-----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, Ku6F3QRTvC0IwWXAf1QJw8weQlLiILFuoGunw72EYImFPLjTq8ol1Xydh6++UakJ QGrdiRQhoh/r84ynG8v5ew== 0000914039-98-000089.txt : 19980323 0000914039-98-000089.hdr.sgml : 19980323 ACCESSION NUMBER: 0000914039-98-000089 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRENWICK GROUP INC CENTRAL INDEX KEY: 0000787952 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061152790 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14737 FILM NUMBER: 98568852 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, 1997. 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: COMMON STOCK, $.10 PAR VALUE 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, 1998 of the voting stock held by non-affiliates of the registrant was 419,105,702. 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, 1998 Common Stock, $.10 par value 12,018,010
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, 1997. 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 17 6. Selected Financial Data ............................................... 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operation .................................................. 19 8. Financial Statements and Supplementary Data ........................... 27 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................................. 55 PART III 10. Directors and Executive Officers ..................................... 55 11. Executive Compensation ............................................... 55 12. Security Ownership of Certain Beneficial Owners and Management ....... 55 13. Certain Relationships and Related Transactions ....................... 55 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...... 56 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 facultative and treaty reinsurance. Facultative is underwritten on a risk-by-risk basis where Trenwick applies its own pricing to the individual exposure. Treaty business involves evaluating groupings of multiple risks or segments of an insurance company's overall portfolio. Trenwick underwrites treaty business utilizing a variety of techniques. Blocks of risks where the type of business or the size and longevity of the account generate credible data are primarily evaluated by actuarial methods. Specialty classes or lines of business which are less statistically predictable require a more detailed analysis of the original risks, rates and coverages within the block of business in addition to quantitative tests. 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 1997 amounted to 45% and 55% 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. On February 27, 1998, Trenwick expanded its product mix through the acquisition of SOREMA (UK) Limited (renamed Trenwick International Limited), a London market company, which underwrites specialty types of insurance and reinsurance on a worldwide basis. 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)
1997 1996 1995 -------- -------- -------- Casualty Automobile Liability $ 50,187 $ 64,539 $ 61,388 Errors and Omissions 40,063 48,888 50,077 General Liability 20,795 22,519 20,819 Workers' Compensation 18,328 20,502 873 Medical Malpractice 10,293 9,846 6,933 Products Liability 1,743 2,595 3,101 Accident and Health 6,326 205 4 Other Casualty 9,133 10,247 12,727 -------- -------- -------- Total Casualty 156,868 179,341 155,922 Property 38,362 47,023 41,240 -------- -------- -------- Total $195,230 $226,364 $197,162 ======== ======== ========
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 66% of net premiums written in all years indicated. These lines as well as products liability and other casualty have declined as a result of three principal causes. Competition among primary companies has caused cedants to reduce their own premium writings or restructure their reinsurance programs, reducing the amount of reinsurance they purchase. As a result of consolidation within the industry, many ceding companies are now larger and financially stronger, enabling them to retain more risk. In addition, increasingly intense competition in the reinsurance markets has driven reinsurance prices on a number of accounts below pricing levels which Trenwick will accept. Medical malpractice and accident and health increased by approximately 65%, as compared to 1996. These increases resulted primarily from the strategic alliances with Transatlantic Re and Duncanson and Holt, respectively. In 1997, the amount of property business underwritten by Trenwick remained constant as a percentage of total net written premiums. In 1997, 1996 and 1995, twelve programs underwritten by Trenwick accounted for approximately 45%, 49% and 52%, respectively, of gross premiums written. One ceding company accounted for 11%, 15% and 19% of gross premiums written for years 1997, 1996 and 1995, 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, 1997 in excess of $316,000,000. During 1997, 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 4%, 6% and 9%, respectively, of gross premiums written in years 1997, 1996 and 1995. Trenwick also obtained approximately 11% and 10% of gross premiums written in 1997 from American International Group and Travelers Group, respectively. Trenwick expects to renew these accounts for 1998. 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 2 5 that such a loss would result in a concurrent material decrease in its earnings. Further, 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)
1997 1996 1995 ------------------------ ------------------------ ------------------------ CASUALTY Treaty $169,692 87% $190,122 84% $158,923 81% Facultative 3,254 2 6,404 3 6,035 3 -------- -------- -------- -------- -------- -------- 172,946 89% 196,526 87% 164,958 84% PROPERTY 22,284 11% 29,838 13% 32,204 16% -------- -------- -------- -------- -------- -------- Total $195,230 100% $226,364 100% $197,162 100% ======== ======== ======== ======== ======== ========
Treaty Reinsurance Approximately 98% 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 decreased 13% in 1997 and increased 15% and 41% in 1996 and 1995, respectively. In 1997, Trenwick wrote on a quota share and excess of loss basis an aggregate of 230 treaties, as compared to 229 treaties in 1996 and 222 treaties in 1995. 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 2% of net premiums written. All facultative business is written on an excess of loss basis. The average gross limit provided by Trenwick is $579,000. Maximum facultative gross capacity per risk is $2,000,000. Trenwick retains the first $500,000 per transaction. In 1997, casualty facultative net premiums written represented by 297 contracts decreased 49% when compared to 1996. In 1996 and 1995, casualty facultative net premiums written represented by 384 and 318 contracts increased 6% and 45%, respectively, when compared to 1995 and 1994, respectively. 3 6 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 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 4%, 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 1997, Trenwick's three largest broker sources accounted for 41%, 14% and 10%, respectively, of Trenwick's gross premiums written. In 1996, the three largest broker sources accounted for 31%, 18% and 12%, respectively. These 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 4 7 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 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 $322,850,000 at December 31, 1997. Based on the most recent information prepared by the Reinsurance Association of America (RAA), this surplus placed Trenwick among the top sixteen ranked reinsurance companies and the top thirteen 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 5 8 professional property and casualty reinsurers which, among other things, compiles data on reinsurers and their reinsurance operations. 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 6 9 earned premium of other reinsurers, applied by accident year, line of business and type of reinsurance (excess of loss versus quota share) written by Trenwick. Reserve methods implicitly recognize the effect 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, 1997 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, 1997 outstanding claims including incurred but not reported claims for environmental liability were approximately $8,800,000, 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 1997, 1996 and 1995. The gross unpaid claims and claims expense balances for December 31, 1997 and 1996 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)
1997 1996 1995 ----------------------- ----------------------- ----------------------- Gross Net Gross Net Gross Net --------- --------- --------- --------- --------- --------- Unpaid claims and claims expenses, beginning of year $ 467,177 $ 386,887 $ 411,874 $ 327,001 $ 389,298 $ 294,008 --------- --------- --------- --------- --------- --------- Provision for claims and claims expenses: for claims incurred in the current year 175,133 114,920 161,061 133,755 135,013 115,133 for claims incurred in prior years (4,098) (5,366) (3,669) (4,439) (23,666) (2,065) --------- --------- --------- --------- --------- --------- Subtotal 171,035 109,554 157,392 129,316 111,347 113,068 --------- --------- --------- --------- --------- --------- Payments for claims and claims expenses: for claims incurred in the current year (22,914) (22,893) (22,603) (22,570) (18,849) (18,271) for claims incurred in prior years (96,911) (94,197) (79,486) (46,860) (69,922) (61,804) --------- --------- --------- --------- --------- --------- Subtotal (119,825) (117,090) (102,089) (69,430) (88,771) (80,075) --------- --------- --------- --------- --------- --------- Unpaid claims and claims expenses, end of year $ 518,387 $ 379,351 $ 467,177 $ 386,887 $ 411,874 $ 327,001 ========= ========= ========= ========= ========= ========= Reinsurance recoverable on unpaid claims and claims expenses, end of year $ 139,036 $ 80,290 $ 84,873 ========= ========= =========
8 11 In 1996, Trenwick commuted 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 $29,700,000 representing outstanding reserves of approximately the same amount. The commutation was recorded in 1996 as a paid loss recovery. In 1997, 1996 and 1995, Trenwick recorded decreases of $5,366,000, $4,439,000, and $2,065,000, respectively, in estimated net claims for claims occurring in prior accident years. The decrease in 1997 is primarily due to the favorable development in accident years 1990 and prior, partially offset by unfavorable development in accident years 1991 through 1993. In 1997, Trenwick recorded a decrease of $4,098,000 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 1987 through 1997. 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 the year with the related gross unpaid claims and claims expenses as of December 31, 1991 through 1997. 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 1997 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)
1997 1996 1995 1994 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- ---- ---- ---- ---- Net unpaid claims and claims expenses, end of year 379,351 $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 -- 94,197 46,860 61,804 52,300 52,260 44,930 42,234 29,407 Two years later -- -- 110,289 81,417 90,382 93,312 80,725 77,183 60,888 Three years later -- -- 121,133 89,445 118,345 111,225 102,590 84,283 Four years later -- -- -- -- 112,119 111,174 127,431 124,129 101,597 Five years later -- -- -- -- -- 125,847 116,224 134,657 116,047 Six years later -- -- -- -- -- -- 127,130 122,089 124,465 Seven years later -- -- -- -- -- -- -- 129,100 110,656 Eight years later -- -- -- -- -- -- -- -- 115,017 Nine years later -- -- -- -- -- -- -- -- -- Ten years later -- -- -- -- -- -- -- -- -- Net liability re-estimated as of: One year later -- 381,521 322,562 291,943 267,644 255,379 253,781 238,324 206,724 Two years later -- -- 317,199 279,561 263,473 255,379 243,488 233,565 199,864 Three years later -- -- -- 274,283 246,367 252,458 243,586 223,417 196,232 Four years later -- -- -- -- 241,478 236,009 241,600 224,171 188,052 Five years later -- -- -- -- -- 230,488 225,592 223,172 189,148 Six years later -- -- -- -- -- -- 217,852 213,327 188,884 Seven years later -- -- -- -- -- -- -- 205,179 180,619 Eight years later -- -- -- -- -- -- -- -- 176,778 Nine years later -- -- -- -- -- -- -- -- -- Ten years later -- -- -- -- -- -- -- -- -- Net cumulative redundancy Amount of original liability -- 5,366 9,802 19,725 26,613 36,197 40,922 39,926 37,613 Percentage -- 1% 3% 7% 10% 14% 16% 16% 18% Gross liability, end of year 518,387 467,177 411,874 389,298 354,582 351,897 332,503 Reinsurance recoverable 139,036 80,290 84,873 95,290 86,491 85,212 73,729 Net liability, end of year 379,351 386,887 327,001 294,008 268,091 266,685 258,774 Gross re-estimated liability-latest 463,079 402,561 348,453 305,121 296,260 275,234 Re-estimated recoverable-latest 81,558 85,362 74,170 63,643 65,772 57,382 Net re-estimated liability-latest 381,521 317,199 274,283 241,478 230,488 217,852 Gross cumulative redundancy 4,098 9,313 40,845 49,461 55,637 57,269
1988 1987(1) ---- ------ Net unpaid claims and claims expenses, end of year $169,785 $123,148 Cumulative amount of net liability paid as of: One year later 19,983 21,086 Two years later 34,855 32,409 Three years later 53,243 40,285 Four years later 67,132 48,307 Five years later 77,922 53,827 Six years later 87,397 58,568 Seven years later 93,109 64,172 Eight years later 78,032 67,798 Nine years later 81,381 53,974 Ten years later -- 55,816 Net liability re-estimated as of: One year later 163,848 123,978 Two years later 154,646 118,452 Three years later 150,470 109,536 Four years later 145,457 106,093 Five years later 137,426 102,436 Six years later 137,818 97,304 Seven years later 138,255 96,900 Eight years later 133,192 98,125 Nine years later 130,422 97,785 Ten years later -- 95,700 Net cumulative redundancy Amount of original liability 39,363 27,448 Percentage 23% 22% 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 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 on the preceding page, 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, 1996 have developed redundantly due to favorable development for claims occurring in accident years 1990 and prior, partially offset by unfavorable development in accident years 1991 through 1993. 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 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, Limited. At December 31, 1997, Trenwick had no material uncollectible amounts due from its retrocessionaires. 11 14 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 debt investments. At December 31, 1997, 88% of Trenwick's debt 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, 1997, 5% 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%, 9% and 7%, respectively, of Trenwick's portfolio at December 31, 1997. 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 home equity 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 A or better by various Nationally Recognized Statistical Rating Organizations. Trenwick also invests in agency pass-through securities which account for 5% of Trenwick's portfolio at December 31, 1997. 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, 1997 by type, maturity and quality rating. INVESTMENTS (DOLLARS IN THOUSANDS)
AVERAGE ESTIMATED MATURITY FAIR AMORTIZED IN YEARS VALUE COST -------- -------- -------- TYPE U.S. government bonds 4.9 $ 64,814 $ 62,418 Tax-exempt bonds(1) 4.4 384,854 373,867 Mortgage-backed and asset-backed securities 8.8 286,228 278,271 Debt securities issued by foreign governments 2.2 3,175 3,111 Public utilities 4.6 2,970 2,832 Corporate securities 6.4 68,138 66,108 Redeemable preferred stocks 4.6 2,015 2,000 Short-term securities .5 120 120 -------- -------- Total debt securities 6.2 812,314 788,727 Equity securities 39,163 31,603 Cash and cash equivalents -- 12,847 12,847 -------- -------- Total investments and cash $864,324 $833,177 ======== ======== MATURITY(DEBT SECURITIES) Due in one year or less .6 $ 65,473 $ 65,096 Due in one year through five years 3.3 404,906 395,373 Due after five years through ten years 7.3 254,518 244,294 Due after ten years 21.1 87,417 83,964 -------- -------- Total debt securities 6.2 $812,314 $788,727 ======== ======== QUALITY (DEBT SECURITIES) Aaa(2)-U.S. government bonds $ 64,814 $ 62,418 Tax-exempt bonds 351,751 342,156 Mortgage-backed and asset-backed securities 201,464 196,100 Corporate securities 7,213 6,810 Redeemable preferred stocks 2,015 2,000 -------- -------- 627,257 609,484 -------- -------- Aa(2)-Tax-exempt bonds 33,103 31,711 Mortgage-backed securities 41,556 39,899 Corporate securities 10,596 10,109 -------- -------- 85,255 81,719 -------- -------- A(2)-Mortgage-backed securities 43,208 42,272 Debt securities issued by foreign governments 3,175 3,111 Public utilities 2,970 2,832 Corporate securities 50,329 49,189 -------- -------- 99,682 97,404 -------- -------- Short-term securities 120 120 -------- -------- Total debt securities $812,314 $788,727 ======== ========
(1) Tax-exempt bonds include $98,625,000 escrowed in U.S. Government Securities, $166,090,000 insured by Municipal Bond Investors Assurance Corporation, Financial Guaranty Insurance Company, AMBAC Indemnity Corporation, or Financial Security Assurance Corporation and $45,155,000 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 and certain asset-backed securities. Quality ratings for these other securities 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 Item 7, 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, 1997. Trenwick believes its capital will continue to exceed these RBC capital and surplus requirements for the foreseeable future. See Item 7, 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 relate 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 1998 without regulatory approval would be $84,392,000. 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, 1997, Trenwick employed a total of 72 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. This lease terminates in 1998, and upon its termination Trenwick will relocate its offices to approximately 46,000 square feet of space located at One Canterbury Green, Stamford, Connecticut. Trenwick has entered into a ten-year lease for the new space. 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. PART II ITEM 5. MARKET FOR CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Trenwick Common Stock is listed on the NASDAQ National Market System under the ticker symbol TREN. There were 126 holders of record and in excess of 1000 beneficial owners of Common Stock as of February 28, 1998. The other information called for by this item can be found in Item 8, Note 12 of Notes to the Consolidated Financial Statements. For a description of restrictions on Trenwick's ability to pay dividends, reference is made to Item 1, Business - Regulation, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Note 6 of Notes to the Consolidated Financial Statements of Trenwick. 17 20 ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 ---------- -------- -------- --------- -------- (in thousands except per share data) INCOME STATEMENT DATA Net premiums written $ 195,230 $226,364 $197,162 $ 139,635 $101,392 ========== ======== ======== ========= ======== Net premiums earned $ 190,156 $211,069 $177,394 $ 132,683 $ 93,180 Net investment income 48,402 41,226 36,828 33,932 34,954 Net realized investment gains (losses) 2,304 299 368 (196) 1,842 Other income 10 -- -- -- -- ---------- -------- -------- --------- -------- Total revenues $ 240,872 $252,594 $214,590 $ 166,419 $129,976 ========== ======== ======== ========= ======== Net income $ 35,252 $ 33,848 $ 29,841 $ 20,282 $ 23,739 ========== ======== ======== ========= ======== PER SHARE DATA Basic earnings Income before extraordinary item $ 3.12 $ 3.40 $ 3.09 $ 2.10 $ 2.44 ========== ======== ======== ========= ======== Net income $ 3.03 $ 3.40 $ 3.09 $ 2.10 $ 2.44 ========== ======== ======== ========= ======== Weighted average shares outstanding 11,645 9,959 9,674 9,638 9,736 ========== ======== ======== ========= ======== Diluted earnings Income before extraordinary item $ 3.01 $ 2.85 $ 2.59 $ 1.88 $ 2.11 ========== ======== ======== ========= ======== Net income $ 3.01 $ 2.85 $ 2.59 $ 1.88 $ 2.11 ========== ======== ======== ========= ======== Weighted average shares outstanding 12,265 13,352 13,149 13,056 13,261 ========== ======== ======== ========= ======== Dividends $ .97 $ .83 $ .75 $ .67 $ .57 ========== ======== ======== ========= ======== BALANCE SHEET DATA Investments and cash $ 864,324 $754,210 $653,704 $ 551,784 $546,303 Total assets 1,087,923 920,804 820,930 727,245 700,407 Unpaid claims and claims expenses 518,387 467,177 411,874 389,298 354,582 Convertible debentures -- 103,500 103,500 103,500 103,500 Company obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of Trenwick 110,000 -- -- -- -- Common stockholders' equity 357,649 265,753 240,776 188,213 206,763 Shares of common stock outstanding 11,951 10,088 9,886 9,660 9,874 Book value per share $ 29.93 $ 26.34 $ 24.36 $ 19.48 $ 20.94
18 21 CERTAIN GAAP FINANCIAL RATIOS
1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Combined ratio 96.5% 95.8% 95.6% 103.2% 102.5% Net premiums written to surplus ratio 0.55:1 0.85:1 0.82:1 0.74:1 0.49:1 Unpaid claims and claims expenses to surplus ratio 1.45:1 1.76:1 1.71:1 2.07:1 1.71:1
All share and per share information reflects a 3 for 2 stock split, paid on April 15, 1997. The earnings per share amounts have been restated to comply with the newly adopted accounting standard, "Earnings Per Share." The other information called for by this item can be found in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation and Item 8, Financial Statements and Supplementary Data. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION INDUSTRY OVERVIEW The property and casualty reinsurance industry is currently in its ninth consecutive year of soft market conditions. Competition has increased in recent years as a result of the ability of companies to raise additional capital through public and other financing and the use of both traditional and non-traditional reinsurance products. The level of excess capital has also been aided by favorable financial markets and the lower than normal number of major catastrophe losses in the last several years. These factors have mitigated any positive impact which may have occurred from the decline in the number of reinsurance companies through withdrawal or acquisition. Companies are now 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 1997, domestic premiums as reported by the RAA amounted to $19.9 billion, an increase of 5.3% compared to $18.9 billion, in 1996. Despite soft market conditions, Trenwick has taken advantage of both the availability of capital in the financial markets and new opportunities in the business. Trenwick has raised additional capital for its reinsurance operation to increase its capacity for underwriting risks and to position the Company to take advantage of market opportunities. Over the past several years, Trenwick has implemented several strategic initiatives which have enabled it to write new business during the current soft market. Until 1997, this has resulted in an overall increase in premium writings. These initiatives included increased participation in renewal business through increased marketing efforts as reinsurance buyers consolidated their business within a smaller number of higher quality reinsurers, such as Trenwick. Growth was further augmented by hiring a team of senior underwriters in 1995. 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 19 22 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. On February 27, 1998, the Company expanded its product mix through the acquisition of SOREMA (UK) Limited (renamed Trenwick International Limited), a London market company, which underwrites specialty types of insurance and reinsurance on a worldwide basis. RESULTS OF OPERATIONS Premiums In 1997, Trenwick reported net premiums written of $195.2 million, a 14% decrease compared to 1996. This compares to a 15% increase in premiums written in 1996 over 1995. The decline in premium volume is due to Trenwick's decision not to participate in the continuing downward spiral of rates in the U.S. property/casualty reinsurance market. This decline is magnified by Trenwick's decision to buy more reinsurance protection in 1997 in light of the continued general deterioration in reinsurance pricing and the opportunity to buy additional protection at more favorable terms than in prior years. Trenwick's net casualty premium writings declined 12% as a result of three principal causes. Competition among primary companies has caused cedants to reduce their own premium writings or restructure their reinsurance programs, reducing the amount of reinsurance they purchase. As a result of consolidation within the industry, many ceding companies are now larger and financially stronger, enabling them to retain more risk. In addition, increasingly intense competition in the reinsurance markets has driven reinsurance prices on a number of accounts below pricing levels which the Company will accept. New casualty business on a gross basis increased 8% for the year ended December 31, 1997 over the same period in 1996 and represented approximately 35% of total premium writings during the period. Continuing casualty business on a gross basis increased 2% for the year ended December 31, 1997 over the same period in 1996 and represented 55% of the total premium writings during the period. Net and gross property business declined primarily as a result of PXRE Re's (the Company's strategic partner in the writing of catastrophe reinsurance) conservative response to continued erosion in pricing in that segment of the reinsurance business and represented approximately 10% of total premium writings for the year ended December 31, 1997. 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, 1997 of $14.1 million as compared to 1996, and an increase of $15.1 million in 1996 over 1995. These estimated premiums did not materially affect the Company's earnings in 1997, 1996 or 1995. The following table sets forth gross premiums written, net premiums written and net premiums earned for the periods indicated:
(in thousands) 1997 1996 1995 --------- --------- --------- Gross premiums written $ 248,662 $ 247,358 $ 214,336 Ceded premiums written (53,432) (20,994) (17,174) --------- --------- --------- Net premiums written $ 195,230 $ 226,364 $ 197,162 ========= ========= ========= Net premiums earned $ 190,156 $ 211,069 $ 177,394 ========= ========= =========
20 23 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 1997, 1996 and 1995, Trenwick recorded an underwriting profit of $6.6 million, $8.8 million and $7.7 million, respectively. 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:
1997 1996 1995 ---- ---- ---- Claims and claims expense ratio 57.6% 61.3% 63.7% ---- ---- ---- Expense ratio: Policy acquisition expense ratio 30.8 27.8 24.8 Underwriting expense ratio 8.1 6.7 7.1 ---- ---- ---- Total expense ratio 38.9 34.5 31.9 ---- ---- ---- Combined ratio 96.5% 95.8% 95.6% ==== ==== ==== Trenwick America Re statutory combined ratio 95.9% 95.7% 95.5% ==== ==== ====
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 and claims expense ratio has improved since 1995, reflecting the lack of any material adverse impact from property catastrophe claims and favorable development of prior year reserves for claims and claims expense. Trenwick's property premium writings, including catastrophe business associated with PXRE Re, amounted to $22.3 million, $29.8 million and $32.2 million in 1997, 1996 and 1995, respectively. In 1997, 1996 and 1995, estimates of prior accident year claims were reduced by approximately $5.4 million, $4.4 million and $2.1 million, respectively. The reduction in 1997 is primarily due to favorable development in accident years 1990 and prior, partially offset by unfavorable development in accident years 1991 through 1993. 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 1997 to 38.9% as compared to 34.5% in 1996 and 31.9% in 1995. 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 1997, quota share business 21 24 increased to 55% of total premium writings as compared to approximately 43% and 35% for 1996 and 1995, respectively. Underwriting expenses, which generally do not vary with premium volume, were approximately $15.4 million, $14.2 million and $12.6 million in 1997, 1996 and 1995, respectively. The underwriting expense ratio increased 1.4 percentage points in 1997 compared to 1996 primarily as a result of the decrease in premium writings. Trenwick America Re's statutory combined ratios for 1997, 1996 and 1995, provided in the preceding table, were 6.8, 8.1 and 15.6 percentage points better, respectively, than the weighted average statutory combined ratios for all reinsurance companies which reported their results to the RAA in those periods. The statutory combined ratios for this group of reinsurance companies in 1997, 1996 and 1995 were 102.7%, 103.8% and 111.1%, respectively. The statutory combined ratios as reported to the RAA by those companies, including Trenwick America Re, which primarily accept business from brokers, for 1997, 1996 and 1995 were 104.6%, 107.6% and 106.9%, respectively. Investment Income Net investment income in 1997 of $48.4 million increased 17% compared to net investment income of $41.2 million in 1996. Net investment income in 1996 increased 12% compared to net investment income of $36.8 million in 1995. Pre-tax yields on invested assets, excluding equity securities, increased to 6.4% in 1997 from 6.3% in 1996 and decreased from 6.5% in 1995. The fluctuation in yield reflected the composition of the maturing securities. During 1997, yields on the approximately $79 million of maturities were lower than yields on the approximately $63 million of maturities in 1996. In 1997, maturities included $31 million in principal repayments associated with Trenwick's portfolio of structured and agency pass-through securities compared to $24 million in 1996. As a result of the decrease in interest rates during 1997, principal repayments are expected to remain similar or increase marginally in 1998. The increase in investment income from 1996 to 1997 is due to the continued growth in Trenwick's invested asset base. This growth resulted primarily from funds received of $29.7 million from the aggregate excess of loss commutation recorded in December 1996, coupled with approximately $61 million of net funds received in January 1997 from Trenwick's private offering of $110 million in 8.82% Subordinated Capital Income Securities. The remaining proceeds were used to redeem the Company's convertible debentures. Investment income is expected to increase in 1998 as the Company's invested asset base continues to grow. During 1997, the Company sold approximately $31 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. Operating Results Trenwick's income before extraordinary item was $36.3 million, or $3.12 per share compared to $33.8 million, or $3.40 per share for 1996. Weighted average shares outstanding for 1997 were increased by 1,784,000 common shares issued in February 1997 when $57.7 million of Trenwick's debentures converted. On a diluted basis, income before extraordinary item for 1997 was $3.01 per share, compared to $2.85 per share for 1996. In 1997, Trenwick recorded an extraordinary loss of $1.0 million, net of income taxes, associated with the redemption of $45.8 million principal amount of its 6% convertible debentures. There were no extraordinary items in 1996. 22 25 Included in Trenwick's net income were after-tax realized investment gains of $1.5 million, or $.13 per share, $194,000 or $.02 per share and $239,000 or $.03 per share in 1997, 1996 and 1995, respectively. Year 2000 Issue Trenwick completed the modification of its internally developed software to be year 2000 compliant during 1996, and is currently in the process of monitoring the compliance of its outside vendors. The total cost of achieving such compliance is not anticipated to have a material impact on Trenwick's financial condition or results of operations. INVESTMENTS At December 31, 1997, Trenwick had investments and cash of $864.3 million, an increase of 15% compared to investments and cash of $754.2 million at December 31, 1996. This increase resulted principally from cash provided by financing and operations. In addition to dividends paid to stockholders, financing cash flow included $61 million of net funds received in January 1997 from Trenwick's private offering of $110 million in 8.82% Subordinated Capital Income Securities. The remaining proceeds were used to redeem the Company's convertible debentures. All debt and equity investments are classified as "available for sale" and reported at fair value, with the unrealized gain or loss, net of income taxes, reported in a separate component of stockholders' equity. Since December 31, 1996, the market value of the Company's debt and equity investments increased approximately $13.0 million. In 1996, Trenwick's investments and cash increased by $100.5 million or approximately 15% when compared to 1995. That 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. The average maturity of debt securities at December 31, 1997 was 6.2 years compared to 6.0 years at December 31, 1996. During 1997, the proceeds from sales and maturities of taxable and tax-exempt securities of $117.8 million, together with cash provided by financing and operations, were invested primarily in taxable securities consisting of mortgage-backed securities of $72 million, asset-backed securities of $33 million, U.S. government and agency securities of $28 million and corporate bonds of $30 million. In addition, $39 million of tax-exempt securities were purchased along with $9 million of preferred stock and $6 million of common stock. Debt securities were invested in the average maturity range of between two to fifteen years. 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. The Company's investment policy requires that certain debt investments be maintained in an amount equal to the discounted present value of net reinsurance liabilities. The policy also requires that additional debt investments be maintained in an amount equal to approximately 10% of total reserve liabilities to ensure adequate liquidity in the event of a significant change in estimated payments. At December 31, 1997, the debt investments held under this policy had an average maturity of approximately 4.6 years, as compared to approximately 4.5 years estimated for such liabilities. 23 26 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. In January 1997, Trenwick completed a private offering of $110 million in 8.82% Subordinated Capital Income Securities due February 1, 2037 through Trenwick Capital Trust I, a Delaware statutory business trust. In connection with this offering, on February 20, 1997, Trenwick called for redemption all $103.5 million aggregate principal amount of the Company's 6% convertible debentures due December 15, 1999, at a redemption price of 102.57% principal amount plus accrued interest to the redemption date. Of the $103.5 million principal amount of debentures outstanding on that date, $45.8 million principal amount were redeemed and $57.7 million principal amount were converted into an aggregate of 1.8 million shares of Trenwick's common stock. Cash provided by operating activities of $47 million in 1997 decreased approximately 57% as compared to $110.5 million in 1996. In 1996, Trenwick commuted an aggregate excess of loss retrocessional agreement covering the years 1989 through 1993 for which 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. Trenwick expects that its cash provided by operating activities will be sufficient to meet its operating and financing requirements in 1998 and its longer term operating needs. Cash provided by financing activities increased to $50.6 million compared to cash used for financing activities of $5.3 million in 1996. This increase primarily resulted from funds received from the aforementioned private offering partially offset by the debt redemption. At December 31, 1997, Trenwick's investments and cash of $864.3 million exceeded total liabilities, including gross reserves for claims and claims expenses of $518.4 million, by $244.1 million, compared to $99.2 million and $73.6 million at December 31, 1996 and 1995, respectively. At December 31, 1997, 1996 and 1995, Trenwick's net book value amounted to $357.6 million, $265.8 million and $240.8 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, 1997, Trenwick's investments consisted principally of fixed-income securities, 88% 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 income taxes (see Note 1 to Consolidated Financial Statements). 24 27 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 were 0.6:1 for 1997 and 0.8:1 for both 1996 and 1995. 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 1997, Trenwick's reinsurance treaties consisted principally of an excess of loss treaty for its facultative casualty business and property catastrophe reinsurance treaties. In addition, Trenwick purchased an annual aggregate excess of loss ratio treaty for casualty business effective January 1, 1997. These coverages were renewed effective January 1, 1998. 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, 1997. 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 1998 without regulatory approval would be $84.4 million. 25 28 SUBSEQUENT EVENT On February 27, 1998, Trenwick completed the acquisition of SOREMA (UK) Limited (renamed Trenwick International Limited) from SOREMA S.A. for cash in the amount of $60.6 million, which approximated book value. Trenwick International Limited is based in London and underwrites specialty treaty and facultative insurance and reinsurance on a worldwide basis. For the year ended December 31, 1997, Trenwick International Limited had gross and net premiums written of approximately $102 million and $70 million, respectively. The acquisition will be accounted for as a purchase and its capital will be doubled to over $125 million. Trenwick believes that the acquisition is an excellent means of diversifying its current business. Trenwick International Limited's experienced team of underwriters specializes in shorter-tail classes of insurance and reinsurance of risks located outside the United States. Trenwick also believes that the acquisition of an established company in the London insurance market provides an opportune platform for further international expansion. Pierre Croizat (former Chief Executive Officer of SOREMA Group), who joined the Company last September to initiate an international expansion plan, will head Trenwick's international operations. 26 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TRENWICK GROUP INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Pages Financial Statements: Report of Independent Accountants on Consolidated Financial Statements.......................................28 Consolidated Balance Sheet at December 31, 1997 and 1996......................29 Consolidated Statement of Income for the three years ended December 31, 1997................................30 Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1997................................31 Consolidated Statement of Cash Flows for the three years ended December 31, 1997................................32 Notes to Consolidated Financial Statements.................................33-54 Financial Statement Schedules: III - Condensed Financial Information of Registrant .....................S-1-S-3 Report of Independent Accountants on Financial Statement Schedules..................................................................S-4 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. 27 30 REPORT OF INDEPENDENT ACCOUNTANTS 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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. PRICE WATERHOUSE LLP New York, New York January 27, 1998 28 31 TRENWICK GROUP INC. CONSOLIDATED BALANCE SHEET
December 31, ----------------------- 1997 1996 ----------- --------- (dollars in thousands) Assets Securities available for sale at fair value: Debt securities (amortized cost: $788,727 and $700,476) $ 812,314 $ 713,998 Equity securities (cost: $31,603 and $21,346) 39,163 25,959 Cash and cash equivalents 12,847 14,253 ----------- --------- Total investments and cash 864,324 754,210 Accrued investment income 10,969 10,386 Receivables from ceding insurers 91,867 62,689 Reinsurance recoverable balances, net 66,361 47,772 Deferred policy acquisition costs 22,524 21,805 Net deferred income taxes 12,451 20,231 Other assets 19,427 3,711 ----------- --------- Total assets $ 1,087,923 $ 920,804 =========== ========= Liabilities and Stockholders' Equity Liabilities: Unpaid claims and claims expenses $ 518,387 $ 467,177 Unearned premium income 87,020 71,448 Convertible debentures -- 103,500 Other liabilities 14,867 12,926 ----------- --------- Total liabilities 620,274 655,051 ----------- --------- Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of Trenwick Group Inc. 110,000 -- ----------- --------- Common stockholders' equity: Common stock, $.10 par value, 30,000,000 shares authorized; 11,951,060 and 10,087,826 shares outstanding 1,195 1,009 Additional paid-in capital 153,714 94,423 Retained earnings 183,218 159,512 Net unrealized appreciation of securities available for sale, net of income taxes 20,245 11,789 Deferred compensation under stock award plan (723) (980) ----------- --------- Total common stockholders' equity 357,649 265,753 ----------- --------- Total liabilities and stockholders' equity $ 1,087,923 $ 920,804 =========== =========
All share and per share information reflects a 3 for 2 stock split, paid on April 15, 1997. The accompanying notes are an integral part of these statements. 29 32 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, ----------------------- 1997 1996 1995 --------- -------- -------- (in thousands except per share data) Revenues: Net premiums earned $ 190,156 $211,069 $177,394 Net investment income 48,402 41,226 36,828 Net realized investment gains 2,304 299 368 Other income 10 -- -- --------- -------- -------- Total revenues 240,872 252,594 214,590 --------- -------- -------- Expenses: Claims and claims expenses incurred 109,554 129,316 113,068 Policy acquisition costs 58,549 58,757 44,024 Underwriting expenses 15,425 14,190 12,589 Interest expense 894 6,503 6,496 Minority interest in subsidiary trust 8,920 -- -- --------- -------- -------- Total expenses 193,342 208,766 176,177 --------- -------- -------- Income before income taxes and extraordinary item 47,530 43,828 38,413 Income taxes 11,241 9,980 8,572 --------- -------- -------- Income before extraordinary item 36,289 33,848 29,841 Extraordinary loss on debt redemption, net of $558 income tax benefit (1,037) -- -- --------- -------- -------- Net income $ 35,252 $ 33,848 $ 29,841 ========= ======== ======== BASIC EARNINGS PER SHARE Income before extraordinary item $ 3.12 $ 3.40 $ 3.09 Extraordinary loss (.09) -- -- --------- -------- -------- Net income $ 3.03 $ 3.40 $ 3.09 ========= ======== ======== DILUTED EARNINGS PER SHARE Income before extraordinary item $ 3.01 $ 2.85 $ 2.59 ========= ======== ======== Net income $ 3.01 $ 2.85 $ 2.59 ========= ======== ======== DIVIDENDS PER COMMON SHARE $ .97 $ .83 $ .75 ========= ======== ========
All share and per share information reflects a 3 for 2 stock split, paid on April 15, 1997. The earnings per share amounts prior to 1997 have been restated to comply with the newly adopted accounting standard, "Earnings Per Share". The accompanying notes are an integral part of these statements. 30 33 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, ----------------------- 1997 1996 1995 --------- --------- --------- (dollars in thousands) Stockholders' equity, beginning of year $ 265,753 $ 240,776 $ 188,213 Common stock, $.10 par value, and additional paid-in capital: Conversion of debentures (1,783,926 shares) 57,780 -- -- Exercise of employer stock options (76,750, 221,028 and 198,060 shares) 956 4,001 1,657 Income tax benefits from additional compensation deductions allowable for income tax purposes 626 1,467 987 Restricted common stock awarded (9,782, 15,030 and 31,956 shares) 327 507 933 Restricted common stock awards cancelled (2,133 and 3,150 shares) (42) (91) -- Common stock purchased and retired (5,091, 30,699 and 4,584 shares) (171) (1,031) (134) Retained earnings: Net income 35,252 33,848 29,841 Cash dividends (11,546) (8,285) (7,287) Net unrealized appreciation of investments available for sale: Change in unrealized appreciation 13,012 (8,551) 41,487 Change in applicable deferred income taxes (4,556) 2,994 (14,519) Deferred compensation under stock award plan: Restricted common stock awarded (327) (507) (933) Restricted common stock awards cancelled 42 91 -- Compensation expense recognized 543 534 531 --------- --------- --------- Common stockholders' equity, end of year $ 357,649 $ 265,753 $ 240,776 ========= ========= =========
All share and per share information reflects a 3 for 2 stock split, paid on April 15, 1997. The accompanying notes are an integral part of these statements. 31 34 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, ----------------------- 1997 1996 1995 --------- --------- --------- (in thousands) Cash flows from operating activities: Premiums collected $ 149,351 $ 171,017 $ 144,996 Ceded premiums paid (10,026) (6,254) (7,908) Claims and claims expenses paid (117,916) (102,759) (89,487) Claims and claims expenses recovered 2,841 34,156 7,942 Underwriting expenses paid (13,753) (12,765) (11,008) --------- --------- --------- Cash provided by underwriting activities 10,497 83,395 44,535 Net investment income received 50,469 42,654 38,829 Interest and other expenses paid (5,364) (6,190) (6,239) Income taxes paid (8,592) (9,381) (9,681) --------- --------- --------- Cash provided by operating activities 47,010 110,478 67,444 --------- --------- --------- Cash flows for investing activities: Purchases of debt securities (203,554) (177,611) (163,262) Sales of debt securities 33,980 22,460 43,859 Maturities of debt securities 78,770 62,983 55,600 Purchases of equity securities (12,967) (12,529) (326) Sales of equity securities 5,009 7,638 37 Additions to premises and equipment (227) (611) (612) --------- --------- --------- Cash used for investing activities (98,989) (97,670) (64,704) --------- --------- --------- Cash flows for financing activities: Issuance of mandatorily redeemable preferred capital securities 110,000 -- -- Redemption of convertible debentures (46,997) -- -- Issuance costs of capital securities (1,669) -- -- Issuance of common stock 956 4,001 1,657 Repurchase of common stock (171) (1,031) (134) Dividends paid (11,546) (8,285) (7,287) --------- --------- --------- Cash provided by (used for) financing activities 50,573 (5,315) (5,764) --------- --------- --------- Change in cash and cash equivalents (1,406) 7,493 (3,024) Cash and cash equivalents, beginning of year 14,253 6,760 9,784 --------- --------- --------- Cash and cash equivalents, end of year $ 12,847 $ 14,253 $ 6,760 ========= ========= =========
The accompanying notes are an integral part of these statements. 32 35 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 OF 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 POLICIES 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 Trenwick has classified all of its debt 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 debt securities 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. 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 debt securities 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. 33 36 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. 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 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 and non-employee directors with an exercise price equal to the market value of the shares at the date of grant. The 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 has included the pro forma disclosures required by the fair value based method in Note 7. 34 37 EARNINGS PER SHARE Effective December 31, 1997, Trenwick adopted a new accounting standard, "Earnings Per Share", which specifies the computation, presentation and disclosure requirements of earnings per share and supersedes the previous standard. It requires a dual presentation of basic and diluted earnings per share. Basic earnings per share, which excludes the effect of common stock equivalents, replaces primary earnings per share. Diluted earnings per share, which utilizes the average market price per share as opposed to the greater of the average market price per share or ending market price per share when applying the treasury stock method in determining common stock equivalents, replaces fully-diluted earnings per share. In this report, all per share amounts prior to 1997 have been restated to comply with this standard. 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. ISSUANCE COSTS OF CAPITAL SECURITIES AND DEBT The issuance costs of the capital securities are being amortized over the term of the junior subordinated debentures. Debt issuance costs associated with the issuance of convertible debentures were being amortized over the term of the related debt using the interest method. The unamortized costs applicable to debentures converted to common stock were charged to stockholders' equity at the time of conversion. COMPREHENSIVE INCOME A new accounting standard, "Reporting Comprehensive Income", which is effective for Trenwick's interim and annual periods beginning after December 15, 1997, establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Adoption of this standard will have no material effect on the earnings of Trenwick. 35 38 NOTE 2 INVESTMENTS The fair value and amortized cost of debt securities at December 31 are as follows:
1997 1996 ----------------------- ----------------------- FAIR AMORTIZED FAIR AMORTIZED (in thousands) VALUE COST VALUE COST -------- --------- -------- --------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 64,814 $ 62,418 $ 91,702 $ 90,421 Obligations of states and political subdivisions 384,854 373,867 367,029 360,201 Mortgage-backed and asset-backed securities 286,228 278,271 211,228 206,774 Debt securities issued by foreign governments 3,175 3,111 3,227 3,156 Public utilities 2,970 2,832 2,918 2,803 Corporate securities 68,138 66,108 37,774 37,001 Redeemable preferred stock 2,015 2,000 -- -- Short-term securities 120 120 120 120 -------- -------- -------- -------- Total debt securities $812,314 $788,727 $713,998 $700,476 ======== ======== ======== ========
The fair value and amortized cost of debt securities at December 31, 1997 are shown below by contractual or expected maturity periods. Expected maturities will differ from contractual 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 $ 65,473 $ 65,096 Due after one year through five years 404,906 395,373 Due after five years through ten years 254,518 244,294 Due after ten years 87,417 83,964 -------- -------- Total debt securities $812,314 $788,727 ======== ========
36 39 NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS During the twelve months ended December 31, 1997, all investments were income producing. The sources of net investment income for the years ended December 31 are as follows:
(in thousands) 1997 1996 1995 ---- ---- ---- Debt securities $ 47,400 $ 41,332 $ 37,219 Equity securities 1,257 393 289 Cash and cash equivalents 1,228 719 621 -------- -------- -------- Gross investment income 49,885 42,444 38,129 Investment expenses (1,483) (1,218) (1,301) -------- -------- -------- Net investment income $ 48,402 $ 41,226 $ 36,828 ======== ======== ======== Net realized gains (losses) on sales of investments are as follows: (in thousands) 1997 1996 1995 ---- ---- ---- Debt securities: Gross realized gains $ 151 $ 137 $ 605 Gross realized losses (146) (1) (274) Equity securities: Gross realized gains 2,299 862 37 Gross realized losses -- (699) -- ------- ----- ----- Net realized investment gains $ 2,304 $ 299 $ 368 ======= ===== =====
37 40 UNREALIZED GAINS (LOSSES) ON DEBT AND EQUITY SECURITIES Unrealized gains and losses at December 31 are as follows:
(in thousands) 1997 1996 ------------------- ------------------- GAINS LOSSES GAINS LOSSES ----- ------ ----- ------ U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2,396 $ -- $1,319 $ (38) Obligations of states and political subdivisions 11,022 (35) 7,173 (345) Mortgage-backed and asset-backed securities 7,994 (37) 4,958 (504) Debt securities issued by foreign governments 64 -- 71 -- Public utilities 138 -- 115 -- Corporate securities 2,030 -- 775 (2) Redeemable preferred stock 15 -- -- -- ------- ---- ------- ----- Total debt securities $23,659 $(72) $14,411 $(889) ======= ==== ======= ===== Equity securities $ 7,560 $-- $ 4,616 $ (3) ======= ==== ======= =====
NET UNREALIZED APPRECIATION OF INVESTMENTS AVAILABLE FOR SALE The components of the net unrealized appreciation of investments available for sale at December 31 are as follows:
(in thousands) 1997 1996 ---- ---- Unrealized appreciation of debt securities $ 23,587 $ 13,522 Unrealized appreciation of equity securities 7,560 4,613 -------- -------- Unrealized appreciation of investments 31,147 18,135 Deferred income taxes (10,902) (6,346) -------- -------- Net unrealized appreciation of investments available for sale, net of income taxes $ 20,245 $ 11,789 ======== ========
INVESTMENTS HELD AS COLLATERAL OR ON DEPOSIT Debt securities with a carrying value of $102,921,000 are being held in trust as collateral for certain reinsurance obligations. In addition, investments with a carrying value of $7,962,000 at December 31, 1997 were on deposit with various state or governmental insurance departments in order to comply with insurance laws. 38 41 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 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. Trenwick America Re obtained approximately 65% of its gross written premiums from three brokers in 1997 and 62% from three brokers in 1996 and 1995. 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 1997, 1996 and 1995, Trenwick America Re obtained approximately 11%, 11% and 10%; 15%, 12% and 10%; 19%, 11% and 9%, respectively, of its gross written premiums from three ceding companies. Included in receivables from ceding insurers at December 31, 1997 and 1996 are accrued premiums of approximately $77,115,000 and $59,070,000, respectively, which have estimated payment dates ranging from 1997 to 2002. 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 1997 and 1996 is approximately $74,739,000 and $57,300,000, respectively, which is estimated using cash flows discounted at an interest rate of 5%. 39 42 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) 1997 1996 1995 ---- ---- ---- Assumed premiums written $ 248,662 $ 247,358 $ 214,336 Ceded premiums written (53,432) (20,994) (17,174) --------- --------- --------- Net premiums written $ 195,230 $ 226,364 $ 197,162 ========= ========= ========= Assumed premiums earned $ 233,090 $ 231,960 $ 194,592 Ceded premiums earned (42,934) (20,891) (17,198) --------- --------- --------- Net premiums earned $ 190,156 $ 211,069 $ 177,394 ========= ========= ========= Assumed claims and claims expenses incurred $ 170,343 $ 156,819 $ 111,351 Ceded claims and claims expenses incurred (60,789) (27,503) 1,717 --------- --------- --------- Net claims and claims expenses incurred $ 109,554 $ 129,316 $ 113,068 ========= ========= =========
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 1997, 1996 and 1995. The gross unpaid claims and claims expense balances at December 31, 1997 and 1996 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. 40 43 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) 1997 1996 1995 ---- ---- ---- Reserve for unpaid claims and claims expenses, net of related reinsurance recoverable, at beginning of year $ 386,887 $ 327,001 $ 294,008 Provision for claims and claims expenses, net of reinsurance: For claims incurred in the current year 114,920 133,755 115,133 For claims incurred in prior years (5,366) (4,439) (2,065) --------- --------- --------- Subtotal 109,554 129,316 113,068 --------- --------- --------- Payments for claims and claims expenses, net of reinsurance: For claims incurred in the current year (22,893) (22,570) (18,271) For claims incurred in prior years (94,197) (46,860) (61,804) --------- --------- --------- Subtotal (117,090) (69,430) (80,075) --------- --------- --------- Reserve for unpaid claims and claims expenses, net of related reinsurance recoverable, at end of year 379,351 386,887 327,001 Reinsurance recoverable on unpaid claims and claims expenses, at end of year 139,036 80,290 84,873 --------- --------- --------- Reserve for unpaid claims and claims expenses, gross of reinsurance recoverable on unpaid claims, at end of year $ 518,387 $ 467,177 $ 411,874 ========= ========= =========
In 1997, 1996 and 1995, Trenwick recorded decreases of $5,366,000, $4,439,000 and $2,065,000, respectively, in estimates for claims occurring in prior accident years. The reduction in 1997 is primarily due to favorable development in 1990 and prior years, partially offset by unfavorable development in 1991 through 1993. In 1996, Trenwick commuted an aggregate excess of loss retrocessional agreement covering the years 1989 through 1993 for which Trenwick received a total consideration of $29,700,000 representing outstanding reserves of approximately the same amount. The commutation was recorded in 1996 as a paid loss recovery. 41 44 Inflation raises the cost of economic losses and non-economic 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. 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, 1997 are adequate. 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, 1997, outstanding claims including incurred but not reported claims for environmental liability were approximately $8,800,000, 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. REINSURANCE RECOVERABLE The components of reinsurance recoverable balances, net on the balance sheet at December 31 are as follows: (in thousands) 1997 1996 ---- ---- Paid claims $ 1,267 $ 1,505 Unpaid claims and claims expenses 139,036 80,290 Funds held liability (60,967) (33,353) Reinsurance balances payable (12,975) (670) --------- -------- Reinsurance recoverable balances, net $ 66,361 $ 47,772 ========= ======== 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, 1997, letters of credit in the amount of $1,945,000 have been arranged in favor of Trenwick America Re in respect of certain outstanding claims recoverable and the unearned portion of premiums ceded. 42 45 At December 31, 1997, approximately $76,346,000 and $33,517,000 of reinsurance recoverables on unpaid claims and claims expenses are recoverable from Centre Reinsurance Company of New York and Continental Casualty Company, respectively. There are no prepaid reinsurance premiums which relate to these reinsurers. For the years ended December 31, 1997, 1996 and 1995, Trenwick America Re earned commissions on cessions to retrocessionaires of $4,503,000, $1,235,000 and $13,000, respectively. NOTE 4 INCOME TAXES Trenwick files a consolidated United States income tax return with its United States subsidiaries. In 1997, the income tax provision includes an income tax benefit of $558,000 applicable to an extraordinary loss on debt redemption. The components of the provision for income taxes for the years ended December 31 are as follows:
(in thousands) 1997 1996 1995 ---- ---- ---- Current income tax provision $ 7,459 $ 13,633 $7,821 Deferred income tax provision 3,224 (3,653) 751 ------- -------- ------ Income tax provision $10,683 $ 9,980 $8,572 ======= ======== ======
Trenwick's effective income tax rates were 23% for the years ended December 31, 1997 and 1996 and 22% for the year ended December 31, 1995. 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) 1997 1996 1995 ---- ---- ---- Income before income taxes $ 45,935 $ 43,828 $ 38,413 ======== ======== ======== Income taxes at statutory rate $ 16,077 $ 15,340 $ 13,445 Effect of tax-exempt investment income (5,757) (5,286) (4,963) Other, net 363 (74) 90 -------- -------- -------- Income tax provision $ 10,683 $ 9,980 $ 8,572 ======== ======== ========
The components of the net deferred income tax provision for the years ended December 31 are as follows:
(in thousands) 1997 1996 1995 ---- ---- ---- Discounting of unpaid claims $ 2,782 $(4,541) $(1,369) Unearned premium income (355) (1,071) (1,384) Policy acquisition costs deferred 251 1,778 2,112 Alternative minimum taxes 10 (10) 908 Accretion of market discount on fixed maturity investments 315 518 378 Other, net 221 (327) 106 ------- ------- ------- Total deferred income tax provision $ 3,224 $(3,653) $ 751 ======= ======= =======
43 46 Deferred income tax assets (liabilities) are attributable to the following temporary differences as of December 31:
(in thousands) 1997 1996 ---- ---- DEFERRED INCOME TAX ASSET Discounting of unpaid claims $ 26,455 $ 29,237 Unearned premium income 5,335 4,980 Employee stock option plans 120 439 Alternative minimum taxes -- 10 Other 652 524 -------- -------- Gross deferred income tax assets 32,562 35,190 -------- -------- DEFERRED INCOME TAX LIABILITY Policy acquisition costs deferred (7,883) (7,632) Unrealized appreciation of investments available for sale (10,902) (6,346) Accretion of market discount on fixed maturity investments (1,211) (896) Other (115) (85) -------- -------- Gross deferred income tax liabilities (20,111) (14,959) -------- -------- Net deferred income tax assets $ 12,451 $ 20,231 ======== ========
44 47 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 MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES On January 28, 1997, Trenwick completed a private offering of $110,000,000 in 8.82% Subordinated Capital Income Securities through Trenwick Capital Trust I, a Delaware statutory business trust. Trenwick owns all of the common securities of the trust. Concurrently with the issuance of the capital securities, the trust invested the proceeds of their sale, together with the consideration paid to the trust by Trenwick for the common securities, in Trenwick's junior subordinated debentures, whose terms are similar to those of the capital securities. The trust was formed for the sole purpose of issuing the capital securities and the common securities, investing the proceeds thereof in the junior subordinated debentures and making distributions to the holders of the capital securities. The capital securities mature on February 1, 2037; require preferential cumulative cash distributions at an annual rate of 8.82%, payable semiannually on February 1 and August 1 (beginning August 1, 1997) from the payment of interest on the junior subordinated debentures; and are guaranteed by Trenwick, within certain limits, as to the payment of distributions and liquidation or redemption payments. They are subject to mandatory redemption, (i) in whole but not in part at maturity, upon repayment of the junior subordinated debentures, at a redemption price equal to the principal amount plus accrued and unpaid interest; (ii) in whole but not in part at any time, contemporaneously with the optional prepayment of the junior subordinated debentures upon the occurrence and continuation of certain events, at a redemption price equal to the greater of the principal amount or the present value of principal and interest payable to February 1, 2007, plus accrued and unpaid interest and possible additional sums; and (iii) in whole or in part, after February 1, 2007, contemporaneously with the optional prepayment of the junior subordinated debentures, at a redemption price equal to the principal amount plus accrued and unpaid interest and possible additional sums. Upon the occurrence and continuation of an event of default with respect to the junior subordinated debentures, the capital securities shall have a preference over the common securities. Upon the occurrence of an event of default with respect to the junior subordinated debentures which is attributable to Trenwick's failure to make required payments or with respect to Trenwick's guarantee, the holders of the capital securities may institute a direct action against Trenwick. In accordance with their terms, the capital securities were subsequently exchanged for fully registered capital securities, which are not subject to restrictions on transfer. NOTE 6 INSURANCE REGULATION Trenwick's reinsurance subsidiary, Trenwick America Re, is domiciled in and subject to the insurance statutes of Connecticut. During 1997, 1996 and 1995, Trenwick America Re paid dividends of $8,250,000, $4,100,000 and $9,500,000, 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 45 48 which has 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, 1997 was $84,392,000. 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 debt securities. 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) 1997 1996 1995 -------- --------- --------- RECONCILIATION OF NET INCOME Statutory net income of Trenwick America Re $ 42,797 $ 29,555 $ 28,060 Change in deferred policy acquisition costs 719 5,080 6,034 Provision for deferred income taxes (3,021) 3,307 (690) Other -- (6) (12) -------- --------- --------- GAAP net income of Trenwick America Re $ 40,495 $ 37,936 $ 33,392 ======== ========= ========= (in thousands) 1997 1996 1995 -------- --------- --------- RECONCILIATION OF SURPLUS Statutory capital and surplus of Trenwick America Re $322,850 $ 286,284 $ 257,590 Deferred policy acquisition costs 22,524 21,805 16,725 Unrealized appreciation of investments 23,981 13,556 23,526 Net deferred income taxes 11,914 19,365 13,144 Unauthorized reinsurance 2,878 2,669 2,336 Non-admitted assets 210 208 2,142 -------- --------- --------- GAAP stockholders' equity of Trenwick America Re $384,357 $ 343,887 $ 315,463 ======== ========= =========
NOTE 7 STOCKHOLDERS' EQUITY PREFERRED STOCK Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized and none outstanding. COMMON STOCK On May 21, 1997, Trenwick's Board of Directors approved a stock repurchase program covering up to 1,000,000 shares of the Company's common stock; no shares have been repurchased to date. 46 49 On March 6, 1997, Trenwick's Board of Directors approved a three-for-two common stock split which was paid on April 15, 1997 to stockholders of record at the close of business on March 18, 1997. An amount equal to the par value of the additional shares issued has been transferred from additional paid-in capital to common stock. All share and per share data have been retroactively restated to reflect the common stock split. CONVERTIBLE DEBENTURES Trenwick called for redemption all $103,500,000 aggregate principal amount of Trenwick'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 1,783,926 shares of Trenwick's common stock. As a result of the redemption, Trenwick recorded an extraordinary loss of $1,037,000, net of a tax benefit of $558,000. 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, 1997 is 999,362. Transactions under the stock option plans are summarized as follows:
1997 1996 1995 ---- ---- ---- NUMBER OF SHARES Outstanding, beginning of year 981,195 1,137,528 1,190,838 Granted 8,250 81,750 144,750 Cancelled (1,500) (17,055) -- Exercised (76,750) (221,028) (198,060) -------- ---------- ---------- Outstanding, end of year 911,195 981,195 1,137,528 ======== ========== ========== Exercisable, end of year 312,807 337,770 511,316 ======== ========== ========== AVERAGE EXERCISE PRICE Granted $ 32.88 $ 31.63 $ 29.33 Cancelled 30.92 19.43 -- Exercised 12.46 18.10 8.37 Outstanding, end of year 25.82 24.73 22.86 Exercisable, end of year 21.81 18.79 17.40
47 50 Included in the table on the preceding page 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. Trenwick applies the provisions of the previous opinion and related interpretations in accounting for its stock-based compensation plans. Since stock options under Trenwick's plans are issued at fair market value on the date of grant, no compensation expense has been recognized for these stock options. Had Trenwick applied the fair value based method, net income and net income per share would have been the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ---- Net income As reported $ 35,252 $ 33,848 $ 29,841 Pro forma $ 35,056 $ 33,694 $ 29,760 Basic earnings per share As reported $ 3.03 $ 3.40 $ 3.09 Pro forma $ 3.01 $ 3.38 $ 3.08
The pro forma adjustments relate to options granted during 1995, 1996, and 1997 for which a fair value on the date of grant was determined using the Black-Scholes option pricing model. No effect has been given to options granted prior to 1995. Valuation and related assumption information are presented below:
1997 1996 1995 ---- ---- ---- Valuation Assumptions: Expected volatility Employees -- 27% 29% Non-employee directors 18% 16% 21% Risk-Free interest rate Employees -- 6.5% 6.8% Non-employee directors 5.8% 5.7% 6.1% Dividend Yield 2.6% 2.7% 2.0%
The Black-Scholes option valuation model was developed for use in estimating the fair value of options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Trenwick's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. RESTRICTED COMMON STOCK AWARDS Trenwick awards restricted common stock to key employees, primarily under the terms of the 1989 Stock Plan. In 1997, 9,782 shares were awarded at an average value of $33.42 per share (approximately 48 51 $327,000), which vest over five years. Shares awarded in 1996 and 1995 vest over three to seven years. Shares repurchased in 1997, 1996 and 1995 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 $543,000, $534,000 and $531,000 for 1997, 1996 and 1995, 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 an eligible employee's total compensation to the pension plan. Prior to this date, Trenwick contributed 4% of an eligible employee's total compensation, plus 3% of the eligible employee's 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 life insurance companies. Trenwick's contributions to the pension plan were $503,000, $432,000 and $297,000 for 1997, 1996 and 1995, respectively; its contributions to the savings plan were $330,000, $314,000 and $122,000 for 1997, 1996 and 1995, respectively. STOCKHOLDER RIGHTS PLAN During 1997, Trenwick adopted a new stockholder rights plan, replacing the plan adopted in 1989, and redeemed the rights issued under the 1989 plan. Stockholders of record at the close of business on September 24, 1997 received $0.01 for each redeemed right (equivalent to $0.00667 per share) and received one new right for each share of common stock held. The rights are exercisable only if a person or group acquires beneficial ownership of 15% or more of Trenwick's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of Trenwick's common stock. Each right entitles a stockholder to buy 1/200 of a share of Trenwick's Series B Junior Participating Preferred Stock at an exercise price of $125, subject to adjustment. Trenwick has reserved 200,000 shares of such preferred stock for possible issuance under the plan. In the event that an acquiror accumulates 15% or more of Trenwick's common stock, all rights holders except the acquiror may purchase, for the exercise price, in lieu of the Series B 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 15% 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 at $0.01 per right, subject to certain restrictions. The rights will expire on September 23, 2007. 49 52 NOTE 8 SUPPLEMENTAL CASH FLOWS INFORMATION A reconciliation of cash provided by operations for the three years ended December 31 is as follows:
(in thousands) 1997 1996 1995 ---- ---- ---- Net income $ 35,252 $ 33,848 $ 29,841 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on debt redemption 1,595 -- -- Amortization of premiums on investments, net 2,557 1,579 1,003 Deferred income taxes 3,224 (3,653) 750 Net realized investment gains (2,304) (299) (368) Amortization of debt issuance costs 32 295 276 Other 929 900 907 Change in: Receivables from ceding insurers (29,178) (13,710) (21,181) Deferred policy acquisition costs (719) (5,080) (6,034) Accrued interest (583) (188) 134 Other assets (4,685) (152) 459 Unpaid claims and claims expenses, net of reinsurance recoverable balances 32,621 75,980 42,099 Unearned premium income, net of prepaid reinsurance premiums 5,073 15,295 19,769 Other liabilities 3,196 5,663 (211) -------- --------- -------- Net cash provided by operating activities $ 47,010 $ 110,478 $ 67,444 ======== ========= ========
NOTE 9 OTHER ASSETS AND LIABILITIES Other assets comprise:
DECEMBER 31, (in thousands) 1997 1996 ---- ---- Prepaid reinsurance premiums $10,804 $ 305 Deferred issuance costs of capital securities, net of accumulated amortization of $5 1,681 -- Deferred debt issuance costs, net of accumulated amortization of $1,075 -- 986 Premises and equipment, net of accumulated depreciation and amortization of $2,693 and $2,373 972 1,135 Funds held in escrow 515 515 Deposits 4,712 177 Other 743 593 ------- ------ Total other assets $19,427 $3,711 ======= ======
50 53 Trenwick entered into a new ten-year operating lease agreement for office space as its current operating lease agreement expires on July 15, 1998. Assuming the new operating lease commences on July 16, 1998, Trenwick's minimum non-cancellable office space lease commitments totalling $15,317,000 would be payable as follows: 1998 - $1,094,000; 1999 - $1,419,000; 2000 - $1,419,000; 2001 $1,419,000; 2002 - $1,419,000; thereafter - $8,547,000. Total office rent expense for the years ended December 31, 1997, 1996 and 1995 was $917,000, $918,000 and $883,000, respectively. NOTE 10 FAIR VALUE FINANCIAL INSTRUMENTS Accounting literature defines the fair value of a financial instrument as the amount at which the OF 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 were 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:
RELATED 1997 1996 FOOTNOTE CARRYING FAIR CARRYING FAIR CROSS AMOUNT VALUE AMOUNT VALUE REFERENCE ------ ----- ------ ----- --------- (in thousands) ASSETS: Debt securities $812,314 $812,314 $713,998 $713,998 Notes 1&2 Equity securities 39,163 39,163 25,959 25,959 Notes 1&2 Cash and cash equivalents 12,847 12,847 14,253 14,253 Note 1 Accrued premiums 77,115 74,739 59,070 57,300 Note 3 Funds held in escrow 515 515 515 515 Note 9 LIABILITIES: Convertible debentures $ - $ - $103,500 $108,675 Note 7 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF TRENWICK $110,000 $112,160 $ - $ - Note 5
51 54 NOTE 11 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
(in thousands) 1997 1996 1995 ---- ---- ---- INCOME AVAILABLE TO COMMON STOCKHOLDERS: Income before extraordinary item (basic) $36,289 $33,848 $29,841 Add interest on convertible debentures, net of income taxes 578 4,228 4,216 ------- ------- ------- Income before extraordinary item (diluted) $36,867 $38,076 $34,057 ======= ======= ======= Net income (basic) $35,252 $33,848 $29,841 Add interest on convertible debentures and loss on debt redemption, net of income taxes 1,615 4,228 4,216 ------- ------- ------- Net income (diluted) $36,867 $38,076 $34,057 ======= ======= ======= WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Weighted average shares outstanding (basic) 11,645 9,959 9,674 Weighted average shares issuable on conversion of debt 447 3,201 3,201 Weighted average shares issuable on exercise of employee stock options, net of assumed repurchases 173 192 274 ------- ------- ------- Weighted average shares outstanding (diluted) 12,265 13,352 13,149 ======= ======= ======= PER SHARE AMOUNTS: Basic Income before extraordinary item $ 3.12 $ 3.40 $ 3.09 ======= ======= ======= Net income $ 3.03 $ 3.40 $ 3.09 ======= ======= ======= Diluted Income before extraordinary item $ 3.01 $ 2.85 $ 2.59 ======= ======= ======= Net income $ 3.01 $ 2.85 $ 2.59 ======= ======= =======
52 55 NOTE 12 UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data reported by Trenwick for the years ended December 31, 1997, 1996 and 1995 are as follows:
DECEMBER SEPTEMBER JUNE MARCH Quarter ended 31 30 30 31 -- -- -- -- (dollars in thousands, except per share data) Earned premiums 1997 $ 45,414 $ 43,723 $ 47,105 $ 53,914 1996 54,994 55,008 53,376 47,691 1995 46,032 43,200 43,698 44,464 Net investment income 1997 12,372 12,178 12,123 11,729 1996 10,840 10,332 10,185 9,869 1995 9,737 9,354 9,193 8,544 Net realized 1997 388 -- 1 1,915 investment gains 1996 281 (21) (11) 50 (losses) 1995 87 131 52 98 Net income 1997 9,122 8,773 8,593 8,764 1996 8,819 8,520 8,327 8,182 1995 8,041 7,956 7,340 6,504 Basic earnings 1997 .77 .74 .72 .81 per common share 1996 .88 .85 .84 .83 1995 .83 .82 .76 .68 Diluted earnings 1997 .75 .73 .71 .81 per common share 1996 .74 .72 .70 .69 1995 .69 .68 .64 .58 Dividends per common 1997 .24 .25 .24 .24 share 1996 .21 .21 .21 .21 1995 .19 .19 .19 .19 Common stock 1997 38.75 39.50 39.63 34.00 price: high 1996 35.83 36.17 35.67 37.83 1995 38.33 35.33 30.50 29.50 Common stock 1997 34.00 34.75 31.83 30.67 price: low 1996 30.67 32.50 30.67 33.50 1995 33.00 28.50 27.83 27.17
All share and per share information reflects a 3-for-2 stock split, paid on April 15, 1997. The earnings per share amounts prior to 1997 have been restated to comply with the newly adopted accounting standard, "Earnings Per Share". The stock prices are based on closing prices reported by the NASDAQ National Market System. 53 56 NOTE 13 SUBSEQUENT EVENT (UNAUDITED) On February 27, 1998, Trenwick completed the acquisition of SOREMA (UK) Limited (renamed Trenwick International Limited) from SOREMA S.A. for cash in the amount of $60,619,000 which approximated book value. Trenwick International Limited is based in London and underwrites specialty treaty and facultative insurance and reinsurance on a worldwide basis. For the year ended December 31, 1997, Trenwick International Limited had gross and net premiums written of approximately $101,811,000 and $70,035,000, respectively. The acquisition will be accounted for as a purchase. 54 57 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 1998 ("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. 55 58 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 27, are filed as part of this Report. (3) Exhibits 3.1 Restated Certificate of Incorporation of Trenwick Group Inc. with Certificates of Amendment thereto. Incorporated by reference to Exhibit 3.1 to Trenwick's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. File No. 0-14737. 3.2 (a) Certificate of Elimination amending Trenwick's Restated Certificate of Incorporation to eliminate all reference to Series A Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.1(a) to Trenwick's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. File No. 0-14737. (b) Certificate of Designation amending the Restated Certificate of Incorporation of Trenwick Group Inc. to create Series B Junior Participating Preferred Stock. Incorporated by reference to Exhibit 3.2(b) to Trenwick's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 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 September 24, 1997 between Trenwick and First Chicago Trust Company of New York including, as Exhibit A thereto, a form of Rights Certificate. Incorporated by reference to Exhibit 1 to Trenwick's Form 8-A filed September 24, 1997, File No. 0-14737. 4.2 (a) Indenture dated as of January 31, 1997, between The Chase Manhattan Bank and Trenwick. Incorporated by reference to Exhibit 4.2(a) to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 0-14737. (b) Amended and Restated Declaration of Trust of Trenwick Capital Trust I dated as of January 31, 1997. Incorporated by reference to Exhibit 4.2(b) to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 0-14737. (c) Exchange Capital Securities Guarantee Agreement dated as of July 25, 1997, between Trenwick and The Chase Manhattan Bank, as Trustee. Incorporated by reference to Exhibit 4.7 to Trenwick's Registration Statement on Form S-4, File No. 333-28707. 56 59 +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 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. 10.4 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. 10.5 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. 10.6 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. 10.7 Trenwick 1993 Stock Option Plan, as amended. Incorporated by reference to Appendix A to Trenwick's Proxy Statement for the 1997 Annual Meeting of Stockholders, File No. 0-14737. 10.8 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. 10.9 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. 10.10 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. 10.11 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. + As required by Item 14, each of Exhibits 10.1 through 10.15 is hereby identified as a management contract or compensatory plan or arrangement. 57 60 10.12 Leased Automobile Policy for executive officers. Incorporated by reference to Exhibit 10.15 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.13 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. 10.14 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. 10.15 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. 10.16 Office lease between Trenwick and EOP-Canterbury Green, L.L.C. dated as of January 29, 1998. 10.17 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. 10.18 Automobile Liability First Excess of Loss/Quota Share Reinsurance Agreement between Trenwick and the Canal Insurance Company/Canal Indemnity Company.* 10.19 Interests and Liabilities Agreement between Trenwick and Kemper Reinsurance Group and participants thereon.* 10.20 Property Catastrophe Treaty between Trenwick and numerous reinsurers.* 10.21 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.* 10.22 Property Quota Share Retrocession Placement Slip between Trenwick and each of Toa-Re Insurance Co. (U.K.) Ltd. and Underwriters at Lloyd's.* 10.23 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, 10.41, 10.43, 10.44 and 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. 58 61 10.24 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. 10.25 1995 First Facultative Casualty Excess of Loss Reinsurance Agreement between Trenwick and numerous reinsurers. Incorporated by reference to Exhibit 10.3 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1995, File No. 0-14737. 10.26 1996 First Facultative Casualty Excess of Loss Reinsurance Agreement between Trenwick and numerous reinsurers. Incorporated by reference to Exhibit 10.31 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 0-14737. 10.27 1996 Coinsured Aggregate Excess of Loss Reinsurance Agreement between Trenwick and Centre Reinsurance Company of New York and CNA Re. Incorporated by reference to Exhibit 10.32 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 0-14737. 10.28 1997 First Layer Property Catastrophe Excess of Loss Agreement with Trenwick and several reinsurers. 10.29 1997 Special Catastrophe Excess of Loss Retrocessional Agreement between Trenwick and several reinsurers. 10.30 1997 Catastrophe Excess of Loss Reinsurance Agreement Placement Slip between Trenwick and several reinsurers. 10.31 1997 First and Second Coinsured Aggregate Excess of Loss Reinsurance Agreement between Trenwick and Centre Reinsurance Company of New York and CNA Re. 10.32 1997 First Casualty Retrocessional Excess of Loss Reinsurance Agreement between Trenwick and several reinsurers. 10.33 1997 Reverse Franchise Catastrophe Excess of Loss Reinsurance Agreement between Trenwick and several reinsurers. 12.0 Computation of Ratios. 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 59 62 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 19, 1998 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 19, 1998 - ---------------------------- James F. Billett, Jr. President and Chief Executive Officer and Director (Principal Executive Officer) ALAN L. HUNTE Vice President and March 19, 1998 - ---------------------------- Alan L. Hunte Treasurer (Principal Financial Officer and Accounting Officer) ANTHONY S. BROWN Director March 19, 1998 - ---------------------------- Anthony S. Brown 60 63 NEIL DUNN Director March 19, 1998 - ----------------------------- Neil Dunn W. MARSTON BECKER Director March 19, 1998 - ----------------------------- W. Marston Becker P. ANTHONY JACOBS Director March 19, 1998 - ----------------------------- P. Anthony Jacobs HERBERT PALMBERGER Director March 19, 1998 - ----------------------------- Herbert Palmberger JOSEPH D. SARGENT Director March 19, 1998 - ----------------------------- Joseph D. Sargent FREDERICK D. WATKINS Director March 19, 1998 - ----------------------------- Frederick D. Watkins STEPHEN R. WILCOX Director March 19, 1998 - ----------------------------- Stephen R. Wilcox 61 64 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET
December 31, ------------ 1997 1996 ---- ---- (in thousands) Assets: Investments in consolidated subsidiaries $ 389,604 $346,060 Debt securities available for sale at fair value (amortized cost: $71,652 and $14,793) 72,032 14,814 Cash and cash equivalents 5,108 2,964 Due from consolidated subsidiaries 6,211 4,303 Deferred debt issuance costs 1,681 986 Accrued investment income 607 2 Net deferred income taxes -- 391 Other assets 8 9 --------- -------- Total assets $ 475,251 $369,529 ========= ======== Liabilities: Convertible debentures -- $103,500 Junior subordinated debentures $ 113,403 -- Accrued interest expense 4,168 276 Net deferred income taxes 14 -- Other liabilities 17 -- --------- -------- Total liabilities 117,602 103,776 Stockholders' equity 357,649 265,753 --------- -------- Total liabilities and stockholders' equity $ 475,251 $369,529 ========= ========
S-1 65 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF INCOME -- PARENT COMPANY ONLY
Year ended December 31, 1997 1996 1995 ---- ---- ---- (in thousands) Revenues: Consolidated subsidiary dividends $ 8,250 $ 9,100 $ 9,500 Net investment income 4,974 1,000 940 -------- -------- -------- Total revenues 13,224 10,100 10,440 Interest and operating expenses 10,090 6,504 6,486 -------- -------- -------- Income before income taxes, extraordinary item and equity in undistributed income of unconsolidated subsidiaries 3,134 3,596 3,954 Income tax benefit (1,239) (1,997) (1,954) -------- -------- -------- Income before extraordinary item and equity in undistributed income of consolidated subsidiaries 4,373 5,593 5,908 Extraordinary loss on debt redemption, net of $558 income tax benefit 1,037 -- -- -------- -------- -------- Income before equity in undistributed income of consolidated subsidiaries 3,336 5,593 5,908 Equity in undistributed income of consolidated subsidiaries 31,916 28,255 23,933 -------- -------- -------- Net income $ 35,252 $ 33,848 $ 29,841 ======== ======== ========
S-2 66 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY
Year ended December 31, 1997 1996 1995 ---- ---- ---- (in thousands) Cash flows from operating activities: Dividends and net investment income received $ 12,642 $ 10,537 $ 10,436 Interest and operating expenses paid (4,983) (5,642) (5,678) Income taxes received 794 2,061 2,116 --------- -------- -------- Cash provided by operating activities 8,453 6,956 6,874 --------- -------- -------- Cash flows for investing activities: Purchases of debt securities (72,932) -- -- Maturities of debt securities 16,050 -- -- Investment in Trenwick Capital Trust I (3,403) -- -- --------- -------- -------- Cash used for investing activities (60,285) -- -- --------- -------- -------- Cash flows for financing activities: Issuance of mandatorily redeemable preferred capital securities 113,403 -- -- Redemption of convertible debentures (46,997) -- -- Issuance costs of capital securities (1,669) -- -- Issuance of common stock 956 4,001 1,657 Repurchase of common stock (171) (1,031) (134) Dividends paid (11,546) (8,285) (7,287) --------- -------- -------- Cash provided by (used for) financing activities 53,976 (5,315) (5,764) --------- -------- -------- Change in cash and cash equivalents 2,144 1,641 1,110 Cash and cash equivalents, beginning of year 2,964 1,323 213 --------- -------- -------- Cash and cash equivalents, end of year $ 5,108 $ 2,964 $ 1,323 ========= ======== ========
S-3 67 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, 1998, appearing on Page 28 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedules listed in Item 14 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, 1998 S-4 EX-10.16 2 EXHIBIT 10.16 1 ONE CANTERBURY GREEN STAMFORD, CONNECTICUT STANDARD FORM OFFICE LEASE BETWEEN EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("LANDLORD"), AND TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION ("TENANT") 2 TABLE OF CONTENTS I. BASIC LEASE INFORMATION; DEFINITIONS.......................................................1 II. LEASE GRANT................................................................................6 III. ADJUSTMENT OF COMMENCEMENT DATE/POSSESSION.................................................6 IV. RENT.......................................................................................7 V. USE.......................................................................................13 VI. SECURITY DEPOSIT..........................................................................13 VII. SERVICES TO BE FURNISHED BY LANDLORD......................................................13 VIII. LEASEHOLD IMPROVEMENTS....................................................................16 IX. GRAPHICS..................................................................................16 X. REPAIRS AND ALTERATIONS...................................................................17 XI. USE OF ELECTRICAL SERVICES BY TENANT......................................................18 XII. ENTRY BY LANDLORD.........................................................................19 XIII. ASSIGNMENT AND SUBLETTING.................................................................19 XIV. LIENS.....................................................................................21 XV. INDEMNITY AND WAIVER OF CLAIMS............................................................22 XVI. TENANT'S INSURANCE........................................................................23 XVII. SUBROGATION...............................................................................24 XVIII. LANDLORD'S INSURANCE......................................................................24 XIX. CASUALTY DAMAGE...........................................................................25 XX. DEMOLITION................................................................................26 XXI. CONDEMNATION..............................................................................26 XXII. EVENTS OF DEFAULT.........................................................................26 XXIII. REMEDIES..................................................................................27 XXIV. LIMITATION OF LIABILITY...................................................................29 XXV. NO WAIVER.................................................................................29 XXVI. EVENT OF BANKRUPTCY.......................................................................30 XXVII. WAIVER OF JURY TRIAL......................................................................31 XXVIII. RELOCATION................................................................................31 XXIX. HOLDING OVER..............................................................................31 XXX. SUBORDINATION TO MORTGAGES; ESTOPPEL CERTIFICATE..........................................31 XXXI. ATTORNEYS' FEES...........................................................................32 XXXII. NOTICE....................................................................................33 XXXIII. LANDLORD'S LIEN...........................................................................33 XXXIV. EXCEPTED RIGHTS...........................................................................33 XXXV. SURRENDER OF PREMISES.....................................................................34 XXXVI. MISCELLANEOUS.............................................................................34 XXXVII. ENTIRE AGREEMENT..........................................................................36
i 3 OFFICE LEASE AGREEMENT This Office Lease Agreement (the "Lease") is made and entered into as of the ____ day of __________, 1998, by and between EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord") and TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION ("Tenant"). I. BASIC LEASE INFORMATION; DEFINITIONS. A. The following are some of the basic lease information and defined terms used in this Lease. 1. "Additional Base Rental" shall mean Tenant's Pro Rata Share of Basic Costs and any other sums (exclusive of Base Rental) that are required to be paid by Tenant to Landlord hereunder, which sums are deemed to be additional rent under this Lease. Additional Base Rental and Base Rental are sometimes collectively referred to herein as "Rent". 2. "Base Rental" shall mean the sums that Tenant is required to pay to Landlord in accordance with the following schedule. The aggregate amount of Base Rental that Tenant is required to pay to Landlord during the initial Lease Term is ten million seven hundred twenty-eight thousand two hundred fifty-five and 60/100 dollars ($10,728,255.60), plus the amount of any Base Rental payable with respect to any partial month in which the Commencement Date occurs. Such Base Rental shall be payable by Tenant to Landlord as follows: a. sixty (60) equal installments of eighty-nine thousand four hundred two and 13/100 Dollars ($89,402.13), each payable on or before the first day of each month during the period beginning on the Commencement Date (hereinafter defined) and ending on the last day of the sixtieth (60th) full calendar month of the Lease Term, provided that the installment of Base Rental for the third (3rd) full calendar month of the Lease Term shall be payable upon the execution of this Lease by Tenant. In the event that the Commencement Date does not occur on the first day of a calendar month, Tenant shall pay Base Rental for such initial partial calendar month at the rate of two thousand nine hundred thirty-nine and 25/100 dollars ($2,939.25) per day. Notwithstanding the foregoing to the contrary, provided Tenant is not in default after the expiration of applicable cure periods, Tenant shall be entitled to receive a full abatement of Base Rental with respect to the first sixty (60) days of the Lease Term (the "Abatement Period"). In addition to performing Initial Alterations (hereinafter defined) during the Abatement Period, Tenant shall be entitled to use the Premises for the Permitted Use during the Abatement Period without any obligation to pay Base Rental. b. sixty (60) equal installments of ninety-eight thousand twenty-six and 13/100 Dollars ($98,026.13), each payable on or before the first day of each month during the period beginning on the first day of the sixty-first (61st) full calendar month of the Lease Term and ending on the Termination Date (hereinafter defined). 3. "Building" shall mean the office building located at One Canterbury Green, County of Fairfield, State of Connecticut, commonly known as Canterbury Green. 1 4 4. The "Commencement Date," "Lease Term" and "Termination Date" shall have the meanings set forth in subsection I.A.4.a. below or subsection I.A.4.b. below (delete one): a. The "Lease Term" shall mean a period of one hundred twenty (120) months commencing on the Commencement Date, provided if the Commencement Date does not occur on the first day of a calendar month, the Lease Term shall automatically be extended by the number of days in the period beginning on the Commencement Date and ending on the last day of the month in which the Commencement Date occurs. For purposes hereof, the Commencement Date shall mean the date on which Landlord delivers the Premises to Tenant free from occupancy by NationsCredit Commercial Corporation ("Nations"), the existing tenant in the Premises, or any other party. The "Termination Date" shall, unless sooner terminated as provided herein, mean the last day of the Lease Term. Tenant acknowledges that Nations is currently leasing the Premises, exclusive of the Stamford Atlanta Space (hereinafter defined) pursuant to the terms of a lease (the "Nations Lease") that is currently scheduled to expire on September 16, 1998. Landlord agrees to use good faith efforts to negotiate an agreement with Nations pursuant to which the Nations Lease would terminate prior to its scheduled expiration date. In the event Landlord and Nations enter into an agreement accelerating the expiration date of the Nations Lease, Landlord shall provide Tenant with written notice (the "Early Commencement Notice") setting forth the new expiration date of the Nations Lease and the date on which Landlord intends to provide Tenant with possession of the Premises (i.e. the targeted Commencement Date). Such Early Commencement Notice shall be delivered to Tenant not less than fifteen (15) days prior to the date on which Landlord intends to provide Tenant with possession of the Premises. Notwithstanding the foregoing, in no event shall the Commencement Date occur prior to May 1, 1998 without the written consent of Tenant. Notwithstanding the foregoing to the contrary, Tenant acknowledges that a 2,741 rentable square foot portion of the fourth floor (the "Stamford Atlanta Space") is currently leased to Stamford Atlanta Capital ("Stamford Atlanta") for a lease term that is currently scheduled to expire on October 31, 1998. In the event that Tenant has not exercised its Substitution Option (hereinafter defined) and Landlord is unable to deliver the Stamford Atlanta Space on or before the date on which is delivers the remainder of the Premises, the Commencement Date with respect to the Stamford Atlanta Space only shall be postponed, and all Rent with respect to the Stamford Atlanta Space abated, until the date on which the Stamford Atlanta Space is delivered. The Commencement Date for the remainder of the Premises shall commence in accordance with the terms and conditions hereof. In addition, if Landlord fails to provide Tenant with possession of the Stamford Atlanta Space on or before November 1, 1998 (the "Outside Delivery Date"), Tenant shall be entitled to a rent abatement following the delivery of the Stamford Atlanta Space in the amount of two hundred thirty-three and 55/100 dollars ($233.55) per day for every day in the period beginning on the Outside Delivery Date and ending on the day prior to the date on which Landlord provides Tenant with possession of the Stamford Atlanta Space. For example, if Landlord provides Tenant with possession of the Stamford Atlanta Space on November 15, 1998, 2 5 Tenant shall not be obligated to pay Rent with respect to the Stamford Atlanta Space with respect to the period prior to November 15, 1998 and, in addition, Tenant shall be entitled to receive an abatement of Rent in the amount of $3,269.70 (i.e. 14 x $233.55 = $3,269.70). b. Intentionally Omitted. 5. "Premises" shall mean the area located on the second (2nd) and fourth (4th) floors of the Building, as outlined on Exhibits A and A-1 attached hereto. Landlord and Tenant hereby stipulate and agree that the "Rentable Area of the Premises" shall mean 34,496 square feet, consisting of 22,797 square feet on the 2nd floor as shown on Exhibit A and 11,699 square feet on the fourth (4th) floor as shown on Exhibit A-1 (the "Fourth Floor Space"). The "Rentable Area of the Building" shall mean 217,500 square feet. If the Premises being leased to Tenant hereunder include one or more floors within the Building in their entirety, the definition of Premises with respect to such full floor(s) shall include all corridors and restroom facilities located on such floor(s). Unless specifically provided herein to the contrary, the Premises shall not include any telephone closets, electrical closets, janitorial closets, equipment rooms or similar areas on any full or partial floor that are used by Landlord for the operation of the Building. Notwithstanding anything herein to the contrary, Landlord and Tenant acknowledge that the Third Floor Space (hereinafter defined) is currently leased by Coopers & Lybrand ("Coopers") for a term that is currently scheduled to expire on November 17, 1998. Such expiration, however, is subject to Coopers right to extend the term of its lease for up to two (2) additional periods of five (5) years each. In the event that Coopers does not elect to extend the term of its Lease, pursuant to an exercise of its renewal option, Landlord shall provide Tenant with written notice (the "Substitution Notice") of the fact that the Coopers lease will not be extended. Upon receipt of a Substitution Notice from Landlord, Tenant, by written notice that is delivered to Landlord within ten (10) days after Tenant's receipt of the Substitution Notice, shall have the right (the "Substitution Option") to elect to substitute the Third Floor Space for the Fourth Floor Space as Premises hereunder. For purposes hereof, the Third Floor Space shall mean the 13,936 square feet of space shown on Exhibit A-2 attached hereto. In the event Tenant exercises its Substitution Option, Landlord and Tenant shall promptly enter into an amendment to this Lease to modify (i) the total square footage, (ii) the definition of the Premises, (iii) Tenant's Pro Rata Share, (iv) the aggregate amount of Base Rental and the amount of the monthly installments thereof, and (v) the amount of the Allowance. Landlord and Tenant acknowledge and agree that, if Tenant is entitled to and appropriately exercises its Substitution Option, the Third Floor Space shall be leased upon the same terms and conditions as a set forth herein with respect to the remainder of the Premises, including, without limitation, the same rate per square foot for Base Rental and Allowance. Notwithstanding the foregoing, the Commencement Date for the Third Floor Space shall mean the date on which Landlord delivers the Third Floor Space to Tenant free from occupancy by Coopers or any other party, provided that, without the written consent of Tenant, in no event shall the Commencement Date for the Third Floor Space occur prior to the Commencement Date for the remainder of the Premises. The Commencement Date for the remainder of the Premises shall be as set forth in Section I.A.4. above. In the event the Commencement Date for the Third Floor Space occurs subsequent to the Commencement Date for the remainder of the Premises, the Lease Term shall be determined based upon the initial Commencement Date, it being agreed that 3 6 the Lease Term for the Third Floor Space and the remainder of the Premises shall expire coterminously. 6. "Permitted Use" shall mean general office use. 7. "Security Deposit" shall mean the sum of Zero Dollars ($0). 8. "Tenant's Pro Rata Share" shall mean FIFTEEN AND EIGHTY-SIX ONE HUNDREDTHS PERCENT (15.86%), which is the quotient (expressed as a percentage), derived by dividing the Rentable Area of the Premises by the Rentable Area of the Building. 9. "Guarantor(s)" shall mean any party that agrees in writing to guarantee the Lease. 10. "Notice Addresses" shall mean the following addresses for Tenant and Landlord, respectively: Tenant: On and after the Commencement Date, notices shall be sent to Tenant at the Premises. Prior to the Commencement Date, notices shall be sent to Tenant at the following address: Trenwick America Corporation Metro Center One Station Place Stamford, CT 06902 Attention: Michelle Diener Landlord: EOP - Canterbury Green, L.L.C. c/o Equity Office Properties One Canterbury Green Stamford, CT 06901 Attention: Building Manager With a copy to: Equity Office Properties Two North Riverside Plaza Suite 2200 Chicago, Illinois 60606 Attention: General Counsel for Property Operations Payments of Rent only shall be made payable to the order of: EQUITY OFFICE PROPERTIES at the following address: Equity Office Properties dba Canterbury Green Dept. 0426 P.O. Box 40000 Hartford, CT 06151-0426 B. The following are additional definitions of some of the defined terms used in the Lease. 1. "Base Year" shall mean the calendar year 1999. Tenant acknowledges that Taxes are billed to Landlord based upon a fiscal year of July 1st through June 30th. Tenant further acknowledges that Taxes for the Base Year shall be the average 4 7 of the Taxes payable by Landlord for the fiscal year of July 1, 1998 to June 30, 1999 and the fiscal year of July 1, 1999 to June 30, 2000. Likewise, Taxes for any subsequent calendar year after the Base Year shall reflect the average of Taxes for the two (2) fiscal years that fall within such calendar year. 2. "Basic Costs" shall mean Taxes (hereinafter defined) and all costs and expenses paid or incurred in connection with operating, maintaining, repairing and managing the Building and the Property, as further described in Article IV hereof. Notwithstanding the foregoing, for the purpose of determining Tenant's Pro Rata Share of Basic Costs, Basic Costs shall include only Taxes and Expenses attributable to the Rentable Area of the Office Portions of the Building (i.e. 217,500 square feet), it being understood that the Building includes residential, office and retail portions. The Taxes and Expenses attributable only to the Rentable Area of the Office Portions of the Building and Property are determined as follows: (i) Taxes are split between the residential portion of the Building and the Commercial Portion of the Building (hereinafter defined) on a 30/70 basis, with 30% of Taxes being allocated to the residential portions and 70% being allocated to the Commercial Portion. For purposes hereof, the "Commercial Portion of the Building" shall consist collectively of the office and retail portions and shall exclude the residential portions; (ii) Expenses that are common to the entire Building and Property (e.g. landscaping) are split between the residential portion of the Building and the Commercial Portion of the Building on a 30/70 basis, with 30% of common Expenses being allocated to the residential portions and 70% being allocated to the Commercial Portion; (iii) any Expenses that are contracted only for or separately for either the residential portion of the Building or the Commercial Portion of the Building (e.g. elevator maintenance) shall be included in Basic Costs only if such Expenses are contracted for with respect to the Commercial Portion of the Building; and (iv) once Basic Costs (i.e. Taxes and Expenses) for the Commercial Portions of the Building have been determined, such Basic Costs are allocated on a 95/5 basis, with 95% of Basic Costs being attributable to the office portions of the Building and 5% being attributed to the Rentable Area of the Retail Portions of the Building. 3. "Broker" means Albert B. Ashforth, Inc.. 4. "Building Standard" shall mean the type, grade, brand, quality and/or quantity of materials Landlord designates from time to time to be the minimum quality and/or quantity to be used in the Building. 5. "Business Day(s)" shall mean Mondays through Fridays exclusive of the normal business holidays ("Holidays") of New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Landlord, from time to time during the Lease Term, shall have the right to designate additional Holidays, provided that such additional Holidays are commonly recognized by other office buildings in the area where the Building is located. 6. "Common Areas" shall mean those areas provided for the common use or benefit of all tenants generally and/or the public, such as corridors, elevator foyers, common mail rooms, restrooms, vending areas, lobby areas (whether at ground level or otherwise) and other similar facilities. 7. Intentionally Omitted. 5 8 8. "Maximum Rate" shall mean the greatest per annum rate of interest permitted from time to time under applicable law. 9. "Normal Business Hours" for the Building shall mean 8:00 A.M. to 6:00 P.M. Mondays through Fridays, exclusive of Holidays. 10. "Prime Rate" shall mean the per annum interest rate publicly announced by The First National Bank of Chicago or any successor thereof from time to time (whether or not charged in each instance) as its prime or base rate in Chicago, Illinois. 11. "Property" shall mean the Building and the parcel(s) of land on which it is located and the Building garage and all other improvements owned by Landlord and serving the Building and the tenants thereof and the parcel(s) of land on which they are located. II. LEASE GRANT. Subject to and upon the terms herein set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises, together with the right, in common with others, to use the Common Areas. III. ADJUSTMENT OF COMMENCEMENT DATE/POSSESSION. A. Promptly after the determination of the Commencement Date, Landlord and Tenant shall enter into a letter agreement (the "Commencement Letter") on the form attached hereto as Exhibit C setting forth the Commencement Date, the Termination Date and any other dates that are affected by the adjustment of the Commencement Date. Tenant, within five (5) days after receipt thereof from Landlord, shall execute the Commencement Letter and return the same to Landlord. B. By taking possession of the Premises, Tenant is deemed to have accepted the Premises and agreed that the Premises is in good order and satisfactory condition, with no representation or warranty by Landlord as to the condition of the Premises or the Building or suitability thereof for Tenant's use. Notwithstanding the foregoing, Landlord hereby represents to Tenant that the Premises, as currently demised, is in a condition and configuration that can be occupied by Tenant for the Permitted Use in accordance with any applicable building codes and zoning ordinances. C. Notwithstanding anything to the contrary contained in the Lease, Landlord shall not be obligated to tender possession of any portion of the Premises or other space leased by Tenant from time to time hereunder that, on the date possession is to be delivered, is occupied by a tenant or other occupant or that is subject to the rights of any other tenant or occupant, nor shall Landlord have any other obligations to Tenant under this Lease with respect to such space until the date Landlord: (1) recaptures such space from such existing tenant or occupant; and (2) regains the legal right to possession thereof. This Lease shall not be affected by any such failure to deliver possession and Tenant shall have no claim for damages against Landlord as a result thereof, all of which are hereby waived and released by Tenant. Notwithstanding the foregoing, if Landlord is unable to deliver possession of the Premises, or applicable portion thereof, within sixty (60) days after the date on which possession of such space is to delivered in accordance with the terms hereof and the existing occupant thereof is not actively engaged in the process of vacating such space, Landlord shall thereafter proceed in good faith and with due diligence to commence and pursue such actions as are reasonably necessary to obtain possession of such space for the benefit of Tenant, including the commencement of necessary eviction and forcible detainer proceedings. In addition, if Landlord is unable to obtain possession of the Premises within ninety (90) days after the date on which possession of such space 6 9 is to be delivered in accordance with the terms hereof, Tenant, as its sole remedy, shall have the right to terminate this Lease by written notice to Landlord given on or before the date on which Landlord obtains possession of the Premises. Notwithstanding the foregoing, Tenant shall not have the right to terminate this Lease due solely to Landlord's failure to deliver the Stamford Atlanta Space within the time periods described above. D. If Tenant takes possession of the Premises prior to the Commencement Date, such possession shall be subject to all the terms and conditions of the Lease and Tenant shall pay Base Rental and Additional Base Rental to Landlord for each day of occupancy prior to the Commencement Date. Notwithstanding the foregoing, if Tenant, with Landlord's prior approval, takes possession of the Premises prior to the Commencement Date for the sole purpose of performing any Landlord-approved improvements therein or installing furniture, equipment or other personal property of Tenant, such possession shall be subject to all of the terms and conditions of the Lease, except that Tenant shall not be required to pay Base Rental or Additional Base Rental with respect to the period of time prior to the Commencement Date during which Tenant performs such work. Tenant shall, however, be liable for the cost of any services (e.g. electricity, HVAC, freight elevators) that are provided to Tenant or the Premises during the period of Tenant's possession prior to the Commencement Date. Nothing herein shall be construed as granting Tenant the right to take possession of the Premises prior to the Commencement Date, whether for construction, fixturing or any other purpose, without the prior consent of Landlord. IV. RENT. A. During each calendar year, or portion thereof, falling within the Lease Term, Tenant shall pay to Landlord as Additional Base Rental hereunder the sum of (1) Tenant's Pro Rata Share of the amount, if any, by which Taxes (hereinafter defined) for the applicable calendar year (determined in accordance with Section I.B.1. above) exceed Taxes for the Base Year plus (2) Tenant's Pro Rata Share of the amount, if any, by which Expenses (hereinafter defined) for the applicable calendar year exceed Expenses for the Base Year. For purposes hereof, "Expenses" shall mean all Basic Costs with the exception of Taxes. Tenant's Pro Rata Share of increases in Taxes and Tenant's Pro Rata Share of increases in Expenses shall be computed separately and independently of each other prior to being added together to determine the "Excess." In the event that Taxes and/or Expenses, as the case may be, in any calendar year decrease below the amount of Taxes or Expenses for the Base Year, Tenant's Pro Rata Share of Taxes and/or Expenses, as the case may be, for such calendar year shall be deemed to be $0, it being understood that Tenant shall not be entitled to any credit or offset if Taxes and/or Expenses decrease below the corresponding amount for the Base Year. Prior to January 1, 2000 and prior to January 1 of each calendar year during the Lease Term, or as soon thereafter as practical, Landlord shall make a good faith estimate of the Excess for the applicable calendar year and Tenant's Pro Rata Share thereof. On or before the first day of each month during such calendar year, Tenant shall pay to Landlord, as Additional Base Rental, a monthly installment equal to one-twelfth of Tenant's Pro Rata Share of Landlord's estimate of the Excess. Landlord shall have the right from time to time during any such calendar year (but not more than once in any calendar year) to revise the estimate of Basic Costs and the Excess for such year and provide Tenant with a revised statement therefor, and thereafter the amount Tenant shall pay each month shall be based upon such revised estimate. If Landlord does not provide Tenant with an estimate of the Basic Costs and the Excess by July 1 of any calendar year, Tenant shall continue to pay a monthly installment based on the previous year's estimate until such time as Landlord provides Tenant with an estimate of Basic Costs and the Excess for the current year. Upon receipt of such current year's estimate, an adjustment shall be made for any month 7 10 during the current calendar year with respect to which Tenant paid monthly installments of Additional Base Rental based on the previous year's estimate. Tenant shall pay Landlord for any underpayment within thirty (30) days after demand. Any overpayment shall, at Landlord's option, be refunded to Tenant or credited against the installment of Base Rental and Additional Base Rental due for the months immediately following the furnishing of such estimate. Any amounts paid by Tenant based on any estimate shall be subject to adjustment pursuant to the immediately following paragraph when actual Basic Costs are determined for such calendar year. As soon as is practical following the end of each calendar year during the Lease Term, Landlord shall furnish to Tenant a statement of Landlord's actual Basic Costs and the actual Excess for the previous calendar year. If the estimated Excess actually paid by Tenant for the prior year is in excess of Tenant's actual Pro Rata Share of the Excess for such prior year, then Landlord shall apply such overpayment against Base Rental and Additional Base Rental due or to become due hereunder, provided if the Lease Term expires prior to the determination of such overpayment, Landlord, simultaneously with the delivery of such statement to Tenant, shall refund such overpayment to Tenant after first deducting the amount of any Rent due hereunder. Likewise, Tenant shall pay to Landlord, within thirty (30) days after demand, any underpayment with respect to the prior calendar year, whether or not the Lease has terminated prior to receipt by Tenant of a statement for such underpayment, it being understood that this clause shall survive the expiration of the Lease. B. "Basic Costs" as defined in Section I.B.2. above shall include, without limitation, the following: 1. All labor costs for all persons performing services required or utilized in connection with the operation, repair, replacement and maintenance of and control of access to the Building and the Property, including but not limited to amounts incurred for wages, salaries and other compensation for services, payroll, social security, unemployment and other similar taxes, workers' compensation insurance, uniforms, training, disability benefits, pensions, hospitalization, retirement plans, group insurance or any other similar or like expenses or benefits. 2. All management fees, the cost of equipping and maintaining a management office at the Building, accounting services, legal fees not attributable to leasing and collection activity, and all other administrative costs relating to the Building and the Property. If management services are not provided by a third party, Landlord shall be entitled to a management fee comparable to that due and payable to third parties provided Landlord or management companies owned by, or management divisions of, Landlord perform actual management services of a comparable nature and type as normally would be performed by third parties. In the event that any of the Building's management and administrative personnel perform material services in connection with the operation and management of buildings other than the Building, including, without limitation, the building located at 177 Broad Street, the labor costs in connection with such personnel shall be equitably apportioned between the Building and such other buildings. Likewise, if the Building management office serves as a management office for buildings in addition to the Building, the costs of equipping and maintaining such management office shall be equitably apportioned between the Building and such other buildings. 3. All rental and/or purchase costs of materials, supplies, tools and equipment used in the operation, repair, replacement and 8 11 maintenance and the control of access to the Building and the Property. 4. All amounts charged to Landlord by contractors and/or suppliers for services, replacement parts, components, materials, equipment and supplies furnished in connection with the operation, repair, maintenance, replacement of and control of access to any part of the Building, or the Property generally, including the heating, air conditioning, ventilating, plumbing, electrical, elevator and other systems and equipment. At Landlord's option, major repair items may be amortized over a period of up to five (5) years. Notwithstanding the foregoing, except to the extent set forth in Subsection IV.B.11 below, it is hereby agreed that any costs in connection with replacements that would properly be considered to be capital improvements under generally accepted accounting principles shall be excluded from Basic Costs. 5. All premiums and deductibles paid by Landlord for fire and extended coverage insurance, earthquake and extended coverage insurance, liability and extended coverage insurance, rental loss insurance, elevator insurance, boiler insurance and other insurance customarily carried from time to time by landlords of comparable office buildings or required to be carried by Landlord's Mortgagee. 6. Charges for water, gas, steam and sewer, but excluding those charges for which Landlord is otherwise reimbursed by tenants, and charges for Electrical Costs. For purposes hereof, the term "Electrical Costs" shall mean: (i) all charges paid by Landlord for electricity supplied to the Building, Property and Premises, regardless of whether such charges are characterized as distribution charges, transmission charges, generation charges, public good charges, disconnection charges, competitive transaction charges, stranded cost recoveries or otherwise; (ii) except to the extent otherwise included in Basic Costs, any costs incurred in connection with the energy management program for the Building, Property and Premises, including any costs incurred for the replacement of lights and ballasts and the purchase and installation of sensors and other energy saving equipment; and (iii) if and to the extent permitted by law, a reasonable fee for the services provided by Landlord in connection with the selection of utility companies and the negotiation and administration of contracts for the generation of electricity. Notwithstanding the foregoing, Electrical Costs shall be adjusted as follows: (a) any amounts received by Landlord as reimbursement for above standard electrical consumption shall be deducted from Electrical Costs, (b) any amounts received by Landlord as a rebate from the utility provider with respect to the period of time for which Electrical Costs are being determined shall be deducted from Electrical Costs, (c) the cost of electricity incurred in providing overtime HVAC to specific tenants shall be deducted from Electrical Costs, it being agreed that the electrical component of overtime HVAC Costs shall be calculated as a reasonable percentage of the total HVAC costs charged to such tenants, and (d) if Tenant is billed directly for the cost of electricity to the Premises as a separate charge in addition to Base Rental and Basic Costs, the cost of electricity to individual tenant spaces in the Building shall be deducted from Electrical Costs (whether collected by Landlord through a fixed electrical charge, submetered charge or otherwise). In the event that the total amount received by Landlord pursuant to subsections (a), (b), (c) and (d) of the foregoing sentence with respect to any given calendar year is in excess of Landlord's actual electrical bill for the Building with respect to such calendar year, any such excess 9 12 amount received by Landlord shall be credited against Basic Costs for the applicable calendar year. 7. "Taxes", which for purposes hereof, shall mean: (a) all real estate taxes and assessments on the Property, the Building or the Premises, and taxes and assessments levied in substitution or supplementation in whole or in part of such taxes, (b) all personal property taxes for the Building's personal property, including license expenses, (c) all taxes imposed on services of Landlord's agents and employees, (d) all other taxes, fees or assessments now or hereafter levied by any governmental authority on the Property, the Building or its contents or on the operation and use thereof (except as relate to specific tenants), and (e) all costs and fees incurred in connection with seeking reductions in or refunds in Taxes including, without limitation, any costs incurred by Landlord to challenge the tax valuation of the Building, but excluding income taxes. For the purpose of determining real estate taxes and assessments for any given calendar year, the amount to be included in Taxes for such year shall be as follows: (1) with respect to any special assessment that is payable in installments, Taxes for such year shall include the amount of the installment (and any interest) due and payable during such year; and (2) with respect to all other real estate taxes, Taxes for such year shall, at Landlord's election, include either the amount accrued, assessed or otherwise imposed for such year or the amount due and payable for such year, provided that Landlord's election shall be applied consistently throughout the Lease Term. If a reduction in Taxes is obtained for any year of the Lease Term during which Tenant paid its Pro Rata Share of Basic Costs, then Basic Costs for such year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on such adjustment. Likewise, if a reduction is subsequently obtained for Taxes for the Base Year (if Tenant's Pro Rata Share is based upon increases in Basic Costs over a Base Year), Basic Costs for the Base Year shall be restated and the Excess for all subsequent years recomputed. Tenant shall pay to Landlord Tenant's Pro Rata Share of any such increase in the Excess within thirty (30) days after Tenant's receipt of a statement therefor from Landlord. 8. All landscape expenses and costs of maintaining, repairing, resurfacing and striping of the parking areas and garages of the Property, if any. 9. Cost of all maintenance service agreements, including those for equipment, alarm service, window cleaning, drapery or venetian blind cleaning, janitorial services, pest control, uniform supply, plant maintenance, landscaping, and any parking equipment. 10. Cost of all other repairs, replacements and general maintenance of the Property and Building neither specified above nor directly billed to tenants. 11. The amortized cost of capital improvements made to the Building or the Property which are: (a) primarily for the purpose of reducing operating expense costs or otherwise improving the operating efficiency of the Property or Building; or (b) required to comply with any laws, rules or regulations of any governmental authority or a requirement of Landlord's insurance carrier. The cost of such capital improvements shall be amortized over a period equal to the lesser of ten (10) years or the useful life of such capital improvement and shall, at Landlord's option, include interest at a rate that is reasonably equivalent to the interest rate that Landlord would be required to pay to finance the cost of the capital improvement in question as of the date such capital improvement is performed, provided if the payback period for any 10 13 capital improvement is less than the amortization period provided above, Landlord may amortize the cost of such capital improvement over the payback period. Notwithstanding the foregoing, the portion of the annual amortized costs to be included in Basic Costs in any calendar year with respect to a capital improvement which is intended to reduce expenses or improve the operating efficiency of the Property or Building shall equal the lesser of: a) such annual amortized costs; and b) the actual annual amortized reduction in expenses (as reasonably determined by Landlord) for that portion of the amortization period of the capital improvement which falls within the Lease Term. 12. Any other expense or charge of any nature whatsoever which, in accordance with general industry practice with respect to the operation of a first-class office building, would be construed as an operating expense. Basic Costs shall not include (i) the cost of capital improvements (except as set forth above and as distinguished from replacement parts or components purchased and installed in the ordinary course), (ii) depreciation, (iii) interest (except as provided above with respect to the amortization of capital improvements), (iv) the cost of maintaining and operating a leasing office, (v) leasing commissions, brochures, marketing supplies, attorney's fees, costs, and disbursements and other expenses incurred in connection with negotiation of leases with prospective tenants, (vi) principal payments on mortgage and other non-operating debts of Landlord, and (vii) expenses incurred by Landlord to the extent the same are reimbursed to Landlord by other tenants or occupants of the Building or by other third parties. If the Building is not at least ninety-five percent (95%) occupied during any calendar year of the Lease Term or if Landlord is not supplying services to at least ninety-five percent (95%) of the total Rentable Area of the Building at any time during any calendar year of the Lease Term, actual Basic Costs for purposes hereof shall be determined as if the Building had been ninety-five percent (95%) occupied and Landlord had been supplying services to ninety-five percent (95%) of the Rentable Area of the Building during such year. If Tenant pays for its Pro Rata Share of Basic Costs based on increases over a "Base Year" and Basic Costs for any calendar year during the Lease Term are determined as provided in the foregoing sentence, Basic Costs for such Base Year shall also be determined as if the Building had been ninety-five percent (95%) occupied and Landlord had been supplying services to ninety-five percent (95%) of the Rentable Area of the Building. Any necessary extrapolation of Basic Costs under this Article shall be performed by adjusting the cost of those components of Basic Costs that are impacted by changes in the occupancy of the Building (including, at Landlord's option, Taxes) to the cost that would have been incurred if the Building had been ninety-five percent (95%) occupied and Landlord had been supplying services to ninety-five percent (95%) of the Rentable Area of the Building. In addition, if Tenant's Pro Rata Share of Basic Costs is determined based upon increases over a Base Year and Basic Costs for the Base Year include exit and disconnection fees, stranded cost charges and/or competitive transaction charges, such fees and charges may, at Landlord's option, be imputed as a Basic Cost for subsequent years in which such fees and charges are not incurred. In no event, however, shall the amount of such imputed fees and charges exceed the actual amount of exit and disconnection fees, stranded cost charges and/or competitive transaction charges that were actually included in Basic Costs for the Base Year. C. Tenant, within ninety (90) days after receiving Landlord's statement of actual Basic Costs for a particular calendar year, shall have the right to provide Landlord with written notice (the "Review Notice") of its intent to review Landlord's books and records relating to the Basic Costs for such calendar year. Within a reasonable time after receipt of a timely Review 11 14 Notice, Landlord shall make such books and records available to Tenant or Tenant's agent for its review at either Landlord's home office or at the office of the Building, provided that if Tenant retains an agent to review Landlord's books and records for any calendar year, such agent must be CPA firm licensed to do business in the state in which the Building is located. Tenant shall be solely responsible for any and all costs, expenses and fees incurred by Tenant or Tenant's agent in connection with such review. If Tenant elects to review Landlord's books and records, within sixty (60) days after such books and records are made available to Tenant, Tenant shall have the right to give Landlord written notice stating in reasonable detail any objection to Landlord's statement of actual Basic Costs for such calendar year. If Tenant fails to give Landlord written notice of objection within such sixty (60) day period or fails to provide Landlord with a Review Notice within the ninety (90) day period provided above, Tenant shall be deemed to have approved Landlord's statement of Basic Costs in all respects and shall thereafter be barred from raising any claims with respect thereto. Notwithstanding the foregoing, if a subsequent review of Expenses in accordance with the terms hereof discloses that a particular material item of Expenses has been overstated by more than two and one half percent (2.5%) and there is a reasonable basis to assume such item was similarly overstated in any prior year, Landlord shall allow Tenant to perform a review of Landlord's books and records with respect to such particular item(s) for any previous calendar year in which Tenant elected not to review Landlord's books and records. In addition, if Landlord's statement of Basic Costs for any calendar year was fraudulently prepared by Landlord (as evidenced by Landlord's admission or a judgment against Landlord by a court of proper jurisdiction), Tenant shall not be barred from raising claims with respect to the statement for such calendar year. Upon Landlord's receipt of a timely objection notice from Tenant, Landlord and Tenant shall work together in good faith to resolve the discrepancy between Landlord's statement and Tenant's review. If Landlord and Tenant determine that Basic Costs for the calendar year in question are less than reported, Landlord shall provide Tenant with a credit against future Base Rental and Additional Base Rental in the amount of any overpayment by Tenant. Likewise, if Landlord and Tenant determine that Basic Costs for the calendar year in question are greater than reported, Tenant shall forthwith pay to Landlord the amount of underpayment by Tenant. Any information obtained by Tenant pursuant to the provisions of this Section shall be treated as confidential. Notwithstanding anything herein to the contrary, Tenant shall not be permitted to examine Landlord's books and records or to dispute any statement of Basic Costs unless Tenant has paid to Landlord the amount due as shown on Landlord's statement of actual Basic Costs, said payment being a condition precedent to Tenant's right to examine Landlord's books and records. D. Tenant covenants and agrees to pay to Landlord during the Lease Term, without any setoff or deduction whatsoever, the full amount of all Base Rental and Additional Base Rental due hereunder. In addition, Tenant shall pay and be liable for, as additional rent, all rental, sales and use taxes (but excluding income taxes) imposed upon or measured by the Rent payable by Tenant, provided that Tenant is the party responsible for paying such tax under the provisions of the applicable law, order, rule or regulation (regardless of whether Landlord is the party responsible for collecting such amounts from Tenant). Any such payments shall be paid concurrently with the payments of the Rent on which the tax is based. The Base Rental, Tenant's Pro Rata Share of Basic Costs and any recurring monthly charges due hereunder shall be due and payable in advance on the first day of each calendar month during the Lease Term without demand, provided that the installment of Base Rental for the third (3rd) full calendar month of the Lease Term shall be payable upon the execution of this Lease by Tenant. All other items of Rent shall be due and payable by Tenant on or before thirty (30) days after billing by Landlord. If the Lease Term commences on a day other than the first day of a calendar month or terminates on a day other than the last day 12 15 of a calendar month, then the monthly Base Rental and Tenant's Pro Rata Share of Basic Costs for such month shall be prorated for the number of days in such month occurring within the Lease Term based on a fraction, the numerator of which is the number of days of the Lease Term that fell within such calendar month and the denominator of which is thirty (30). All such payments shall be by a good and sufficient check. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct amount of Rent due under this Lease shall be deemed to be other than a payment on account of the earliest Rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other available remedy. The acceptance by Landlord of any Rent on a date after the due date of such payment shall not be construed to be a waiver of Landlord's right to declare a default for any other late payment. Tenant's covenant to pay Rent shall be independent of every other covenant set forth in this Lease. E. All Rent not paid when due and payable shall bear interest from the date due until paid at the lesser of: (1) the Prime Rate plus five percent (5%) per annum; or (2) the Maximum Rate. In addition, if Tenant fails to pay any installment of Rent when due and payable hereunder and such failure continues for ten (10) days after written notice from Landlord, a service fee equal to five percent (5%) of such unpaid amount will be due and payable immediately by Tenant to Landlord. V. USE. The Premises shall be used for the Permitted Use and for no other purpose. Tenant agrees not to use or permit the use of the Premises for any purpose which is illegal, dangerous to life, limb or property or which, in Landlord's reasonable opinion, creates a nuisance or which would increase the cost of insurance coverage with respect to the Building. Tenant shall conduct its business and control its agents, servants, contractors, employees, customers, licensees, and invitees in such a manner as not to interfere with, annoy or disturb other tenants, or in any way interfere with Landlord in the management and operation of the Building. Tenant will maintain the Premises in a clean and healthful condition, and comply with all laws, ordinances, orders, rules and regulations of any governmental entity with reference to the operation of Tenant's business and to the use, condition, configuration or occupancy of the Premises, including without limitation, the Americans with Disabilities Act (collectively referred to as "Laws"). Tenant, within ten (10) days after receipt thereof, shall provide Landlord with copies of any notices it receives with respect to a violation or alleged violation of any Laws. Tenant will comply with the rules and regulations of the Building attached hereto as Exhibit B and such other rules and regulations adopted and altered by Landlord from time to time and will cause all of its agents, servants, contractors, employees, customers, licensees and invitees to do so. Notwithstanding the foregoing, Tenant shall not be required to comply with any rules and regulations or revisions to rules and regulations not listed on Exhibit B until such time as a copy of such new rules or revisions have been delivered to Tenant. All changes to such rules and regulations will be reasonable and shall be sent by Landlord to Tenant in writing. VI. SECURITY DEPOSIT. Intentionally Omitted. VII. SERVICES TO BE FURNISHED BY LANDLORD. A. Landlord, as part of Basic Costs (except as otherwise provided), agrees to furnish Tenant the following services: 1. Hot and cold water for use in the lavatories on the floor(s) on which the Premises is located. If Tenant desires water in the Premises for any approved reason, including a private lavatory or kitchen, cold water shall be supplied, at Tenant's sole cost and 13 16 expense, from the Building water main through a line and fixtures installed at Tenant's sole cost and expense with the prior reasonable consent of Landlord. If Tenant desires hot water in the Premises, Tenant, at its sole cost and expense and subject to the prior reasonable consent of Landlord, may install a hot water heater in the Premises. Tenant shall be solely responsible for maintenance and repair of any such hot water heater. 2. Central heat and air conditioning in season during Normal Business Hours in accordance with the specifications attached hereto as Exhibit G, or as required by governmental authority, provided that Landlord shall not be liable for any failure to maintain the temperatures ranges set forth on Exhibit G to the extent that such failure arises directly out of any of the foregoing circumstances: (a) an excess density or electrical load within the Premises beyond any density or load limits specified in this Lease, or (b) alterations performed to the HVAC system by Tenant or any contractors retained by Tenant where the performance or design of such alterations is the direct cause of the failure of the HVAC system to meet the specifications set forth on Exhibit G, or (c) Tenant's failure to keep the window covering in the Premises closed during periods when the Premises are exposed to direct sunlight. In the event that Tenant requires central heat, ventilation or air conditioning at hours other than Normal Business Hours, such central heat, ventilation or air conditioning shall be furnished only upon the written request of Tenant delivered to Landlord at the office of the Building prior to 3:00 P.M. at least one Business Day in advance of the date for which such usage is requested. Tenant shall pay Landlord, as Additional Base Rental, the entire cost of additional service as such costs are determined by Landlord from time to time. As of the date hereof, the cost of after hours HVAC service is fifty dollars ($50.00) per hour. In the event Tenant requires heat or air conditioning during hours other than Normal Business Hours, charges for such services will be prorated by Landlord between each requesting user-tenant (if more than one tenant in the same service zone requests additional heating or air conditioning at the same time) and the proration shall be based on the area of the Building leased to such tenants and their respective periods of use. 3. Maintenance and repair of all Common Areas in the manner and to the extent standard for buildings of similar class, size, age and location. 4. Janitor service on Business Days in accordance with the specifications attached hereto as Exhibit H (or such reasonably comparable specifications as Landlord may designate from time to time); provided, however, if Tenant's use, floor covering or other improvements require special services, Tenant shall pay the additional cost reasonably attributable thereto as Additional Base Rental. 5. Passenger elevator service in common with other tenants of the Building. Subject to Force Majeure, at least two (2) passenger elevators shall be available to serve the Premises during Normal Business Hours and at least one (1) passenger elevator shall be available to serve the Premises twenty-four (24) hours per day, seven (7) days per week. 6. Electricity to the Premises for general office use, in accordance with and subject to the terms and conditions set forth in Article XI of this Lease. 7. Tenant, without additional charge, shall have the right to use the loading dock for the Building in common with other tenants of the 14 17 Building and other parties that are permitted by Landlord to use such loading dock. Any usage of the loading dock for a period in excess of one hour must be scheduled in advance with Landlord. 8. Security service at a level reasonably comparable to the average level of security service provided at other first class buildings in Stamford, Connecticut. B. The failure by Landlord to any extent to furnish, or the interruption or termination of, any services in whole or in part, resulting from adherence to laws, regulations and administrative orders, wear, use, repairs, improvements, alterations or any causes beyond the reasonable control of Landlord shall not render Landlord liable in any respect nor be construed as a constructive eviction of Tenant, nor give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof. In such event, Landlord, to the extent the restoration of such service is reasonably within its control, shall use reasonable diligence to repair such equipment or machinery or to otherwise take such steps as are reasonably necessary to restore the service in question. In the event any such interruption of services renders the Premises untenantable for a period in excess of two (2) Business Days, Landlord, as soon as reasonably possible thereafter, shall provide Tenant with a written estimate (the "Restoration Estimate") of the date on which such service will be restored so as to return the Premises to a tenantable condition. If the interruption of the service in question involves a building system, building contract (e.g. janitorial service) or other agency that is reasonably within the control of Landlord, such Restoration Estimate shall be based upon the reasonable judgment of Landlord or Landlord's contractors. If the interruption of service is outside of Landlord's reasonable control to restore (e.g. electrical service to the Building), such Restoration Estimate shall be based upon the reasonable estimate of the party providing such service to the Building (e.g. the utility company). If the Restoration Estimate indicates that the Premises cannot be made tenantable within nine (9) months after the date the Premises were first rendered untenantable, Tenant shall have the right to terminate this Lease by giving written notice to Landlord of such election within ten (10) days after its receipt of the Restoration Estimate. Tenant, however, shall not have the right to terminate this Lease in the event that the interruption of service in question was caused by the negligence or intentional misconduct of Tenant or any Tenant Related Parties. If the Restoration Estimate indicates that the Premises can be made tenantable within nine (9) months, Landlord, to the extent the same is within its control, shall proceed with reasonable promptness to restore the service in question so as to return the Premises to a tenantable condition. Notwithstanding the foregoing, if the service in question is not restored within nine (9) months following the date on which the Premises are rendered untenantable, Tenant may terminate this Lease by written notice to Landlord prior to the date on which the service in question is restored and the Premises returned to a tenantable condition. Landlord and Tenant acknowledge that in the event any service is interrupted as a result of a fire or other casualty to the Building, Tenant's rights and remedies shall be controlled by Article XIX. C. Tenant expressly acknowledges that Landlord shall not be deemed to have warranted the efficiency of any security personnel, service, procedures or equipment and Landlord shall not be liable in any manner for the failure of any such security personnel, services, procedures or equipment to prevent or control, or apprehend anyone suspected of personal injury, property damage or any criminal conduct in, on or around the Property. VIII. LEASEHOLD IMPROVEMENTS. A. Any trade fixtures, unattached and movable equipment or furniture, or other personalty brought into the Premises by Tenant ("Tenant's 15 18 Property") shall be owned and insured by Tenant. Tenant shall remove all such Tenant's Property from the Premises in accordance with the terms of Article XXXV hereof. Any and all alterations, additions and improvements to the Premises, including any built-in furniture (collectively, "Leasehold Improvements") shall be owned and insured by Landlord and shall remain upon the Premises, all without compensation, allowance or credit to Tenant. Landlord may, nonetheless, at any time prior to, or within six (6) months after, the expiration or earlier termination of this Lease or Tenant's right to possession, require Tenant to remove any Leasehold Improvements performed by or for the benefit of Tenant and all electronic, phone and data cabling as are designated by Landlord (the "Required Removables") at Tenant's sole cost. In the event that Landlord so elects, Tenant shall remove such Required Removables within twenty (20) days after notice from Landlord, provided that in no event shall Tenant be required to remove such Required Removables prior to the expiration or earlier termination of this Lease or Tenant's right to possession. In addition to Tenant's obligation to remove the Required Removables, Tenant shall repair any damage caused by such removal and perform such other work as is reasonably necessary to restore the Premises to a "move in" condition. If Tenant fails to remove any specified Required Removables or to perform any required repairs and restoration within the time period specified above, Landlord, at Tenant's sole cost and expense, may remove, store, sell and/or dispose of the Required Removables and perform such required repairs and restoration work. Tenant, within five (5) days after demand from Landlord, shall reimburse Landlord for any and all reasonable costs incurred by Landlord in connection with the Required Removables. B. Notwithstanding Section VIII.A. above to the contrary, Tenant shall not be obligated to remove any portion of the Initial Alterations unless Landlord, within five (5) days after its approval of the final plans for the Initial Alterations, advises Tenant that such removal will be required. With respect to any subsequent alterations, additions or improvements performed by Tenant, Tenant may request in writing at the time it submits its plans and specifications for an alteration, addition or improvement, that Landlord advise Tenant whether Landlord will require Tenant to remove, at the termination of this Lease or Tenant's right to possession hereunder, such alteration, addition or improvement, or any particular portion thereof. Landlord, within ten (10) days after receipt of Tenant's request, shall advise Tenant in writing as to whether Landlord will require removal of such alteration, addition or improvement, or any particular portion thereof. Landlord shall not require Tenant to remove any usual office improvements such as gypsum board, partitions, ceiling grids and tiles, Building Standard fluorescent lighting panels, building standard doors and non-glued down carpeting. IX. GRAPHICS. Landlord shall provide and install, at Tenant's cost, any suite numbers and Tenant identification on the exterior of the Premises using the standard graphics for the Building. Notwithstanding the foregoing, Tenant, at its sole cost and expense (subject to the Allowance), shall have the right to install additional custom signage identifying Tenant on any full floors leased by Tenant, provided that such signage is not visible from outside the Building. Tenant shall also be entitled to ___ lines on the building directory. Tenant shall not be charged a fee for the initial installation of any names on the Building directory. Tenant shall, however, be required to pay Landlord's then standard fee (which fee must be reasonable) for any additional names to be added to the Building directory or any replacement of previously existing names. Tenant shall not be permitted to install any signs or other identification without Landlord's prior written consent, which consent shall not be unreasonably withheld with respect to the placement of Tenant's name or logo on any entry door to the Premises. X. REPAIRS AND ALTERATIONS. A. Except to the extent such obligations are imposed upon Landlord hereunder, Tenant, at its sole cost and expense, shall perform all 16 19 maintenance and repairs to the Premises as are necessary to keep the same in good condition and repair throughout the entire Lease Term, reasonable wear and tear excepted. Tenant's repair and maintenance obligations with respect to the Premises shall include, without limitation, any necessary repairs with respect to: (1) any carpet or other floor covering, (2) any interior partitions, (3) any doors, (4) the interior side of any demising walls, (5) any telephone and computer cabling that serves Tenant's equipment exclusively, (6) any supplemental air conditioning units, private showers and kitchens, including any plumbing in connection therewith, and similar facilities serving Tenant exclusively, and (7) alterations, additions or improvements performed by contractors retained by Tenant, provided if alterations, additions or improvements are made to the Building systems with Landlord's approval, Tenant shall only be responsible for the repairs of those portions of the Building systems that were altered, improved or added to by Tenant if and to the extent that the need for any such repairs results from work that was improperly performed or designed by Tenant or its contractors. All such work shall be performed in accordance with section X.B. below and the rules, policies and procedures reasonably enacted by Landlord from time to time for the performance of work in the Building. If Tenant fails to make any necessary repairs to the Premises, Landlord may, at its option, make such repairs, and Tenant shall pay the cost thereof to the Landlord on demand as Additional Base Rental, together with an administrative charge in an amount equal to ten percent (10%) of the cost of such repairs. Landlord shall, at its expense (except as included in Basic Costs), keep and maintain in good repair and working order and make all repairs to and perform necessary maintenance upon: (a) all structural elements of the Building; and (b) all mechanical, electrical and plumbing systems that serve the Building and Premises, except to the extent such repair and maintenance is the responsibility of Tenant pursuant to subsections (6) and (7) above; and (c) the Building facilities common to all tenants including, but not limited to, the ceilings, walls and floors in the Common Areas. B. Tenant shall not make or allow to be made any alterations, additions or improvements to the Premises without first obtaining the written consent of Landlord in each such instance, which approval or disapproval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Landlord's consent shall not be required for any alteration, addition or improvement that satisfies all of the following criteria: 1) costs less than $25,000.00; 2) is of a cosmetic nature such as painting, wallpapering, moving partitions, hanging pictures and installing carpeting; 3) is not visible from the exterior of the Premises or Building; and 4) will not affect the systems or structure of the Building and does not require work to be performed inside the walls or above the ceiling of the Premises; provided that even if consent is not required, Tenant shall still comply with all the other provisions of this Section X.B. Prior to commencing any such work and as a condition to obtaining Landlord's consent, Tenant must furnish Landlord with plans and specifications reasonably acceptable to Landlord; names and addresses of contractors reasonably acceptable to Landlord; copies of contracts; necessary permits and approvals; and evidence of contractor's and subcontractor's insurance in accordance with Article XVI section B. hereof. All such improvements, alterations or additions shall be constructed in a good and workmanlike manner using new or like new materials of first class quality. Landlord, to the extent reasonably necessary to avoid any disruption to the tenants and occupants of the Building, shall have the right to designate the time when any such alterations, additions and improvements may be performed and to otherwise designate reasonable rules, regulations and procedures for the performance of work in the Building. Upon completion, Tenant shall furnish "as-built" plans, contractor's affidavits and full and final waivers of lien and receipted bills covering all labor and materials. All improvements, alterations and additions shall comply with all insurance requirements, codes, ordinances, laws and regulations, including without limitation, the Americans with Disabilities Act. Tenant shall reimburse Landlord upon demand as Additional Base Rental for all 17 20 sums, if any, expended by Landlord for third party examination of the architectural, mechanical, electric and plumbing plans for any alterations, additions or improvements, provided that Tenant shall not be required to reimburse Landlord for any such costs in connection with the Initial Alterations. In addition, if Landlord so requests, Landlord shall be entitled to oversee the construction of any alterations, additions or improvements that may affect the structure of the Building or any of the mechanical, electrical, plumbing or life safety systems of the Building. Landlord's approval of Tenant's plans and specifications for any work performed for or on behalf of Tenant shall not be deemed to be a representation by Landlord that such plans and specifications comply with applicable insurance requirements, building codes, ordinances, laws or regulations or that the alterations, additions and improvements constructed in accordance with such plans and specifications will be adequate for Tenant's use. XI. USE OF ELECTRICAL SERVICES BY TENANT. A. Tenant, at its sole cost and expense, shall submeter electrical consumption in the Premises as part of the Initial Alterations. Tenant, as Additional Base Rental, shall pay to Landlord within ten (10) days after receipt of an invoice from Landlord, the sum of (a) an amount computed by applying Tenant's consumption and demand for the billing period in question (as measured by the submeter(s) installed in the Premises) to Landlord's Monthly Cost Rate, as such term is hereinafter defined, plus, (b) three percent (3%) of the amount determined in (a). As used herein, the term "Landlord's Monthly Cost Rate" shall mean an amount equal to Landlord's average monthly cost of purchasing electricity from the utility provider(s) servicing the Building for the relevant monthly billing period by the total kilowatt hours consumed by the Building for such monthly period carried to six decimal places. If any tax is imposed on Landlord's receipt from the sale or resale of electric energy to Tenant by any federal, state or municipal authority, Tenant covenants and agrees that where permitted by law, Tenant's pro rata share of such taxes shall be passed on to, and included in the bill of, and paid by, Tenant to Landlord. B. Tenant's use of electrical service in the Premises shall not exceed, either in voltage, rated capacity, use beyond Normal Business Hours or overall load, that which Landlord deems to be standard for the Building. Landlord hereby represents that the standard electrical usage for the Building is five (5) watts per square foot for lighting and power. In the event Tenant shall consume (or request that it be allowed to consume) electrical service in excess of the standard for the Building, Landlord may refuse to consent to such excess usage or may condition its consent to such excess usage upon such conditions as Landlord reasonably elects (including the installation of utility service upgrades, submeters, air handlers or cooling units), and all such additional usage (to the extent permitted by law), installation and maintenance thereof shall be paid for by Tenant as Additional Base Rental. Landlord, at any time during the Lease Term, shall have the right to separately meter electrical usage for the Premises or to measure electrical usage by survey or any other method that Landlord, in its reasonable judgment, deems to be appropriate. C. Notwithstanding Section A. above to the contrary, if Landlord permits Tenant to purchase electrical power for the Premises from a provider other than Landlord's designated company(ies), such provider shall be considered to be a contractor of Tenant and Tenant shall indemnify and hold Landlord harmless from such provider's acts and omissions while in, or in connection with their services to, the Building or Premises in accordance with the terms and conditions of Article XV. In addition, at the request of Landlord, Tenant shall allow Landlord to purchase electricity from Tenant's provider at Tenant's rate or at such lower rate as 18 21 can be negotiated by the aggregation of Landlord's and Tenant's requirements for electricity power. XII. ENTRY BY LANDLORD. Landlord and its agents or representatives shall have the right to enter the Premises to inspect the same, or to show the Premises to prospective purchasers, mortgagees, tenants (during the last twelve months of the Lease Term or earlier in connection with a potential relocation) or insurers, or to clean or make repairs, alterations or additions thereto, including any work that Landlord deems necessary for the safety, protection or preservation of the Building or any occupants thereof, or to facilitate repairs, alterations or additions to the Building or any other tenants' premises. Except for any entry by Landlord in an emergency situation or to provide normal cleaning and janitorial service, Landlord shall provide Tenant with reasonable prior notice of any entry into the Premises, which notice may be given verbally. If reasonably necessary for the protection and safety of Tenant and its employees, Landlord shall have the right to temporarily close the Premises to perform repairs, alterations or additions in the Premises, provided that Landlord shall use reasonable efforts to perform all such work on weekends and after Normal Business Hours. Entry by Landlord hereunder shall not constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof. XIII. ASSIGNMENT AND SUBLETTING. A. Restrictions against Transfers. Tenant shall not assign, sublease, transfer or encumber this Lease or any interest therein or grant any license, concession or other right of occupancy of the Premises or any portion thereof or otherwise permit the use of the Premises or any portion thereof by any party other than Tenant (any of which events is hereinafter called a "Transfer") without the prior written consent of Landlord, which consent shall not be unreasonably withheld with respect to any proposed assignment or subletting. Landlord's consent shall not be considered unreasonably withheld if: (1) in connection with a proposed assignment of this Lease by Tenant, the proposed transferee's financial responsibility does not meet the same criteria Landlord uses to select Building tenants; (2) the proposed transferee's business is not suitable for the Building considering the business of the other tenants and the Building's prestige or would result in a violation of an exclusive right granted to another tenant in the Building; (3) the proposed use is different than the Permitted Use; (4) the proposed transferee is a government agency or, subject to the limitations described below, the proposed transferee is an occupant of the Building; (5) Tenant is in default; or (6) any portion of the Building or Premises would become subject to additional or different governmental laws or regulations as a consequence of the proposed Transfer and/or the proposed transferee's use and occupancy of the Premises. Notwithstanding subsection (4) above to the contrary, if: (i) Landlord, pursuant to a Prior Notice (defined below), elected not to recapture any particular space that Tenant intended to sublet or assign, and (ii) Tenant proposes to sublet or assign such space to an occupant of the Building within six (6) months following Landlord's election, Landlord shall not be entitled to withhold its consent to such proposed Transfer solely because the proposed transferee is an occupant of the Building. Tenant acknowledges that the foregoing is not intended to be an exclusive list of the reasons for which Landlord may reasonably withhold its consent to a proposed Transfer. Any attempted Transfer in violation of the terms of this Article shall, at Landlord's option, be void. Consent by Landlord to one or more Transfers shall not operate as a waiver of Landlord's rights as to any subsequent Transfers. In addition, Tenant shall not, without Landlord's consent, publicly advertise the proposed rental rate for any Transfer, provided that Tenant shall be entitled to distribute customary direct broker mailings containing the proposed rental rate for a Transfer. B. Permitted Transfers. Notwithstanding anything to the contrary contained herein or in Section XIII.D., Tenant may assign its entire interest under this Lease or sublet the Premises to a wholly owned corporation, 19 22 partnership or other legal entity or controlled subsidiary or parent of Tenant or to any successor to Tenant by purchase, merger, consolidation or reorganization (hereinafter, collectively, referred to as "Permitted Transfer") without the consent of Landlord, provided: (i) Tenant is not in default under this Lease; (ii) if such proposed transferee is a successor to Tenant by purchase, merger, consolidation or reorganization, the continuing or surviving entity shall own all or substantially all of the assets of Tenant and shall have a net worth which is at least equal to the greater of Tenant's net worth at the date of this Lease or Tenant's net worth at the date of the Transfer; (iii) such proposed transferee operates the business in the Premises for the Permitted Use and no other purpose; and (iv) in no event shall any Transfer release or relieve Tenant from any of its obligations under this Lease. Tenant shall give Landlord written notice at least thirty (30) days prior to the effective date of such Permitted Transfer. As used herein: (a) 'parent' shall mean a company which owns a majority of Tenant's voting equity; (b) "controlled" or "subsidiary" shall mean a entity wholly owned by Tenant or at least fifty-one percent (51%) of whose voting equity is owned by Tenant; and (c) 'affiliate' shall mean an entity controlled, controlling or under common control with Tenant. Notwithstanding the foregoing, sale of the shares of equity of any affiliate or subsidiary to which this Lease has been assigned or transferred other than to another parent, subsidiary or affiliate of the original Tenant named hereunder shall be deemed to be an assignment requiring the consent of Landlord hereunder. In no event shall Landlord have the right to terminate this Lease with respect to any space that Tenant assigns or sublets pursuant to a Permitted Transfer. C.. Procedure for Obtaining Consent to Transfer. Tenant, prior to entering into a sublease or assignment (except pursuant to a Permitted Transfer), shall have the obligation to advise Landlord (the "Prior Notice") of its intention to sublet the Premises or assign this Lease. Such Prior Notice shall describe the space Tenant intends to sublet or assign and the effective date thereof. Landlord, within sixty (60) days after receipt of the Prior Notice, shall have the right to terminate this Lease with respect to the space that Tenant intends to sublet or assign as of the effective date set forth in the Prior Notice. If Landlord fails to exercise its right to terminate within sixty (60) days after the Prior Notice, for the next six (6) months thereafter Landlord shall not have the right to recapture the space that was described in Tenant's Prior Notice and Tenant shall have the right to sublet or assign such space subject only to Landlord's right to reasonably grant or withhold consent to the proposed Transfer as described below. If Tenant requests Landlord's consent to a Transfer, Tenant, together with such request for consent, shall provide Landlord with the name of the proposed transferee and the nature of the business of the proposed transferee, the term, use, rental rate and all other material terms and conditions of the proposed Transfer, including, without limitation, a copy of the proposed assignment, sublease or other contractual documents and evidence satisfactory to Landlord that the proposed transferee is financially responsible. Landlord, within thirty (30) days after its receipt of all information and documentation required herein, shall either consent to or reasonably refuse to consent to such Transfer in writing. Notwithstanding the foregoing, if (i) the proposed Transfer is not a Permitted Transfer, and (ii) Tenant failed to provide Landlord with a Prior Notice, Landlord, within sixty (60) days after its receipt of all information and documentation required herein, may either reasonably grant or refuse to grant consent to the proposed transfer or may cancel and terminate this Lease with respect to the space and the portion of the Lease Term that Tenant proposes to Transfer. In the event Landlord fails to respond to any request for consent within the thirty (30) day or sixty (60) day period set forth above, as applicable, Tenant shall have the right to provide Landlord with a second request for consent. If Landlord's failure to respond continues for ten (10) days after its receipt of such second request for consent, the Transfer for which Tenant has requested consent shall be deemed to have been approved by Landlord. Tenant's second request for consent shall state that Landlord's failure to 20 23 respond within a period of ten (10) days shall be deemed to be an approval by Landlord. In the event Landlord consents to any such Transfer, the Transfer and consent thereto shall be in a form approved by Landlord, and Tenant shall bear all actual costs and expenses reasonably incurred by Landlord in connection with the review and approval of such documentation. D. Proceeds of Transfer. In addition to the Rent hereunder, Tenant hereby covenants and agrees to pay to Landlord sixty percent (60%) of all rent and other consideration which it receives which is in excess of the Rent payable hereunder (without regard to any rent credits and abatements herein granted to Tenant) within ten (10) days following receipt thereof by Tenant. In determining excess rent in connection with an assignment or subletting, Tenant may deduct all of its reasonable expenses in connection with such subletting or assignment, including the following expenditures resulting from such subletting or assignment: 1) brokerage and marketing fees; 2) legal fees; 3) construction costs, including, without limitation, design fees; and 4) financial concessions granted in such sublease or assignment. In addition to any other rights Landlord may have in connection with an uncured event of default by Tenant, Landlord shall have the right to contact any transferee and require that all payments made pursuant to the Transfer shall be made directly to Landlord. E. Change of Ownership. If Tenant is a corporation, limited liability company or similar entity, and if at any time during the Lease Term the entity or entities who own the voting shares at the time of the execution of this Lease cease for any reason (including but not limited to merger, consolidation or other reorganization involving another corporation) to own a majority of such shares, or if Tenant is a partnership and if at any time during the Lease Term the general partner or partners who own the general partnership interests in the partnership at the time of the execution of this Lease, cease for any reason to own a majority of such interests (except as the result of transfers by gift, bequest or inheritance to or for the benefit of members of the immediate family of such original shareholder[s] or partner[s]), such an event shall be deemed to be a Transfer. The preceding sentence shall not apply whenever Tenant is a corporation, the outstanding stock of which is listed on a recognized security exchange, or if at least eighty percent (80%) of its voting stock is owned by another corporation, the voting stock of which is so listed. F. No Release. Any Transfer consented to by Landlord in accordance with this Article XIII shall be only for the Permitted Use and for no other purpose. In no event shall any Transfer release or relieve Tenant or any Guarantors from any obligations under this Lease. XIV. LIENS. Tenant will not permit any mechanic's liens or other liens to be placed upon the Premises or Tenant's leasehold interest therein, the Building, or the Property. Landlord's title to the Building and Property is and always shall be paramount to the interest of Tenant, and nothing herein contained shall empower Tenant to do any act that can, shall or may encumber Landlord's title. In the event any such lien does attach, Tenant shall, within five (5) days of notice of the filing of said lien, either discharge or bond over such lien to the satisfaction of Landlord and Landlord's Mortgagee (as hereinafter defined), and in such a manner as to remove the lien as an encumbrance against the Building and Property. If Tenant shall fail to so discharge or bond over such lien, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to bond over or discharge the same. Any amount paid by Landlord for any of the aforesaid purposes, including reasonable attorneys' fees (if and to the extent permitted by law) shall be paid by Tenant to Landlord on demand as Additional Base Rental. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the Premises and the Building from such liens. XV. INDEMNITY AND WAIVER OF CLAIMS. 21 24 A. Tenant shall indemnify, defend and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, Mortgagee(s) and agents, and the respective principals and members of any such agents (collectively the "Landlord Related Parties") harmless against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including, without limitation, reasonable attorneys' fees and other professional fees (if and to the extent permitted by law), which may be imposed upon, incurred by, or asserted against Landlord or any of the Landlord Related Parties and arising, directly or indirectly, out of or in connection with the use, occupancy or maintenance of the Premises by, through or under Tenant including, without limitation, any of the following: (1) any work or thing done in, on or about the Premises or any part thereof by Tenant or any of its transferees, agents, servants, contractors, employees, customers, licensees or invitees; (2) any use, non-use, possession, occupation, condition, operation or maintenance of the Premises or any part thereof; (3) any act or omission of Tenant or any of its transferees, agents, servants, contractors, employees, customers, licensees or invitees, regardless of whether such act or omission occurred within the Premises; (4) any injury or damage to any person or property occurring in, on or about the Premises or any part thereof; or (5) any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease with which Tenant must comply or perform. In case any action or proceeding is brought against Landlord or any of the Landlord Related Parties by reason of any of the foregoing, Tenant shall, at Tenant's sole cost and expense, resist and defend such action or proceeding with counsel approved by Landlord or, at Landlord's option, reimburse Landlord for the cost of any counsel retained directly by Landlord to defend and resist such action or proceeding. B. Landlord and the Landlord Related Parties shall not be liable for, and Tenant hereby waives, all claims for loss or damage to Tenant's business or damage to person or property sustained by Tenant or any person claiming by, through or under Tenant [including Tenant's principals, agents and employees (collectively, the "Tenant Related Parties")] resulting from any accident or occurrence in, on or about the Premises, the Building or the Property, including, without limitation, claims for loss, theft or damage resulting from: (1) the Premises, Building, or Property, or any equipment or appurtenances becoming out of repair; (2) wind or weather; (3) any defect in or failure to operate, for whatever reason, any sprinkler, heating or air-conditioning equipment, electric wiring, gas, water or steam pipes; (4) broken glass; (5) the backing up of any sewer pipe or downspout; (6) the bursting, leaking or running of any tank, water closet, drain or other pipe; (7) the escape of steam or water; (8) water, snow or ice being upon or coming through the roof, skylight, stairs, doorways, windows, walks or any other place upon or near the Building; (9) the falling of any fixture, plaster, tile or other material; or (10) any act, omission or negligence of other tenants, licensees or any other persons or occupants of the Building or of adjoining or contiguous buildings, or owners of adjacent or contiguous property or the public, or by construction of any private, public or quasi-public work. Notwithstanding the foregoing, except as provided in Article XVII to the contrary, Tenant shall not be required to waive any claims against Landlord (other than for loss or damage to Tenant's business) where such loss or damage is due to Landlord's negligence or willful misconduct or Landlord's failure to make repairs within a reasonable period after receiving notice from Tenant of the need for such repairs. Nothing herein shall be construed as to diminish the repair and maintenance obligations of Landlord contained elsewhere in this Lease. To the maximum extent permitted by law, Tenant agrees to use and occupy the Premises, and to use such other portions of the Building as Tenant is herein given the right to use, at Tenant's own risk. XVI. TENANT'S INSURANCE. A. At all times commencing on and after the earlier of the Commencement Date and the date Tenant or its agents, employees or contractors enters 22 25 the Premises for any purpose, Tenant shall carry and maintain, at its sole cost and expense: 1. Commercial General Liability Insurance applicable to the Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of Two Million Dollars ($2,000,000.00), with a contractual liability endorsement covering Tenant's indemnity obligations under this Lease. 2. All Risks of Physical Loss Insurance written at replacement cost value and with a replacement cost endorsement covering all of Tenant's Property in the Premises. 3. Workers' Compensation Insurance as required by the state in which the Premises is located and in amounts as may be required by applicable statute, and Employers' Liability Coverage of One Million Dollars ($1,000,000.00) per occurrence. 4. Whenever good business practice, in Landlord's reasonable judgment, indicates the need of additional insurance coverage or different types of insurance in connection with the Premises or Tenant's use and occupancy thereof, Tenant shall, upon request, obtain such insurance at Tenant's expense and provide Landlord with evidence thereof. B. Except for items for which Landlord is responsible under the Work Letter Agreement, before any repairs, alterations, additions, improvements, or construction are undertaken by or on behalf of Tenant, Tenant shall carry and maintain, at its expense, or Tenant shall require any contractor performing work on the Premises to carry and maintain, at no expense to Landlord, in addition to Workers' Compensation Insurance as required by the jurisdiction in which the Building is located, All Risk Builder's Risk Insurance in the amount of the replacement cost of any alterations, additions or improvements (or such other amount reasonably required by Landlord) and Commercial General Liability Insurance (including, without limitation, Contractor's Liability coverage, Contractual Liability coverage and Completed Operations coverage,) written on an occurrence basis with a minimum combined single limit of Two Million Dollars ($2,000,000.00) and adding "the named Landlord hereunder (or any successor thereto), Equity Office Properties Trust, a Maryland real estate investment trust, EOP Operating Limited Partnership, a Delaware limited partnership, and their respective members, principals, beneficiaries, partners, officers, directors, employees, agents and any Mortgagee(s)", and other designees of Landlord as the interest of such designees shall appear, as additional insureds (collectively referred to as the "Additional Insureds"). C. Any company writing any insurance which Tenant is required to maintain or cause to be maintained pursuant to the terms of this Lease (all such insurance as well as any other insurance pertaining to the Premises or the operation of Tenant's business therein being referred to as "Tenant's Insurance"), as well as the form of such insurance, shall at all times be subject to Landlord's reasonable approval, and each such insurance company shall have an A.M. Best rating of "A-" or better and shall be licensed and qualified to do business in the state in which the Premises is located. All policies evidencing Tenant's Insurance (except for Workers' Compensation Insurance) shall specify Tenant as named insured and the Additional Insureds as additional insureds. Provided that the coverage afforded Landlord and any designees of Landlord shall not be reduced or otherwise adversely affected, all of Tenant's Insurance may be carried under a blanket policy covering the Premises and any other of Tenant's locations. All policies of Tenant's Insurance shall contain endorsements that the insurer(s) will give to Landlord and its designees at least thirty (30) days' advance written notice of any change, cancellation, termination or lapse of said insurance. Tenant shall be solely responsible for payment of premiums for all of Tenant's Insurance. Tenant shall deliver to Landlord at least fifteen (15) days prior to the time 23 26 Tenant's Insurance is first required to be carried by Tenant, and upon renewals at least fifteen (15) days prior to the expiration of any such insurance coverage, a certificate of insurance of all policies procured by Tenant in compliance with its obligations under this Lease. The limits of Tenant's Insurance shall in no event limit Tenant's liability under this Lease. D. Tenant shall not do or fail to do anything in, upon or about the Premises which will: (1) violate the terms of any of Landlord's insurance policies; (2) prevent Landlord from obtaining policies of insurance acceptable to Landlord or any Mortgagees; or (3) result in an increase in the rate of any insurance on the Premises, the Building, any other property of Landlord or of others within the Building. In the event of the occurrence of any of the events set forth in this Section, Tenant shall pay Landlord upon demand, as Additional Base Rental, the cost of the amount of any increase in any such insurance premium, provided that the acceptance by Landlord of such payment shall not be construed to be a waiver of any rights by Landlord in connection with a default by Tenant under the Lease. If Tenant fails to obtain the insurance coverage required by this Lease, Landlord may, at its option, obtain such insurance for Tenant, and Tenant shall pay, as Additional Base Rental, the cost of all premiums thereon and all of Landlord's costs associated therewith. XVII. SUBROGATION. Notwithstanding anything set forth in this Lease to the contrary, Landlord and Tenant do hereby waive any and all right of recovery, claim, action or cause of action against the other, their respective principals, beneficiaries, partners, officers, directors, agents, and employees, and, with respect to Landlord, its Mortgagee(s), for any loss or damage that may occur to Landlord or Tenant or any party claiming by, through or under Landlord or Tenant, as the case may be, with respect to their respective property, the Building, the Property or the Premises or any addition or improvements thereto, or any contents therein, by reason of fire, the elements or any other cause, regardless of cause or origin, including the negligence of Landlord or Tenant, or their respective principals, beneficiaries, partners, officers, directors, agents and employees and, with respect to Landlord, its Mortgagee(s), which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by insurance. Since this mutual waiver will preclude the assignment of any such claim by subrogation (or otherwise) to an insurance company (or any other person), Landlord and Tenant each agree to give each insurance company which has issued, or in the future may issue, policies of insurance, with respect to the items covered by this waiver, written notice of the terms of this mutual waiver, and to have such insurance policies properly endorsed, if necessary, to prevent the invalidation of any of the coverage provided by such insurance policies by reason of such mutual waiver. For the purpose of the foregoing waiver, the amount of any deductible applicable to any loss or damage shall be deemed covered by, and recoverable by the insured under the insurance policy to which such deductible relates. In the event that Tenant is permitted to and self-insures any risk which would have been covered by the insurance required to be carried by Tenant pursuant to Article XVI of the Lease, or if Tenant fails to carry any insurance required to be carried by Tenant pursuant to Article XVI of this Lease, then all loss or damage to Tenant, its leasehold interest, its business, its property, the Premises or any additions or improvements thereto or contents thereof shall be deemed covered by and recoverable by Tenant under valid and collectible policies of insurance. XVIII. LANDLORD'S INSURANCE. Landlord shall maintain liability insurance as well as property insurance on the Building in such amounts as Landlord reasonably elects, provided that during the Lease Term Landlord shall maintain standard so-called "all risk" property insurance covering the Building in an amount equal to the replacement cost thereof (excluding the core and foundation) at the time in question. The cost of such insurance shall be included as a part of the Basic Costs, and payments for losses and recoveries thereunder shall be made solely to Landlord or the Mortgagees of Landlord as their interests shall appear. XIX. CASUALTY DAMAGE. 24 27 A. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged that in Landlord's reasonable judgment, substantial alteration or reconstruction of the Building shall be required (whether or not the Premises has been damaged by such casualty) or in the event Landlord will not be permitted by applicable law to rebuild the Building in substantially the same form as existed prior to the fire or casualty or in the event the Premises has been materially damaged and there is less than two (2) years of the Lease Term remaining on the date of such casualty or in the event any Mortgagee should require that the insurance proceeds payable as a result of a casualty be applied to the payment of the mortgage debt or in the event of any material uninsured loss to the Building, Landlord may, at its option, terminate this Lease by notifying Tenant in writing of such termination within ninety (90) days after the date of such casualty. Such termination shall be effective as of the date of fire or casualty, with respect to any portion of the Premises that was rendered untenantable, and the effective date of termination specified in Landlord's notice, with respect to any portion of the Premises that remained tenantable. If Landlord does not elect to terminate this Lease, Landlord shall commence and proceed with reasonable diligence to restore the Building (provided that Landlord shall not be required to restore any unleased premises in the Building) and the Leasehold Improvements (but excluding any improvements, alterations or additions made by Tenant in violation of this Lease) located within the Premises to substantially the same condition they were in immediately prior to the happening of the casualty. Notwithstanding the foregoing, Landlord's obligation to restore the Building, and the Leasehold Improvements, if any, shall not require Landlord to expend for such repair and restoration work more than the insurance proceeds actually received by the Landlord as a result of the casualty. When repairs to the Premises have been completed by Landlord, Tenant shall complete the restoration or replacement of all Tenant's Property necessary to permit Tenant's reoccupancy of the Premises, and Tenant shall present Landlord with evidence satisfactory to Landlord of Tenant's ability to pay such costs prior to Landlord's commencement of repair and restoration of the Premises. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of Rent on a per diem basis during the time and to the extent any damage to the Premises causes the Premises to be rendered untenantable and not used by Tenant. If the Premises or any other portion of the Building is damaged by fire or other casualty resulting from the negligence of Tenant or any Tenant Related Parties, the Rent hereunder shall not be diminished during any period during which the Premises, or any portion thereof, is untenantable (except to the extent Landlord is entitled to be reimbursed by the proceeds of any rental interruption insurance), and Tenant shall be liable to Landlord for the cost of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. Landlord and Tenant hereby waive the provisions of any law from time to time in effect during the Lease Term relating to the effect upon leases of partial or total destruction of leased property. Landlord and Tenant agree that their respective rights in the event of any damage to or destruction of the Premises shall be those specifically set forth herein. B. Notwithstanding anything in this Article XIX to the contrary, if all or any portion of the Premises shall be made untenantable by a fire or other casualty, Landlord shall with reasonable promptness, cause an architect or general contractor selected by Landlord to estimate the amount of time required to substantially complete repair and restoration of the Premises and make the Premises tenantable again, using standard working methods (the "Completion Estimate"). If the Completion Estimate indicates that the Premises cannot be made tenantable within 25 28 nine (9) months after the date of the casualty, either party shall have the right to terminate this Lease by giving written notice to the other of such election within ten (10) days after its receipt of the Completion Estimate. Tenant, however, shall not have the right to terminate this Lease in the event that the fire or casualty in question was caused by the negligence or intention misconduct of Tenant or any Tenant Related Parties. If the Completion Estimate indicates that the Premises can be made tenantable within nine (9) months after the date of the casualty and Landlord has not otherwise exercised its right to terminate the Lease pursuant to the terms hereof, or if the Completion Estimate indicates that the Premises cannot be made tenantable within nine (9) months but neither party terminates this Lease pursuant to this Article XIX, Landlord shall proceed with reasonable promptness to repair and restore the Premises. Notwithstanding the foregoing, if Tenant was entitled to but elected not to exercise its right to terminate the Lease and Landlord does not substantially complete the repair and restoration the Premises within two (2) months after the expiration of the estimated period of time set forth in the Completion Estimate, which period shall be extended to the extent of any Reconstruction Delays, then Tenant may terminate this Lease by written notice to Landlord within fifteen (15) days after the expiration of such period, as the same may be extended. For purposes of this Lease, the term "Reconstruction Delays" shall mean: (i) any delays caused by Tenant; and (ii) any delays caused by events of Force Majeure. XX. DEMOLITION. Intentionally Omitted. XXI. CONDEMNATION. If (a) the whole or any substantial part of the Premises or (b) any portion of the Building or Property which would leave the remainder of the Building unsuitable for use as an office building comparable to its use on the Commencement Date, shall be taken or condemned for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, then Landlord may, at its option, terminate this Lease effective as of the date the physical taking of said Premises or said portion of the Building or Property shall occur. In the event this Lease is not terminated, the Rentable Area of the Building, the Rentable Area of the Premises and Tenant's Pro Rata Share shall be appropriately adjusted. In addition, Rent for any portion of the Premises so taken or condemned shall be abated during the unexpired term of this Lease effective when the physical taking of said portion of the Premises shall occur. All compensation awarded for any such taking or condemnation, or sale proceeds in lieu thereof, shall be the property of Landlord, and Tenant shall have no claim thereto, the same being hereby expressly waived by Tenant, except for any portions of such award or proceeds which are specifically allocated by the condemning or purchasing party for the taking of or damage to trade fixtures of Tenant, which Tenant specifically reserves to itself. XXII. EVENTS OF DEFAULT. The following events shall be deemed to be events of default under this Lease: A. Tenant shall fail to pay when due any Base Rental, Additional Base Rental or other Rent under this Lease and such failure shall continue for three (3) days after written notice from Landlord (hereinafter sometimes referred to as a "Monetary Default"). B. Any failure by Tenant (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, including, without limitation, the rules and regulations, which failure is not cured within ten (10) days after delivery to Tenant of notice of the occurrence of such failure (or such longer period of time as may be reasonably necessary to cure (not to exceed 60 days), provided that Tenant commences to cure such default within ten (10) days after notice from Landlord and, from time to time upon request of Landlord, furnishes Landlord with evidence that 26 29 demonstrates, in Landlord's reasonable judgment, that Tenant is diligently pursuing a course that will remedy such failure), provided that if any such failure creates a hazardous condition, the hazardous condition must be cured immediately. Notwithstanding the foregoing, if Tenant fails to comply with any particular provision or covenant of this Lease, including, without limitation, Tenant's obligation to pay Rent when due, on three (3) occasions during any twelve (12) month period, any subsequent violation of such provision or covenant shall be considered to be an incurable default by Tenant. C. Tenant or any Guarantor shall become insolvent, or shall make a transfer in fraud of creditors, or shall commit an act of bankruptcy or shall make an assignment for the benefit of creditors, or Tenant or any Guarantor shall admit in writing its inability to pay its debts as they become due. D. Tenant or any Guarantor shall file a petition under any section or chapter of the United States Bankruptcy Code, as amended, pertaining to bankruptcy, or under any similar law or statute of the United States or any State thereof, or Tenant or any Guarantor shall be adjudged bankrupt or insolvent in proceedings filed against Tenant or any Guarantor thereunder; or a petition or answer proposing the adjudication of Tenant or any Guarantor as a debtor or its reorganization under any present or future federal or state bankruptcy or similar law shall be filed in any court and such petition or answer shall not be discharged or denied within sixty (60) days after the filing thereof. E. A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or any Guarantor or of the Premises or of any of Tenant's Property located thereon in any proceeding brought by Tenant or any Guarantor, or any such receiver or trustee shall be appointed in any proceeding brought against Tenant or any Guarantor and shall not be discharged within sixty (60) days after such appointment or Tenant or such Guarantor shall consent to or acquiesce in such appointment. F. The leasehold estate hereunder shall be taken on execution or other process of law or equity in any action against Tenant. G. The liquidation, termination, dissolution, forfeiture of right to do business, or death of Tenant or any Guarantor. H. Tenant is in default beyond any notice and cure period under any other lease with Landlord. XXIII. REMEDIES. A. Upon the occurrence of any event or events of default under this Lease, Landlord shall have the option to pursue any one or more of the following remedies without any notice (except as expressly prescribed in Article XXII above) or demand whatsoever (and without limiting the generality of the foregoing, Tenant hereby specifically waives notice and demand for payment of Rent or other obligations due [except as expressly prescribed in Article XXII above] and waives any and all other notices or demand requirements imposed by applicable law): 1. Terminate this Lease or Tenant's right to possession, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises upon termination of the Lease or Tenant's right to possession, Landlord may without prejudice to any other remedy which it may have, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying said Premises, or any part thereof, and Tenant hereby agrees to pay to Landlord on demand the amount of all loss and damage, including consequential damage, which Landlord may suffer by reason of such termination, whether through inability to relet the 27 30 Premises on satisfactory terms or otherwise, specifically including but not limited to all Costs of Reletting (hereinafter defined) and any deficiency that may arise by reason of any reletting or failure to relet. Any reletting by Landlord shall be on such conditions (which may include concessions, free rent and alterations of the Premises) and for such uses as Landlord in its absolute discretion may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Landlord agrees to use reasonable efforts to mitigate damages, provided that such reasonable efforts shall not require Landlord to relet the Premises in preference to any other space in the Building or to relet the Premises to any party that Landlord could reasonably reject as a transferee pursuant to Article XIII hereof. 2. Intentionally Omitted. 3. Enter upon the Premises without having any civil or criminal liability therefor, and do whatever Tenant is obligated to do under the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for any expense which Landlord may incur in thus affecting compliance with Tenant's obligations under this Lease together with interest at the lesser of a per annum rate equal to: (a) the Maximum Rate, or (b) the Prime Rate plus five percent (5%). 4. In order to regain possession of the Premises and to deny Tenant access thereto in any instance in which Landlord has terminated this Lease or Tenant's right to possession, or to limit access to the Premises in accordance with local law in the event of a default by Tenant, Landlord or its agent may, at the expense and liability of the Tenant, alter or change any or all locks or other security devices controlling access to the Premises without posting or giving notice of any kind to Tenant. Landlord shall have no obligation to provide Tenant a key or grant Tenant access to the Premises so long as Tenant is in default under this Lease. Tenant shall not be entitled to recover possession of the Premises, terminate this Lease, or recover any actual, incidental, consequential, punitive, statutory or other damages or award of attorneys' fees, by reason of Landlord's alteration or change of any lock or other security device. Landlord may, without notice, remove and either dispose of or store, at Tenant's expense, any property belonging to Tenant that remains in the Premises after Landlord has regained possession thereof. 5. Terminate this Lease, in which event, Tenant shall immediately surrender the Premises to Landlord and pay to Landlord the sum of: (a) all Rent accrued hereunder through the date of termination, and, upon Landlord's determination thereof, (b) an amount equal to: the total Rent that Tenant would have been required to pay for the remainder of the Lease Term discounted to present value at the Prime Rate then in effect, minus the then present fair rental value of the Premises for the remainder of the Lease Term, similarly discounted, after deducting all anticipated Costs of Reletting (as defined below). B. For purposes of this Lease, the term "Costs of Reletting" shall mean all costs and expenses incurred by Landlord in connection with the reletting of the Premises, including without limitation, the cost of cleaning, renovation, repairs, decoration and alteration of the Premises for a new tenant or tenants, advertisement, marketing, brokerage and legal fees (if and to the extent permitted by law), the cost of protecting or caring for the Premises while vacant, the cost of removing and storing any property located on the Premises, any increase in insurance premiums caused by the vacancy of the Premises and any other out-of-pocket expenses incurred by Landlord including tenant incentives, allowances and inducements. 28 31 C. Except as otherwise herein provided, no repossession or re-entering of the Premises or any part thereof pursuant to Article XXIII hereof or otherwise shall relieve Tenant or any Guarantor of its liabilities and obligations hereunder, all of which shall survive such repossession or re-entering. Notwithstanding any such repossession or re-entering by reason of the occurrence of an event of default, Tenant will pay to Landlord the Rent required to be paid by Tenant pursuant to this Lease. In no event, however, shall Landlord be entitled to a double recovery of damages in connection with Landlord's exercise of one or more of the remedies provided herein. D. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing by agreement, applicable law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief, or to a decree compelling performance of any of the covenants, agreements, conditions or provisions of this Lease, or to any other remedy allowed to Landlord at law or in equity. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. In no event, however, shall Landlord be entitled to a double recovery of damages in connection with Landlord's exercise of one or more of the remedies provided herein. E. This Article XXIII shall be enforceable to the maximum extent such enforcement is not prohibited by applicable law, and the unenforceability of any portion thereof shall not thereby render unenforceable any other portion. XXIV. LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD HEREUNDER) TO TENANT SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE BUILDING, AND TENANT AGREES TO LOOK SOLELY TO LANDLORD'S INTEREST IN THE BUILDING FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST THE LANDLORD, IT BEING INTENDED THAT NEITHER LANDLORD NOR ANY MEMBER, PRINCIPAL, PARTNER, SHAREHOLDER, OFFICER, DIRECTOR OR BENEFICIARY OF LANDLORD SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. TENANT HEREBY COVENANTS THAT, PRIOR TO THE FILING OF ANY SUIT FOR AN ALLEGED DEFAULT BY LANDLORD HEREUNDER, IT SHALL GIVE LANDLORD AND ALL MORTGAGEES WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES OR DEED OF TRUST LIENS ON THE PROPERTY, BUILDING OR PREMISES NOTICE AND REASONABLE TIME TO CURE SUCH ALLEGED DEFAULT BY LANDLORD. XXV. NO WAIVER. Failure of Landlord to declare any default immediately upon its occurrence, or delay in taking any action in connection with an event of default shall not constitute a waiver of such default, nor shall it constitute an estoppel against Landlord, but Landlord shall have the right to declare the default at any time and take such action as is lawful or authorized under this Lease. Failure by Landlord to enforce its rights with respect to any one default shall not constitute a waiver of its rights with respect to any subsequent default. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance or surrender of the Premises. XXVI. EVENT OF BANKRUPTCY. In addition to, and in no way limiting the other remedies set forth herein, Landlord and Tenant agree that if Tenant ever becomes the subject of a voluntary or involuntary bankruptcy, reorganization, composition, or other similar type proceeding under the federal bankruptcy laws, as now enacted or hereinafter amended, then: 29 32 A. "Adequate protection" of Landlord's interest in the Premises pursuant to the provisions of Section 361 and 363 (or their successor sections) of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., (such Bankruptcy Code as amended from time to time being herein referred to as the "Bankruptcy Code"), prior to assumption and/or assignment of the Lease by Tenant shall include, but not be limited to all (or any part) of the following: 1. the continued payment by Tenant of the Base Rental and all other Rent due and owing hereunder and the performance of all other covenants and obligations hereunder by Tenant; 2. the furnishing of an additional/new security deposit by Tenant in the amount of three (3) times the then current monthly Base Rental. B. "Adequate assurance of future performance" by Tenant and/or any assignee of Tenant pursuant to Bankruptcy Code Section 365 will include (but not be limited to) payment of an additional/new Security Deposit in the amount of three (3) times the then current monthly Base Rental payable hereunder. C. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations of Tenant arising under this Lease on and after the effective date of such assignment. Any such assignee shall, upon demand by Landlord, execute and deliver to Landlord an instrument confirming such assumption of liability. D. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of the Landlord under this Lease, whether or not expressly denominated as "Rent," shall constitute "rent" for the purposes of Section 502(b) (6) of the Bankruptcy Code. E. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered to Landlord (including Base Rentals and other Rent hereunder), shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the bankruptcy estate of Tenant. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust by Tenant or Tenant's bankruptcy estate for the benefit of Landlord and shall be promptly paid to or turned over to Landlord. F. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to the Tenant, then notice of such proposed offer/assignment, setting forth: (1) the name and address of such person or entity, (2) all of the terms and conditions of such offer, and (3) the adequate assurance to be provided Landlord to assure such person's or entity's future performance under the Lease, shall be given to Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assumption and assignment, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such persons or entity, less any brokerage commission which may be payable out of the consideration to be paid by such person for the assignment of this Lease. G. To the extent permitted by law, Landlord and Tenant agree that this Lease is a contract under which applicable law excuses Landlord from accepting performance from (or rendering performance to) any person or 30 33 entity other than Tenant within the meaning of Sections 365(c) and 365(e) (2) of the Bankruptcy Code. XXVII. WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive any right to a trial by jury in any action or proceeding based upon, or related to, the subject matter of this Lease. This waiver is knowingly, intentionally, and voluntarily made by Tenant, and Tenant acknowledges that neither Landlord nor any person acting on behalf of Landlord has made any representations of fact to induce this waiver of trial by jury or in any way to modify or nullify its effect. Tenant further acknowledges that it has been represented (or has had the opportunity to be represented) in the signing of this Lease and in the making of this waiver by independent legal counsel, selected of its own free will, and that it has had the opportunity to discuss this waiver with counsel. XXVIII. RELOCATION. Intentionally Omitted. XXIX. HOLDING OVER. In the event of holding over by Tenant after expiration or other termination of this Lease or in the event Tenant continues to occupy the Premises after the termination of Tenant's right of possession pursuant to Articles XXII and XXIII hereof, occupancy of the Premises subsequent to such termination or expiration shall be that of a tenancy at sufferance and in no event for month-to-month or year-to-year. Tenant shall, throughout the entire holdover period, be subject to all the terms and provisions of this Lease and shall pay for its use and occupancy an amount (on a per month basis without reduction for any partial months during any such holdover) equal to one hundred fifty percent (150%) of the sum of the Base Rental and Additional Base Rental due for the period immediately preceding such holding over, provided that in no event shall Base Rental and Additional Base Rental during the holdover period be less than the fair market rental for the Premises. Notwithstanding the foregoing, if such holding over continues for more than sixty (60) days, effective as of the sixty-first (61st) day, holdover rent shall increase to 200% of the sum of the Base Rental and Additional Base Rental due for the period immediately preceding such holding over. No holding over by Tenant or payments of money by Tenant to Landlord after the expiration of the term of this Lease shall be construed to extend the Lease Term or prevent Landlord from recovery of immediate possession of the Premises by summary proceedings or otherwise. In addition to the obligation to pay the amounts set forth above during any such holdover period, Tenant also shall be liable to Landlord for all damage, including any consequential damage, which Landlord may suffer by reason of any holding over by Tenant, and Tenant shall indemnify Landlord against any and all claims made by any other tenant or prospective tenant against Landlord for delay by Landlord in delivering possession of the Premises to such other tenant or prospective tenant. Notwithstanding the foregoing, Tenant shall not be liable for consequential damages unless: (1) Landlord notifies Tenant that it has entered into a lease for the Premises; and (2) Tenant fails to vacate the Premises within thirty (30) days after the later to occur of the date of Landlord's notice or the termination date of the Lease. Landlord agrees to use reasonable efforts to mitigate any consequential damages. XXX. SUBORDINATION TO MORTGAGES; ESTOPPEL CERTIFICATE. A. Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust, ground lease or other lien presently existing or hereafter arising upon the Premises, or upon the Building and/or the Property and to any renewals, modifications, refinancings and extensions thereof (any such mortgage, deed of trust, lease or other lien being hereinafter referred to as a "Mortgage", and the person or entity having the benefit of same being referred to hereinafter as a "Mortgagee"), but Tenant agrees that any such Mortgagee shall have the right at any time to subordinate such Mortgage to this Lease on such terms and subject to such conditions as such Mortgagee may deem appropriate in its discretion. This clause shall be self-operative and no further instrument of subordination shall be required. However, Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease 31 34 to any Mortgage, and Tenant agrees upon demand to execute such further instruments subordinating this Lease, acknowledging the subordination of this Lease or attorning to the holder of any such Mortgage as Landlord may request. If any person shall succeed to all or part of Landlord's interests in the Premises whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease or otherwise, and if and as so requested or required by such successor-in-interest, Tenant shall, without charge, attorn to such successor-in-interest. Tenant agrees that it will from time to time upon request by Landlord and, within five (5) days of the date of such request, execute and deliver to such persons as Landlord shall request an estoppel certificate or other similar statement in recordable form certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as so modified), stating the dates to which Rent and other charges payable under this Lease have been paid, stating that Landlord is not in default hereunder (or if Tenant alleges a default stating the nature of such alleged default) and further stating such other matters as Landlord shall reasonably require. B. Notwithstanding Section XXX.A. above to the contrary, this agreement shall be contingent upon the execution of a subordination, non-disturbance and attornment agreement by Tenant and Landlord's current Mortgagee on the form attached hereto as Exhibit I. In addition, Landlord will obtain a non-disturbance, subordination and attornment agreement from any future Mortgagee on such future Mortgagee's then current standard form of agreement. Landlord's failure to obtain a non-disturbance, subordination and attornment agreement for Tenant shall have no effect on the rights, obligations and liabilities of Landlord and Tenant or be considered to be a default by Landlord hereunder. Landlord's failure to obtain a non-disturbance, subordination and attornment agreement for Tenant from any future Mortgagee shall have no effect on the rights, obligations and liabilities of Landlord and Tenant or be considered to be a default by Landlord hereunder, provided that if such future Mortgagee is unwilling to enter into a non-disturbance, subordination and attornment agreement with Tenant on its then current standard form, Tenant shall not be required to subordinate its leasehold interest to the interest of such future Mortgagee. If, however, Tenant is unwilling to enter into a non-disturbance, subordination and attornment agreement on such future Mortgagee's standard form of agreement, such refusal shall be considered to be a default hereunder by Tenant and this Lease shall automatically be subordinated to the interest of such future Mortgagee. XXXI. ATTORNEYS' FEES. In the event that Landlord should retain counsel and/or institute any suit against Tenant for violation of or to enforce any of the covenants or conditions of this Lease, or should Tenant institute any suit against Landlord for violation of any of the covenants or conditions of this Lease, or should either party intervene in any suit in which the other is a party to enforce or protect its interest or rights hereunder, the prevailing party in any such suit shall be entitled to all of its costs, expenses and reasonable fees of its attorney(s) (if and to the extent permitted by law) in connection therewith. 32 35 XXXII. NOTICE. Whenever any demand, request, approval, consent or notice ("Notice") shall or may be given to either of the parties by the other, each such Notice shall be in writing and shall be sent by registered or certified mail with return receipt requested, or sent by overnight courier service (such as Federal Express) at the respective addresses of the parties for notices as set forth in Section I.A.10. of this Lease, provided that if Tenant has vacated the Premises or is in default of this Lease Landlord may serve Notice by any manner permitted by law. Any Notice under this Lease delivered by registered or certified mail shall be deemed to have been given, delivered, received and effective on the earlier of (a) the third day following the day on which the same shall have been mailed with sufficient postage prepaid or (b) the delivery date indicated on the return receipt. Notice sent by overnight courier service shall be deemed given, delivered, received and effective upon the day after such notice is delivered to or picked up by the overnight courier service. Either party may, at any time, change its Notice Address by giving the other party Notice stating the change and setting forth the new address. XXXIII. LANDLORD'S LIEN. INTENTIONALLY OMITTED, provided that the deletion of this Article shall not be construed to be a waiver of Landlord's lien rights as provided by law. XXXIV. EXCEPTED RIGHTS. This Lease does not grant any rights to light or air over or about the Building. Landlord specifically excepts and reserves to itself the use of any roofs, the exterior portions of the Premises, all rights to the land and improvements below the improved floor level of the Premises, the improvements and air rights above the Premises and the improvements and air rights located outside the demising walls of the Premises, and such areas within the Premises as are required for installation of utility lines and other installations required to serve any occupants of the Building and the right to maintain and repair the same, and no rights with respect thereto are conferred upon Tenant unless otherwise specifically provided herein. If Landlord needs to perform work in the Premises in connection with the performance of alterations, additions or improvements for another tenant in the Building, Landlord agrees (i) to perform such work so that, following the completion thereof, there will not be any change to the appearance or use of the Premises, and (ii) to perform such work in a manner that will not materially interfere with Tenant's ability to use the Premises for the Permitted Use during Tenant's normal hours of operation. Without limiting the foregoing, any lines or cables that Landlord desires to run through the Premises shall be located above the ceiling or within the walls. Landlord further reserves to itself the right from time to time: (a) to change the Building's name or street address; (b) to install, fix and maintain signs on the exterior and interior of the Building; (c) to designate and approve window coverings; (d) to make any decorations, alterations, additions, improvements to the Building, or any part thereof (including the Premises) which Landlord shall desire, or deem necessary for the safety, protection, preservation or improvement of the Building, or as Landlord may be required to do by law; (e) to have access to the Premises to perform its duties and obligations and to exercise its rights under this Lease; (f) to retain at all times and to use pass-keys to all locks within and into the Premises; (g) to approve the weight, size, or location of heavy equipment, or articles in and about the Premises; (h) to close or restrict access to the Building at all times other than Normal Business Hours subject to Tenant's right to admittance at all times under such regulations as Landlord may prescribe from time to time, or to close (temporarily or permanently) any of the entrances to the Building; (i) to change the arrangement and/or location of entrances of passageways, doors and doorways, corridors, elevators, stairs, toilets and public parts of the Building; (j) if Tenant has vacated the Premises during the last six (6) months of the Lease Term, to perform additions, alterations and improvements to the Premises in connection with a reletting or anticipated reletting thereof without being responsible or liable for the value or preservation of any then existing improvements to the Premises; and (k) to grant to anyone the exclusive right to conduct any business or undertaking in the Building. Landlord, in accordance with Article XII hereof, shall have the right to enter the Premises in connection with the exercise of any of the rights set forth herein and such entry into the Premises and the performance of any work therein shall not constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof. 33 36 XXXV. SURRENDER OF PREMISES. At the expiration or earlier termination of this Lease or Tenant's right of possession hereunder, Tenant shall remove all Tenant's Property from the Premises, remove all Required Removables designated by Landlord and quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear excepted. If Tenant fails to remove any of Tenant's Property within one (1) day after the termination of this Lease or Tenant's right to possession hereunder, Landlord, at Tenant's sole cost and expense, shall be entitled to remove and/or store such Tenant's Property and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay Landlord, upon demand, any and all expenses caused by such removal and all storage charges against such property so long as the same shall be in the possession of Landlord or under the control of Landlord. In addition, if Tenant fails to remove any Tenant's Property from the Premises or storage, as the case may be, within ten (10) days after written notice from Landlord, Landlord, at its option, may deem all or any part of such Tenant's Property to have been abandoned by Tenant and title thereof shall immediately pass to Landlord. XXXVI. MISCELLANEOUS. A. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. This Lease represents the result of negotiations between Landlord and Tenant, each of which has been (or has had opportunity to be) represented by counsel of its own selection, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Consequently, Landlord and Tenant agree that the language in all parts of the Lease shall in all cases be construed as a whole according to its fair meaning and neither strictly for nor against Landlord or Tenant. B. Tenant agrees not to record this Lease without Landlord's prior written consent; provided, however, Landlord agrees to consent to the recordation or registration of a memorandum or notice of this Lease, at Tenant's cost and expense (and in form reasonably satisfactory to Landlord). If this Lease is terminated before the Lease Term expires, than upon Landlord's request that parties shall execute, deliver and record an instrument acknowledging such fact and the date of termination of this Lease, and Tenant hereby appoints Landlord as its attorney-in-fact in its name and behalf to execute such instrument if Tenant shall fail to execute and deliver such instrument after Landlord's request therefor within ten (10) days. C. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the state in which the Building is located. D. Events of "Force Majeure" shall mean strikes, riots, acts of God, shortages of labor or materials (unless any such shortage of materials was reasonably anticipatable and alternate sources of materials were available), war, and changes in governmental law, regulations or restrictions. Whenever a period of time is herein prescribed for the taking of any action by Landlord or Tenant, such party shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to events of Force Majeure. In no event, however, shall Landlord's or Tenant's obligation to pay any Rent or other sums due hereunder be postponed or delayed as a result of events of Force Majeure. In addition, in no event shall Landlord's or Tenant's economic or financial difficulties or hardship ever be considered to be an event of Force Majeure. 34 37 E. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Building and Property referred to herein, and in such event and upon such transfer Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations. F. Tenant hereby represents to Landlord that it has dealt directly with and only with the Broker as a broker in connection with this Lease. Tenant agrees to indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any brokers claiming to have represented Tenant in connection with this Lease. Landlord agrees to indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease. G. If there is more than one Tenant, or if the Tenant is comprised of more than one person or entity, the obligations hereunder imposed upon Tenant shall be joint and several obligations of all such parties. All notices, payments, and agreements given or made by, with or to any one of such persons or entities shall be deemed to have been given or made by, with or to all of them. H. In the event Tenant is a corporation (including any form of professional association), partnership (general or limited), or other form of organization other than an individual (each such entity is individually referred to herein as an "Organizational Entity"), then Tenant hereby covenants, warrants and represents: (1) that such individual is duly authorized to execute or attest and deliver this Lease on behalf of Tenant in accordance with the organizational documents of Tenant; (2) that this Lease is binding upon Tenant; (3) that Tenant is duly organized and legally existing in the state of its organization, and is qualified to do business in the state in which the Premises is located; and (4) that the execution and delivery of this Lease by Tenant will not result in any breach of, or constitute a default under any mortgage, deed of trust, lease, loan, credit agreement, partnership agreement or other contract or instrument to which Tenant is a party or by which Tenant may be bound. If Tenant is an Organizational Entity, upon request, Tenant will, prior to the Commencement Date, deliver to Landlord true and correct copies of all organizational documents of Tenant, including, without limitation, copies of an appropriate resolution or consent of Tenant's board of directors or other appropriate governing body of Tenant authorizing or ratifying the execution and delivery of this Lease, which resolution or consent will be duly certified to Landlord's satisfaction by an appropriate individual with authority to certify such documents, such as the secretary or assistant secretary or the managing general partner of Tenant. I. Tenant acknowledges that the financial capability of Tenant to perform its obligations hereunder is material to Landlord and that Landlord would not enter into this Lease but for its belief, based on its review of Tenant's financial statements, that Tenant is capable of performing such financial obligations. Tenant hereby represents, warrants and certifies to Landlord that its financial statements previously furnished to Landlord were at the time given true and correct in all material respects and that there have been no material subsequent changes thereto as of the date of this Lease. J. Except as expressly otherwise herein provided, with respect to all required acts of Tenant, time is of the essence of this Lease. This Lease shall create the relationship of Landlord and Tenant between the parties hereto. K. This Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord and Tenant and their respective permitted successors and assigns. 35 38 L. Notwithstanding anything to the contrary contained in this Lease, the expiration of the Lease Term, whether by lapse of time or otherwise, shall not relieve Landlord or Tenant from it's obligations accruing prior to the expiration of the Lease Term, and such obligations shall survive any such expiration or other termination of the Lease Term. M. The headings and titles to the paragraphs of this Lease are for convenience only and shall have no affect upon the construction or interpretation of any part hereof. N. LANDLORD HAS DELIVERED A COPY OF THIS LEASE TO TENANT FOR TENANT'S REVIEW ONLY, AND THE DELIVERY HEREOF DOES NOT CONSTITUTE AN OFFER TO TENANT OR OPTION. THIS LEASE SHALL NOT BE EFFECTIVE UNTIL AN ORIGINAL OF THIS LEASE EXECUTED BY BOTH LANDLORD AND TENANT AND AN ORIGINAL GUARANTY, IF ANY, EXECUTED BY EACH GUARANTOR IS DELIVERED TO AND ACCEPTED BY LANDLORD. O. Quiet Enjoyment. Tenant shall, and may peacefully have, hold, and enjoy the Premises, subject to the other terms of this Lease (including, without limitation, Article XXX hereof), provided that Tenant pays the Rent herein recited to be paid by Tenant and performs all of Tenant's covenants and agreements herein contained. This covenant and any and all other covenants of Landlord shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Landlord's interest hereunder. XXXVII. ENTIRE AGREEMENT. This Lease Agreement, including the following Exhibits: Exhibit A - Outline and Location of 2nd Floor Premises Exhibit A-1 - Outline and Location of Fourth Floor Space Exhibit A-2 - Outline and Location of Third Floor Space Exhibit B - Rules and Regulations Exhibit C - Commencement Letter Exhibit D - Initial Alterations Exhibit E - Additional Provisions Exhibit F - Location of Reserved Parking Spaces Exhibit G - HVAC Specifications Exhibit H - Cleaning Specifications Exhibit I - Form of Non-Disturbance Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter of this Lease and supersedes all prior agreements and understandings between the parties related to the Premises, including all lease proposals, letters of intent and similar documents. TENANT EXPRESSLY ACKNOWLEDGES AND AGREES THAT LANDLORD HAS NOT MADE AND IS NOT MAKING, AND TENANT, IN EXECUTING AND DELIVERING THIS LEASE, IS NOT RELYING UPON, ANY WARRANTIES, REPRESENTATIONS, PROMISES OR STATEMENTS, EXCEPT TO THE EXTENT THAT THE SAME ARE EXPRESSLY SET FORTH IN THIS LEASE. ALL UNDERSTANDINGS AND AGREEMENTS HERETOFORE MADE BETWEEN THE PARTIES ARE MERGED IN THIS LEASE WHICH ALONE FULLY AND COMPLETELY EXPRESSES THE AGREEMENT OF THE PARTIES, NEITHER PARTY RELYING UPON ANY STATEMENT OR REPRESENTATION NOT EMBODIED IN THIS LEASE. THIS LEASE MAY BE MODIFIED ONLY BY A WRITTEN AGREEMENT SIGNED BY LANDLORD AND TENANT. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, SUITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, ALL OF WHICH ARE HEREBY WAIVED BY TENANT, AND THAT THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. 36 39 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. WITNESS/ATTEST: LANDLORD: EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY By: EOP Operating Limited Partnership, a Delaware limited partnership, its managing member By: Equity Office Properties Trust, a Maryland real estate investment trust, its managing general partner - ----------------------------- Name (print): By: ------------------------------------- Name: - ----------------------------- ----------------------------------- Name (print): Title: ---------------- ---------------------------------- WITNESS/ATTEST: TENANT: TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION - ----------------------------- By: ------------------------------------- Name (print): ---------------- Name: ----------------------------------- Title: ---------------------------------- Name (print): ---------------- 37 40 EXHIBIT A PREMISES This Exhibit is attached to and made a part of the Lease dated _____________, 1998, by and between EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord") and TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION ("Tenant") for space in the Building commonly known as One Canterbury Green. 38 41 EXHIBIT B BUILDING RULES AND REGULATIONS The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking garage associated therewith (if any), the Property and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises. No rubbish, litter, trash, or material of any nature shall be placed, emptied, or thrown in those areas. At no time shall Tenant permit Tenant's employees to loiter in common areas or elsewhere in or about the Building or Property. 2. Plumbing fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant or its agents, employees or invitees, shall be paid for by Tenant, and Landlord shall not in any case be responsible therefor. 3. No signs, advertisements or notices shall be painted or affixed on or to any windows, doors or other parts of the Building, except those of such color, size, style and in such places as shall be first approved in writing by Landlord. Except in connection with the hanging of lightweight pictures, wall hanging and decorations, no nails, hooks or screws shall be driven or inserted into any part of the Premises or Building except by the Building maintenance personnel, nor shall any part of the Building be defaced by Tenant. 4. Landlord may provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board listing all Tenants, and no other directory shall be permitted unless previously consented to by Landlord in writing. 5. Tenant shall not place any additional lock or locks on any door in the Premises or Building without Landlord's prior written consent. A reasonable number of keys to the locks on the doors in the Premises shall be furnished by Landlord to Tenant at the cost of Tenant, and Tenant shall not have any duplicate keys made. All keys shall be returned to Landlord at the expiration or earlier termination of this Lease. 6. All contractors, contractor's representatives, and installation technicians performing work in the Building shall be subject to Landlord's prior approval and shall be required to comply with Landlord's standard rules, regulations, policies and procedures, as the same may be revised from time to time. Tenant shall be solely responsible for complying with all applicable laws, codes and ordinances pursuant to which said work shall be performed. 7. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of any merchandise or materials which require the use of elevators, stairways, lobby areas, or loading dock areas, shall be restricted to hours reasonably designated by Landlord, provided that Tenant shall not be required to schedule use of the loading dock for periods of less than one hour. Tenant must seek Landlord's prior approval by providing in writing a detailed listing of any such activity, which approval shall not be unreasonably withheld or delayed. Landlord may prohibit any article, equipment or any other item from being brought into the Building if, in Landlord's reasonable judgment, the bringing of such article, equipment or other item into the Building would create a dangerous condition. Tenant is to assume all risk for damage to articles moved and injury to any persons resulting from such activity. If any equipment, property, and/or personnel of Landlord or of any other tenant is damaged or injured as a result of or in connection with such activity, Tenant shall be solely liable for any and all damage or loss resulting therefrom. 8. Landlord shall have the power to prescribe the weight and position of safes and other heavy equipment or items, which in all cases shall not in the opinion of 39 42 Landlord exceed acceptable floor loading and weight distribution requirements. All damage done to the Building by the installation, maintenance, operation, existence or removal of any property of Tenant shall be repaired at the expense of Tenant. 9. Corridor doors, when not in use, shall be kept closed. 10. Tenant shall not: (1) make or permit any improper, objectionable or unpleasant noises or odors in the Building, or otherwise interfere in any way with other tenants or persons having business with them; (2) solicit business or distribute, or cause to be distributed, in any portion of the Building any handbills, promotional materials or other advertising; or (3) conduct or permit any other activities in the Building that might constitute a nuisance. 11. No animals, except seeing eye dogs, shall be brought into or kept in, on or about the Premises. 12. No inflammable, explosive or dangerous fluid or substance shall be used or kept by Tenant in the Premises or Building. Tenant shall not, without Landlord's prior written consent, use, store, install, spill, remove, release or dispose of within or about the Premises or any other portion of the Property, any asbestos- containing materials or any solid, liquid or gaseous material now or hereafter considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental law which may now or hereafter be in effect. If Landlord does give written consent to Tenant pursuant to the foregoing sentence, Tenant shall comply with all applicable laws, rules and regulations pertaining to and governing such use by Tenant, and shall remain liable for all costs of cleanup or removal in connection therewith. 13. Tenant shall not use or occupy the Premises in any manner or for any purpose which would injure the reputation or impair the present or future value of the Premises or the Building; without limiting the foregoing, Tenant shall not use or permit the Premises or any portion thereof to be used for lodging, sleeping or for any illegal purpose. 14. Tenant shall not take any action which would violate Landlord's labor contracts affecting the Building or which would cause any work stoppage, picketing, labor disruption or dispute, or any interference with the business of Landlord or any other tenant or occupant of the Building or with the rights and privileges of any person lawfully in the Building. Tenant shall take any actions necessary to resolve any such work stoppage, picketing, labor disruption, dispute or interference and shall have pickets removed and, at the request of Landlord, immediately terminate at any time any construction work being performed in the Premises giving rise to such labor problems, until such time as Landlord shall have given its written consent for such work to resume. Tenant shall have no claim for damages of any nature against Landlord or any of the Landlord Related Parties in connection therewith, nor shall the date of the commencement of the Term be extended as a result thereof. 15. Tenant shall utilize the termite and pest extermination service designated by Landlord to control termites and pests in the Premises. Except as included in Basic Costs, Tenant shall bear the cost and expense of such extermination services. 16. Tenant shall not install, operate or maintain in the Premises or in any other area of the Building, any electrical equipment which does not bear the U/L (Underwriters Laboratories) seal of approval, or which would overload the electrical system or any part thereof beyond its capacity for proper, efficient and safe operation as determined by Landlord, taking into consideration the overall electrical system and the present and future requirements therefor in the Building. Tenant shall not furnish any cooling or heating to the Premises, including, without limitation, the use of any electronic or gas heating devices, without Landlord's prior written consent. Tenant shall not use more than its proportionate share of telephone lines available to service the Building. 40 43 17. Tenant shall not operate or permit to be operated on the Premises any coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes or other goods), except for those vending machines or similar devices which are for the sole and exclusive use of Tenant's employees, and then only if such operation does not violate the lease of any other tenant of the Building. 18. Bicycles and other vehicles are not permitted inside or on the walkways outside the Building, except in those areas specifically designated by Landlord for such purposes. 19. Landlord may from time to time adopt appropriate systems and procedures for the security or safety of the Building, its occupants, entry and use, or its contents. Tenant, Tenant's agents, employees, contractors, guests and invitees shall comply with Landlord's reasonable requirements relative thereto. 20. Landlord shall have the right to prohibit the use of the name of the Building or any other publicity by Tenant that in Landlord's opinion may tend to impair the reputation of the Building or its desirability for Landlord or other tenants. Upon written notice from Landlord, Tenant will refrain from and/or discontinue such publicity immediately. 21. Tenant shall carry out Tenant's permitted repair, maintenance, alterations, and improvements in the Premises only during times agreed to in advance by Landlord and in a manner which will not interfere with the rights of other tenants in the Building. 22. Canvassing, soliciting, and peddling in or about the Building is prohibited. Tenant shall cooperate and use its reasonable efforts to prevent the same. 23. At no time shall Tenant permit or shall Tenant's agents, employees, contractors, guests, or invitees smoke in any common area of the Building, unless such common area has been declared a designated smoking area by Landlord, or to allow any smoke from the Premises to emanate into the common areas or any other tenant's premises. Landlord shall have the right at any time to designate the Building as a non-smoking building. 24. Tenant shall observe Landlord's rules with respect to maintaining standard window coverings at all windows in the Premises so that the Building presents a uniform exterior appearance. Tenant shall ensure that to the extent reasonably practicable, window coverings are closed on all windows in the Premises while they are exposed to the direct rays of the sun. 25. All deliveries to or from the Premises shall be made only at such times, in the areas and through the entrances and exits designated for such purposes by Landlord. Tenant shall not permit the process of receiving deliveries to or from the Premises outside of said areas or in a manner which may interfere with the use by any other tenant of its premises or of any common areas, any pedestrian use of such area, or any use which is inconsistent with good business practice. 26. The work of cleaning personnel shall not be hindered by Tenant after 6:00 P.M., and such cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures may be cleaned at any time. Tenant shall provide adequate waste and rubbish receptacles necessary to prevent unreasonable hardship to Landlord regarding cleaning service. 41 44 EXHIBIT C COMMENCEMENT LETTER Date ------------------------------ Tenant ---------------------------- - ---------------------------------- Address --------------------------- - ---------------------------------- - ---------------------------------- - ---------------------------------- - ---------------------------------- Re: Commencement Letter with respect to that certain Lease dated _______________ by and between _________________________________________, as Landlord, and ______________________________________________________, as Tenant, for __________________ square feet of Rentable Area on the ___________ floor of the Building located at ______________________________________________. Dear -------------------------: In accordance with the terms and conditions of the above referenced Lease, Tenant hereby accepts possession of the Premises and agrees as follows: 1. The Commencement Date of the Lease is - -----------------------------------------; 2. The Termination Date of the Lease is - --------------------------------------------. Please acknowledge your acceptance of possession and agreement to the terms set forth above by signing all three (3) copies of this Commencement Letter in the space provided and returning two (2) fully executed copies of the same to my attention. Sincerely, - ------------------------------------- Property Manager Agreed and Accepted: Tenant: ------------------------------------------ By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- Date: -------------------------------------------- 42 45 EXHIBIT D INITIAL ALTERATIONS This Exhibit is attached to and made a part of the Lease dated _________________________, 1998, by and between EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord") and TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION ("Tenant") for space in the Building commonly known as Canterbury Green. I. ALTERATIONS AND ALLOWANCE. A. Tenant, upon the Commencement Date, shall have the right to perform alterations and improvements in the Premises (the "Initial Alterations"). Notwithstanding the foregoing, Tenant and its contractors shall not have the right to perform Initial Alterations in the Premises unless and until Tenant has complied with all of the terms and conditions of Article X.B. of this Lease, including, without limitation, approval by Landlord of the final plans for the Initial Alterations and the contractors to be retained by Tenant to perform such Initial Alterations. Landlord's approval of the contractors to perform the Initial Alterations shall not be unreasonably withheld. The parties agree that Landlord's approval of the general contractor to perform the Initial Alterations shall not be considered to be unreasonably withheld if any such general contractor (i) does not have trade references reasonably acceptable to Landlord, (ii) does not maintain insurance as required pursuant to the terms of this Lease, (iii) does not have the ability to be bonded for the work to be performed, (iv) does not provide current financial statements reasonably acceptable to Landlord, or (v) is not licensed as a contractor in the state/municipality in which the Premises is located. Tenant acknowledges the foregoing is not intended to be an exclusive list of the reasons why Landlord may reasonably withhold its consent to a general contractor. B. Provided Tenant is not in default, Landlord agrees to contribute the sum of three hundred forty-four thousand nine hundred sixty and 00/100 dollars ($344,960.00) (the "Allowance") toward the cost of performing the Initial Alterations in preparation of Tenant's occupancy of the Premises. The amount of such Allowance, however, shall be adjusted in the event Landlord exercises its Substitution Option. The Allowance, less a 10% retainage (which retainage shall be payable as part of the final draw), shall be paid to Tenant or, at Landlord's option, to the order of the general contractor that performs the Initial Alterations, in periodic disbursements within thirty (30) days after receipt of the following documentation: (i) an application for payment and sworn statement of contractor substantially in the form of AIA Document G-702 covering all work for which disbursement is to be made to a date specified therein; (ii) a certification from an AIA architect substantially in the form of the Architect's Certificate for Payment which is located on AIA Document G702, Application and Certificate of Payment; (iii) Contractor's, subcontractor's and material supplier's waivers of liens which shall cover all Initial Alterations for which disbursement is being requested and all other statements and forms required for compliance with the mechanics' lien laws of the State of Connecticut, together with all such invoices, contracts, or other supporting data as Landlord or Landlord's Mortgagee may reasonably require; (iv) a cost breakdown for each trade or subcontractor performing the Initial Alterations; (v) plans and specifications for the Initial Alterations, together with a certificate from an AIA architect that such plans and specifications comply in all material respects with all laws affecting the Building, Property and Premises; (vi) copies of all construction contracts for the Initial Alterations, together with copies of all change orders, if any; and (vii) a request to disburse from Tenant containing an approval by Tenant of the work done and a good faith estimate of the cost to complete the Initial Alterations. Upon completion of the Initial Alterations, and prior to final disbursement of the Allowance, Tenant shall furnish Landlord with: (1) general contractor and architect's completion affidavits, (2) full and final waivers of lien, (3) receipted bills covering all labor and materials expended and used, (4) as-built plans of the Initial Alterations, and (5) the certification of Tenant and its architect that the Initial Alterations have been installed in a good 43 46 and workmanlike manner in accordance with the approved plans, and in accordance with applicable laws, codes and ordinances. In no event shall Landlord be required to disburse the Allowance more than one time per month. If the Initial Alterations exceed the Allowance, Tenant shall be entitled to the Allowance in accordance with the terms hereof, but each individual disbursement of the Allowance shall be disbursed in the proportion that the Allowance bears to the total cost for the Initial Alterations, less the 10% retainage referenced above. Notwithstanding anything herein to the contrary, Landlord shall not be obligated to disburse any portion of the Allowance during the continuance of an uncured default under the Lease, and Landlord's obligation to disburse shall only resume when and if such default is cured. C. In no event shall the Allowance be used for the purchase of equipment, furniture or other items of personal property of Tenant. In the event Tenant does not use the entire Allowance in connection with the performance of the Initial Alterations, any unused amount shall accrue to the sole benefit of Landlord, it being understood that Tenant shall not be entitled to any credit, abatement or other concession in connection therewith. D. Except as provided in Section III.B. of the Lease to the contrary, Tenant agrees to accept the Premises in its "as-is" condition and configuration, it being agreed that Landlord shall not be required to perform any work or, except as provided above with respect to the Allowance, incur any costs in connection with the construction or demolition of any improvements in the Premises. The foregoing, however, shall not be construed to be a waiver or modification of Landlord's repair and maintenance obligations as set forth in this Lease or of Landlord's obligation to provide heating or air-conditioning in accordance with Exhibit G. Landlord shall be entitled to receive a fee of one thousand dollars ($1,000.00) for its review of Tenant's plans for the Initial Alterations. Landlord shall be entitled to deduct such fee directly from the Allowance. E. This Exhibit shall not be deemed applicable to any additional space added to the original Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the original Premises or any additions to the Premises in the event of a renewal or extension of the original Term of this Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease. 44 47 IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of the day and year first above written. WITNESS/ATTEST: LANDLORD: EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY By: EOP Operating Limited Partnership, a Delaware limited partnership, its managing member By: Equity Office Properties Trust, a Maryland real estate investment trust, its managing general partner - ----------------------------- Name (print): By: ------------------------------------- Name: - ----------------------------- ----------------------------------- Name (print): Title: ---------------- ---------------------------------- WITNESS/ATTEST: TENANT: TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION - ----------------------------- By: ------------------------------------- Name (print): ---------------- Name: ----------------------------------- Title: ---------------------------------- Name (print): ---------------- 45 48 EXHIBIT E ADDITIONAL PROVISIONS This Exhibit is attached to and made a part of the Lease dated ______________________________, 1998, by and between EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord") and TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION ("Tenant") for space in the Building commonly known as Canterbury Green. 1) PARKING A. Tenant shall be obligated to lease seventy-eight (78) non-reserved parking spaces and two (2) reserved parking spaces in the Building parking garage (the "Garage"). The location of such reserved parking spaces is shown on Exhibit F attached hereto. In addition to the foregoing, Tenant shall have the right to lease additional non-reserved spaces at the rate of 2.18 spaces for each 1,000 rentable square feet leased by Tenant over and above the initial Premises, including any increase in square footage as a result of Tenant's exercise of its Substitution Option. If Landlord master leases the Garage to a third party operator (the "Operator"), Tenant shall lease any such spaces directly from the Operator and, upon request, enter into such Operator's standard form parking agreement. Except for particular spaces and areas designated by Landlord for reserved parking, all parking in the Garage shall be on an unreserved, first-come, first-served basis. Tenant acknowledges that Landlord shall have the right to operate the Garage through the use of valet parking. B. Tenant shall pay Landlord (or, at Landlord's option, the Operator) Rent for each non-reserved parking space as follows: (i) sixty-five dollars ($65.00) per space per month with respect to the first sixty-eight (68) spaces, plus any applicable tax imposed thereon; and (ii) seventy-five dollars ($75.00) per space per month with respect to the next ten (10) spaces, plus any applicable tax imposed thereon. Tenant shall pay Rent for the two (2) reserved spaces at the rate of one hundred fifty dollars ($150.00) per space per month, plus any applicable tax imposed thereon. Such monthly rate shall be subject to increase from time to time to reflect the prevailing market rate for parking in the Garage. C. Landlord shall not be responsible for money, jewelry, automobiles or other personal property lost in or stolen from the Garage regardless of whether such loss or theft occurs when the Garage or other areas therein are locked or otherwise secured against entry. Except as caused by the negligence or willful misconduct of Landlord, Landlord shall not be liable for any loss, injury or damage to persons using the Garage or automobiles or other property therein, it being agreed that the use of the Garage and the parking spaces shall be at the sole risk of Tenant and its employees. D. Landlord shall have the right from time to time to promulgate reasonable rules and regulations regarding the Garage, the parking spaces and the use thereof, including, but not limited to, rules and regulations controlling the flow of traffic to and from various parking areas, the angle and direction of parking and the like. Tenant shall comply with and cause its employees to comply with all such rules and regulations as well as all reasonable additions and amendments thereto. E. Tenant shall not store or permit its employees to store any automobiles in the Garage without the prior written consent of Landlord, which consent shall not be unreasonably conditioned, withheld or delayed in emergency circumstances. Except for emergency repairs, Tenant and its employees shall not perform any work on any automobiles while located in the Garage or on the Property. If it is necessary for Tenant or its employees to leave an automobile in the Garage for a period of seven (7) or more days, Tenant shall provide Landlord with prior notice thereof designating the license plate number and model of such automobile. F. Landlord shall have the right to temporarily close the Garage or certain areas therein in order to perform necessary repairs, maintenance and improvements to the Garage. Landlord agrees to use reasonable efforts to provide Tenant with reasonable 46 49 advance notice of any such closure. In the event that the Garage is closed for three (3) or more consecutive Business Days, Tenant shall be entitled to receive an abatement of Rent for the Spaces leased by Tenant hereunder beginning on the fourth (4th) consecutive Business Day of such closure, which abatement shall continue until such time as the Garage is once again open and available for use by Tenant and its employees. In the event that a closure relates to only a portion of the Building, such abatement shall be prorated based upon the number of Spaces that are unavailable for use (and not actually used) by Tenant and its employees. G. Except in connection with an assignment of this Lease or a subletting of a portion of the Premises, Tenant shall not assign or sublease any of the parking spaces. Landlord shall have the right to terminate Tenant' parking rights with respect to any parking spaces that Tenant desires to sublet or assign in violation of the foregoing sentence. H. Landlord may elect to provide parking cards or keys to control access to the Garage. In such event, Landlord shall provide Tenant with one card or key for each Space that Tenant is leasing hereunder, provided that Landlord shall have the right to require Tenant or its employees to place a reasonable deposit on such access cards or keys and to pay a fee for any lost or damaged cards or keys. 2) RIGHT OF FIRST OFFER. A. Tenant shall have the right of first offer with respect to any space that becomes Available for Lease (hereinafter defined) on the remaining balance of the fourth (4th) floor (the "Offering Space"), provided if Tenant exercises its Substitution Option, the Offering Space shall consist of the remaining balance of the third (3rd) floor. Offering Space shall be deemed to be "Available for Lease" when Landlord has determined that the then current tenant in the Offering Space, or portion thereof, will not extend or renew the term of its lease for the Offering Space pursuant to either (a) a contractual right to extend or renew in such tenant's lease, or (b) pursuant to a negotiated extension or renewal that is executed prior to the expiration of any option to extend or renew in such tenant's lease. Any renewal or extension pursuant to (b), however, must be for substantially the same length of term that such party was entitled to extend or renew pursuant to the contractual right contained in its lease. Within a reasonable time after Landlord has determined that a particular portion of the Offering Space is Available for Lease (but prior to leasing such portion of the Offering Space to a third party), Landlord shall advise Tenant (the "Advice") of the square footage and location of such portion of the Offering Space and the terms (i.e. Base Rental and Additional Base Rental) under which Landlord is prepared to lease such Offering Space to Tenant for the remainder of the Lease Term, which terms shall reflect the Prevailing Market (hereinafter defined) rate for such Offering Space as reasonably determined by Landlord. Tenant may lease such portion of the Offering Space in its entirety only, under such terms, by delivering written notice of exercise to Landlord ("Notice of Exercise") within twenty (20) days after the date of the Advice, except that Tenant shall have no such Right of First Offer and Landlord need not provide Tenant with an Advice, if: 1. Tenant is in default under the Lease at the time Landlord would otherwise deliver the Advice; or 2. more than twenty-five percent (25%) of the Premises is sublet at the time Landlord would otherwise deliver the Advice (except in connection with a Permitted Transfer); or 3. the Lease has been assigned prior to the date Landlord would otherwise deliver the Advice (except in connection with a Permitted Transfer); or 4. the Offering Space is not intended for the exclusive use of Tenant during the Lease Term; or 5. the Offering Space is defined as the remaining balance of the third (3rd) floor and Howard Systems is the prospect that is interested in leasing such Offering Space, it being agreed that Landlord, without offering such space to Tenant, shall have the right to enter into a lease with Howard Systems for a term of not more than six (6) years. Notwithstanding subsection 6 above to the 47 50 contrary, Tenant's Right of First Offer shall be superior to any rights of Howard Systems to extend the term of its lease, or 6. Tenant's Renewal Option has lapsed for failure by Tenant to exercise the same or as a result of a condition precedent for the exercise of such Renewal Option. In addition, it is hereby agreed that if (i) there is less than thirty-six (36) months remaining in the initial Lease Term, and (ii) Tenant's Renewal Option has not lapsed for failure of Tenant to exercise the same or as a result of a condition precedent for the exercise of such Renewal Option, Tenant's Notice of Exercise shall be contingent upon Tenant's simultaneous exercise of its Renewal Option, or 7. there is less thirty-six (36) months remaining in the Renewal Term at the time Landlord would otherwise provide Tenant with an Advice. B.1 The term for the Offering Space shall commence upon the commencement date stated in the Advice and thereupon such Offering Space shall be considered a part of the Premises, provided that all of the terms stated in the Advice shall govern Tenant's leasing of the Offering Space and only to the extent that they do not conflict with the Advice, the terms and conditions of this Lease shall apply to the Offering Space. 2. Tenant shall pay Base Rental and Additional Base Rental for the Offering Space in accordance with the terms and conditions of the Advice, which terms and conditions shall reflect the Prevailing Market rate for the Offering Space as determined in Landlord's reasonable judgment. 3. The Offering Space (including improvements and personalty, if any) shall be accepted by Tenant in its condition and as-built configuration existing on the earlier of the date Tenant takes possession of the Offering Space or as of the date the term for such Offering Space commences, provided that such Offering Space shall be delivered to Tenant vacant, broom clean and free of claims and possession of third parties. C. The rights of Tenant hereunder with respect to any portion of the Offering Space for which Landlord provides Tenant with an Advice shall terminate on the earlier to occur of: (i) Tenant's failure to exercise its Right of First Offer within the twenty (20) day period provided in paragraph A above, and (ii) the date Landlord would have provided Tenant an Advice if Tenant had not been in violation of one or more of the conditions set forth in Paragraph A above. In addition, if Landlord provides Tenant with an Advice that contains expansion rights (whether such rights are described as an expansion option, right of first refusal, right to first offer or otherwise) and Tenant does not exercise its Right of First Offer to lease the Offering Space described in the Advice, Tenant's Right of First Offer shall be subject and subordinate to all such expansion rights contained in the Advice. Notwithstanding the foregoing, if (i) Tenant was entitled to exercise its Right of First Offer, but failed to provide Landlord with a Notice of Exercise within the twenty (20) day period provided in paragraph A above, and (ii) Landlord does not enter into a lease for such portion of the Offering Space within a period of six (6) months following the date of the Advice, Tenant shall once again have a Right of First Offer with respect to such portion of the Offering Space. In addition, if Landlord does enter into a lease for such portion of the Offering Space, Tenant shall have a Right of First Offer on such Offering Space (subject to the terms and conditions set forth herein) upon the expiration of the lease with the prospect. D. If Tenant exercises its Right of First Offer, Landlord shall prepare an amendment (the "Offering Amendment") adding the Offering Space to the Premises on the terms set forth in the Advice and reflecting the changes in the Base Rental, Rentable Area of the Premises, Tenant's Pro Rata Share and other appropriate terms. A copy of the Offering Amendment shall be (i) sent to Tenant within a reasonable time after receipt of the Notice of Exercise executed by Tenant, and (ii) revised by Landlord to address any requested changes by Tenant that are necessary to accurately reflect the terms and conditions hereof; (iii) executed by Tenant and returned to Landlord within fifteen (15) days thereafter. E. For purposes hereof, "Prevailing Market" shall mean the arms length fair 48 51 market annual rental rate per rentable square foot under leases and amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the Offering Space in the Building and office buildings comparable to the Building in Stamford, Connecticut. The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any comparison lease, such as rent abatements, construction costs and other concessions and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes. F. In the event that: (i) any existing tenant in the Offering Space desires to sublet or assign all or a portion of such Offering Space, and (ii) Landlord, in its reasonable judgment, believes that it has the right to recapture such space pursuant to the terms and conditions of its lease with such tenant, Landlord, prior to consenting to such proposed subletting or assignment, shall provide Tenant with an Advice that is contingent upon Landlord's successful recapture of the Offering Space, or applicable portion thereof. In such event, however, (a) Tenant's Notice of Exercise shall be due within five (5) days after Tenant's receipt of the Advice, and (b) the Base Rental for the Offering Space shall be the greater of the Prevailing Market rate or the rental rate (including scheduled increases) under the existing lease for the Offering Space, or portion thereof, to be recaptured. In the event Tenant exercises its right to first offer with respect to such Offering Space, Landlord shall recapture the Offering Space in question. Notwithstanding the foregoing, in the event the tenant in the Offering Space contests Landlord's legal right to recapture the Offering Space in question, Landlord shall have the right to withdraw its Advice and, if previously delivered by Tenant, to declare Tenant's Notice of Exercise to be null and void. 3) RENEWAL OPTION A. Tenant shall have the right to extend the Lease Term (the "Renewal Option") for one additional period of five (5) years commencing on the day following the Termination Date of the initial Lease Term and ending on the fifth (5th) anniversary of the Termination Date (the "Renewal Term"), if: 1. Landlord receives notice of exercise ("Initial Renewal Notice") not less then twelve (12) full calendar months prior to the expiration of the initial Lease Term and not more than fifteen (15) full calendar months prior to the expiration of the initial Lease Term; and 2. Tenant is not in default under the Lease beyond any applicable cure periods at the time that Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its Binding Notice; and 3. No more than fifty percent (50%) of the Premises is sublet (except in connection with a Permitted Transfer) for a term that extends beyond the date of Tenant's Initial Renewal Notice; and 4. The Lease has not been assigned (except in connection with a Permitted Transfer) prior to the date that Tenant delivers its Initial Renewal Notice or prior to the date Tenant delivers its Binding Notice. B. The initial Base Rental rate per rentable square foot for the Premises during the Renewal Term shall equal the Prevailing Market (hereinafter defined) rate per rentable square foot for the Premises. C. Tenant shall pay Additional Base Rental (i.e. Basic Costs) for the Premises during the Renewal Term in accordance with the terms and conditions of the Lease. In addition, if such is standard in the market at the time, the Base Year shall be adjusted to a current Base Year. Such new Base Year, however, shall be given appropriate consideration in the determination of the Prevailing Market rate. D. Within thirty (30) days after receipt of Tenant's Initial Renewal Notice, Landlord shall advise Tenant of the applicable Base Rental rate for the Premises for the Renewal Term. Tenant, within fifteen (15) days after the date on which Landlord advises Tenant of the applicable Base Rental rate for the Renewal Term, shall either (i) give Landlord final binding written notice ("Binding Notice") of Tenant's exercise of its 49 52 option, or (ii) if Tenant disagrees with Landlord's determination, provide Landlord with written notice of rejection (the "Rejection Notice"). If Tenant fails to provide Landlord with either a Binding Notice or Rejection Notice within such fifteen (15) day period, Tenant's Renewal Option shall be null and void and of no further force and effect. If Tenant provides Landlord with a Binding Notice, Landlord and Tenant shall enter into the Renewal Amendment upon the terms and conditions set forth herein. If Tenant provides Landlord with a Rejection Notice, Landlord and Tenant shall work together in good faith to agree upon the Prevailing Market Base Rental rate for the Premises during the Renewal Term. Upon agreement Tenant shall provide Landlord with Binding Notice and Landlord and Tenant shall enter into the Renewal Amendment in accordance with the terms and conditions hereof. Notwithstanding the foregoing, if Landlord and Tenant are unable to agree upon the Prevailing Market Base Rental rate for the Premises within thirty (30) days after the date on which Tenant provides Landlord with a Rejection Notice, Tenant's Renewal Option shall be null and void and of no force and effect. E. If Tenant is entitled to and properly exercises its Renewal Option, Landlord shall prepare an amendment (the "Renewal Amendment") to reflect changes in the Base Rental, Lease Term, Termination Date and other appropriate terms. The Renewal Amendment shall be: 1. sent to Tenant within a reasonable time after receipt of the Binding Notice; and 2. revised by Landlord to the extent necessary to address any requested revisions by Tenant that are reasonably necessary to accurately reflect the terms and conditions hereof; and 2. executed by Tenant and returned to Landlord within fifteen (15) days after receipt by Tenant. F. For purposes hereof, "Prevailing Market" shall mean the arms length fair market annual rental rate per rentable square foot under renewal leases and amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the Premises in the Building and office buildings comparable to the Building in Stamford, Connecticut. The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any comparison lease, such as rent abatements, construction costs and other concessions and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes. The determination of Prevailing Market shall also take into consideration any reasonably anticipated changes in the Prevailing Market rate from the time such Prevailing Market rate is being determined and the time such Prevailing Market rate will become effective under this Lease. 50 53 IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of the day and year first above written. WITNESS/ATTEST: LANDLORD: EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY By: EOP Operating Limited Partnership, a Delaware limited partnership, its managing member By: Equity Office Properties Trust, a Maryland real estate investment trust, its managing general partner - ----------------------------- Name (print): By: ------------------------------------- Name: - ----------------------------- ----------------------------------- Name (print): Title: ---------------- ---------------------------------- WITNESS/ATTEST: TENANT: TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION - ----------------------------- By: ------------------------------------- Name (print): ---------------- Name: ----------------------------------- Title: ---------------------------------- Name (print): ---------------- 51 EX-10.28 3 EXHIBIT 10.28 1 EXHIBIT 10.28 FIRST LAYER PROPERTY CATASTROPHE EXCESS OF LOSS RETROCESSIONAL 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 XXII 19 TAXES XXIII 20 FEDERAL EXCISE TAX XXIV 20 CURRENCY XXV 21 SERVICE OF SUIT XXVI 21 INTERMEDIARY XXVII 23 1 2 FIRST LAYER PROPERTY CATASTROPHE EXCESS OF LOSS RETROCESSIONAL 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 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 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. 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, 1997. 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 4 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 5 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 6 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 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. "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 7 8 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. 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 will pay an additional premium based upon the pro rata amount of the reinstatement only. The provisional reinstatement 8 9 premium, based on the minimum and deposit premium and finally adjusted as set forth in 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 $1,200,000, payable in equal semi-annual installments of $600,000 on January 1 and July 1. At Agreement expiration, the Retrocedent will adjust the minimum and deposit premium against a rate of 85% of the net written premium (excluding any reinstatement premium) for business classified by the Retrocedent as catastrophe business 9 10 and 5.95% of the net written premium (excluding any reinstatement premium) for all other business covered hereunder. 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 10 11 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 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. 11 12 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 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 12 13 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' 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. 13 14 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. ARTICLE XIV 14 15 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 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 15 16 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 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 16 17 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 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 17 18 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, 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 18 19 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. 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 19 20 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. 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. 20 21 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 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. 21 22 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 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. 22 23 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. 23 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. 24 EX-10.29 4 EXHIBIT 10.29 1 EXHIBIT 10.29 SPECIAL CATASTROPHE EXCESS OF LOSS RETROCESSIONAL 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 1 2 SPECIAL CATASTROPHE EXCESS OF LOSS RETROCESSIONAL 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, 1997, and will remain in full force and effect until 12:01 a.m. Eastern Standard Time on January 1, 2000. 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 5 6 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. 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 6 7 Retrocessionaires, it will be subject to the terms of this Agreement, except as such terms are modified by such acceptance. 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 7 8 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. 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 8 9 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. 9 10 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, 1997, April 1, 1997, July 1, 1997, and October 1, 1997. 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, 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 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, 1999, April 1, 1999, July 1, 1999, and October 1, 1999. At January 1, 1999, 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, 2000, 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. 10 11 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, 1997 through and including December 31, 1999. 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 11 12 relating to income and outgo for the adjustment period have been closed. If an incurred loss is 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 12 13 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 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 13 14 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. 14 15 ARTICLE XII REPORTS AND REMITTANCES 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 15 16 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 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. 16 17 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, 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. 17 18 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 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 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 18 19 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, 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 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 19 20 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 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 20 21 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 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 21 22 with the terms of this Agreement as though such expense had been incurred by the Retrocedent. 22 23 ARTICLE XXI 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. 23 24 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. 24 25 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. 25 26 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 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. 26 27 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. 27 EX-10.30 5 EXHIBIT 10.30 1 EXHIBIT 10.30 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAA-1997 Page 1 of 2 PLACEMENT SLIP RETROCEDENT: TRENWICK AMERICA REINSURANCE CORPORATION TYPE: CATASTROPHE EXCESS OF LOSS REINSURANCE CLASS: Retrocedents participation in all business underwritten by Duncanson & Holt Group. PERIOD: Losses occurring during the period January 1, 1997 through December 31, 1997, both days inclusive. TERRITORIAL SCOPE: As Per Original Policies. LIMITS: THIS REINSURANCE is to indemnify the Reinsured for all losses in excess of an Ultimate Net Loss of US$1,000,000 each and every loss. POLICY FOR up to a further US$4,000,000 each and every loss. REINSTATEMENTS: Two at 100% Additional Premium pro rata as to time and amount. EXCLUSIONS: As Per Original Policies. Employers Liability. MINIMUM AND DEPOSIT PREMIUM: US$75,000. Payable in four installments as follows: 25% at January 1, 1997 25% at April 1, 1997 25% at July 1, 1997 25% at October 1,1997 Adjustable at 1.25% of the Reinsured's Applicable Net Earned Premium Income. March 25, 1997 Alexander Reinsurance Intermediaries, Inc. 2 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAA-1997 Page 2 of 2 GENERAL CONDITIONS: Access to Records Clause Alexander Reinsurance Intermediaries, Inc. Intermediary Clause Arbitration Clause Currency Clause Definition of Loss Occurrence Errors and Omissions Clause Federal Excise Tax Clause Funding of Loss Reserves Clause Insolvency Clause Net Retained Lines Clause Notice of Loss and Loss Settlements Clause Salvage and Subrogation Clause Service of Suit Claim Clause Taxes Clause Ultimate Net Loss Clause 120 Months Commutation Clause (as per original policy basis) 120 Months Sunset Clause LOSS RESERVES: Non-Admitted Reinsurers to provide Letters of Credit for outstanding losses as required by the Retrocedent. WORDING: Subject to Full Wording to be agreed by Leading Underwriter on behalf of all. Signing Slips and any amendments and/or alterations to be agreed by Two Leading Underwriters on behalf of all. PARTICIPANTS: ManuLife Re Corp (ISA) 25 Reliance National 25 London Life 10 AIG 10 SYN 183 10 SYN 1101 10 SYN 957 10 -- 100 === March 25, 1997 Alexander Reinsurance Intermediaries, Inc. 3 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAB-1997 Page 1 of 2 PLACEMENT SLIP RETROCEDENT: TRENWICK AMERICA REINSURANCE CORPORATION TYPE: CATASTROPHE EXCESS OF LOSS REINSURANCE CLASS: Retrocedents participation in all business underwritten by Duncanson & Holt Group. PERIOD: Losses occurring during the period January 1, 1997 through December 31, 1997, both days inclusive. TERRITORIAL SCOPE: As Per Original Policies. LIMITS: THIS REINSURANCE is to indemnify the Reinsured for all losses in excess of an Ultimate Net Loss of US$5,000,000 each and every loss. POLICY FOR up to a further US$20,000,000 each and every loss. REINSTATEMENTS: Two at 100% Additional Premium pro rata as to time and amount. EXCLUSIONS: As Per Original Policies. Employers Liability. MINIMUM AND DEPOSIT PREMIUM: US$30,000. Payable in four installments as follows: 25% at January 1, 1997 25% at April 1, 1997 25% at July 1, 1997 25% at October 1, 1 997 Adjustable at 0.50% of the Reinsured's Applicable Net Earned Premium Income. March 25, 1997 Alexander Reinsurance Intermediaries, Inc. 4 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAB-1997 Page 2 of 2 GENERAL CONDITIONS: Access to Records Clause Alexander Reinsurance Intermediaries, Inc. Intermediary Clause Arbitration Clause Currency Clause Definition of Loss Occurrence Errors and Omissions Clause Federal Excise Tax Clause Funding of Loss Reserves Clause Insolvency Clause Net Retained Lines Clause Notice of Loss and Loss Settlements Clause Salvage and Subrogation Clause Service of Suit Claim Clause Taxes Clause Ultimate Net Loss Clause 120 Months Commutation Clause (as per original policy basis) 120 Months Sunset Clause LOSS RESERVES: Non-Admitted Reinsurers to provide Letters of Credit for outstanding losses as required by the Retrocedent. WORDING: Subject to Full Wording to be agreed by Leading Underwriter on behalf of all. Signing Slips and any amendments and/or alterations to be agreed by Two Leading Underwriters on behalf of all. PARTICIPANTS: ManuLife Re Corp (ISA) 35 CIGNA Re 25 London Life 10 AIG 10 SYN 183 5 SYN 1101 5 SYN 957 10 -- 100 === March 25, 1997 Alexander Reinsurance Intermediaries, Inc. 5 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAC-1997 Page 1 of 2 PLACEMENT SLIP RETROCEDENT: TRENWICK AMERICA REINSURANCE CORPORATION TYPE: CATASTROPHE EXCESS OF LOSS REINSURANCE CLASS: Retrocedents participation in all business underwritten by Duncanson & Holt Group. PERIOD: Losses occurring during the period January 1, 1997 through December 31, 1997, both days inclusive. TERRITORIAL SCOPE: As Per Original Policies. LIMITS: THIS REINSURANCE is to indemnify the Reinsured for all losses in excess of an Ultimate Net Loss of US$25,000,000 each and every loss. POLICY FOR up to a further US$25,000,000 each and every loss. REINSTATEMENTS: Two at 100% Additional Premium pro rata as to time and amount. EXCLUSIONS: As Per Original Policies. Employers Liability. MINIMUM AND DEPOSIT PREMIUM: US$20,000. Payable in four installments as follows: 25% at January 1, 1997 25% at April 1, 1997 25% at July 1, 1997 25% at October 1, 1997 Adjustable at 0.33% of the Reinsured's Applicable Net Earned Premium Income. March 25, 1997 Alexander Reinsurance Intermediaries, Inc. 6 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAD-1997 Page 2 of 2 GENERAL CONDITIONS: Access to Records Clause Alexander Reinsurance Intermediaries, Inc. Intermediary Clause Arbitration Clause Currency Clause Definition of Loss Occurrence Errors and Omissions Clause Federal Excise Tax Clause Funding of Loss Reserves Clause Insolvency Clause Net Retained Lines Clause Notice of Loss and Loss Settlements Clause Salvage and Subrogation Clause Service of Suit Claim Clause Taxes Clause Ultimate Net Loss Clause 120 Months Commutation Clause (as per original policy basis) 120 Months Sunset Clause LOSS RESERVES: Non-Admitted Reinsurers to provide Letters of Credit for outstanding losses as required by the Retrocedent. WORDING: Subject to Full Wording to be agreed by Leading Underwriter on behalf of all. Signing Slips and any amendments and/or alterations to be agreed by Two Leading Underwriters on behalf of all. PARTICIPANTS: ManuLife Re Corp (ISA) 25 CIGNA Re 20 London Life 10 Continental Assurance Company (DSU) 30 AIG 4 SYN 183 1 SYN 1101 2.5 SYN 957 5.0 SYN 959 2.5 --- 100 === March 25, 1997 Alexander Reinsurance Intermediaries, Inc. 7 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAD-1997 Page 1 of 2 PLACEMENT SLIP RETROCEDENT: TRENWICK AMERICA REINSURANCE CORPORATION TYPE: CATASTROPHE EXCESS OF LOSS REINSURANCE CLASS: Retrocedents participation in all business underwritten by Duncanson & Holt Group. PERIOD: Losses occurring during the period January 1, 1997 through December 31, 1997, both days inclusive. TERRITORIAL SCOPE: As Per Original Policies. LIMITS: THIS REINSURANCE is to indemnify the Reinsured for all losses in excess of an Ultimate Net Loss of US$50,000,000 each and every loss. POLICY FOR up to a further US$50,000,000 each and every loss. REINSTATEMENTS: Two at 100% Additional Premium pro rata as to time and amount. EXCLUSIONS: As Per Original Policies. Employers Liability. MINIMUM AND DEPOSIT PREMIUM: US$20,000. Payable in four installments as follows: 25% at January 1, 1997 25% at April 1, 1997 25% at July 1, 1997 25% at October 1, 1997 Adjustable at 0.33% of the Reinsured's Applicable Net Earned Premium Income. March 25, 1997 Alexander Reinsurance Intermediaries, Inc. 8 ALEXANDER REINSURANCE INTERMEDIARIES, INC Trenwick America Reinsurance Corp. TBAC-1997 Page 2 of 2 GENERAL CONDITIONS: Access to Records Clause Alexander Reinsurance Intermediaries, Inc. Intermediary Clause Arbitration Clause Currency Clause Definition of Loss Occurrence Errors and Omissions Clause Federal Excise Tax Clause Funding of Loss Reserves Clause Insolvency Clause Net Retained Lines Clause Notice of Loss and Loss Settlements Clause Salvage and Subrogation Clause Service of Suit Claim Clause Taxes Clause Ultimate Net Loss Clause 120 Months Commutation Clause (as per original policy basis) 120 Months Sunset Clause LOSS RESERVES: Non-Admitted Reinsurers to provide Letters of Credit for outstanding losses as required by the Retrocedent. WORDING: Subject to Full Wording to be agreed by Leading Underwriter on behalf of all. Signing Slips and any amendments and/or alterations to be agreed by Two Leading Underwriters on behalf of all. PARTICIPANTS: ManuLife Re Corp (ISA) 25 CIGNA Re 20 London Life 10 Continental Assurance Company (DSU) 21.5 AIG 5 SYN 183 1 SYN 1101 5 SYN 957 10 SYN 959 2.5 --- 100 === March 25, 1997 Alexander Reinsurance Intermediaries, Inc. EX-10.31 6 EXHIBIT 10.31 1 1 EXHIBIT 10.31 FIRST COINSURED AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "AGREEMENT") In consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinafter set forth THE SUBSCRIBING REINSURERS EXECUTING THE INTERESTS & LIABILITIES CONTRACTS ATTACHED TO AND FORMING A PART OF THIS AGREEMENT (hereinafter referred to as the "REINSURER") does hereby indemnify, as herein provided and specified, TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "REINSURED") 2 2 ARTICLE AND PAGE NUMBER 1. BUSINESS COVERED 3 2. TERM 3 3. TERRITORY 4 4. RETENTION, REINSURER'S SHARE, AND LIMIT 4 5. OTHER REINSURANCE 6 6. LOSS SETTLEMENTS 6 7. REINSURANCE PREMIUM 7 8. ADDITIONAL PREMIUM 7 9. EXPERIENCE ACCOUNT 7 10. REINSURER'S MARGIN 8 11. FUNDS WITHHELD 8 12. COMMUTATION 10 13. REPORTS AND REMITTANCES 11 14. TAXES 12 15. COVENANTS OF THE REINSURED 12 16. DEFINITIONS 13 17. ULTIMATE NET LOSS 14 18. NET RETAINED LINES 14 19. RIGHT OF OFFSET 15 20. ERRORS AND OMISSIONS 15 21. CURRENCY 16 22. EXTRA CONTRACTUAL OBLIGATIONS 16 23. EXCESS OF ORIGINAL POLICY LIMITS LOSS 16 24. ARBITRATION 17 25. ACCESS TO RECORDS 18 26. INSOLVENCY 18 27. GOVERNING LAW 19 28. SERVICE OF SUIT 19 29. AMENDMENTS AND ALTERATIONS 20 30. ASSIGNMENT 20 31. NO THIRD PARTY RIGHTS 20 32. NO IMPLIED WAIVER 20 33. SECURITY 20 34. MERGERS AND ACQUISITIONS 21 35. INTERMEDIARY 21 3 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 in excess of the retention 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 be the period commencing at 12:01 a.m., Eastern Standard Time, January 1, 1997 (the "EFFECTIVE DATE") through to and including the earlier of 11:59 p.m., Eastern Standard Time, December 31, 1997 or the date on which this Agreement is otherwise canceled as provided for below (the "EXPIRATION DATE"). This Agreement may not be canceled by the Reinsured. The Reinsurer shall have the right to 4 4 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 53% of Subject Earned Premium. The "REINSURER'S SHARE" under Limit A shall be determined as follows: If the Ultimate Net Loss is less than 53% of 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%, Where: 5 5 "A" is equal to 193.0% 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 53% of Subject Earned Premium. UNDER NO CIRCUMSTANCES SHALL THE REINSURER'S AGGREGATE LIMIT OF LIABILITY FOR ULTIMATE NET LOSS UNDER THIS LIMIT A EXCEED 193.0% 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 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 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 27.5% of the Reinsurance Premium paid; and "D" is equal to the amount of Ultimate Net Loss in excess of 90% of 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 27.5% 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: 6 6 (1) 220.5% 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) $36,250,000 plus the amount of Ultimate Net loss covered under Limit A that exceeds 193.0% 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", and "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 - OTHER REINSURANCE The Reinsured is hereby granted permission to carry Aggregate Excess of Loss Reinsurance as specified in the SECOND COINSURED AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT between Continental Casualty Company, Centre Reinsurance Company of New York, and the Reinsured as attached hereto and coverage further described as follows: 14% of Subject Earned Premium in excess of 67% of Subject Earned Premium in the annual aggregate; and $3 million in excess of 92% of Subject Earned Premium in the annual aggregate, it being understood and agreed that, for all purposes of this Agreement, including the calculation of the Reinsurance Premium, the Retention, the Limits, and the Ultimate Net Loss hereunder, any amounts recoverable thereunder shall be ignored. ARTICLE 6 - 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 balance 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 LOSS", 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. 7 7 ARTICLE 7 - REINSURANCE PREMIUM Subject to the article entitled "FUNDS WITHHELD", the Reinsured shall pay to the Reinsurer a premium (the "REINSURANCE PREMIUM") equal to 7.25% of the projected Subject Earned Premium, payable in equal quarterly installments in advance, subject to a maximum Reinsurance Premium equal to $18,125,000. Within thirty (30) days following the end of each calendar quarter the Reinsured shall make appropriate adjustments for the amount by which 7.25% 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. ARTICLE 8 - 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 193% 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 put forth 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 193.0% of the Reinsurance Premium paid to date, exceeds or is less than the amounts of Additional Premiums previously paid by the Reinsured. ARTICLE 9 - 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 31 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 8 8 (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". 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, 1997, 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 Credits for each calendar year, or portion thereof, since the Effective Date of this Agreement. ARTICLE 10 - REINSURER'S MARGIN The Reinsurer's margin (the "REINSURER'S MARGIN") shall be equal to 7.0% of the Reinsurance Premium payable under this Agreement, payable in equal quarterly installments in advance on the first day of each calendar quarter. ARTICLE 11 - 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 9 9 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 31 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. 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 account 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, 1997, 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 Credits for each calendar year, or portion thereof, since the Effective Date of this Agreement. At the Reinsurer's option, 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, 2011. 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 shall cause the whole of the Funds Withheld Balance to, upon demand of the Reinsurer, become immediately due and payable, together with all accrued interest and other unpaid sums owing in relation thereto. 10 10 (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 (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 12 - COMMUTATION (APPLICABLE TO CENTRE RE'S PARTICIPATION ONLY) Subject to the terms of this article, the Reinsured may, at its sole option, commute this Agreement at any December 31, beginning on December 31, 2001, subject to ninety (90) days prior written notice by the Reinsured to the Reinsurer by registered or certified mail, provided that as a condition precedent to this right of commutation the Reinsured commutes all prior reinsurance agreements in existence between the Reinsurer and the Reinsured at such date. Such prior reinsurance agreements consist of Coinsured Aggregate Excess of Loss Agreements incepting on January 1, 1994, January 1, 1995, and January 1, 1996. 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: 11 11 (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 the Reinsurer and the 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 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 13 - 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 12 12 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. 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 1, as published in the Wall Street Journal, plus 250 basis points. ARTICLE 14 - 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 15 - 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 13 13 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. 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 16 - 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 "hereunder", "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 $200 million. "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. 14 14 ARTICLE 17 - 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 Loss after making deductions for all recoveries, salvages, subrogations and all claims on inuring reinsurance, whether collectible or not. 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 is 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. For the purposes of this Agreement, the maximum amount that any one loss occurrence from business underwritten by the Reinsured on behalf of Duncanson & Holt (a subsidiary of UNUM Corp., Portland, Maine) may contribute to the Ultimate Net Loss shall be equal to $10 million. ARTICLE 18 - 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. 15 15 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 19 - 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. 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 to the Reinsurer by the Reinsured. 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 20 - 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. 16 16 ARTICLE 21 - 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 22 - 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. "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 23 - 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. 17 17 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. ARTICLE 24 - 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 18 18 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. 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 25 - 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 26 - 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 to 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 19 19 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. 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 27 -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 28 - 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. 20 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 29 - 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 30 - 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 31 - 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 32 - 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 33 - 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. 21 21 ARTICLE 34 - 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 35 - 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. 22 1 SECOND COINSURED AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "AGREEMENT") In consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinafter set forth THE SUBSCRIBING REINSURERS EXECUTING THE INTERESTS & LIABILITIES CONTRACTS ATTACHED TO AND FORMING A PART OF THIS AGREEMENT (hereinafter referred to as the "REINSURER") does hereby indemnify, as herein provided and specified, TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "REINSURED") 23 2 ARTICLE AND PAGE NUMBER 1. BUSINESS COVERED 3 2. TERM 3 3. TERRITORY 4 4. RETENTION, REINSURER'S SHARE, AND LIMIT 4 5. OTHER REINSURANCE 6 6. LOSS SETTLEMENTS 6 7. REINSURANCE PREMIUM 7 8. REINSURER'S MARGIN 7 9. FUNDS WITHHELD 7 10. COMMUTATION 9 11. REPORTS AND REMITTANCES 10 12. TAXES 11 13. COVENANTS OF THE REINSURED 11 14. DEFINITIONS 12 15. ULTIMATE NET LOSS 12 16. NET RETAINED LINES 13 17. RIGHT OF OFFSET 13 18. ERRORS AND OMISSIONS 14 19. CURRENCY 14 20. EXTRA CONTRACTUAL OBLIGATIONS 14 21. EXCESS OF ORIGINAL POLICY LIMITS LOSS 15 22. ARBITRATION 16 23. ACCESS TO RECORDS 17 24. INSOLVENCY 17 25. GOVERNING LAW 18 26. SERVICE OF SUIT 18 27. AMENDMENTS AND ALTERATIONS 19 28. ASSIGNMENT 19 29. NO THIRD PARTY RIGHTS 19 30. NO IMPLIED WAIVER 19 31. SECURITY 19 32. MERGERS AND ACQUISITIONS 20 33. INTERMEDIARY 20 24 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 in excess of the retention 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 be the period commencing at 12:01 a.m., Eastern Standard Time, January 1, 1997 (the "EFFECTIVE DATE") through to and including the earlier of 11:59 p.m., Eastern Standard Time, December 31, 1997 or the date on which this Agreement is otherwise canceled as provided for below (the "EXPIRATION DATE"). This Agreement may not be canceled by the Reinsured. The Reinsurer shall have the right to 25 4 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 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 Funds Withheld account (or zero if the Funds Withheld 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 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 Funds Withheld account (or zero if the Funds Withheld 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 67% of Subject Earned Premium. The "REINSURER'S SHARE" under Limit A shall be determined as follows: If the Ultimate Net Loss is less than 67% of 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%, Where: 26 5 "A" is equal to 224.0% of the Reinsurance Premium paid, and "B" is equal to the amount of Ultimate Net Loss in excess of 67% of Subject Earned Premium. UNDER NO CIRCUMSTANCES SHALL THE REINSURER'S AGGREGATE LIMIT OF LIABILITY FOR ULTIMATE NET LOSS UNDER THIS LIMIT A EXCEED 224.0% OF THE REINSURANCE PREMIUM PAID. 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 92% of Subject Earned Premium. The "REINSURER'S SHARE" under Limit B shall be determined as follows: If the Ultimate Net Loss is less than 92% of 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 $3.0 million; and "D" is equal to the amount of Ultimate Net Loss in excess of 92% of 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 $3.0 MILLION. 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: 27 6 (1) 224.0% of Reinsurance Premium paid, plus $3 million; or (2) $38.0 million. 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", and "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 - OTHER REINSURANCE The Reinsured is hereby granted permission to carry Aggregate Excess of Loss Reinsurance as specified in the FIRST COINSURED AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT between Centre Reinsurance Company of New York, Continental Casualty Company, and the Reinsured as attached hereto and coverage further described as follows: 14% of Subject Earned Premium in excess of 53% of Subject Earned Premium in the annual aggregate; and 2% of Subject Earned Premium in excess of 90% of Subject Earned Premium in the annual aggregate, it being understood and agreed that, for all purposes of this Agreement, including the calculation of the Reinsurance Premium, the Retention, the Limits, and the Ultimate Net Loss hereunder, any amounts recoverable thereunder shall be ignored. ARTICLE 6 - 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 balance 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 LOSS", 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. 28 7 ARTICLE 7 - REINSURANCE PREMIUM Subject to the article entitled "FUNDS WITHHELD", the Reinsured shall pay to the Reinsurer a premium (the "REINSURANCE PREMIUM") equal to 6.25% of the projected Subject Earned Premium, payable in equal quarterly installments in advance on the first day of each calendar quarter, subject to a maximum Reinsurance Premium equal to $15,625,000. Within thirty (30) days following the end of each calendar quarter the Reinsured shall make appropriate adjustments for the amount by which 6.25% 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. ARTICLE 8 - REINSURER'S MARGIN The Reinsurer's margin (the "REINSURER'S MARGIN") shall be equal to 9.0% of the Reinsurance Premium payable under this Agreement, payable in equal quarterly installments in advance on the first day of each calendar quarter. ARTICLE 9 - FUNDS WITHHELD Subject to the terms herein, the Reinsured shall retain the Reinsurance Premium 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, 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 31 shall be defined as: (1) 100% of the Reinsurance Premium 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. The Reinsurance Premium shall be credited to the Funds Withheld Balance on the date such 29 8 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 the 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 account for that calendar year (or portion thereof), determined as if the Reinsurance Premium as finally computed was paid on January 1, 1997, multiplied by 8.5% (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 Credits for each calendar year, or portion thereof, since the Effective Date of this Agreement. At the Reinsurer's option, 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, 2011. 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 shall cause the whole of the Funds Withheld Balance to, 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 30 9 (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 10 - COMMUTATION Subject to the terms of this article, the Reinsured may, at its sole option, commute this Agreement at any December 31, beginning on December 31, 2001, 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 Funds Withheld 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 Funds Withheld 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 the Reinsurer and the 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. 31 10 (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 Funds Withheld 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 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. Non-Commute Charge If the Reinsured does not commute this Agreement on or before December 31, 2002, the Reinsured shall pay to the Reinsurer each January 1 thereafter, beginning January 1, 2003, an annual fee (the "Non-Commute Fee") of $100,000 until such time as this Agreement is commuted. The Non-Commute Fees shall not be included in the calculation of the Funds Withheld Balance and shall be retained 100% by the Reinsurer. ARTICLE 11 - 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. 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. 32 11 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. 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. 6. 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 1, as published in the Wall Street Journal, plus 250 basis points. ARTICLE 12 - 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 13 - 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 Funds Withheld account (or zero if the Funds Withheld 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 Funds Withheld account (or zero if the Funds Withheld Balance is negative) upon 33 12 written notice by the Reinsurer to the Reinsured by registered or certified mail. 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 14 - 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 "hereunder", "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 $200 million. ARTICLE 15 - 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 Loss after making deductions for all recoveries, salvages, subrogations and all claims on inuring reinsurance, whether collectible or not. 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. 34 13 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 is 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. For the purposes of this Agreement, the maximum amount that any one loss occurrence from business underwritten by the Reinsured on behalf of Duncanson & Holt (a subsidiary of UNUM Corp., Portland, Maine) may contribute to the Ultimate Net Loss shall be equal to $10 million. ARTICLE 16 - 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 17 - 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. In extension and not in limitation to the above, the Reinsurer shall have an absolute right to 35 14 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 to the Reinsurer by the Reinsured. 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 Funds Withheld account (or zero if the Funds Withheld 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 Funds Withheld account (or zero if the Funds Withheld Balance is negative) without further notice. ARTICLE 18 - 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 19 - 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 20 - 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. "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 36 15 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 21 - 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. ARTICLE 22 - ARBITRATION 37 16 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 38 17 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. 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 23 - 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 24 - 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 to 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. 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 39 18 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 25 -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 26 - 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. 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 40 19 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 27 - 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 28 - 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 29 - 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 30 - 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 31 - 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. 41 20 ARTICLE 32 - 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 33 - 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. 42 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. 43 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 resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. 44 3 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 thereat. 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, 45 4 (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" includes all forms of radioactive contamination of property; "property damage" includes all forms of radioactive contamination of property. 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 Reassured 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 Reassured 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 Insurance Bureau of Canada or the Insurers' Advisory Organization. *NOTE: THE WORDS PRINTED IN ITALICS 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. 46 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA (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: (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 this Clause, 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 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 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) This Clause shall not extend to risks using radioactive isotopes in any form where the nuclear 47 2 exposure is not considered by the Reassured to be 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. (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 reinsurance does not cover any loss or liability accruing to the Reassured, 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; or (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 Reassured, whether new, renewal or replacement, which become effective on or after December 31, 1992. 48 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA (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 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 49 2 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; (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 50 3 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. 51 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY - (BOILER AND MACHINERY POLICIES) - 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 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. 52 NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) (1994) (WORLDWIDE EXCLUDING U.S.A. AND CANADA) (Wherever the word "Agreement" appears in this Clause, it shall be deemed to read "Agreement", "Contract", "Policy" or whatever other word is employed throughout the text of the reinsurance agreement to which this Clause is attached to designate the attached reinsurance document.) 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 (other than 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 (I) above) used or having been used for: (a) the generation of nuclear energy; or (b) the Production, Use or Storage of 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 of 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. 53 2 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. Definitions "Nuclear Material" means: (i) Nuclear fuel, other than natural uranium and depleted uranium, capable of producing energy by a self-sustaining chain process of nuclear fission 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 utilization 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. 54 3 "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 non-reactor Nuclear Installations, any area where the level of radioactivity requires the provision of a biological shield. N.M.A. 1975(a) April 1, 1994 55 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. 56 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 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. 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 operation of paragraphs (1), (2) and (3) hereof, this 57 2 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) The Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. 58 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. 59 INSOLVENCY FUNDS EXCLUSION CLAUSE This Contract 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. EX-10.32 7 EXHIBIT 10.32 1 Exhibit 10.32 Agreement No.973676001 INTERESTS AND LIABILITIES AGREEMENT IT IS HEREBY MUTUALLY AGREED BY TRENWICK AMERICA REINSURANCE CORPORATION of Stamford, Connecticut (hereinafter referred to as the "Company") and CERTAIN INSURANCE AND/OR REINSURANCE COMPANIES (hereinafter referred to as the "Retrocessionaire") That the Retrocessionaire shall have a 30.00% participation in the interests and liabilities of the Company as set forth in the instrument attached hereto entitled FIRST CASUALTY RETROCESSIONAL EXCESS OF LOSS REINSURANCE AGREEMENT. Such participation shall be several and not joint with the participation of other retrocessionaires and the retrocessionaires shall under no circumstances participate in the interests and liabilities, (if any) of the other retrocessionaires in the said instrument. This interest and liabilities agreement shall attach January 1, 1997 and is subject to the term and cancellation provisions, if any, contained in Article VI of the attached instrument (FIRST CASUALTY RETROCESSIONAL EXCESS OF LOSS REINSURANCE AGREEMENT) which are hereby incorporated by reference into this agreement and which shall apply as though they had been specifically provided for herein. The instrument to which this agreement is attached, and therefore the interests and liabilities of the retrocessionaires, may be changed, altered and amended as the parties may agree, provided such change, alteration and amendment is evidenced by endorsement to this agreement executed by the Company and the retrocessionaire. In witness whereof, the parties hereto have executed this agreement in duplicate by their duly authorised representatives as of the undermentioned dates. At this day of 19 For and on behalf of : TRENWICK AMERICA REINSURANCE CORPORATION By _________________________________________________ 2 and in London, England, this day of 1997 For and on behalf of : CERTAIN INSURANCE AND/OR REINSURANCE COMPANIES (as per the schedule attached) Hereon: 30.00% 3 INDEX to the FIRST CASUALTY RETROCESSIONAL EXCESS OF LOSS REINSURANCE AGREEMENT
Page Number ----------- ARTICLE I - BUSINESS COVERED 1 ARTICLE II - EXCLUSIONS 1, 2 ARTICLE III - AMOUNT OF COVER 3 ARTICLE IV - ULTIMATE NET LOSS 3, 4 ARTICLE V - COSTS 4 ARTICLE VI - TERM AND CANCELLATION 4, 5 ARTICLE VII - LIABILITY OF RETROCESSIONAIRE 5 ARTICLE VIII - ERRORS & OMISSIONS 5 ARTICLE IX - NET RETAINED LINES 5 ARTICLE X - TERRITORY 6 ARTICLE XI - PREMIUM 6 ARTICLE XII - OFFSET 6 ARTICLE XIII - LETTER OF CREDIT 7 ARTICLE XIV - NOTICE OF LOSS AND - LOSS SETTLEMENTS 8 ARTICLE XV - AUTOMATIC REINSTATEMENT 8 ARTICLE XVI - EXCESS OF ORIGINAL POLICY LIMITS 8, 9 ARTICLE XVII - EXTRA CONTRACTUAL OBLIGATIONS 9
4
ARTICLE XVIII - ACCESS TO RECORDS 9 ARTICLE XIX - CURRENCY 9, 10 ARTICLE XX - ARBITRATION 10 ARTICLE XXI - SERVICE OF SUIT 10, 11 ARTICLE XXII - INSOLVENCY 11, 12 ARTICLE XXIII - INTERMEDIARY 12
5 Agreement No.973676001 FIRST CASUALTY RETROCESSIONAL EXCESS OF LOSS REINSURANCE AGREEMENT between TRENWICK AMERICA REINSURANCE CORPORATION of Stamford, Connecticut (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 the AMOUNT OF COVER ARTICLE, 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 EXCLUSIONS This Agreement does not apply to and specifically excludes: 1. Business classified by the Company as Surety. 2. Insolvency and Financial Guaranty. 3. Business classified by the Company as Aviation. 4. Business classified by the Company as Credit Insurance. 5. War risks. Page 1 6 6. Nuclear Energy Risks for those territories as appropriate in accordance with the clauses set out below and as are attached hereto:- (a) NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. - NMA 1590. (b) NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA - NMA 1979. (c) NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) (1994) - WORLDWIDE EXCLUDING U.S.A. AND CANADA - NMA 1975A. 7. Business classified by the Company as Directors and Officers Liability. 8. Business classified by the Company as Securities Exchange Act Liability. 9. Class I Railroads. 10. Surplus relief. 11. Funding plans. 12. Business classified by the Company as ocean marine. This exclusion, however, shall not apply with respect to legal liability arising out of the ownership, operation use of or navigation of ships or vessels: A. Classified as yachts, small pleasure crafts or sports fishing vessels; or B. Operating exclusively in inland and/or coastal waters. 13. Insolvency Funds as per the Insolvency Funds Exclusion Clause, attached hereto. 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 (except as regards exclusions 2, 5, 6 and 13) but only until discovery by the Company and, pending cancellation of such risk, for a period of 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 (except nos. 2, 5, 6 and 13) 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". Page 2 7 ARTICLE III AMOUNT OF COVER No claim shall be made under this Agreement unless and until the Company shall have first sustained, as a result of any one risk, and/or in the aggregate where applicable, an ultimate net loss in excess of $500,000 and the Retrocessionaires shall be liable for the amount in excess of $500,000 ultimate net loss, any one risk, and/or in the aggregate where applicable; but the sum recoverable shall not exceed $1,500,000 ultimate net loss any one risk and/or in the aggregate where applicable. 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 "loss". 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 shall not exceed 275.0% of the premium hereunder or $10,000,000, whichever is greater. The Company shall bear a further retention in respect of Section B of the TERM AND CANCELLATION ARTICLE of up to 5% of the Estimated Premium under the 1987 and 1988 Reinsurance Agreement separately but only after paid losses under this Agreement exceed 17% of the Subject Matter Gross Net Written Premium Income. The Company is permitted to purchase facultative, share, or surplus reinsurance in respect of any loss provided that such reinsurance shall inure to the benefit of the Company and/or the Retrocessionaire. It is further understood and agreed 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 IV 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 the EXTRA CONTRACTUAL OBLIGATIONS ARTICLE hereof and 80% of any Loss in Excess of Original Policy Limits as defined in the EXCESS OF ORIGINAL POLICY LIMITS ARTICLE hereof) in settlement of losses or liability under its original policies after making deductions for all recoveries, all salvages and all claims Page 3 8 upon other reinsurance 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 include such expense within the limit of indemnity. 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 V COSTS In the event of a loss arising to which the Retrocessionaires hereon may be liable to contribute, they shall contribute to the adjustment costs incurred by the Company in the ratio that their proportion of the loss as finally settled bears to that total of the whole amount of such Ultimate Net Loss. Adjustment costs shall exclude all office expense of the Company, all expenses for salaried employees and general retainer fees for counsel normally paid by the Company. ARTICLE VI TERM AND CANCELLATION Section A This Agreement shall cover losses on new and renewal policies of the Company becoming effective during the period commencing 1st January, 1997 and ending 31st December, 1997 Local Standard Time. Upon expiry the liability of the Retrocessionaires, with respect to policies in force on the expiry date, 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 months plus odd time. Odd time is defined as an additional twelve months. 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 the AMOUNT OF COVER ARTICLE 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. Page 4 9 With respect to General liability business written on an occurrence basis, all losses and claims shall be reported with full particulars by the Company to the Retrocessionaire within five years of the first loss report to the Company. No liability shall attach hereunder for any such loss or claim not reported within this period. Section B This Agreement shall also cover losses occurring on risks attaching during the period commencing 1st January, 1987 and ending 31st December, 1988, but only in respect of General Liability written on an occurrence basis where the loss is first reported to the Retrocessionaires during the period commencing 1st January, 1997 and ending 31st December, 1997. ARTICLE VII LIABILITY OF THE RETROCESSIONAIRE The Liability of the Retrocessionaire shall, subject always to the terms and conditions of this Agreement, 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. ARTICLE VIII 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 Reinsurer beyond the period required to afford coverage in accordance with the TERM AND CANCELLATION ARTICLE. 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. Page 5 10 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 Reinsurer, whether specific or general, any amount which may have become due from them, whether such inability arises from the insolvency of such other Reinsurer or otherwise. ARTICLE X TERRITORY This Agreement shall apply wherever the Company's policies apply. ARTICLE XI PREMIUM The Company shall pay to the Retrocessionaire a Deposit Premium of $918,000 payable $183,600 on 31st March, 1997, $183,600 on 30th June, 1997, $275,400 on 30th September, 1997 and $275,400 on 31st December, 1997. At the end of each calendar quarter the Company shall report to the Retrocessionaire the accumulated Gross Net Written Premium Income. The Reinsurance Premium hereunder shall be calculated by applying a gross cession rate of 20%, less the 3% rate withheld as an aggregate loss deductible, as outlined in the AMOUNT OF COVER ARTICLE, 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 expiry. 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. 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. ARTICLE XII OFFSET The Company and any Retrocessionaires may offset any balances, whether on account of premium, claims, losses, adjustment expense, salvage or any other amount due from one party to the other under this Agreement. Page 6 11 ARTICLE XIII LETTER OF CREDIT (This Clause is only applicable to those Retrocessionaires who cannot qualify for credit by the State having jurisdiction over the Company's loss reserves and unearned premium reserves). As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when they shall file with the Insurance Department or set up on its books reserves for losses covered hereunder or unearned premium reserves on policies subject to this Agreement, which it shall be required to set up by law it will forward to the Retrocessionaires a statement showing the proportion of such loss reserves and unearned premium reserves which is applicable to them. The Retrocessionaires hereby agree that they will apply for and secure delivery to the Company a clean irrevocable and unconditional Letter of Credit issued by a bank chosen by the Retrocessionaire and acceptable to the appropriate insurance authorities, in an amount equal to the Retrocessionaires' proportion of the loss reserves calculated in accordance with a formula agreed with Retrocessionaires, and allocated loss expenses relating thereto or unearned premium reserves as shown in the statement prepared by the Company. The Letter of Credit shall be "Evergreen" and shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date, the bank shall notify the Company by certified or registered mail that it elects not to consider the Letter of Credit extended for any additional period. The bank chosen for the issuance of the Letter of Credit shall have no responsibility whatsoever in connection with the proprietary of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorised representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than semiannually, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Retrocessionaire's share of outstanding losses and allocated expenses relating thereto or unearned premium reserves on policies subject to this Agreement. If the statement shows that the Retrocessionaire's share of such losses and allocated loss expenses and/or the unearned premium reserves, exceeds the balance of credit as of the statement date, the Retrocessionaire shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit Page 7 12 by the amount of such difference. If, however, the statement shows that the Retrocessionaire's share of outstanding losses plus allocated loss expenses or unearned premium reserves, relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Retrocessionaire, 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 NOTICE OF LOSS AND LOSS SETTLEMENTS In the event of a loss which in the Company's opinion is likely to give rise to a claim hereunder, and which exceeds 50% of the deductible of $500,000 prompt notice thereof shall be given to the Retrocessionaire through Ballantyne, McKean & Sullivan Limited, Latham House, 16 Minories, London EC3N 1AN. All loss settlements made by the Company, provided same are within the terms of this Agreement, shall be unconditionally binding upon the Retrocessionaire and amounts falling to the share of the Retrocessionaire shall be immediately payable by it upon reasonable evidence of the amount paid or to be paid being given by the Company. ARTICLE XV AUTOMATIC 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 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. The date on which an Excess of Policy Limit amount is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence and furthermore, for the purposes hereof be deemed to follow the Loss Reporting Page 8 13 provisions of this Agreement. With regard to policies issued on a claims made basis such date shall be the date the claim was first made. 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 any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. For the purposes of this Article, the word 'loss' shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy. ARTICLE XVII EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the Company within the limits hereof, where the ultimate net loss includes any Extra Contractual Obligations. "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 following: failure by the Company 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 an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence and furthermore, for the purposes hereof be deemed to follow the Loss Reporting provisions of this Agreement. With regard to policies issued on a claims made basis such date shall be the date the claim was first made. However, this Article shall not apply where the loss has been incurred due to fraud of 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 organisation or party involved in the presentation, defense or settlement of any claim covered hereunder. ARTICLE XVIII ACCESS TO RECORDS The Retrocessionaire or its duly accredited representatives shall have the right after providing reasonable notice to inspect 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 XIX Page 9 14 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. 3. In the administration of the two preceding paragraphs to deal impartially with any such adjustment. ARTICLE XX ARBITRATION Any difference of opinion between the Company and the Retrocessionaires 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 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 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 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, or disinterested Underwriters at Lloyd's, London. 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 Retrocessionaires. Page 10 15 ARTICLE XXI SERVICE OF SUIT (U.S.A.) (Applicable only to those Retrocessionaires who are domiciled outside the United States of America). In the event of the failure of Retrocessionaires hereon to pay any amount claimed to be due hereunder, Retrocessionaires hereon, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States of America. Nothing in this Article constitutes or should be understood to constitute a waiver of Retrocessionaires 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 Messrs Mendes and Mount, 750 Seventh Avenue, New York, N.Y. 10019-6829, and that in any suit instituted against any one of them upon this Agreement, Retrocessionaires will abide by the final decision of such Court or of any Appellate Court in the event of an appeal. The above-named are authorised and directed to accept service of process on behalf of Retrocessionaires in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance on behalf of Retrocessionaires in the event such a suit shall be instituted. Further pursuant to any statute of any state, territory or district of the United States of America which makes provision therefor Retrocessionaires hereby designate 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 their true and lawful attorney upon whom may be served any lawful process in action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement, and hereby designate the above-named as the firm to whom the said officer is authorized to mail such process or a true copy thereof. ARTICLE XXII INSOLVENCY In the event of the insolvency of the Company, this reinsurance 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 Page 11 16 or statutory successor of the Company has 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 Retrocessionaires 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 their own expense in the proceeding where such claim is to be adjudicated, any defense or defenses that they may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Retrocessionaires 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 Retrocessionaires. 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 the reinsurance Agreement as though such expense has been incurred by the Company. ARTICLE XXIII INTERMEDIARY Ballantyne, McKean & Sullivan Ltd., Latham House, 16, Minories, London, EC3N 1AN, is hereby recognised 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 expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Retrocessionaires through Ballantyne, McKean & Sullivan Ltd. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Retrocessionaires. Payments by the Retrocessionaires to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. Page 12 17 INSOLVENCY FUNDS EXCLUSION CLAUSE This Contract excludes all liability of the Reinsured 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 fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Reinsured 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. 18 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A. (1) This Contract 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 contract 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 19 (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. (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 Contract 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, 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 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 20 (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 organisation. 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 21 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 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, (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" includes all forms of radioactive contamination of property 22 "property damage" includes all forms of contamination of property 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 Reassured 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 Reassured 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 contained between asterisks 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. AMENDMENT TO DEFINITION OF WASTE It is agreed that the definition of "Waste" contained in this Clause is amended to read as follows: "WASTE" MEANS ANY MATERIAL (a) containing by-product material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (b) resulting from the operation by any person or organisation of any nuclear facility 23 included under the first two paragraphs of the definition of nuclear facilitiy. In accordance with NMA 1590 (21/9/67) 24 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA 1. This Contract 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 Contract 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 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 enforcible 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 Contract 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 25 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 enforcible 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; 26 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. 27 In accordance with NMA 1979 (11/10/84) 28 NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE) (1994) (WORLDWIDE EXCLUDING U.S.A. & CANADA) This Contract 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 Contract Nuclear Energy Risks shall mean all first party and/or third party insurances or reinsurances (other than 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 (I) above) used or having been used for :- (a) The generation of nuclear energy; or (b) The production Use or Storage of 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 of 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. 29 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. Definitions "Nuclear Material" means: (I) nuclear fuel, other than natural uranium and depleted uranium, capable of producing energy by a self-sustaining chain process of nuclear fission 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; 30 (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 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 non reactor Nuclear Installations, any area where the level of radioactivity requires the provision of a biological shield. In accordance with NMA 1975A (1/4/94) EX-10.33 8 EXHIBIT 10.33 1 Exhibit 10.33 REVERSE FRANCHISE CATASTROPHE EXCESS OF LOSS REINSURANCE (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as "the Company") and SUBSCRIBING REINSURERS AS PER THE ATTACHED INTERESTS & LIABILITIES AGREEMENT (hereinafter referred to as "the Reinsurers") 2 ARTICLE I - BUSINESS COVERED The Reinsurers will indemnify the Company, subject to the limits set forth in the Retention and Limit Article for any loss or losses occurring during the term of this Agreement. This Agreement shall cover all Original Contracts underwritten by the Company and classified by the Company 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, Lightening, 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. All reinsurance for which the Reinsurers 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 Company to which this Agreements applies. Nothing herein will in any manner create any obligations or establish any rights against the Reinsurers 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 April 1, 1997. 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 Reinsurers will indemnify the Company 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 shall only cover losses occurring in the United States of America, the District of Columbia and Canada. ARTICLE V - EXCLUSIONS No reinsurance indemnity will be afforded under this Agreement for: 3 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 Company 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 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 Loss or liability excluded by the Insolvency Funds Exclusion Clause attached to this Agreement. 4 M 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 Company. N All losses sustained by the Company 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 Company'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 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. O 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 contingent business interruption coverages are not subject to this exclusion, provided that these are not part of a transmitter's or distributor's policy. P Auto Collision. The exclusions set forth above will not apply where the Company is obliged to provide coverage by reason of membership in any state plan, pool, facility, joint underwriting association or similar involuntary participation. 5 The Company may submit to the Reinsurers for special acceptance hereunder, business not covered by this Agreement. If said business is accepted by the Reinsurers, it will be subject to the terms of this Agreement, except as such terms are modified by such acceptance. 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 Company, the proportion of such loss or losses that forms part of the Company'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 Company both as regards the original contracts and this Agreement, including 80% of any extra contractual obligations incurred by the Company, 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 Company (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 Company while adjusting such claims, and expenses of other employees of the original reinsured and the Company 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 Company will be excluded. All salvage, 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 Company's ultimate net loss has been ascertained. ARTICLE VII - RETENTION AND LIMIT No claim will be made hereunder unless the Company has first sustained an ultimate net loss in excess of $1,000,000 each and every loss occurrence. The Reinsurers will then be liable for the amount of ultimate net loss in excess of $1,000,000 each and every loss occurrence, 6 but the limit of liability of the Reinsurers will not exceed $2,000,000 with respect to each and every loss occurrence in all. 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 Company retains net for its own account will be included. The amount of the Reinsurers' liability hereunder with respect to any loss or losses will not be increased by the inability of the Company to collect from any other Reinsurers any amounts that may have become due from them, whether such inability arises from the insolvency of such Reinsurers or otherwise. ARTICLE IX - RATE AND PREMIUM For the term of this Agreement, there will be a premium hereon of $150,000 payable on April 1, plus an additional premium equal to 7.5% of all paid losses hereunder, subject to a maximum additional premium of $150,000. The adjustment of the original premium to take into account any such paid losses hereunder shall be made at the anniversary date of this contract and each year thereafter until the losses are finally settled. ARTICLE X - EXTRA CONTRACTUAL OBLIGATIONS This Agreement will extend to cover losses arising from claims related extra contractual obligations whether incurred by the original reinsured or the Company 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. There will be no recovery hereunder for an extra contractual obligation 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 Company, 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 Company. 7 The date on which any extra contractual obligation is incurred by an original reinsured or the Company 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 discussed in the preceding paragraphs. In no event will the total limit of liability of the Reinsurers exceed their applicable limit of liability as set forth in the Retention and Limit Article. ARTICLE XI - RESERVES (This Article is only applicable to those Reinsurers who cannot qualify for credit by each state or governmental authority having jurisdiction over the Company's loss reserves) As regards original contracts issued by the Company coming within the scope of this Agreement, the Company 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 Reinsurers (including loss and loss expense paid by the Company but not recovered from the Reinsurers and loss and loss expense reported and outstanding), which it is required by law to set up, it will forward to the Reinsurers a statement showing the proportion of such loss reserves applicable to them. The Reinsurers hereby agree that they will apply for and secure delivery to the Company of a clean, irrevocable, and unconditional Letter of Credit 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 Company's reserves in an amount equal to the Reinsurers proportion of such reserves as shown in the statement prepared by the Company. Under no circumstances will any amount relating to reserve 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 Company 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 Company, will provide 60 days notice to the Company by registered mail prior to any expiration in the event of nonextension. Notwithstanding any other provisions of this Agreement, the Company or its court-appointed successor in interest may draw upon such credit at any time without diminution because of the insolvency of the Company or of any Reinsurer for one or more of the following purposes only: A To pay the Reinsurers' share or to reimburse the Company for the Reinsurers' share of any loss reinsured by this Agreement, which has not otherwise been paid. 8 B To make refund of any sum in excess of the actual amount required to pay the Reinsurers' 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 Reinsurers' share of reserves for losses under this Agreement. Such cash deposit will be held in an interest bearing account separate from the Company's other assets, and interest thereon will accrue to the benefit of the Reinsurers. The issuing bank will have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual interval, or more frequently as agreed but never more frequently than semi-annually, the Company will prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurers' share of reserves for losses. If the statement shows that the Reinsurers' share of such reserves exceeds the balance of credit as of the statement date, the Reinsurers will, within 30 days after receipt of notice of such excess, secure delivery to the Company 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 Reinsurers' share of such reserves is less than the balance of credit as of the statement date, the Company will, within 30 days after receipt of written request from the Reinsurers, 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 XII - LOSS NOTICES AND SETTLEMENTS The Company will advise the Reinsurers promptly of all losses that, in the opinion of the Company, appear to involve the Reinsurers under this Agreement and of all subsequent developments pertaining thereto that, in the opinion of the Company, may materially affect them as well. Inadvertent omission in dispatching the aforementioned notices will in no way affect the obligation of the Reinsurers under this Agreement, providing the Company informs the Reinsurers of such omission promptly upon discovery. The Company 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 Company, provided they are within the terms of this Agreement, will be unconditionally binding on the Reinsurers in proportion to their participation in this Agreement. Amounts due the Company hereunder in the settlement of loss and loss expense will be payable by the Reinsurers immediately upon being furnished by the Company with reasonable evidence of the amount paid or to be paid in excess of the Company's ultimate net loss retention as set forth in the Retention and Limit Article, by reason of any one loss occurrence. 9 ARTICLE XIII - OFFSET The Company and each Reinsurer 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 XIV - SALVAGE AND SUBROGATION The Reinsurers will be credited with their share of salvage and/or subrogation (i.e., reimbursement obtained or recovery made by the Company less 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 Reinsurers (and the Company 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 Company 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 Company prior to any reimbursement for salvage and/or subrogation. ARTICLE XV - WARRANTIES Claims will only be eligible for recovery hereunder if there is an original insured market loss from one event (for first party physical damage only) equal to or less than $2,000,000,000 in the U.S.A., the District of Columbia and Canada. This loss will be determined by the stated values reported in the Property Claims Services Division or the "Insurance Facts" Handbook for U.S. losses. In the event of a market loss involving the U.S.A., the District of Columbia and Canada and countries outside the U.S.A., the District of Columbia and Canada the amount of the market loss shall be understood to mean only that part of the loss pertaining to the U.S.A., the District of Columbia and Canada. In the event that the Property Claims Service is discontinued, or they materially change their methodology in a way that makes them unsuitable for the purposes intended, an alternative source will be used subject to the agreement of the Leading Underwriter and the Company. The final determination of the insured Market Loss shall be established 24 months after the occurrence. However, the Company shall be entitled to make provisional recovery for actual paid losses recoverable under this Agreement based on prior statements of loss by the source mentioned above. Notwithstanding the above, the Company specifically agrees to return all claims monies received from Reinsurers hereon as soon as practicable, in respect of any loss (or losses), if 10 (a) finally determined at above $2,000,000,000 or equivalent in any other currency or (b) when the reserve for such loss, as defined herein is increased to above $2,000,000,000 or equivalent in any other currency, whichever the sooner. No loss shall attach hereunder unless the Company sustain loss from two or more original risks involved in the same loss event. For the purpose of the above, any one risk is defined as all values at one location including all business interruption and/or time element exposures whether by way of Contingent Business Interruption, Suppliers or Customers extensions. ARTICLE XVI - DELAYS, ERRORS AND 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 or omission is rectified immediately upon discovery. The liability of the Reinsurers under this Agreement will in no event exceed the limits specified in the Retention and Limit Article, nor will the Reinsurers' liability be extended to cover any risks, perils, or classes of insurance excluded herein except as set forth in the Exclusions Article. ARTICLE XVII - AMENDMENTS This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the Company and the Reinsurers by addenda hereto, which will then constitute a part of this Agreement. ARTICLE XVIII - ACCESS TO RECORDS Provided that the Company has been given reasonable notice, the Reinsurers will have the right to inspect at any reasonable time, through their designated representatives, all records of the Company that pertain in any way to this Agreement. ARTICLE XIX-INSOLVENCY In the event of the Company's insolvency, the reinsurance under this Agreement will be payable by the Reinsurers directly to the Company, its liquidator, receiver, conservator or statutory successor on the basis of the Company's liability under the original contracts without diminution because of the Company's insolvency or because the liquidator; receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claims, subject however, to the right of the Reinsurers to offset from such funds due hereunder, any sums that may be payable to it by said insolvent Company in accordance with the Offset Article 11 As a condition precedent to the Reinsurers foregoing obligation, however, the liquidator, receiver, conservator or statutory successor of the Company will give written notice of the pendency of a claim against the insolvent Company 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 Reinsurers may investigate such claim and interpose, at their own expense, in the proceeding where such claim is to be adjudicated, any defense they may deem available to the Company, its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurers shall be chargeable against the Company, 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 Company solely as a result of the defense undertaken by the Reinsurers. . Where 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 Company. ARTICLE XX-ARBITRATION As a condition precedent to any right of action hereunder, any dispute arising out of this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in the City in which the Company's Head Office is located unless otherwise agreed. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Lloyd's Underwriters. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. In the event that either party should fail to choose an arbitrator within thirty (30) days following a written request by the other party to enter upon arbitration, the requesting party may choose two arbitrators who shall in turn choose an umpire before entering upon arbitration. In the event the two arbitrators fail to agree on an umpire either party shall have the right to submit the matter to the American Arbitration Association in effect at that time. Each party shall present its case to the arbitrators within sixty (60) days following the date of their appointment. The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within sixty (60) days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this clause and communications shall be made by the Company to each of the reinsurers constituting the one party, provided, however, that nothing shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor 12 be construed as changing the liability of the Reinsurer under the terms of this Agreement from several to joint. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. ARTICLE XXI - TAXES The Company will pay all taxes (except Federal Excise Tax) on premiums reported to the Reinsurers on this Agreement. ARTICLE XXII - FEDERAL EXCISE TAX (This Article applies to Reinsurers domiciled outside the United States of America, excepting Lloyd's of London Underwriters and other Reinsurers exempt from Federal Excise Tax.) The Reinsurers 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 Reinsurers will deduct the aforesaid percentage from the return premium payable hereon and the Company or its agent will recover such tax from the United States Government. ARTICLE XXIII - CURRENCY The use of the sign "$" in this Agreement is in reference to United States of America Dollars. Therefore, premiums due the Reinsurers and loss payments due the Company hereunder will be in United States of America Dollars. ARTICLE XXIV - SERVICE OF SUIT (This Article applies to those Reinsurers domiciled outside the United States of America as well as those Reinsurers unauthorized in the Company'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 Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, 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 Reinsurers' 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 13 Liabilities Agreement attached hereto. In any suit instituted against it upon this Agreement, 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 Company to give a written undertaking to the Company that they will enter a general appearance upon the Reinsurers' 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 therefore, the Reinsurer 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 Company 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 XXV - INTERMEDIARY Ballantyne, McKean and Sullivan Limited., are hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communication (including, but not limited to, notices, statements, premiums, return premiums, losses, loss adjustment expenses, salvages and loss settlements) relating thereto shall be transmitted to the Reinsurers or the Company through Ballantyne, McKean and Sullivan Limited., Latham House, 16 Minories, London EC3N 1AX. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. 14 Our Ref : 973676005 INTERESTS AND LIABILITIES AGREEMENT to the REVERSE FRANCHISE CATASTROPHE EXCESS OF LOSS REINSURANCE (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION STAMFORD, CONNECTICUT (hereinafter referred to as the "Company") and CERTAIN INSURANCE/REINSURANCE COMPANIES (hereinafter referred to as "the Reinsurers") This Agreement shall be effective at 12.01 a.m. Eastern Standard Time, 1st April, 1997, and shall remain in force until terminated in accordance with the provisions of the attached Agreement. The share of the Reinsurers in the Interests and Liabilities of the Reinsurers' in respect of the said Agreement shall be separate and apart from the shares of the other Reinsurers' to the said Agreement, and the Interests and Liabilities of the Reinsurers shall not be joint with those of the other Reinsurers' and in no event shall the Reinsurers participate in the Interests and Liabilities of the other Reinsurers'. The Reinsurers shall have a 66.67 % share of this Agreement. IN WITNESS WHEREOF, the Reinsurers hereon, by their respective duly authorized officer, has executed this Agreement as of the date undermentioned. Signed in this day of ,1997 For and on behalf of: TRENWICK AMERICA REINSURANCE CORPORATION 15 -------------------------- and in this day of ,1997 For and on behalf of: CERTAIN INSURANCE/REINSURANCE COMPANIES (as per schedule attached) ----------------------------------- EX-12 9 EXHIBIT 12 1 EXHIBIT 12.0 TRENWICK GROUP INC. COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ----------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (dollars in thousands) Earnings: Net Income $35,252 $33,848 $29,841 $20,282 $23,739 Extraordinary loss on debt redemption, net of tax $558 income tax benefit 1,037 -- -- -- -- Income taxes 11,241 9,980 8,572 2,753 4,220 -------- ------- ------- ------- ------- Income before income taxes and extraordinary item 47,530 43,828 38,413 $23,035 $27,959 Fixed charges (as below) 10,140 6,826 6,805 6,785 6,737 Earnings (for ratio calculation) $ 57,670 $50,654 $45,218 $29,820 $34,696 ======== ======= ======= ======= ======= Fixed charges: Interest expense $ 894 $ 6,503 $ 6,496 $ 6,469 $ 6,486 Minority interest 8,920 -- -- -- -- Portion of rental expense which approximates the interest factor 326 323 309 316 251 Total fixed charges $ 10,140 $ 6,826 $ 6,805 $ 6,785 $ 6,737 ======== ======= ======= ======= ======= Ratio of earnings to fixed charges 5.7 7.4 6.6 4.4 5.2 ======== ======= ======= ======= =======
For purposes of computing the consolidated ratio of earnings to fixed charges, "earnings" represent income before income taxes and extraordinary item and fixed charges. "Fixed charges" include gross interest expense (other than on deposits), minority interest and the proportion deemed representative of the interest factor of rent expense. EX-21 10 EXHIBIT 21 1 EXHIBIT 21 Trenwick Group Inc. ID No. 06-1152790
100% 100% Trenwick Services, Ltd. Trenwick America Corporation ID No. 06-1087672 100% 100% Trenwick Guaranty Insurance Company, Ltd. Trenwick America Reinsurance Corporation ID No. 06-1117063 Domicile-Connecticut NAIC Code 34894
EX-23 11 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 Trenwick Group Inc. of our report dated January 27, 1998, appearing on page 28 of this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the financial statement schedules, which appears on page S-4 of this Form 10-K. PRICE WATERHOUSE LLP New York, New York March 19, 1998 EX-27 12 EXHIBIT 27
7 This schedule contains summary financial information extracted from the Financial Statements contained in Form 10-K for the year ended December 31, 1997 for Trenwick Group Inc. 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 812,314 0 0 39,163 0 0 851,477 12,847 66,361 22,524 1,087,923 518,387 87,020 0 0 0 110,000 0 1,195 356,454 1,087,923 190,156 48,402 2,304 10 109,554 58,549 25,239 47,530 11,241 0 0 (1,037) 0 35,252 3.03 3.01 386,887 114,920 (5,366) (22,893) (94,197) 379,351 4,098 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. Reflect gross redundancy in restated reserves.
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