Trenwick expects that its cash provided by operating activities will be sufficient to meet its operating and financing requirements in 1997 and its longer term operating needs. At December 31, 1996, Trenwick's investments and cash of $754.2 million exceeded total liabilities, including gross reserves for claims and claims expenses of $467.2 million, by $99.2 million, compared to $73.6 million and $12.8 million at December 31, 1995 and 1994, respectively. 39 39 At December 31, 1996, 1995 and 1994, Trenwick's net book value amounted to $265.8 million, $240.8 million and $188.2 million, respectively. Trenwick maintains a portion of its investment portfolio in cash equivalents which are available in the event of unanticipated changes in cash requirements. At December 31, 1996, Trenwick's investments consisted principally of fixed-income securities, 92% of which are rated Aa or better. Trenwick's general policy is to hold these securities to maturity. However, there may be business reasons which would cause all or a portion of these securities to be made available for sale prior to maturity; therefore, Trenwick records these investments at fair value, with market value fluctuations reflected in stockholders' equity, net of tax (see Note 1 to Consolidated Financial Statements). The ratio of net premiums written to surplus, the "surplus ratio," relates to the amount of risk to which an insurer's or reinsurer's statutory capital is exposed, as measured by the amount of premiums written in relation to such surplus. Property and casualty reinsurance companies currently have a surplus ratio of approximately 0.7:1. Trenwick America Re's surplus ratios for both 1996 and 1995 were 0.8:1 and 0.6:1 for 1994, respectively. Accordingly, Trenwick has sufficient surplus capacity to write additional business without significantly exceeding the industry average. Trenwick purchases reinsurance to reduce its exposure to catastrophe claims and the frequency and severity of claims in all lines of business. In 1996, Trenwick's reinsurance treaties consisted principally of an excess of loss treaty for its facultative casualty business and two property catastrophe reinsurance treaties. In addition, Trenwick purchased an annual aggregate excess of loss ratio treaty for casualty business effective January 1, 1996. These coverages were renewed effective January 1, 1997. 40 40 REGULATORY MATTERS The National Association of Insurance Commissioners (NAIC) has adopted Risk-Based Capital (RBC) requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines minimum capital standards that supplement the system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the enterprise's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The ratios of Total Adjusted Capital to Authorized Control Level RBC for Trenwick America Re exceeded all the RBC trigger points at December 31, 1996. Trenwick believes its capital will continue to exceed these RBC capital and surplus requirements for the foreseeable future. Under Connecticut insurance laws and regulations, the maximum amount of shareholder dividends or other distributions that Trenwick America Re may declare or pay to Trenwick within any twelve month period, without the permission of the Connecticut Insurance Commissioner, is limited to the greater of 10% of policyholder surplus at December 31 of the preceding year, or 100% of net income excluding realized capital gains, for the twelve month period ending December 31 of the preceding year, both determined in accordance with statutory accounting practices. For the purpose of computing the limitation, carryforward provisions apply with respect to net income realized in the two previous calendar years which has not already been paid out as dividends. The maximum amount of dividends which could be paid by Trenwick America Re in 1997 without regulatory approval would be $62,901,000. 41 41 SUBSEQUENT EVENT In January 1997, the Company made a private offering of $110 million in 8.82% Subordinated Capital Income Securities ("Capital Securities") through Trenwick Capital Trust I, a Delaware statutory business trust. In connection with this offering, the Company called for redemption all $103.5 million aggregate principal amount of the Company's 6% convertible debentures due December 15, 1999 on February 20, 1997, at a redemption price of 102.57% principal amount plus accrued interest to the redemption date. As a result of the redemption call, $45,819,000 principal amount were redeemed and $57,681,000 principal amount were converted into an aggregate of 1,189,284 shares of the Company's common stock, par value $.10 per share. The remaining net proceeds from the offering of the Capital Securities will be used for general corporate purposes, which may include investments in and advances to subsidiaries, the financing of growth and expansion, the financing of possible future acquisitions and other corporate purposes. 42 42 REPORT OF INDEPENDENT ACCOUNTANTS [LETTERHEAD PRICE WATERHOUSE LLP] To the Board of Directors and Stockholders of Trenwick Group Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Trenwick Group Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/PRICE WATERHOUSE LLP New York, New York January 27, 1997, except for Note 13, which is as of February 20, 1997 43 43 TRENWICK GROUP INC. CONSOLIDATED BALANCE SHEET
December 31, 1996 1995 - - -------------------------------------------------------- -------- ---------- (dollars in thousands) ASSETS - - -------------------------------------------------------- -------- ---------- Fixed maturity investments available for sale at fair value (amortized cost: $700,476 and $609,751) $713,998 $633,525 - - -------------------------------------------------------- -------- ---------- Equity securities available for sale at fair value (cost: $21,346 and $10,507) 25,959 13,419 - - -------------------------------------------------------- -------- ---------- Cash and cash equivalents 14,253 6,760 - - -------------------------------------------------------- -------- ---------- Total investments and cash 754,210 653,704 - - -------------------------------------------------------- -------- ---------- Accrued investment income 10,386 10,198 - - -------------------------------------------------------- -------- ---------- Receivables from ceding insurers 62,689 48,979 - - -------------------------------------------------------- -------- ---------- Reinsurance recoverable balances, net 47,772 68,449 - - -------------------------------------------------------- -------- ---------- Deferred policy acquisition costs 21,805 16,725 - - -------------------------------------------------------- -------- ---------- Net deferred income taxes 20,231 13,585 - - -------------------------------------------------------- -------- ---------- Other assets 3,711 9,290 - - -------------------------------------------------------- -------- ---------- Total assets $920,804 $820,930 - - -------------------------------------------------------- -------- ----------
44 44
December 31, 1996 1995 - - -------------------------------------------------------- -------- ---------- (dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY - - -------------------------------------------------------- -------- ---------- LIABILITIES - - -------------------------------------------------------- -------- ---------- Unpaid claims and claims expenses $467,177 $411,874 - - -------------------------------------------------------- -------- ---------- Unearned premium income 71,448 56,050 - - -------------------------------------------------------- -------- ---------- Convertible debentures 103,500 103,500 - - -------------------------------------------------------- -------- ---------- Other liabilities 12,926 8,730 - - -------------------------------------------------------- -------- ---------- Total liabilities 655,051 580,154 - - -------------------------------------------------------- -------- ---------- STOCKHOLDERS' EQUITY - - -------------------------------------------------------- -------- ---------- Preferred stock, $.10 par value, 1,000,000 shares authorized; none outstanding -- -- - - -------------------------------------------------------- -------- ---------- Common stock, $.10 par value, 15,000,000 shares authorized; 6,725,217 and 6,590,411 shares outstanding 673 659 - - -------------------------------------------------------- -------- ---------- Additional paid-in capital 94,759 89,920 - - -------------------------------------------------------- -------- ---------- Retained earnings 159,512 133,949 - - -------------------------------------------------------- -------- ---------- Net unrealized appreciation of investments available for sale, net of income taxes 11,789 17,346 - - -------------------------------------------------------- -------- ---------- Deferred compensation under stock award plan (980) (1,098) - - -------------------------------------------------------- -------- ---------- Total stockholders' equity 265,753 240,776 - - -------------------------------------------------------- -------- ---------- Total liabilities and stockholders' equity $920,804 $820,930 - - -------------------------------------------------------- -------- ----------
The accompanying notes are an integral part of these statements. 45 45 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 1996 1995 1994 - - --------------------------------------------- -------- -------- -------- (in thousands except per share data) Revenues - - --------------------------------------------- -------- -------- -------- Net premiums earned $211,069 $177,394 $132,683 - - --------------------------------------------- -------- -------- -------- Net investment income 41,226 36,828 33,932 - - ------------------------------------------------------------------------------ Net realized investment gains (losses) 299 368 (196) - - ------------------------------------------------------------------------------ Total revenues 252,594 214,590 166,419 - - --------------------------------------------- -------- -------- -------- Expenses - - --------------------------------------------- -------- -------- -------- Claims and claims expenses incurred 129,316 113,068 92,840 - - --------------------------------------------- -------- -------- -------- Policy acquisition costs 58,757 44,024 33,799 - - --------------------------------------------- -------- -------- -------- Underwriting expenses 14,190 12,589 10,276 - - ------------------------------------------------------------------------------ Interest expense 6,503 6,496 6,469 - - --------------------------------------------- -------- -------- -------- Total expenses 208,766 176,177 143,384 - - --------------------------------------------- -------- -------- -------- Income before income taxes 43,828 38,413 23,035 - - --------------------------------------------- -------- -------- -------- Income taxes 9,980 8,572 2,753 - - --------------------------------------------- -------- -------- -------- Net income $ 33,848 $ 29,841 $ 20,282 - - --------------------------------------------- -------- -------- -------- Primary earnings per share $4.95 $4.44 $3.04 - - --------------------------------------------- -------- -------- -------- Weighted average shares outstanding 6,832 6,723 6,670 - - --------------------------------------------- -------- -------- -------- Fully diluted earnings per share (assuming conversion of dilutive convertible debentures) $4.25 $3.80 $2.78 - - --------------------------------------------- -------- -------- -------- Weighted average shares outstanding 8,966 8,960 8,847 - - --------------------------------------------- -------- -------- -------- Dividends per common share $1.24 $1.12 $1.00 - - --------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of these statements. 46 46 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended December 31, 1996 1995 1994 - - ---------------------------------------------------- -------- -------- -------- (dollars in thousands) Stockholders' equity, beginning of year $240,776 $188,213 $206,763 - - ---------------------------------------------------- -------- -------- -------- COMMON STOCK, $.10 PAR VALUE, AND ADDITIONAL PAID-IN CAPITAL - - ---------------------------------------------------- -------- -------- -------- Exercise of employer stock options (147,352, 132,040 and 49,050 shares) 4,001 1,657 759 - - ---------------------------------------------------- -------- -------- -------- Income tax benefits from additional compensation deductions allowable for income tax purposes 1,467 987 142 - - ---------------------------------------------------- -------- -------- -------- Restricted common stock awarded (10,020, 21,304 and 4,871 shares) 507 933 168 - - ---------------------------------------------------- -------- -------- -------- Restricted common stock awards cancelled (2,100 and 2,359 shares) (91) -- (76) - - ---------------------------------------------------- -------- -------- -------- Common stock purchased and retired (20,466, 3,056 and 194,233 shares) (1,031) (134) (6,590) - - ---------------------------------------------------- -------- -------- -------- RETAINED EARNINGS - - ---------------------------------------------------- -------- -------- -------- Net income 33,848 29,841 20,282 - - ---------------------------------------------------- -------- -------- -------- Cash dividends (8,285) (7,287) (6,463) - - ---------------------------------------------------- -------- -------- -------- NET UNREALIZED APPRECIATION OF INVESTMENTS AVAILABLE FOR SALE - - ---------------------------------------------------- -------- -------- -------- Change in unrealized appreciation (8,551) 41,487 (41,558) - - ---------------------------------------------------- -------- -------- -------- Change in applicable deferred income taxes 2,994 (14,519) 14,545 - - ---------------------------------------------------- -------- -------- -------- DEFERRED COMPENSATION UNDER STOCK AWARD PLAN - - ---------------------------------------------------- -------- -------- -------- Restricted common stock awarded (507) (933) (168) - - ---------------------------------------------------- -------- -------- -------- Restricted common stock awards cancelled 91 -- 76 - - ---------------------------------------------------- -------- -------- -------- Compensation expense recognized 534 531 333 - - ---------------------------------------------------- -------- -------- -------- Stockholders' equity, end of year $265,753 $240,776 $188,213 - - ---------------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of these statements. 47 47 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1996 1995 1994 - - ---------------------------------------------------- -------- -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES - - ---------------------------------------------------- -------- -------- -------- Premiums collected $171,017 $144,996 $117,360 - - ---------------------------------------------------- -------- -------- -------- Ceded premiums paid (6,254) (7,908) (5,440) - - ---------------------------------------------------- -------- -------- -------- Claims and claims expenses paid (102,759) (89,487) (79,216) - - ---------------------------------------------------- -------- -------- -------- Claims and claims expenses recovered 34,156 7,942 11,972 - - ---------------------------------------------------- -------- -------- -------- Underwriting expenses paid (12,765) (11,008) (8,381) - - ---------------------------------------------------- -------- -------- -------- Cash provided by underwriting activities 83,395 44,535 36,295 - - ---------------------------------------------------- -------- -------- -------- Net investment income received 42,654 38,829 33,952 - - ---------------------------------------------------- -------- -------- -------- Interest and other expenses paid (6,190) (6,239) (6,231) - - ---------------------------------------------------- -------- -------- -------- Income taxes paid (9,381) (9,681) (3,194) - - ---------------------------------------------------- -------- -------- -------- Cash provided by operating activities 110,478 67,444 60,822 - - ---------------------------------------------------- -------- -------- -------- CASH FLOWS FOR INVESTING ACTIVITIES - - ---------------------------------------------------- -------- -------- -------- Purchases of fixed maturity investments (177,611) (163,262) (192,962) - - ---------------------------------------------------- -------- -------- -------- Sales of fixed maturity investments 22,460 43,859 87,090 - - ---------------------------------------------------- -------- -------- -------- Maturities of fixed maturity investments 62,983 55,600 70,967 - - ---------------------------------------------------- -------- -------- -------- Purchases of equity securities (12,529) (326) (10,181) - - ---------------------------------------------------- -------- -------- -------- Sales of equity securities 7,638 37 60 - - ---------------------------------------------------- -------- -------- -------- Additions to premises and equipment (611) (612) (123) - - ---------------------------------------------------- -------- -------- -------- Cash used for investing activities (97,670) (64,704) (45,149) - - ---------------------------------------------------- -------- -------- -------- CASH FLOWS FOR FINANCING ACTIVITIES - - ---------------------------------------------------- -------- -------- -------- Issuance of common stock 4,001 1,657 759 - - ---------------------------------------------------- -------- -------- -------- Repurchase of common stock (1,031) (134) (6,590) - - ---------------------------------------------------- -------- -------- -------- Dividends paid (8,285) (7,287) (6,463) - - ---------------------------------------------------- -------- -------- -------- Cash used for financing activities (5,315) (5,764) (12,294) - - ---------------------------------------------------- -------- -------- -------- Change in cash and cash equivalents 7,493 (3,024) 3,379 - - ---------------------------------------------------- -------- -------- -------- Cash and cash equivalents, beginning of year 6,760 9,784 6,405 - - ---------------------------------------------------- -------- -------- -------- Cash and cash equivalents, end of year $ 14,253 $ 6,760 $ 9,784 - - ---------------------------------------------------- -------- -------- --------
The accompanying notes are an integral part of these statements. 48 48 TRENWICK GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the accounts of Trenwick Group Inc. (Trenwick) and its subsidiaries. Trenwick's principal subsidiary, Trenwick America Reinsurance Corporation (Trenwick America Re), underwrites reinsurance. INVESTMENTS AND CASH EQUIVALENTS The Company has classified all of its fixed maturity investments and equity securities as "Available for sale" and reported them at fair value with net unrealized gains and losses included in stockholders' equity, net of related deferred income taxes. The fair value of fixed maturity investments and equity securities is estimated using quoted market prices or broker dealer quotes. Cash equivalents represent investments with maturities at date of purchase of three months or less and are carried at cost which approximates fair value. 49 49 Realized gains or losses on disposition of investments are determined on the basis of the specific identification method. Investment income consisting of dividends and interest, net of investment expenses, is recognized in income when earned. The amortization of premiums and accretion of discount for fixed maturity investments is computed utilizing the interest method. Structured securities, anticipated prepayments and expected maturities are used in applying the interest method. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the security is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security and that adjustment is included in net investment income. REVENUES Insurance premiums are earned on a pro rata basis over the related contract period, which is generally one year. Unearned premium income represents the portion of premiums applicable to the unexpired portion of premium coverage with renewal dates later than year end. Premiums on contracts are accrued on an estimated basis throughout the term of such contracts. These estimates may change in the near term. POLICY ACQUISITION COSTS Policy acquisition costs are stated net of policy acquisition costs ceded and consist of commissions and brokerage expenses incurred at policy or contract issue date. These costs vary with, and are primarily related to, the acquisition of business and are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts after allowing for anticipated investment income. 50 50 RESERVE FOR UNPAID CLAIMS AND CLAIMS EXPENSES Claims are recorded as incurred so as to match such costs with premiums over the contract periods. The amount provided for unpaid claims consists of any unpaid reported claims and estimates for incurred but not reported claims, net of salvage and subrogation. The estimates for claims incurred but not reported were developed based on Trenwick's historical claims experience and an actuarial evaluation of expected claims experience. Insurance liabilities are necessarily based on estimates and the ultimate liability may vary from such estimates. Any adjustments to these estimates are reflected in income when known. INCOME TAXES Income taxes are provided based on income reported in the financial statements. Deferred income taxes are provided based on an asset and liability approach which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. STOCK-BASED COMPENSATION Trenwick grants stock options for a fixed number of common shares to employees with an exercise price equal to the market value of the shares at the date of grant. A newly adopted accounting standard, "Accounting for Stock-Based Compensation," supersedes the previous opinion and establishes a fair value based method of accounting for stock-based compensation plans. However, it permits an entity to continue to apply the accounting provisions of the previous opinion and make pro forma disclosures of net income and earnings per share, as if the fair market value based method had been applied. Trenwick continues to account for the stock option grants in accordance with the previous opinion, and accordingly, recognizes no compensation expense for the stock option grants. 51 51 The effect of applying the new standard's fair value method to Trenwick's stock option awards results in pro forma net income and earnings per share that are not materially different from amounts reported. EARNINGS PER SHARE Primary earnings per share are computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year. Primary weighted average shares outstanding are adjusted to reflect as outstanding, throughout each year presented, common stock equivalents pursuant to the assumed exercise of stock options. Fully diluted earnings per share are computed based on the assumption that the convertible debentures are converted into common shares. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements, are recorded at cost and are amortized or depreciated using the straight-line method over their useful lives, which range from three to ten years. DEBT ISSUANCE COSTS Debt issuance costs associated with the issuance of convertible debentures are being amortized over the term of the related debt using the interest method. Unamortized costs applicable to debentures converting to common stock will be charged to stockholders' equity at the time of any conversion. 52 52 The fair value and amortized cost of fixed maturity investments at December 31, 1996 and 1995 are as follows:
1996 1995 - - ------------------ -------- --------- ------- --------- FAIR AMORTIZED FAIR AMORTIZED (in thousands) VALUE COST VALUE COST - - ------------------ -------- -------- -------- -------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 91,702 $ 90,421 $ 97,502 $ 94,024 -------- -------- -------- -------- Obligations of states and political subdivisions 367,029 360,201 318,590 308,909 -------- -------- -------- -------- Mortgage-backed and asset-backed securities 211,228 206,774 176,642 168,119 -------- -------- -------- -------- Debt securities issued by for- eign governments 3,227 3,156 3,347 3,199 -------- -------- -------- -------- Public utilities 2,918 2,803 2,970 2,775 -------- -------- -------- -------- Corporate securities 37,774 37,001 33,994 32,245 -------- -------- -------- -------- Short-term securities 120 120 480 480 -------- -------- -------- -------- Total fixed matur- ity investments $713,998 $700,476 $633,525 $609,751 -------- -------- -------- --------
The fair value and amortized cost of fixed maturity investments at December 31, 1996 are shown on the following page by contractual or expected maturity periods. Expected maturities will differ from contractual 53 53 maturities because borrowers may have the right to call or prepay obligations with or without penalty. The maturities for mortgage-backed and asset-backed securities are calculated using expected maturity dates, adjusted for anticipated prepayments.
FAIR AMORTIZED (in thousands) VALUE COST -------- -------- Due in one year or less $ 64,268 $ 63,899 -------- -------- Due after one year through five years 314,690 308,687 -------- -------- Due after five years through ten years 273,802 266,533 -------- -------- Due after ten years 61,238 61,357 -------- -------- Total fixed maturity investments $713,998 $700,476 -------- --------
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS During the twelve months ended December 31, 1996, all investments were income producing. The components of net investment income for the years ended December 31 are as follows:
(in thousands) 1996 1995 1994 -------- -------- -------- Fixed maturity investments $ 41,332 $ 37,219 $ 34,538 -------- -------- -------- Equity securities 393 289 122 -------- -------- -------- Cash and cash equivalents 719 621 628 -------- -------- -------- Gross investment income 42,444 38,129 35,288 -------- -------- -------- Investment expenses (1,218) (1,301) (1,356) -------- -------- -------- Net investment income $ 41,226 $ 36,828 $ 33,932 -------- -------- --------
Net realized gains (losses) on sales of investments are as follows:
(in thousands) 1996 1995 1994 ------- ------- ------- FIXED MATURITY INVESTMENTS Gross realized gains $ 137 $ 605 $ 2,006 ------- ------- ------- Gross realized losses (1) (274) (2,262) ------- ------- ------- EQUITY SECURITIES Gross realized gains 862 37 60 ------- ------- ------- Gross realized losses (699) -- -- ------- ------- ------- Net realized investment gains (losses) $ 299 $ 368 $ (196) ------- ------- -------
54 54 UNREALIZED GAINS (LOSSES) ON FIXED MATURITY INVESTMENTS AND EQUITY SECURITIES At December 31, 1996 and 1995, unrealized gains and losses are as follows:
(in thousands) 1996 1995 - - -------------- --------------------- ---------------------- GAINS LOSSES GAINS LOSSES ------- ------- ------- ------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 1,319 $ (38) $ 3,478 $ -- ------- ------- ------- ------- Obligations of states and political subdivisions 7,173 (345) 9,848 (167 ------- ------- ------- ------- Mortgage-backed and asset-backed securities 4,958 (504) 8,523 -- ------- ------- ------- ------- Debt securities issued by for- eign governments 71 -- 148 -- ------- ------- ------- ------- Public utilities 115 -- 195 -- ------- ------- ------- ------- Corporate securities 775 (2) 1,749 -- ------- ------- ------- ------- Total fixed matur- ity investments $14,411 $ (889) $23,941 $ (167) ------- ------- ------- ------- Equity securities $ 4,616 $ (3) $ 2,912 -- ------- ------- ------- -------
55 55 NET UNREALIZED APPRECIATION OF INVESTMENTS AVAILABLE FOR SALE The components of the net unrealized appreciation of investments available for sale at December 31, 1996 and 1995 are as follows:
(in thousands) 1996 1995 -------- -------- Unrealized appreciation of fixed maturity investments $ 13,522 $ 23,774 -------- -------- Unrealized appreciation of equity securities 4,613 2,912 -------- -------- Unrealized appreciation of investments 18,135 26,686 -------- -------- Deferred income taxes (6,346) (9,340) -------- -------- Net unrealized appreciation of investments available for sale, net of income taxes $ 11,789 $ 17,346 -------- --------
INVESTMENTS HELD AS COLLATERAL OR ON DEPOSIT Fixed maturity investments with a carrying value of $104,271,000 are being held in trust as collateral for certain reinsurance obligations. In addition, investments with a carrying value of $7,225,000 at December 31, 1996 were on deposit with various state or governmental insurance departments in order to comply with insurance laws. NOTE 3 REINSURANCE ACTIVITY AND RESERVE FOR UNPAID CLAIMS AND CLAIMS EXPENSES REINSURANCE ACTIVITY Trenwick's subsidiary, Trenwick America Re, primarily provides reinsurance to insurers of property and casualty risks in the United States. Trenwick America Re generally obtains all of its business through brokers and reinsurance intermediaries which seek its participation on reinsurance being placed for their customers. Trenwick America Re writes both treaty and facultative reinsurance both on an excess of loss and quota share basis. In underwriting reinsurance, Trenwick America Re does not target types of clients, classes of business or types of reinsurance. Rather, it selects transactions based upon the quality of the reinsured, the attractiveness of the reinsured's insurance rates and policy conditions and the adequacy of the proposed reinsurance terms. 56 56 Trenwick America Re obtained approximately 62% of its gross written premiums from three brokers in 1996 and 1995, and 57% from three brokers in 1994. Trenwick America Re's concentration of business through a small number of sources is consistent with the concentration of the property and casualty broker reinsurance market, in which a majority of the business is written through the top ten largest brokers in the reinsurance industry. Loss of all or a substantial portion of the business provided by these brokers could have a material adverse effect on the business and operations of Trenwick America Re. Trenwick does not believe, however, that the loss of such business would have a long-term adverse effect because of Trenwick's competitive position within the broker reinsurance market and the availability of business from other brokers. In 1996, Trenwick America Re obtained approximately 15%, 12% and 10% of its gross written premiums from three ceding companies. In 1995, Trenwick America Re obtained approximately 19%, 11% and 9% of its gross written premiums from three ceding companies and in 1994, approximately 14% and 12% of Trenwick America Re's gross written premiums were obtained from two ceding companies. Included in receivables from ceding insurers at December 31, 1996 and 1995 are accrued premiums of approximately $59,070,000 and $38,794,000, respectively, which have estimated payment dates ranging from 1996 to 2001. Premium payment dates are estimated using the anticipated payout pattern of claims which result in the additional premium due from ceding companies. The fair value of the accrued premiums for 1996 and 1995 is approximately $57,300,000 and $37,400,000, respectively, which is estimated using cash flows discounted at an interest rate of 5%. 57 57 The effects of reinsurance on premiums written, premiums earned and claims and claims expenses incurred for the three years ended December 31 are as follows:
(in thousands) 1996 1995 1994 --------- --------- --------- Assumed premiums written $ 247,358 $ 214,336 $ 153,834 --------- --------- --------- Ceded premiums written (20,994) (17,174) (14,199) --------- --------- --------- Net premiums written $ 226,364 $ 197,162 $ 139,635 --------- --------- --------- Assumed premiums earned $ 231,960 $ 194,592 $ 147,129 --------- --------- --------- Ceded premiums earned (20,891) (17,198) (14,446) --------- --------- --------- Net premiums earned $ 211,069 $ 177,394 $ 132,683 --------- --------- --------- Assumed claims and claims expenses incurred $ 156,819 $ 111,351 $ 114,340 --------- --------- --------- Ceded claims and claims expenses incurred (27,503) 1,717 (21,500) --------- --------- --------- Net claims and claims expenses incurred $ 129,316 $ 113,068 $ 92,840 --------- --------- ---------
UNPAID CLAIMS AND CLAIMS EXPENSES The following table presents an analysis of gross and net unpaid claims and claims expenses and a reconciliation of beginning and ending net unpaid claims and claims expense balances for 1996, 1995 and 1994. The gross unpaid claims and claims expense balances at December 31, 1996 and 1995 are reflected in Trenwick's consolidated balance sheet. The net unpaid claims and claims expense balances are stated on a net basis after deductions for reinsurance recoverable on unpaid claims and claims expenses from retrocessionaires. 58 58 Activity in the reserve for unpaid claims and claims expenses, net of reinsurance recoverable, for the years ended December 31 is summarized below:
(in thousands) 1996 1995 1994 --------- --------- --------- Reserve for unpaid claims and claims expenses, net of related reinsurance recoverable, at beginning of year $ 327,001 $ 294,008 $ 268,091 --------- --------- --------- Provision for claims and claims expenses, net of reinsurance --------- --------- --------- For claims incurred in the current year 133,755 115,133 93,287 --------- --------- --------- For claims incurred in prior years (4,439) (2,065) (447) --------- --------- --------- Subtotal 129,316 113,068 92,840 --------- --------- --------- Payments for claims and claims expenses, net of reinsurance --------- --------- --------- For claims incurred in the current year (22,570) (18,271) (14,623) --------- --------- --------- For claims incurred in prior years (46,860) (61,804) (52,300) --------- --------- --------- Subtotal (69,430) (80,075) (66,923) --------- --------- --------- Reserve for unpaid claims and claims expenses, net of related reinsurance recoverable, at end of year 386,887 327,001 294,008 --------- --------- --------- Reinsurance recoverable on unpaid claims and claims expenses, at end of year 80,290 84,873 95,290 --------- --------- --------- Reserve for unpaid claims and claims expenses, gross of reinsurance recoverable on unpaid claims, at end of year $ 467,177 $ 411,874 $ 389,298 --------- --------- ---------
59 59 In 1996, 1995 and 1994, Trenwick recorded a decrease of $4,439,000, $2,065,000 and $447,000, respectively, in estimates for claims occurring in prior accident years. The reduction over the last three years primarily reflects the favorable development of Trenwick's casualty business written between accident years 1987 and 1992 partially offset by unfavorable development in accident years 1993 through 1995. EXPOSURE TO ENVIRONMENTAL CLAIMS Trenwick's exposure to environmental claims, including asbestos and pollution liability, is primarily associated with its participation in business written by its predecessor company between 1978 and 1983. Exposure to environmental claims on Trenwick's business written since 1983 is generally limited by exclusions on its own reinsurance contracts and also by exclusions on policies issued by ceding companies. Casualty business written in 1983 and prior is not material to Trenwick's overall book of business. As of December 31, 1996, outstanding claims including incurred but not reported claims for environmental liability were approximately $9.2 million, approximately 2% of Trenwick's total net outstanding reserves. Under Trenwick's current interpretation of policy language, management does not believe that it has a material exposure to environmental claims that requires additional reserves beyond its current estimates. Inflation raises the cost of economic losses and noneconomic damages covered by insurance contracts and therefore is a factor in determining effective rates of reinsurance. The methods used by Trenwick to estimate individual case reserves and reserves for claims incurred but not yet reported implicitly incorporate the effects of inflation in the projection of ultimate losses. 60 60 Due to the inherent uncertainties of estimating insurance company claim reserves, actual claims and claims expenses may deviate, perhaps substantially, from estimates of Trenwick's reserves reflected in Trenwick's consolidated financial statements. Trenwick's management believes that its claim reserve methods are reasonable and prudent and that Trenwick's reserve for claims and claims expenses at December 31, 1996 are adequate. REINSURANCE RECOVERABLE The components of reinsurance recoverable balances net on the balance sheet at December 31 are as follows:
(in thousands) 1996 1995 -------- -------- Paid claims $ 1,505 $ 2,978 -------- -------- Unpaid claims and claims expenses 80,290 84,873 -------- -------- Funds held liability (33,353) (18,323) -------- -------- Reinsurance balances payable (670) (1,079) -------- -------- Reinsurance recoverable balances, net $ 47,772 $ 68,449 -------- --------
Trenwick America Re purchases reinsurance to reduce its exposure to catastrophe losses and the frequency of large losses in all lines of business. Trenwick America Re, however, remains liable in the event that its retrocessionaires do not meet their contractual obligations. At December 31, 1996, letters of credit in the amount of $2,103,000 have been arranged in favor of Trenwick America Re in respect of certain outstanding claims recoverable and the unearned portion of premiums ceded. At December 31, 1996, approximately $50,951,000 of reinsurance recoverable on unpaid claims and claims expenses is recoverable from one reinsurer, Centre Reinsurance Company of New York. There is no prepaid reinsurance premium which relates to this reinsurer. For the years ended December 31, 1996, 1995 and 1994, Trenwick America Re earned commissions on cessions to retrocessionaires of $29,000, $13,000 and $112,000, respectively. 61 61 NOTE 4 INCOME TAXES Trenwick files a consolidated United States income tax return with its United States subsidiaries. The components of the provision for income taxes for the years ended December 31, 1996, 1995 and 1994 are as follows:
(in thousands) 1996 1995 1994 -------- -------- -------- Current income tax provision $ 13,633 $ 7,821 $ 4,635 -------- -------- -------- Deferred income tax provision (3,653) 751 (1,882) -------- -------- -------- Income tax provision $ 9,980 $ 8,572 $ 2,753 -------- -------- --------
Trenwick's effective income tax rates were 23%, 22% and 12% for the years ended December 31, 1996, 1995 and 1994, respectively. The income tax provision for each of the years presented differs from the amounts determined by applying the applicable U.S. statutory federal income tax rate of 35% to income before income taxes as a result of the following:
(in thousands) 1996 1995 1994 -------- -------- -------- Income before income taxes $ 43,828 $ 38,413 $ 23,035 -------- -------- -------- Income taxes at statutory rate $ 15,340 $ 13,445 $ 8,062 -------- -------- -------- Effect of tax-exempt investment income (5,286) (4,963) (5,156) -------- -------- -------- Other, net (74) 90 (153) -------- -------- -------- Income tax provision $ 9,980 $ 8,572 $ 2,753 -------- -------- --------
The components of the net deferred income tax provision for the years ended December 31 are as follows:
(in thousands) 1996 1995 1994 ------- ------- ------- Discounting of unpaid claims $(4,541) $(1,369) $(1,073) ------- ------- ------- Unearned premium income (1,071) (1,384) (522) ------- ------- ------- Policy acquisition costs deferred 1,778 2,112 769 ------- ------- ------- Alternative minimum taxes (10) 908 (908) ------- ------- ------- Accretion of market discount on fixed maturity investments 518 378 -- ------- ------- ------- Other, net (327) 106 (148) ------- ------- ------- Total deferred income tax provision $(3,653) $ 751 $(1,882) ------- ------- -------
62 62 Deferred income tax assets (liabilities) are attributable to the following temporary differences as of December 31, 1996 and 1995:
(in thousands) 1996 1995 -------- -------- DEFERRED INCOME TAX ASSET Discounting of unpaid claims $ 29,237 $ 24,696 -------- -------- Unearned premium income 4,980 3,909 -------- -------- Employee stock option plans 439 209 -------- -------- Alternative minimum taxes 10 -- -------- -------- Other 524 440 -------- -------- Gross deferred income tax assets 35,190 29,254 -------- -------- DEFERRED INCOME TAX LIABILITY Policy acquisition costs deferred (7,632) (5,854) -------- -------- Unrealized appreciation of investments available for sale (6,346) (9,340) -------- -------- Accretion of market discount on fixed maturity investments (896) (378) -------- -------- Other (85) (97) -------- -------- Gross deferred income tax liabilities (14,959) (15,669) -------- -------- Net deferred income tax assets $ 20,231 $ 13,585 -------- --------
Trenwick's management has concluded that the deferred income tax assets are more likely than not to be realized. Therefore, no valuation allowance has been provided. Estimates used in the development of the net deferred income tax assets may change in the near term. NOTE 5 LONG-TERM DEBT AND FINANCING ARRANGEMENTS Trenwick's $103,500,000 convertible debentures due December 15, 1999, issued at par, bear interest at 6% and are convertible, at any time prior to maturity, into shares of common stock of Trenwick at a conversion price of $48.50 per share, subject to adjustment under certain conditions. Interest on the debentures is payable on June 15 and December 15 of each year. The debentures are redeemable at any time on or after December 15, 1995, in 63 63 whole or in part, at the option of Trenwick, at a redemption price of 103.43% of par, decreasing to 100% at maturity. In January 1997, Trenwick called for redemption on February 20, 1997 all then outstanding debentures at a redemption price of 102.57% of the principal amount, $106,160,000, plus accrued interest to the redemption date. See Note 13 for further disclosures with respect to the redemption of this debt. Subject to certain limitations, Trenwick is not restricted from incurring secured or unsecured indebtedness and currently has no secured indebtedness or indebtedness senior to the debentures. As of December 31, 1996, 2,134,000 shares of Trenwick's common stock are reserved for issuance in the event of conversion of the debentures. The fair value of Trenwick's convertible debentures at December 31, 1996 and 1995 was $108,675,000 and $121,600,000, respectively, based on the quoted market prices reported by the NASDAQ National Market System. Trenwick incurred interest expense on its long-term debt of $6,504,000, $6,486,000 and $6,469,000 for the years ended December 31, 1996, 1995 and 1994, respectively, at effective rates of approximately 6% for the years then ended. NOTE 6 INSURANCE REGULATION Trenwick's reinsurance subsidiary, Trenwick America Re, is domiciled in and subject to the insurance statutes of Connecticut. During 1996, 1995 and 1994, Trenwick America Re paid dividends of $4,100,000, $9,500,000 and $9,400,000, respectively. The statutory limitation on dividends which can be paid without prior approval of the Connecticut Insurance Commissioner, applicable to Trenwick America Re, is the greater of 10% of policyholder surplus at December 31 of the preceding year or 100% of net income, not including realized capital gains, for the twelve month period ending December 31 of the preceding year, both determined in accordance with statutory accounting practices. For the purpose of computing the limitation, carryforward provisions apply with respect to net income realized in the two previous calendar years which has 64 64 not already been paid out as dividends. The amount of dividends or other distributions that could be paid by Trenwick America Re without prior approval as of December 31, 1996 was $62,901,000. The differences between GAAP and statutory accounting practices for Trenwick America Re are the treatment of acquisition costs, deferred income taxes, other deferred charges and the carrying value of fixed maturity investments. The following tables set forth a reconciliation of Trenwick America Re's net income and statutory surplus, as filed with the insurance regulatory authorities, to its net income and stockholders' equity as determined in accordance with GAAP for the years ended and as of December 31:
(in thousands) 1996 1995 1994 --------- --------- --------- RECONCILIATION OF NET INCOME Statutory net income of Trenwick America Re $ 29,555 $ 28,060 $ 19,966 --------- --------- --------- Change in deferred policy acquisition costs 5,080 6,034 2,197 --------- --------- --------- Provision for net deferred income taxes 3,307 (690) 1,729 --------- --------- --------- Other (6) (12) 19 --------- --------- --------- GAAP net income of Trenwick America Re $ 37,936 $ 33,392 $ 23,911 --------- --------- --------- 1996 1995 1994 --------- --------- --------- RECONCILIATION OF SURPLUS Statutory capital and surplus of Trenwick America Re $ 286,284 $ 257,590 $ 236,056 --------- --------- --------- Deferred acquisition costs 21,805 16,725 10,691 --------- --------- --------- Unrealized appreciation (depreciation) of investments 13,556 23,526 (13,685) --------- --------- --------- Net deferred income taxes 19,365 13,144 28,027 --------- --------- --------- Unauthorized reinsurance 2,669 2,336 2,265 --------- --------- --------- Non-admitted assets 208 2,142 1,858 --------- --------- --------- GAAP stockholders' equity of Trenwick America Re $ 343,887 $ 315,463 $ 265,212 --------- --------- ---------
65 65 NOTE 7 STOCK OPTIONS AND BENEFIT PLANS STOCK OPTIONS Trenwick has several plans through which it makes options in common stock available to Trenwick employees at the discretion of the Board of Directors. Non-employee directors receive automatic grants under a separate plan. Exercise prices are generally fixed at the market value at the date of grant. Options vest and are exercisable on various terms, usually either over a five year period or up to a ten year period. All options have an expiration date not exceeding ten years. Total authorized common stock reserved for issuance under all stock benefit plans at December 31, 1996 is 723,963. Transactions under the stock option plans are summarized as follows:
1996 1995 1994 -------- -------- -------- NUMBER OF SHARES Outstanding, beginning of year 758,352 793,892 841,442 -------- -------- -------- Granted 54,500 96,500 4,000 -------- -------- -------- Cancelled (11,370) -- (2,500) -------- -------- -------- Exercised (147,352) (132,040) (49,050) -------- -------- -------- Outstanding, end of year 654,130 758,352 793,892 -------- -------- -------- Exercisable, end of year 225,180 340,877 435,892 -------- -------- -------- AVERAGE EXERCISE PRICE Granted $ 47.44 $ 44.00 $ 41.50 -------- -------- -------- Cancelled 29.14 -- 40.00 -------- -------- -------- Exercised 27.15 12.55 15.45 -------- -------- -------- Outstanding, end of year 37.09 34.29 29.50 -------- -------- -------- Exercisable, end of year 28.18 26.10 20.73 -------- -------- --------
Included in the above are options granted to certain senior officers under the 1993 Stock Option Plan. The exercise and vesting of these options are accelerated if the price of Trenwick's common stock achieves certain specified levels, subject to certain conditions. 66 66 RESTRICTED COMMON STOCK AWARDS Trenwick awarded restricted common stock to key employees, primarily under the terms of the 1989 Stock Plan. In 1996, 10,020 shares were awarded at values of $48.75 to $53.50 (approximately $507,000), which vest over five to seven years. Shares awarded in 1995 and 1994 vest over three to five years. Shares repurchased in 1996, 1995 and 1994 have been in connection with the satisfaction of employees' withholding taxes payable upon the vesting of previously awarded shares. Trenwick has recognized compensation expense of $534,000, $531,000 and $333,000 for 1996, 1995 and 1994, respectively, determined by the award value of the shares amortized over the applicable vesting period. RETIREMENT PLANS Trenwick has a pension plan and a 401(k) savings plan for substantially all full-time employees. Effective July 1, 1995, Trenwick contributes 8% of eligible employees' total compensation to the pension plan. Prior to this date, Trenwick contributed 4% of an eligible employees' total compensation, plus 3% of the eligible employees' total compensation above the FICA limit. No employee contributions are made to the plan. Effective January 1, 1996, Trenwick matches 100% of employees' contributions to the savings plan up to 6% of each eligible employee's total compensation. Prior to January 1, 1996, Trenwick matched 100% of employees' contributions up to the lesser of 6% of an eligible employee's total compensation or $2,000. Assets of both plans are administered by a life insurance company. Trenwick's contributions to the pension plan were $432,000, $297,000 and $235,000 for 1996, 1995 and 1994, respectively; its contributions to the savings plan were $314,000, $122,000 and $114,000 for 1996, 1995 and 1994, respectively. 67 67 NOTE 8 STOCKHOLDER RIGHTS PLAN Trenwick has adopted a stockholder rights plan under which preferred stock purchase rights attach to all outstanding shares of Trenwick's common stock. The rights are exercisable only if a party acquires, or announces a tender offer to acquire, 20% or more of Trenwick's common stock. Each right entitles a stockholder to buy 1/100 of a share of Trenwick's Series A Junior Participating Preferred Stock for a $96 exercise price. Each 1/100 of a share of such preferred stock will have dividend and voting rights approximately equal to one share of common stock. In the event that an acquiror accumulates 20% or more of Trenwick's common stock, all rights holders except the acquiror may purchase, for the exercise price, in lieu of the Series A Junior Participating Preferred Stock, shares of common stock of Trenwick having a market value of twice the exercise price of each right. If Trenwick is acquired in a merger or other business combination after the acquisition of 20% of Trenwick's common stock, all rights holders except the acquiror may purchase the acquiror's shares at a similar discount. Trenwick is entitled to redeem the rights for one cent each, subject to certain restrictions. Trenwick has reserved 150,000 shares of its preferred stock for possible issuance under the plan. The rights will expire on November 2, 1999. 68 68 NOTE 9 SUPPLEMENTAL CASH FLOWS INFORMATION A reconciliation of cash provided by operations for the three years ended December 31 is as follows:
(in thousands) 1996 1995 1994 --------- --------- --------- Net income $ 33,848 $ 29,841 $ 20,282 --------- --------- --------- ADJUSTMENTS Amortization of premiums on investments, net 1,579 1,003 1,169 --------- --------- --------- Policy acquisition costs incurred, net of amortization (5,080) (6,034) (2,197) --------- --------- --------- Provision for deferred income taxes (3,653) 750 (1,882) --------- --------- --------- Net realized investment (gains) losses (299) (368) 196 --------- --------- --------- Amortization of debt issuance costs 295 276 259 --------- --------- --------- Other non-cash items, net 900 907 601 --------- --------- --------- (INCREASE) DECREASE IN ASSETS Receivables and recoverables 6,623 (1,112) (3,133) --------- --------- --------- Other (99) 72 458 --------- --------- --------- INCREASE (DECREASE) IN LIABILITIES Unpaid claims and claims expenses 55,303 22,576 34,716 --------- --------- --------- Unearned premium income 15,398 19,744 6,705 --------- --------- --------- Payables 5,663 (211) 3,648 --------- --------- --------- Net cash provided by operating activities $ 110,478 $ 67,444 $ 60,822 --------- --------- ---------
69 69 NOTE 10 OTHER ASSETS AND LIABILITIES Other assets comprise:
December 31, 1996 1995 ------ ------ (in thousands) Non-marketable equity investment, at fair value $ -- $6,300 ------ ------ Deferred debt issuance costs, net of accumulated amortization of $1,075 and $780 986 1,281 ------ ------ Premises and equipment, net of accumulated depreciation and amortization of $2,373 and $2,050 1,135 889 ------ ------ Prepaid reinsurance premiums 305 202 ------ ------ Funds held in escrow 515 -- ------ ------ Other 770 618 ------ ------ Total other assets $3,711 $9,290 ------ ------
At December 31, 1995, Trenwick owned approximately 15% of common stock of Investors Insurance Holding Corporation, a property and casualty insurer. The shares were unregistered and Trenwick did not exercise significant influence over the investment. Consequently, Trenwick accounted for its investment at fair value, which was equal to cost until substantive events occurred which could indicate a diminution or appreciation in value. During 1996, Trenwick sold its investment for $5,601,000, including $515,000 of funds held in escrow, and recognized a loss of $699,000, which is included in realized investment losses for the year 1996. Trenwick's minimum non-cancellable office space lease commitments totalling $1,258,000 at December 31, 1996 are payable as follows: 1997 - $816,000; 1998 - $442,000. Total office rent expense for the years ended December 31, 1996, 1995 and 1994 was $918,000, $883,000 and $899,000, respectively. 70 70 NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS Accounting literature defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties and requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. In the event that quoted market prices were not available, fair values are based on estimates using discounted cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of the amount and timing of future cash flows. These fair value estimates may vary in the near term. The following table presents in summary form the carrying amounts and estimated fair values of Trenwick's financial instruments at December 31, 1996 and 1995:
1996 1995 Related ----------------------- -------------------- Footnote Carrying Fair Carrying Fair Cross (in thousands) Amount Value Amount Value Reference -------- -------- -------- -------- ----------- ASSETS -------- -------- -------- -------- ------------ Fixed maturity investments $713,998 $713,998 $633,525 $633,525 Notes 1 & 2 -------- -------- -------- -------- ------------ Equity securities 25,959 25,959 13,419 13,419 Notes 1 & 2 -------- -------- -------- -------- ------------ Cash and cash equivalents 14,253 14,253 6,760 6,760 Note 1 -------- -------- -------- -------- ------------ Accrued premiums 59,070 57,300 38,794 37,400 Note 3 -------- -------- -------- -------- ------------ Non-marketable equity investment -- -- 6,300 6,300 Note 10 -------- -------- -------- -------- ------------ Funds held in escrow 515 515 -- -- Note 10 -------- -------- -------- -------- ------------ LIABILITIES -------- -------- -------- -------- ------------ Convertible debentures $103,500 $108,675 $103,500 $121,600 Notes 5 & 13 -------- -------- -------- -------- ------------
71 71 NOTE 12 UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data reported by Trenwick for the years ended December 31, 1996, 1995 and 1994 are as follows:
December September June March Quarter ended 31 30 30 31 -------- --------- ------- ------- (dollars in thousands, except per share data) Earned premiums 1996 $54,994 $55,008 $53,376 $47,691 ---- -------- --------- ------- ------- 1995 46,032 43,200 43,698 44,464 ---- -------- --------- ------- ------- 1994 37,677 33,137 31,693 30,176 ---- -------- --------- ------- ------- Net investment income 1996 10,840 10,332 10,185 9,869 ---- -------- --------- ------- ------- 1995 9,737 9,354 9,193 8,544 ---- -------- --------- ------- ------- 1994 8,852 8,596 8,303 8,181 ---- -------- --------- ------- ------- Net realized investment 1996 281 (21) (11) 50 gains (losses) ---- -------- --------- ------- ------- 1995 87 131 52 98 ---- -------- --------- ------- ------- 1994 (181) -- (118) 103 ---- -------- --------- ------- ------- Net income 1996 8,819 8,520 8,327 8,182 ---- -------- --------- ------- ------- 1995 8,041 7,956 7,340 6,504 ---- -------- --------- ------- ------- 1994 6,626 6,402 6,097 1,157 ---- -------- --------- ------- ------- Primary earnings 1996 1.29 1.24 1.22 1.20 per common share ---- -------- --------- ------- ------- 1995 1.18 1.18 1.09 .97 ---- -------- --------- ------- ------- 1994 1.00 .96 .92 .17 ---- -------- --------- ------- ------- Fully diluted earnings 1996 1.10 1.06 1.05 1.03 per common share ---- -------- --------- ------- ------- 1995 1.01 1.01 .95 .86 ---- -------- --------- ------- ------- 1994 .87 .85 .82 .17(1) ---- -------- --------- ------- ------- Dividends per common 1996 .31 .31 .31 .31 share ---- -------- --------- ------- ------- 1995 .28 .28 .28 .28 ---- -------- --------- ------- ------- 1994 .25 .25 .25 .25 ---- -------- --------- ------- ------- Common stock 1996 53.75 54.25 53.50 56.75 price range: high ---- -------- --------- ------- ------- 1995 57.50 53.00 45.75 44.25 ---- -------- --------- ------- ------- 1994 43.88 40.50 43.75 39.50 ---- -------- --------- ------- ------- Common stock 1996 46.00 48.75 46.00 50.25 price range: low ---- -------- --------- ------- ------- 1995 49.50 42.75 41.75 40.75 ---- -------- --------- ------- ------- 1994 36.50 36.00 33.75 33.25 ---- -------- --------- ------- -------
(1) The conversion of the convertible debentures into common stock was anti-dilutive at March 31, 1994. The stock price range is based on closing prices reported by the NASDAQ National Market System. 72 72 NOTE 13 SUBSEQUENT EVENT In January 1997, the Company made a private offering of $110,000,000 in 8.82% Subordinated Capital Income Securities due February 20, 2037 through Trenwick Capital Trust I, a Delaware statutory business trust. In connection with this offering, the Company called for redemption all $103,500,000 aggregate principal amount of the Company's 6% convertible debentures due December 15, 1999, on February 20, 1997, at a redemption price of 102.57% principal amount plus accrued interest to the redemption date. Of the $103,500,000 principal amount of debentures outstanding on that date, $45,819,000 principal amount were redeemed and $57,681,000 principal amount were converted into an aggregate of 1,189,284 shares of the Company's common stock, par value $.10 per share. The remaining net proceeds from the offering of the Capital Securities will be used for general corporate purposes, which may include investments in and advances to subsidiaries, the financing of growth and expansion, the financing of possible future acquisitions and other corporate purposes. The following table sets forth the consolidated income statement and earnings per share data for the year ended December 31, 1996, and the pro forma income statement and earnings per share data for the year ended December 31, 1996, as adjusted to provide pro forma effect as if the conversion had been consummated at January 1, 1996. Pro forma data excludes extraordinary loss on extinguishment of debt of $1,049,000, net of tax.
AS (in thousands except per share data) ACTUAL ADJUSTED ---------- ---------- Net income $ 33,848 $ 36,204 ---------- ---------- Primary earnings per share $ 4.95 $ 4.51 ---------- ---------- Fully diluted earnings per share $ 4.25 -- ---------- ----------
73 73 TRENWICK GROUP INC. BOARD OF DIRECTORS [PHOTO] Standing Left to Right: Sargent, Dunn, Billett, Jacobs, Gruber Seated Left to Right: Wilcox, Watkins, Palmberger, Brown (A) Audit Committee (C) Compensation Committee (E) Executive Committee (I) Investment Committee (*) Committee Chairman JAMES F. BILLETT, JR. (E*,I*) Chairman, President and Chief Executive Officer Trenwick Group Inc. ANTHONY S. BROWN (A) Professor Terry Sanford Institute of Public Policy Duke University NEIL DUNN (C,E,I) Managing Director Voyageur International Asset Managers Ltd ALAN R. GRUBER (C*,E) Chairman of the Executive and Investment Committees; Chairman and Chief Executive Officer (Retired) Orion Capital Corporation P. ANTHONY JACOBS (C,E,I) President and Chief Operating Officer Seafield Capital Corporation HERBERT PALMBERGER (A) General Manager Chubb Insurance Company of Europe, S.A. JOSEPH D. SARGENT (C,E) Chairman, Treasurer and Chief Financial Officer Connecticut Surety Corporation FREDERICK D. WATKINS (A,C,E) Executive Vice President (Retired) Connecticut General Corporation STEPHEN R. WILCOX (A*,I) President The Wilcox Group, Inc. OFFICERS JAMES F. BILLETT, JR. Chairman, President and Chief Executive Officer ALAN L. HUNTE Vice President and Treasurer JANE T. WIZNITZER Vice President - Legal Affairs and Secretary 71 74 TRENWICK AMERICA REINSURANCE CORPORATION BOARD OF DIRECTORS (E) Executive Committee (*) Committee Chairman JAMES F. BILLETT, JR. (E*) Chairman, President and Chief Executive Officer Trenwick America Reinsurance Corporation STEPHEN H. BINET Executive Vice President Trenwick America Reinsurance Corporation PAUL FELDSHER Executive Vice President Trenwick America Reinsurance Corporation ROBERT A. GIAMBO Executive Vice President and Chief Actuary Trenwick America Reinsurance Corporation ALAN R. GRUBER (E) Chairman of the Executive and Investment Committees; Chairman and Chief Executive Officer (Retired) Orion Capital Corporation ALAN L. HUNTE Executive Vice President, Chief Financial Officer and Treasurer Trenwick America Reinsurance Corporation MICHAEL F. MATHER Senior Vice President Trenwick America Reinsurance Corporation JAMES E. ROBERTS Vice Chairman Trenwick America Reinsurance Corporation FREDERICK D. WATKINS (E) Executive Vice President (Retired) Connecticut General Corporation 76 75 TRENWICK AMERICA REINSURANCE CORPORATION OFFICERS CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER JAMES F. BILLETT, JR. VICE CHAIRMAN JAMES E. ROBERTS EXECUTIVE VICE PRESIDENTS STEPHEN H. BINET PAUL FELDSHER ROBERT A. GIAMBO ALAN L. HUNTE DAVID C. SMITH SENIOR VICE PRESIDENTS JEFFREY A. ENGLANDER LYNN M. HALPER FRANCIS J. LOCKWOOD MICHAEL F. MATHER WILLIAM L. PIERCE MOLLY P. SANDERS PETER R. ZIESING VICE PRESIDENTS GARY W. DANIELS KURT A. KRAUSHAAR EUGENE R. LOCK YVONNE M. POSTER JOHN R. PREZZANO JOSEPH P. SAYDLOWSKI JOSEPH W. WALSH JANE T. WIZNITZER ASSISTANT VICE PRESIDENTS MICHAEL J. BRENNAN WILLIAM A. CAMPERLENGO LYNN Q. S. DEMAN MICHELLE R. DIENER ELLEN L. HAY JOYCE D. HESKE DONALD R. MASSO ANDREA S. O'HAGAN JOHN R. SENESAC, JR. JODEE P. SOLTES LORI J. STALOWICZ RICHARD R. THOMAS, III JAMES J. WILSON, III ASSISTANT SECRETARIES THOMAS P. BOYLE JOYCE P. CHIMBOLE DONNA M. INSLEY MAUREEN M. POIRIER MARY BETH RAUSER MARYBETH M. RICE 77 76 STOCKHOLDER INFORMATION ANNUAL MEETING The Annual Meeting of Stockholders of the Company will be held at 10:00 a.m. local time May 22, 1997 at the Company's corporate headquarters, Metro Center, One Station Place, Stamford, Connecticut. As of February 28, 1997 there were 134 holders of record and in excess of 1,200 beneficial owners of Trenwick Group Inc. common stock. MARKET LISTING The common stock is listed by the NASDAQ National Market System under the ticker symbol TREN. REGISTRAR AND TRANSFER AGENT FOR COMMON STOCK First Chicago Trust Company of New York 14 Wall Street, Mail Suite 4680 New York, New York 10005 (201) 324-0498 10-K A copy of the Company's 1996 Form 10-K as filed with the Securities and Exchange Commission may be obtained without charge by writing to the Office of the Corporate Secretary, Trenwick Group Inc., Metro Center, One Station Place, Stamford, Connecticut 06902. 78 77 CORPORATE ADDRESS Trenwick Group Inc. Metro Center One Station Place Stamford, Connecticut 06902 Telephone: (203) 353-5500 Facsimile: (203) 353-5550 79 EX-21 11 EXHIBIT 21 1 EXHIBIT 21.0 ORGANIZATIONAL CHART ------------------------------ Trenwick Group Inc. ID No. 06-1152790 ------------------------------ | | ------------------------------------------- | | 100% | | 100% - - ------------------------------------- ---------------------------------------- Trenwick Services, Ltd. Trenwick America Corporation ID No. 06-1087972 - - ------------------------------------- ---------------------------------------- | | 100% | | 100% - - ------------------------------------- ---------------------------------------- Trenwick Guaranty Insurance Trenwick America Reinsurance Corporation Company, Ltd. ID No. 06-1117063 Domicile-Connecticut NAIC Code-34894 - - ------------------------------------- ---------------------------------------- EX-23 12 EXHIBIT 23 1 EXHIBIT 23.0 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-09245, No. 33-09248, No. 33-19833, No. 33-31115, No. 33-68112, No. 33-83092 and No. 33-83094) of our report dated January 27, 1997, except as to the subsequent event described in Note 13 which is as of February 20, 1997, appearing on page 43 of the 1996 Annual Report to Stockholders of Trenwick Group Inc., which is incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1996. We also consent to the incorporation by reference of our report dated January 27, 1997 on the Financial Statement Schedules, which appears on page S-3 of this Form 10-K. PRICE WATERHOUSE LLP New York, New York March 28, 1997 EX-27 13 EXHIBIT 27
7 This schedule contains summary financial information extracted from the financial statements contained in the FORM 10-K for the year ended December 31, 1996 for Trenwick Group Inc. 1,000 U. S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 713,998 0 0 25,959 0 0 739,957 14,253 47,772 21,805 920,804 467,177 71,448 0 0 103,500 0 0 673 265,080 920,804 211,069 41,226 299 0 129,316 58,757 20,693 43,828 9,980 0 0 0 0 33,848 4.95 4.25 327,001 133,755 (4,439) (22,570) (46,860) 386,887 3,669 Represents net reinsurance recoverable balances after offset of funds held and reinsurance balances payable. Reflects net reserve at beginning of year for unpaid claims Reflects net reserve at end of year for unpaid claims Reflects gross redundancy in restated reserves
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