-----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, EkfSsGKs4ogzxDhGRxHVd5CGa2HBbwVy9SxHOIUnT9b8KuW/OzdFp4qP5M5tEVQk iCvZLa4FbCzzidazbE4NuQ== 0000914039-99-000146.txt : 19990402 0000914039-99-000146.hdr.sgml : 19990402 ACCESSION NUMBER: 0000914039-99-000146 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99580234 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, 1998. 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.)
One Canterbury Green, Stamford, Connecticut 06901 (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. [X] The aggregate market value on February 28, 1999 of the voting stock held by non-affiliates of the registrant was $294,018,385. 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, 1999 ----- -------------------------------- Common Stock, $.10 par value 10,714,945
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, 1998. 2 TRENWICK GROUP INC. Table of Contents
Page Item Number - ---- ------ PART I 1. Business ......................................................................................... 1 2. Properties ....................................................................................... 16 3. Legal Proceedings ................................................................................ 16 4. Submission of Matters to a Vote of Security Holders .............................................. 16 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 7a. Quantitative and Qualitative Disclosures About Market Risk......................................... 19 8. Financial Statements and Supplementary Data ...................................................... 19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................................................. 19 PART III 10. Directors and Executive Officers ................................................................. 19 11. Executive Compensation ........................................................................... 19 12. Security Ownership of Certain Beneficial Owners and Management ................................... 20 13. Certain Relationships and Related Transactions ................................................... 20 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................. 20
3 PART I ITEM 1. BUSINESS GENERAL BACKGROUND AND HISTORY Trenwick Group Inc. (Trenwick), incorporated in the State of Delaware in 1985, is a holding company which owns and operates two principal subsidiaries, Trenwick America Reinsurance Corporation (Trenwick America Re) and Trenwick International Limited (Trenwick International). Trenwick America Re, a Connecticut corporation was acquired in 1983 by Trenwick America Corporation, became a wholly owned subsidiary of Trenwick in 1985 as a result of a corporate restructuring. Trenwick America Re reinsures property and casualty risks primarily written by U.S. insurance companies. Trenwick International, a London based company acquired by Trenwick in February 1998, underwrites reinsurance and specialty insurance risks primarily located outside the U.S. In addition, Trenwick owns two inactive Bermuda subsidiaries. Trenwick America Re, which comprised 68% of Trenwick's total net premiums written in 1998, underwrites treaty reinsurance, which accounts for the majority of its business, as well as facultative reinsurance. Trenwick International's business, which accounted for 32% of Trenwick's total net premiums written, consists principally of insurance and facultative reinsurance of specialty classes. Trenwick International also underwrites property and casualty treaty reinsurance. In the latter part of 1998, Trenwick International opened a branch office in Paris which specializes in facultative reinsurance of large, technically complex property risks. Premiums written by the Paris branch in 1998 were not material. DOMESTIC OPERATIONS 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. 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. The table set forth below shows the distribution of domestic net premiums written by type which classifies the business by type of underwriting methodology used. DOMESTIC NET PREMIUMS WRITTEN BY TYPE OF BUSINESS (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- CASUALTY Treaty $150,678 89% $169,692 87% $190,122 84% Facultative 3,690 2 3,254 2 6,404 3 -------- ---- -------- --- -------- --- 154,368 91 172,946 89 196,526 87 PROPERTY 14,744 9 22,284 11 29,838 13 -------- ---- -------- --- -------- -- Total $169,112 100% $195,230 100% $226,364 100% ======== === ======== === ======== ===
1 4 Treaty Reinsurance Treaty reinsurance involves evaluating groupings of multiple risks or segments of a ceding company's overall business. Approximately 98% of Trenwick America Re's net premiums written is currently represented by treaty reinsurance including standard treaty, specialty and property business. Specialty business underwritten by Trenwick America Re generally includes specialty coverages and classes such as professional liability, directors' and officers' liability and other excess and surplus lines exposures. Specialty business also encompasses reinsurance of business written by managing general agents or alternative risk mechanisms other than insurance companies. Net treaty premiums written decreased 14% and 13% in 1998 and 1997, respectively, and increased 15% in 1996. In 1998, Trenwick wrote an aggregate of 233 treaties on both a quota share and excess of loss basis, as compared to 230 treaties in 1997 and 229 treaties in 1996. Trenwick America Re's commitment is currently limited to $2,500,000 per contract on casualty treaty business and $1,500,000 on property business. Larger commitments are subject to Trenwick America Re's Underwriting Committee referral process. Facultative Reinsurance Facultative reinsurance is reinsurance written on a risk-by-risk basis and consists entirely of casualty business. This business, predominantly automobile liability, currently accounts for only 2% of net premiums written in 1998. All facultative business is written on an excess of loss basis. The average gross limit provided by Trenwick is $601,000. Maximum facultative gross capacity per risk is $2,000,000. Trenwick America Re retains the first $500,000 per transaction. In 1998 and 1997, casualty facultative net premiums written represented by 295 and 297 contracts increased 13% and decreased 49%, respectively. In 1996, casualty facultative net premiums written represented by 384 contracts increased 6% over the prior year. Domestic net premiums written by line of business are set forth in the following table for the periods indicated. DOMESTIC NET PREMIUMS WRITTEN BY LINES OF BUSINESS (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- Casualty Automobile Liability $ 51,299 $ 50,187 $ 64,539 Errors and Omissions 36,655 40,063 48,888 General Liability 17,743 20,795 22,519 Accident and Health 11,014 6,326 205 Medical Malpractice 7,700 10,293 9,846 Workers' Compensation 3,025 18,328 20,502 Products Liability 2,312 1,743 2,595 Other Casualty 2,697 9,133 10,247 ---------- ----------- --------- Total Casualty 132,445 156,868 179,341 Property 36,667 38,362 47,023 ---------- ----------- --------- Total $169,112 $195,230 $226,364 ======== ======== ========
2 5 The major lines of reinsurance currently written by Trenwick America Re are automobile liability, errors and omissions, general liability and accident and health. Together these lines account for an aggregate of at least 60% of its net premiums written in all years indicated. Except for accident and health, these lines as well as medical malpractice, workers compensation, products liability and other casualty, have declined since 1996 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 America Re will accept. The decline in workers compensation is primarily due to the non-renewal of a single significant account. Accident and health net premiums written increased by approximately 74% as compared to 1997 resulting primarily from Trenwick America Re's strategic alliance with Duncanson and Holt. In 1998, the amount of property business, including automobile physical damage, underwritten by Trenwick America Re remained constant as a percentage of total net written premiums. In 1998, 1997 and 1996, twelve programs underwritten by Trenwick America Re accounted for approximately 51%, 45% and 49%, respectively, of Trenwick America Re's gross premiums written. Three ceding companies accounted for approximately 38%, 32% and 37% of Trenwick America Re's gross premiums written in 1998, 1997 and 1996, respectively. During 1998, Duncanson and Holt, American International Group and Fort Washington Holdings accounted for 16%, 12% and 10%, respectively, of Trenwick America Re's gross premiums written. Trenwick America Re expects to renew these accounts for 1999. While Trenwick America Re believes that the loss of any one of these accounts would have a material adverse effect on premiums written, Trenwick America Re does not believe that such a loss would result in a concurrent material decrease in its earnings. Further, Trenwick America Re believes that it would continue to underwrite new business to replace these accounts, in the event that they were non-renewed. INTERNATIONAL OPERATIONS Trenwick International also obtains all of its business through brokers. Trenwick International's business consists of Specialist Risk Underwriting (SRU) which includes direct insurance, facultative reinsurance and treaty reinsurance. The following table reflects Trenwick International's net premiums written by type of business for 1998. INTERNATIONAL NET PREMIUMS WRITTEN BY TYPE OF BUSINESS (IN THOUSANDS)
1998 ---- SRU 72,015 89% TREATY 9,092 11% ------- --- Total $81,107 100% ======= ===
3 6 SRU SRU underwrites business in both London and Paris. The Company's branch office in Paris was opened in September of 1998 and accordingly the contribution to premium writings in 1998 from this office was not material. In both SRU locations, the company employs specialty underwriters with extensive experience in niche sectors. The principal lines of business underwritten in 1998 include property, engineering, accident and health professional indemnity, financial institutions, liability, extended warranty and yacht hull. Approximately 56% of Trenwick International's net premiums were written directly as insurance. The Company's Paris branch specializes in large, complex property risks that require a high degree of underwriting expertise. Trenwick International generally underwrites this business, which includes large manufacturing facilities, construction projects as well as both onshore and offshore energy risks, as facultative reinsurance, but can also function directly as an insurer. Paris benefits from a pool of underwriters trained as engineers and has emerged as a center for this type of technical underwriting. Treaty Trenwick International's treaty business includes liability business, which accounted for approximately 70% of treaty business in 1998, as well as property and credit business. Treaty is written both on a proportional and non-proportional basis. MARKETING Trenwick generally obtains all its business through insurance and reinsurance brokers which represent the ceding company and clients in negotiations for the purchase of insurance or reinsurance. The process of effecting a brokered placement typically begins when a client or ceding company enlists the aid of a broker in structuring an insurance or reinsurance program. Often the various parties will consult with one or more lead underwriters as to the pricing and contract terms of the protection being sought. Once the terms quoted by the lead underwriter have been approved, the broker will offer participations to qualified insurers or reinsurers until the program is fully subscribed at terms agreed to by all parties. Trenwick pays such intermediaries or brokers commissions representing negotiated percentages of the premium it writes. These commissions 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 agreements, nor does Trenwick commit in advance to accept any portion of the business that brokers submit to it. Business from any company, whether new or renewal, is subject to acceptance by Trenwick. Substantially all of Trenwick America Re's business is produced by reinsurance brokers. During 1998, three reinsurance brokers, AON Reinsurance, Peglar and Associates, Inc. and Willis Faber, N.A. generated 37%, 10% and 10%, respectively, of Trenwick America Re's gross written premiums. These brokers are among the ten largest brokers in the reinsurance industry. 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 ten largest brokers. Contrary to the U.S. broker market concentration, Trenwick International's business is produced from a variety of sources, including 125 insurance and reinsurance brokerage firms. Trenwick International obtained approximately 15% and 12% of its gross written premiums from two brokers in 1998, which were Nelson Hurst and AON Reinsurance, respectively. Loss of all or 4 7 a substantial portion of the business provided by Trenwick's 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 insurance and reinsurance market and the availability of business from other brokers. UNDERWRITING Trenwick's underwriting philosophy emphasizes a transactional approach to underwriting in which any insurance or 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, when available, 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 terms and conditions. With respect to its domestic operations which comprises fewer but significantly larger accounts, Trenwick frequently conducts underwriting and claims audits of ceding companies to assist it in evaluating the information submitted by the ceding companies, before agreeing to participate in a reinsurance transaction. Trenwick has established formal underwriting policy standards for both domestic and international operations. This process involves pre-binding reviews of individual material transactions by its senior underwriting staff. Underwriting policies for insurance and reinsurance transactions are 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 insurance and reinsurance companies. These competitors, many of which have substantially greater financial and staff resources than Trenwick, include independent insurance and reinsurance companies, subsidiaries or affiliates of established insurance companies, reinsurance departments of certain commercial insurance companies and underwriting syndicates. Trenwick America Re's 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. Trenwick America Re's brokers must compete with direct reinsurers for business to be offered to Trenwick America Re. Trenwick International competes with international insurance and reinsurance companies that generally obtain their business through brokers. Competition in the types of business which Trenwick underwrites is based on many factors. These factors include the perceived overall financial strength of the insurer or reinsurer, rates charged, other terms and conditions, agency ratings (including A.M. Best and Standard and Poor's), service offered, speed of service (including claims payment) and perceived technical ability and experience of staff. The number of jurisdictions in which an insurer or reinsurer is licensed or authorized to do business is also a factor. 5 8 The financial security of insurers and reinsurers has emerged as a key issue throughout the 1990's. To be accepted by clients, and by ceding companies and their brokers, insurers and reinsurers 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, Trenwick's management believes that the increased specialization of ceding companies 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 insurance and reinsurance industry, including the broker market, will continue to undergo further consolidation and that size and financial strength will continue to be significant factors in effective competition. Trenwick America Re's statutory surplus was $330,496,000 at December 31, 1998. 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 professional property and casualty reinsurers which, among other things, compiles data on reinsurers and their reinsurance operations. Trenwick International has approximately $132,000,000 in statutory surplus. Trenwick America Re is domiciled in Connecticut and is licensed, authorized or approved to write reinsurance in all 50 states and the District of Columbia. It is rated A+ (Superior) by A.M. Best Company and also holds an A+ (Good) Claims-Paying Ability Rating from Standard & Poor's Insurance Rating Services. Trenwick International, domiciled in England, is authorized to write insurance in over 30 countries and participates in the London market for worldwide reinsurance. It is rated A (Excellent) by A.M. Best and also holds an A+ (Good) Standard & Poor's Claims-Paying Ability Rating. 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 brokers and ceding companies. In certain instances, a claims audit may be performed prior to assuming reinsurance business as part of a comprehensive risk evaluation process. For insurance business, Trenwick's claim staff uses their own judgement as well as advice from lawyers and loss adjusters where appropriate. 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 6 9 between the occurrence of an insured claim, the reporting of the claims to the insurer and the subsequent reporting of the claims to the reinsurer, the insurer's payment of that claim, and later payments by the reinsurer. Trenwick first establishes its case reserves for reported claims when it receives notice of the claim. It is Trenwick's policy to establish reserves for reported claims in an amount equal to the greater of the reserve recommended by the ceding company or the claim as estimated by Trenwick's claims personnel. Trenwick periodically conducts investigations to determine if the amount reserved by the ceding company is appropriate or should be adjusted. During the claim settlement period, which may be many years, additional facts regarding individual claims may become known. As Trenwick learns additional facts, it may become necessary to refine and adjust upward or downward the estimated reserves on a claim, and even then the ultimate net reserve may be less than or greater than the revised estimates. Trenwick does not discount any of its reserves for reported or unreported claims in any line of its business for anticipated investment income. Trenwick uses a combination of actuarial methods to determine its IBNR reserves. These methods fall into two general categories: (1) methods by which ultimate claims are estimated based upon historical patterns of reported claim development experienced by Trenwick, as supplemented by reported industry data, and (2) methods in which the level of Trenwick's IBNR claim reserves are established based upon the IBNR claim reserves relative to earned premium of other reinsurers, applied by accident year, line of 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, 1998 are adequate. Trenwick America Re'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 America Re'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, 1998 outstanding claims including incurred but not reported claims for environmental liability were approximately $8,400,000, approximately 1% of Trenwick America Re's total net outstanding reserves. Trenwick International has no known exposure to environmental claims. 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. 7 10 The following table presents the development of Trenwick's net unpaid claims and claims expenses for 1988 through 1998. 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 1998. 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 1998 represents the aggregate change in the initial gross estimates over all subsequent calendar years. 8 11 DEVELOPMENT OF UNPAID CLAIMS AND CLAIMS EXPENSES (in thousands)
1998 1997 1996 1995 1994 ---- ------ ------ -------- -------- Net unpaid claims and claims expenses, end of year $449,264 $379,351 $386,887 $327,001 $294,008 Cumulative amount of net liability paid as of: One year later 104,718 94,197 46,860 61,804 Two years later -- 162,565 110,289 81,417 Three years later -- -- 149,810 121,133 Four years later -- -- -- 142,485 Five years later -- -- -- -- Six years later -- -- -- -- Seven years later -- -- -- -- Eight years later -- -- -- -- Nine years later -- -- -- -- Ten years later -- -- -- -- Net liability re-estimated as of: One year later 372,176 381,521 322,562 291,943 Two years later -- 374,336 317,199 279,561 Three years later -- -- 308,700 274,283 Four years later -- -- -- 265,041 Five years later -- -- -- -- Six years later -- -- -- -- Seven years later -- -- -- -- Eight years later -- -- -- -- Nine years later -- -- -- -- Ten years later -- -- -- -- Net cumulative redundancy Amount of original liability* 7,175 12,551 18,301 28,967 Percentage -- 3% 6% 10% Gross liability, end of year 518,387 467,177 411,874 389,298 Reinsurance recoverable 139,036 80,290 84,873 95,290 Net liability, end of year 379,351 386,887 327,001 294,008 Gross re-estimated liability-latest 510,703 456,134 393,467 338,577 Re-estimated recoverable-latest 138,527 81,798 84,767 73,536 Net re-estimated liability-latest 372,176 374,336 308,700 265,041 Gross cumulative redundancy 7,685 11,043 18,407 50,721 1993 1992 1991 1990 1989 1988 -------- -------- -------- -------- ------ ------- Net unpaid claims and claims expenses, end of year $268,091 $266,685 $258,774 $245,105 $214,391 $169,785 Cumulative amount of net liability paid as of: One year later 52,300 52,260 44,930 42,234 29,407 19,983 Two years later 90,382 93,312 80,725 77,183 60,888 34,855 Three years later 89,445 118,345 111,225 102,590 84,283 53,243 Four years later 112,119 111,174 127,431 124,129 101,597 67,132 Five years later 124,096 125,847 116,224 134,657 116,047 77,922 Six years later -- 133,502 127,130 122,089 124,465 87,397 Seven years later -- -- 132,194 129,100 110,656 93,109 Eight years later -- -- -- 132,888 115,017 78,032 Nine years later -- -- -- -- 117,364 81,381 Ten years later -- -- -- -- -- 83,229 Net liability re-estimated as of: One year later 267,644 255,379 253,781 238,324 206,724 163,848 Two years later 263,473 255,379 243,488 233,565 199,864 154,646 Three years later 246,367 252,458 243,586 223,417 196,232 150,470 Four years later 241,478 236,009 241,600 224,171 188,052 145,457 Five years later 229,742 230,488 225,592 223,172 189,148 137,426 Six years later -- 222,094 217,852 213,327 188,884 137,818 Seven years later -- -- 208,701 205,179 180,619 138,255 Eight years later -- -- -- 199,948 176,778 133,192 Nine years later -- -- -- -- 172,846 130,422 Ten years later -- -- -- -- -- 128,595 Net cumulative redundancy Amount of original liability* 38,349 44,591 50,073 45,157 41,545 41,190 Percentage 14% 17% 19% 18% 19% 24% Gross liability, end of year 354,582 351,897 332,503 Reinsurance recoverable 86,491 85,212 73,729 Net liability, end of year 268,091 266,685 258,774 Gross re-estimated liability-latest 293,805 288,040 266,406 Re-estimated recoverable-latest 64,063 65,946 57,705 Net re-estimated liability-latest 229,742 222,094 208,701 Gross cumulative redundancy 60,777 63,857 66,097
*Excludes Trenwick International's prior year claims in the amount of $5,381,000 acquired on date of purchase, February 27, 1998. 9 12 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, 1997 have developed redundantly due to Trenwick America Re's favorable development for claims occurring in accident years 1993 and prior, partially offset by adverse development in accident years 1994 through 1997. For further discussion of unpaid claims and claims expenses see Note 4 of Notes to the Consolidated Financial Statements of Trenwick. REINSURANCE AND RETROCESSIONAL AGREEMENTS Insurance and reinsurance companies enter into reinsurance and retrocessional agreements to reduce their net liability on individual risks, protection against catastrophic losses and maintenance of acceptable ratios. Trenwick America Re has various retrocessional facilities, all of which are on a treaty basis. These retrocessional facilities include one treaty for Trenwick America Re'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 America Re's maximum retention generally does not exceed $500,000 per occurrence on facultative business and $2,300,000 per occurrence on property catastrophe business. Since 1989, Trenwick America Re has purchased aggregated excess of loss ratio treaties from several reinsurers. These facilities provided Trenwick with a layer of protection against adverse results from its domestic casualty business in excess of specified loss ratios. Trenwick International, as customary with companies operating in the London market, buys large amounts of reinsurance. Reinsurance and retrocessional coverage is customized for each class of business. During 1998, following an increase in its share capital, Trenwick International increased its retention of business by reducing the amount of reinsurance it buys, principally proportional reinsurance treaties with its former parent. Trenwick remains liable with respect to insurance and reinsurance ceded in the event that the insurer or retrocessionaire is unable to meet its obligations. All reinsurers and retrocessionaires must be formally approved by Trenwick America Re's and Trenwick International's Security Committee. The Security Committees re-evaluate the financial condition of Trenwick reinsurers and 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 Committees. Trenwick America Re's principal retrocessionaires domiciled in the United States are Zurich Reinsurance, Continental Casualty Company and Unum Life Insurance Company of America, which are rated A or better by A.M. Best Company. Trenwick America Re's principal retrocessionaires domiciled outside the United States are syndicates at Lloyds of London and Unionamerica Insurance Company, Limited. 10 13 Trenwick International has two principal retrocessionaires, Societe de Reassurance des Mutuelles Agricoles S.A., which is domiciled in France and SOREMA North America Reinsurance Company which is domiciled in the U.S. Both companies are rated A (Excellent) by A.M. Best Company. At December 31, 1998, Trenwick America Re and Trenwick International had no material uncollectible amounts due from its retrocessionaires. INVESTMENTS Trenwick America Re's investments comply with the insurance laws of the state of Connecticut, its domicile state, and of the other states in which it 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. Similarly, Trenwick International's investments comply with the insurance laws of the Financial Services Authority (FSA). These laws penalize high concentrations of riskier types of assets and high exposures to certain types of issuers. The Investment Committees of Trenwick's Boards of Directors oversee investments and set procedures and guidelines for investment strategy. Trenwick's internal staff manage these investments and utilize the services of investment advisers. 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, Trenwick emphasizes investment grade debt investments. At December 31, 1998, 89% of Trenwick's domestic companies (Trenwick America) debt investments were rated Aa or better and none had a Moody's Investors Service quality rating less than A. In October 1998, securities with an estimated fair value of $4,390,000 had their ratings withdrawn by various Nationally Recognized Statistical Rating Organizations. The servicer of these securities, Commercial Financial Services, Inc., filed for protection under Chapter 11 of the Federal Bankruptcy Code in December 1998. At December 31, 1998, 100% of Trenwick International's debt investments were rated Aaa/P1 by Moody's Investors Service. Trenwick's investment strategy permits an allocation for equity securities. At December 31, 1998, 5% of Trenwick's total investments and cash were invested in common and preferred equities of U.S. and United Kingdom corporations respectively. The primary risk associated with these securities is the exposure to daily market fluctuations. Trenwick America 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 10%, 11% and 4%, respectively, of Trenwick America's portfolio at December 31, 1998. 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. 11 14 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. The asset-backed securities owned by Trenwick have primarily credit card 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, with the exception of the asset-backed securities serviced by Commercial Financial Services, Inc. for which ratings have been withdrawn. Trenwick also invests in agency pass-through securities which account for 3% of Trenwick America's portfolio at December 31, 1998. As with CMOs, these securities are subject to prepayment risk. Trenwick International holds debt securities and cash in a number of currencies. At December 31, 1998, approximately 81% of Trenwick International's debt securities and cash were held in U.K. sterling, 9% in U.S. dollars, 4% in German marks, and the remainder in eight other currencies. 12 15 The table below sets forth the distribution of Trenwick's investments at December 31, 1998 by type, maturity and quality rating. INVESTMENTS (DOLLARS IN THOUSANDS)
AVERAGE ESTIMATED MATURITY FAIR AMORTIZED IN YEARS VALUE COST --------- ---------- --------- TYPE U.S. government bonds 4.4 $ 68,668 $ 64,831 Tax-exempt bonds(1) 5.2 394,017 380,593 Mortgage-backed and asset-backed securities 10.5 212,116 206,790 Debt securities issued by British government 1.4 46,536 45,949 Debt securities issued by other foreign governments .5 8,241 8,163 Public utilities 3.6 3,086 2,864 Corporate securities 6.0 57,310 55,364 Redeemable preferred stocks 3.6 2,048 2,000 Certificates of deposit .5 100,998 100,998 ---------- --------- Total debt securities 5.7 893,020 867,552 Equity securities 49,188 44,342 Cash and cash equivalents .1 63,003 63,003 ---------- ---------- Total investments and cash $1,005,211 $974,897 ========== ======== MATURITY (DEBT SECURITIES) Due in one year or less .4 $ 146,008 $145,390 Due in one year through five years 2.8 417,662 406,249 Due after five years through ten years 7.6 207,440 197,655 Due after ten years 19.1 121,910 118,258 ---------- --------- Total debt securities 5.7 $ 893,020 $867,552 ========== ======== QUALITY (DEBT SECURITIES) Aaa(2)-U.S. government bonds $ 68,668 $ 64,831 Tax-exempt bonds 351,232 339,628 Mortgage-backed and asset-backed securities 122,282 117,117 Debt securities issued by British government 46,536 45,949 Debt securities issued by other foreign governments 5,118 5,101 Corporate securities 7,118 6,785 ---------- --------- 600,954 579,411 ---------- --------- Aa(2)-Tax-exempt bonds 40,620 38,898 Mortgage-backed and asset-backed securities 50,377 48,559 Corporate securities 18,005 17,285 Redeemable preferred stocks 2,048 2,000 ---------- --------- 111,050 106,742 ---------- --------- A(2)-Tax-exempt bonds 2,165 2,067 Mortgage-backed securities 35,067 34,360 Debt securities issued by foreign governments 3,123 3,062 Public utilities 3,086 2,864 Corporate securities 32,187 31,294 ---------- --------- 75,628 73,647 ---------- --------- P1(2)-Certificates of deposits 100,998 100,998 ---------- --------- Withdrawn - Asset-backed securities 4,390 6,754 ---------- --------- Total debt securities $893,020 $867,552 ========== =========
(1) Tax-exempt bonds include $64,540,000 escrowed in U.S. Government Securities, $197,870,000 insured by Municipal Bond Investors Assurance Corporation, Financial Guaranty Insurance Company, AMBAC Indemnity Corporation, or Financial Security Assurance Corporation and $42,020,000 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. 13 16 REGULATION Trenwick and its domestic subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business, including all states of the United States. These regulations vary from jurisdiction to jurisdiction and are generally designed to protect ceding insurance companies and policyholders by regulating Trenwick's financial integrity and solvency in its business transactions and operations. Trenwick International is subject to the regulatory authority of the United Kingdom Financial Services Authority (FSA). Many of the insurance statutes and regulations applicable to Trenwick's subsidiaries relate to reporting and enable regulators to closely monitor Trenwick's performance. Typical required reports include information concerning Trenwick's capital structure, ownership, financial condition, and general business operations. 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, 1998. 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 America Re 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 14 17 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. Trenwick America Re is subject to regulation under the insurance statutes and insurance holding company statutes of various states, including Connecticut, its domicile. 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. Effective January 1, 2001, the Connecticut Insurance Department will adopt the codification of Statutory Accounting Principles. The codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. Assuming Trenwick America Re adopted codification as of January 1, 1998, the effect of adoption would have been an increase in statutory net income of approximately $25,600,000 and a net increase to statutory surplus of approximately $27,600,000 as a result of recording a deferred tax benefit and a net deferred tax asset. Dividends Under the holding company structure, Trenwick is dependent upon the ability of its operating subsidiaries, Trenwick America Re and Trenwick International to transfer funds, principally in the form of cash dividends and tax reimbursements. The statutory limitation on dividends which can be paid, within any preceding twelve months, 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 for the twelve month period ending December 31 of the preceding year, but shall not include pro rata distributions of any class of Trenwick America Re's own securities, both determined in accordance with statutory accounting practices. The amount of dividends or other distributions that could be paid by Trenwick America Re without prior approval as of December 31, 1998 was $40,930,000. During 1998, 1997 and 1996, Trenwick America Re paid dividends of $30,100,000, $8,250,000 and $4,100,000, respectively. Under the applicable laws of the United Kingdom, Trenwick International may make shareholder distributions only from accumulated realized profits, net of accumulated realized losses. In addition, under the U.K. Insurance Companies Act, Trenwick International is not permitted to make any distribution that would reduce its net assets below the minimum margin of solvency required by law. The FSA promulgates rules for determining the required margin of solvency which is approximately $11,451,000 as of December 31, 1998. The Company must also notify the FSA of any proposal to declare or pay a dividend on any of its share capital. 15 18 Investment Limitations Connecticut laws and regulations govern 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 permit a Connecticut insurer to purchase only 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. The Financial Services Authority governs the types and amounts of investments which are permissible for insurers in the United Kingdom, including Trenwick International. These laws penalize high concentrations of riskier types of assets and high exposures to certain types of issuers. Trenwick believes that it is in compliance with all applicable investment laws. EMPLOYEES At December 31, 1998, Trenwick employed a total of 68 and 79 persons in its domestic and international operations, respectively. Trenwick has no employees represented by a labor union and believes that its employee relations are good. ITEM 2. PROPERTIES Trenwick's corporate headquarters and Trenwick America Re's offices are located in approximately 46,000 total square feet of leased office space at One Canterbury Green, Stamford, Connecticut. Trenwick International leases office space in London, England and Paris, France. See Note 7 of Notes to the Consolidated Financial Statements of Trenwick. ITEM 3. LEGAL PROCEEDINGS Trenwick is party to various legal proceedings generally arising in the normal course of its 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 business. Pursuant to Trenwick's insurance and reinsurance arrangements, disputes are generally required to be finally settled by arbitration. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 19 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. For the periods presented below, the high and low sales price and closing prices of the common stock as reported by the NASDAQ were as follows:
1998 1997 1996 ---- ---- ---- High December 31 34.50 38.75 35.83 September 30 39.50 39.50 36.17 June 30 41.75 39.63 35.67 March 31 38.00 34.00 37.83 Low December 31 27.31 34.00 30.67 September 30 28.00 34.75 32.50 June 30 35.50 31.83 30.67 March 31 33.75 30.67 33.50 Close December 31 32.63 37.63 30.83 September 30 29.13 37.75 34.50 June 30 38.84 37.50 33.33 March 31 37.50 33.00 34.00
There were 112 holders of record and in excess of 1000 beneficial owners of Common Stock as of February 28, 1999. 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 11 of Notes to the Consolidated Financial Statements of Trenwick. 17 20 ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands except per share data) INCOME STATEMENT DATA Net premiums written $ 250,219 $ 195,230 $ 226,364 $ 197,162 $ 139,635 ========== ========== ========== ========== ========== Net premiums earned $ 245,561 $ 190,156 $ 211,069 $ 177,394 $ 132,683 Net investment income 56,316 48,402 41,226 36,828 33,932 Net realized investment gains (losses) 9,016 2,304 299 368 (196) Other income 421 10 -- -- -- ---------- ---------- ---------- ---------- ---------- Total revenues $ 311,314 $ 240,872 $ 252,594 $ 214,590 $ 166,419 ========== ========== ========== ========== ========== Net income $ 34,792 $ 35,252 $ 33,848 $ 29,841 $ 20,282 ========== ========== ========== ========== ========== PER SHARE DATA Basic earnings Income before extraordinary item $ 2.99 $ 3.12 $ 3.40 $ 3.09 $ 2.10 ========== ========== ========== ========== ========== Net income $ 2.99 $ 3.03 $ 3.40 $ 3.09 $ 2.10 ========== ========== ========== ========== ========== Weighted average shares outstanding 11,657 11,645 9,959 9,674 9,638 ========== ========== ========== ========== ========== Diluted earnings Income before extraordinary item $ 2.95 $ 3.01 $ 2.85 $ 2.59 $ 1.88 ========== ========== ========== ========== ========== Net income $ 2.95 $ 3.01 $ 2.85 $ 2.59 $ 1.88 ========== ========== ========== ========== ========== Weighted average shares outstanding 11,779 12,265 13,352 13,149 13,056 ========== ========== ========== ========== ========== Dividends $ 1.00 $ .97 $ .83 $ .75 $ .67 ========== ========== ========== ========== ========== BALANCE SHEET DATA Investments and cash $1,005,211 $ 864,324 $ 754,210 $ 653,704 $ 551,784 Total assets 1,392,261 1,085,956 920,804 820,930 727,245 Unpaid claims and claims expenses 682,428 518,387 467,177 411,874 389,298 6.7% senior notes due 2003 75,000 -- -- -- -- Convertible debentures -- -- 103,500 103,500 103,500 Company obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of Trenwick 110,000 110,000 -- -- -- Common stockholders' equity 348,029 357,649 265,753 240,776 188,213 Shares of common stock outstanding 11,051 11,951 10,088 9,886 9,660 Book value per share $ 31.49 $ 29.93 $ 26.34 $ 24.36 $ 19.48
Amounts for 1998 reflect the results of Trenwick International, accounted for as a purchase, from February 27, 1998, date of acquisition. 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 accounting standard, "Earnings per Share". 18 21 CERTAIN GAAP FINANCIAL RATIOS
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Combined ratio 102.3% 96.5% 95.8% 95.6% 103.2% Net premiums written to surplus ratio 0.77:1 0.55:1 0.85:1 0.82:1 0.74:1 Unpaid claims and claims expenses to surplus ratio 1.96:1 1.45:1 1.76:1 1.71:1 2.07:1
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 Operations and Item 8, Financial Statements and Supplementary Data. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information called for by this item can be found in Trenwick's 1998 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information called for by this item can be found in Trenwick's 1998 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item can be found in Trenwick's 1998 Annual Report to Stockholders immediately following the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" and to the items included in Item 14(a) of this report, and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Incorporated by reference to the captions "Board of Directors", "Management", and "Executive Compensation" in the Proxy Statement for the Annual Meeting in 1999 ("Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the caption "Executive Compensation" in the Proxy Statement. 19 22 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 "Election of Directors" in the Proxy Statement. 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 26, 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. 20 23 (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. 4.3 Indenture dated as of March 27, 1998 between Trenwick and The First National Bank of Chicago, as Trustee, with respect to Trenwick's $75 million principal amount of 6.7% Senior Notes due April 1, 2003, incorporated by reference to Exhibit 4.2 to Trenwick's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 0-14737. +10.1 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. 10.2 Trenwick 1993 Stock Option Plan, as amended through May 21, 1998. Incorporated by reference to Appendix A to Trenwick's Proxy Statement for the 1998 Annual Meeting of Stockholders, File No. 0-14737. 10.3 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. 10.4 Trenwick Unfunded Supplemental Executive Retirement Plan, as amended through December 14, 1993. Incorporated by reference to Exhibit 10.14 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-14737. 10.5 Leased Automobile Policy for executive officers. 10.6 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. 10.7 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. 10.8 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. 10.9 Declaration of Trust dated December 10, 1996, as amended through September 9, 1997, establishing a retirement plan for certain employees of Trenwick Management Services Limited. 10.10 Office lease between Trenwick and EOP-Canterbury Green, L.L.C. dated as of January 29, 1998, with respect to office space in Stamford, Connecticut. Incorporated by reference to Exhibit 10.16 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-14737. + As required by Item 14, each of Exhibits 10.1 through 10.9 is hereby identified as a management contract or compensatory plan or arrangement. 21 24 10.11 First amendment dated as of March 31, 1998, to office lease between Trenwick and EOP-Canterbury Green L.L.C. dated January 29, 1998. 10.12 Underlease between Wereldhave Property Corporation PLC and predecessors of Trenwick Management Services Limited dated May 22, 1991, with respect to office space in London, England. 10.13 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. 10.14 Automobile Liability First Excess of Loss/Quota Share Reinsurance Agreement between Trenwick and the Canal Insurance Company/Canal Indemnity Company. Incorporated by reference to Exhibits 10.40 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. 10.15 Interests and Liabilities Agreement between Trenwick and Kemper Reinsurance Group and participants thereon. Incorporated by reference to Exhibits 10.41 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. 10.16 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. 10.17 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. 10.18 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. 10.19 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. 10.20 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. 10.21 First Layer Property Catastrophe Excess of Loss Agreement with Trenwick and several reinsurers. Incorporated by reference to Exhibit 10.28 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-14737. 22 25 10.22 Special Catastrophe Excess of Loss Retrocessional Agreement between Trenwick and several reinsurers. Incorporated by reference to Exhibit 10.29 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-14737. 10.23 First and Second Coinsured Aggregate Excess of Loss Reinsurance Agreement between Trenwick and Centre Reinsurance Company of New York and CNA Re. Incorporated by reference to Exhibit 10.31 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-14737. 10.24 First Casualty Retrocessional Excess of Loss Reinsurance Agreement between Trenwick and several reinsurers. Incorporated by reference to Exhibit 10.32 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-14737. 10.25 Reverse Franchise Catastrophe Excess of Loss Reinsurance Agreement between Trenwick and several reinsurers. Incorporated by reference to Exhibit 10.33 to Trenwick's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 0-14737. 10.26 Catastrophe Excess of Loss Reinsurance Agreement between Trenwick and several reinsurers. 10.27 Coinsured Aggregate Excess of Loss Reinsurance Agreement between Trenwick and Centre Reinsurance Company of New York and National Union. 10.28 Quota Share Reinsurance Agreement between Trenwick and Unistar Insurance Company. 10.29 Fronting Quota Share Reinsurance Agreement between Trenwick and Unum Life Insurance Company. 10.30 Fronting Quota Share Reinsurance Agreement between Trenwick and American Accident Reinsurance Group. 12.0 Computation of Ratios. 13.0 Excerpts from Trenwick's 1998 Annual Report to Stockholders expressly incorporated by reference in this Form 10-K. 21.0 List of Subsidiaries. 23.0 Consent of PricewaterhouseCoopers LLP. 27.0 Financial Data Schedule. (b) Reports on Form 8-K None 23 26 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 /s/ JAMES F. BILLETT, JR. -------------------------- James F. Billett, Jr. Chairman, President and Chief Executive Officer Dated: March 31, 1999 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 - --------- ----- ---- /s/ JAMES F. BILLETT, JR. Chairman of the Board, March 31, 1999 - ------------------------------ President and Chief James F. Billett, Jr. Executive Officer and Director (Principal Executive Officer) /s/ ALAN L. HUNTE Vice President and March 31, 1999 - ------------------------------- Treasurer (Principal Alan L. Hunte Financial Officer and Accounting Officer) /s/ ANTHONY S. BROWN Director March 31, 1999 - ------------------------------- Anthony S. Brown
24 27
/s/ NEIL DUNN Director March 31, 1999 - ------------------------------- Neil Dunn /s/ W. MARSTON BECKER Director March 31, 1999 - ------------------------------- W. Marston Becker /s/ P. ANTHONY JACOBS Director March 31, 1999 - ------------------------------- P. Anthony Jacobs /s/ JOSEPH D. SARGENT Director March 31, 1999 - ------------------------------- Joseph D. Sargent /s/ FREDERICK D. WATKINS Director March 31, 1999 - ------------------------------- Frederick D. Watkins /s/ STEPHEN R. WILCOX Director March 31, 1999 - ------------------------------- Stephen R. Wilcox
25 28 TRENWICK GROUP INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Pages ----- Financial Statements: Report of Independent Accountants on Consolidated Financial Statements........................................................... * Consolidated Balance Sheet at December 31, 1998 and 1997 ........................................ * Consolidated Statement of Income and Comprehensive Income for the years ended December 31, 1998, 1997 and 1996...................................... * Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996...................................... * Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996...................................... * Notes to Consolidated Financial Statements..................................................... * Financial Statement Schedules: II - Condensed Financial Information of Registrant .....................................S-1-S-3 III - Supplementary Insurance Information ............................................... S-4 Report of Independent Accountants on Financial Statement Schedules .................................................................................. S-5
* Incorporated by reference to Trenwick's 1998 Annual Report to Stockholders. Schedules other than those listed above are omitted since they are either not required or are not applicable or the information required is presented in the consolidated financial statements, including the notes thereto. 26 29 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TRENWICK GROUP INC. BALANCE SHEET (Parent company only)
December 31, ------------------------- 1998 1997 ---- ---- (in thousands) Assets: Investments in consolidated subsidiaries $532,069 $389,604 Debt securities available for sale at fair value (amortized cost: $71,652) - 72,032 Cash and cash equivalents 523 5,108 Due from consolidated subsidiaries 4,287 6,211 Deferred debt issuance costs 2,463 1,681 Accrued investment income 125 607 Net deferred income taxes 4,198 - Goodwill 1,605 - Other assets 9 8 -------- -------- Total assets $545,279 $475,251 ======== ======== Liabilities: 6.70% Senior notes due 2003 $ 75,000 - Junior subordinated debentures 113,403 $113,403 Due to consolidated subsidiaries 2,700 - Accrued interest expense 5,424 4,168 Net deferred income taxes - 14 Other liabilities 723 17 -------- -------- Total liabilities 197,250 117,602 Stockholders' equity 348,029 357,649 -------- -------- Total liabilities and stockholders' equity $545,279 $475,251 ======== ========
S-1 30 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(continued) TRENWICK GROUP INC. STATEMENT OF INCOME (Parent Company only)
Year ended December 31, -------------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Revenues: Consolidated subsidiary dividends $ 26,600 $ 8,250 $ 9,100 Net investment income 1,500 4,974 1,000 Realized gains 778 -- -- Other income 12 -- -- -------- -------- -------- Total revenues 28,890 13,224 10,100 Interest and operating expenses 13,983 10,090 6,504 -------- -------- -------- Income before income taxes, equity in undistributed income of unconsolidated subsidiaries and extraordinary item 14,907 3,134 3,596 Income tax benefit (3,942) (1,239) (1,997) -------- -------- -------- Income before equity in undistributed income of consolidated subsidiaries and extraordinary item 18,849 4,373 5,593 Equity in undistributed income of consolidated subsidiaries 15,943 31,916 28,255 -------- -------- -------- Income before extraordinary loss on debt redemption 34,792 36,289 33,848 Extraordinary loss on debt redemption, net of $558 income tax benefit -- 1,037 -- -------- -------- -------- Net income $ 34,792 $ 35,252 $ 33,848 ======== ======== ========
S-2 31 TRENWICK GROUP INC. AND SUBSIDIARIES SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(continued) TRENWICK GROUP INC. STATEMENT OF CASH FLOWS (Parent Company only)
Year ended December 31, ------------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Cash flows from operating activities: Dividends and net investment income received $ 28,548 $ 12,642 $ 10,537 Interest and operating expenses paid (11,786) (4,983) (5,642) Income taxes received 5,035 794 2,061 --------- --------- --------- Cash provided by operating activities 21,797 8,453 6,956 --------- --------- --------- Cash flows for investing activities: Purchases of debt securities (16,637) (72,932) -- Sales of debt securities 88,190 -- -- Maturities of debt securities 911 16,050 -- Investment in subsidiaries (130,582) (3,403) -- --------- --------- --------- Cash used for investing activities (58,118) (60,285) -- --------- --------- --------- Cash flows for financing activities: Issuance of senior notes 75,000 -- -- Issuance of junior subordinated debentures -- 113,403 -- Issuance costs of senior notes and securities capital (922) (1,669) -- Redemption of convertible debentures -- (46,997) -- Issuance of common stock 1,536 956 4,001 Repurchase of common stock (34,880) (171) (1,031) Dividends paid (11,698) (11,546) (8,285) Intercompany loans 2,700 -- -- --------- --------- --------- Cash provided by (used for) financing activities 31,736 53,976 (5,315) --------- --------- --------- Change in cash and cash equivalents (4,585) 2,144 1,641 Cash and cash equivalents, beginning of year 5,108 2,964 1,323 --------- --------- --------- Cash and cash equivalents, end of year $ 523 $ 5,108 $ 2,964 ========= ========= =========
S-3 32 TRENWICK GROUP, INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (in thousands)
1998 1997 1996 ---- ---- ---- Deferred policy acquisition costs Domestic $ 21,023 $ 22,524 $ 21,805 International 14,238 - - -------- -------- -------- 35,261 22,524 21,805 -------- -------- -------- Unpaid claims and claim Domestic 546,292 518,387 467,177 expenses International 136,136 - - ------- -------- ------- 682,428 518,387 467,177 ------- -------- ------- Unearned premium income Domestic 75,206 87,020 71,448 International 76,845 - - -------- -------- -------- 152,051 87,020 71,448 -------- --------- -------- Net premiums earned Domestic 174,443 190,156 211,069 International 71,118 - - -------- -------- -------- 245,561 190,156 211,069 -------- -------- -------- Net investment income Domestic 44,490 43,692 40,215 International 10,614 - - Unallocated 1,212 4,710 1,011 -------- -------- -------- 56,316 48,402 41,226 -------- ---------- -------- Claims and claims expenses Domestic 105,478 109,554 129,316 incurred International 47,657 - - -------- -------- -------- 153,135 109,554 129,316 -------- -------- -------- Policy acquisition costs Domestic 58,310 58,549 58,757 International 15,887 - - -------- -------- -------- 74,197 58,549 58,757 -------- -------- -------- Underwriting expenses Domestic 13,822 15,425 14,190 International 10,006 - - -------- -------- -------- 23,828 15,425 14,190 -------- -------- -------- Net premiums written Domestic 169,112 195,230 226,364 International 81,107 - - -------- -------- -------- 250,219 195,230 226,364 -------- -------- --------
S-4 33 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Trenwick Group Inc. Our audits of the consolidated financial statements referred to in our report dated February 3, 1999, appearing on Page 53 of this 1998 Annual Report to Stockholders of Trenwick Group Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York February 3, 1999 S-5 EX-10.5 2 EXHIBIT 10.5 1 Exhibit 10.5 CORPORATE ADMINISTRATION COMPANY VEHICLE LEASING POLICY The Company provides leased vehicles, equipped with cellular phones if desired, to employees of Executive Vice President status (or equivalent) and above. Other individuals may be entitled to leased vehicles upon approval of the Chief Executive Officer. Corporate Administration's responsibilities and related procedures regarding the policy are as follows: LEASE ADMINISTRATION 1. Once the individual has selected their vehicle and negotiated the leasing terms, a Credit Application is prepared by the Corporate Manager, and a lease is drawn up. The lease is then given to the Chairman/Chief Executive Officer or the Corporate Manager for execution. 2. A check request for the down payment is prepared and forwarded with the lease and related documentation to Corporate Accounting for processing. License, taxes and up front costs shall not exceed $6,500, exclusive of refundable amounts. Monthly lease payments shall not exceed $600. 3. The Corporate Manager provides Human Resources with a copy of the lease with the odometer reading for their Benefits file. INSURANCE 1. The leased vehicles are incorporated into Trenwick Group Inc.'s inforce Business Automobile insurance policy that is issued through Willis Corroon. 2. The Corporate Manager contacts Don Herington at Willis Corroon (212) 837-0819 and provides him with vehicle information; i.e., VIN number, make, model, engine size, garage location. Willis Corroon will prepare and forward Insurance I.D. cards. 2 Company Vehicle Leasing Policy Page Two VEHICLE REGISTRATION 1. Corporate Administration is also responsible for the registration of the vehicle at the DMV Department, if the dealership does not provide this service. Insurance I.D. Cards are required for registration. Place the Registration documentation in the vehicles upon receipt. 2. The annual emissions testing is also handled through Corporate Administration. The insurance I.D. Card, Registration and $20 cash are required at the time of testing. The money is obtained from Petty Cash. MAINTENANCE At the request of the individual driver, appointment pick-ups and drop-offs of vehicles for scheduled vehicle maintenance, (i.e., oil changes, tune ups, tire rotations, etc.) are coordinated by Corporate Administration at the respective dealerships. EQUIPMENT The removal/replacement/installation of cellular telephones into leased vehicles is coordinated by Corporate Administration. The Corporate Manager contacts Connecticut Telephone, 810 Post Road, Fairfield (203) 256-8100 to schedule on-site appointments for any of these services. LeasingV/g/rmd 25 FEBRUARY 1999 EX-10.9 3 EXHIBIT 10.9 1 Exhibit 10.9 Scheme No: FU00068-088 THIS DECLARATION OF TRUST is made on 10/12/1996 by SOREMA (UK) Underwriting Limited having its registered office at 16 Eastcheap, London EC3M 1BD ("the Principal Employer"). WHEREAS: (A) The Principal Employer has decided to establish a retirement benefit scheme to be known as THE SOREMA (UK) Underwriting Ltd FUNDED UNAPPROVED RETIREMENT BENEFITS SCHEME ("the Plan") to provide benefits for such employees or directors of the Principal Employer and, where appropriate, of such other companies as enter into a supplementary deed as provided for below, as are admitted to membership of the Plan (the "Members"). (B) The Principal Employer has determined to appoint itself as Trustee of the Plan. (C) The Principal Employer has submitted or is submitting details of each Member's benefits to him. IT IS HEREBY DECLARED AND AGREED THAT: 1. The Plan is hereby established and constituted under irrevocable trusts and commences on the date hereof and this declaration of trust adopts the Rules attached hereto ("the Rules") which, subject to any modifications made hereafter, shall govern the Plan. 2. The Principal Employer appoints itself as the Trustee of the Plan. 3. The Principal Employer hereby bests the sum of pound sterling1.00 in the Trustee to constitute the Plan and the Trustee acknowledges receipt thereof. 4. The Principal Employer hereby agrees to enable the Trustee to pay the contributions due under the Plan (by passing his own share of the cost to the Trustee) notwithstanding that it will have no beneficial interest hereunder save to the extent as expressly provided for in the Rules. 5. The Trustee shall have power to invest in: (a) any of the unit trusts managed by Allied Dunbar Unit Trusts plc or Threadneedle Investment Services Limited and any open-ended investment company of which Threadneedle Investment Services Limited is the authorised corporate director; and (b) in any Policy or Policies issued by Allied Dunbar Assurance plc having its registered office at Allied Dunbar Centre, Swindon SN1 1EL (whether such Policy or Policies is/are new, existing or future policies) ("the Policy"). 6. The Trustee hereby agrees to manage and administer the Plan, hold the assets of the Plan (including any Policies) and receive, hold and apply the contributions under the Plan in the trust subject to the attached Rules of the Plan, which (subject to any subsequent amendments) will govern the Plan from the date hereof. 7. (a) Subject to (b) and (c) below the power of appointing new or additional Trustees of the Plan and the trusts hereby established, and the power of removing trustees, is hereby vested in the Principal Employer, and is exercisable by deed. (b) If any one of the following events occurs, Allied Dunbar Pension Services Limited ("ADPS"), will have power, exercisable by deed, to appoint as trustee of the Plan and the trusts hereby established any other person or persons (being either a body corporate, including itself, or at least two but not more than four individuals) in place of the Trustee who will thereby be discharged from the trusteeship, without any requirement for it to be joined as a party to the deed or to take any other action. The events referred to above are: 2 (i) The making of any order or the passing of an effective resolution for the liquidation, winding-up or dissolution of the Trustee; (ii) The appointment of a receiver in respect of all or a material part of the assets or undertaking of the Trustee; (iii)The Trustee making a general assignment or entering into a composition or arrangement, for the benefit of creditors; (iv) The Trustee ceasing to trade; (v) The Trustee being struck off or removed from the Register of Companies. (c) Once the powers under sub-clause (b) have arisen, they will remain exercisable until and unless released by ADPS and the decision to exercise them or not and the way in which they are exercised will be within the absolute discretion of ADPS. (d) Subject to any prior exercise thereof, ADPS may by deed release the powers under sub-clause (b) or either or them at any time or times whether before or after they shall have arisen. 8. (a) Any Trustee or officer or director of a corporate Trustee may benefit under the Rules. (b) The Principal Employer may agree to remunerate the Trustee. (c) The trustee of the Plan or any subsidiary, associated or holding company thereof shall not be required by reason only of the general rules disabling a trustee from deriving a profit from this trusteeship to account to the Plan for any profit made in the ordinary course of business by such trustee, or the subsidiary, associated or holding company thereof. (d) The trustee of the Plan, in the absence of any fraud or crime, shall be entitled to all the indemnities conferred on trustees by law and no trustee or director, employee or member of a body corporate being a trustee for the time being of the Plan shall be liable for any acts or omissions not due to their or his own wilful neglect or default. Where the trustee of the Plan is entitled to such an indemnity the Principal Employer shall indemnify the trustee against all actions, proceedings, costs, claims and demands in respect of any matters relating to the Plan. Furthermore the Principal Employer shall indemnify the trustee of the Plan against all expenses properly incurred in the execution or purported execution of the trusts of the Plan. 9. The Principal Employer as Trustee hereby adopts and agrees to abide by the Rules which are intended to be in such form as to meet the preservation requirements of Chapter 11 of Part IV of the Pensions Schemes Act 1993. 10. Any company (being a subsidiary of the Principal Employer or a company otherwise associated in business with the Principal Employer) which wishes to participate in the Plan may be admitted as a party to the Plan on entering into a supplemental deed with the Principal Employer and the Trustee whereby such company agrees to serve and perform such of the provisions of the Rules as apply to it. 11. THIS Deed and the Rules will be read and construed in accordance with the law of England and Wales. SIGNED AS A DEED BY THE PRINCIPAL EMPLOYER in accordance with the provisions of Section 36A of the Companies Act 1985 acting by a Director and its Company Secretary or by two Directors. Director's Signature: Director's/Company Secretary's Signature: - --------------------- ----------------------------------------- 2 EX-10.11 4 EXHIBIT 10.11 1 Exhibit 10.11 FIRST AMENDMENT This First Amendment (the "Amendment") is made and entered into as of the 31st day of March, 1998, by and between EOP-CANTERBURY GREEN, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord") and TRENWICK AMERICA CORPORATION, A DELAWARE CORPORATION ("Tenant"). WITNESSETH A. WHEREAS, Landlord and Tenant are parties to that certain lease dated the 29th day of January, 1998, (the "Lease") for space currently containing approximately 22,797 rentable square feet on the second (2nd) floor (the "Second Floor Space") and 11,699 rentable square feet on the fourth (4th) floor (the "Fourth Floor Space") (collectively, the "Premises") of the building commonly known as One Canterbury Green and the address of which is One Canterbury Green, Stamford, Connecticut (the "Building"); and B. WHEREAS, Coopers & Lybrand ("Coopers") currently leases space containing approximately 22,832 rentable square feet on the third (3rd floor of the Building and Coopers has not exercised its option to extend the term of its lease (the "Coopers Lease") for such space and therefore, upon the expiration of Coopers Lease, such space shall be available for leasing to Tenant; and C. WHEREAS, Tenant is hereby exercising its option (the "Substitution Option" as defined in Section I.A.5 of the Lease) to substitute the Third Floor Space for the Fourth Floor Space pursuant to Section I.A.5 of the Lease and, in addition, is leasing the remainder of the space on the third floor of the Building. Accordingly, for purposes hereto the term "Third Floor Space" shall mean 22,832 square feet on the third floor of the Building; and D. WHEREAS, Tenant and Landlord mutually desire that the Lease be amended on and subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. PREMISES. Effective as of the date hereof (the "Effective Date") Section l.A.5 of the Lease shall be deleted in its entirety and the following inserted in lieu thereof: "5 "Premises" shall be deemed to mean the area outlined on Exhibits A and A1 attached hereto. Landlord and Tenant hereby stipulate and agree that the Rentable Area of the Premises shall be deemed to mean 45,629 square feet, consisting of 22,797 square feet on the second (2nd ) floor as shown on Exhibit A attached hereto (the "Second Floor Space") and 22,832 square feet on the third (3rd) floor as shown on Exhibit A-1 attached hereto. Tenant acknowledge that the space on the third floor is currently demised into two separate parcels of space, the first of which contains 13,936 square feet ("Space A") and the second of which contains 8,896 square feet ("Space B"). Tenant further acknowledges that Space B may be delivered to Tenant subsequent to the delivery of the Second Floor 2 Space and Space A (together, the "Initial Space"); accordingly, the Commencement Date with respect to such spaces may occur at separate times. In the event the Commencement Date for Space B occurs subsequent to the Commencement Date for the Initial Space, the Lease Term shall be determined based upon the initial Commencement Date, it being agreed that the Lease Term for the Initial Space and Space B shall expire coterminously. 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." 1. BASE RENTAL. Effective as of the Effective Date, Section I.A.2 of the Lease shall be deleted in its entirety and the following inserted in lieu thereof: "2. "Base Rental" shall mean the sums that Tenant is required to pay to Landlord in accordance with the following schedule. a. sixty (60) equal installments of one hundred eighteen thousand two hundred fifty five and 15/100 dollars ($118,255.15), 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 (60) 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. Notwithstanding the foregoing, the amount of such monthly installments of Base Rental is subject to modification as follows: (i)In the event that the Commencement Date for Space B occurs after the Commencement Date for the Initial Space, Tenant shall only be required to pay Base Rental with respect the Initial Space. In such case, the monthly installment of Base Rental as of the Commencement Date would be $95,199.70 and, upon the occurrence of the Commencement Date with respect to Space B, the monthly installment of Base Rental would increase by $23,055.45 to be $118,255.15; (ii) In the event the Commencement Date does not occur on the first day of a calendar month (or in the event the Commencement Date with respect to a particular space does not occur on the first day of a calendar month), Base Rental with respect to such initial calendar month shall be appropriately prorated based upon a percentage the numerator of which is the number of days of Lease Term that fall within such calendar month and the denominator of which in the total number of days in such calendar month; 2 3 (iii) 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"). If the Lease Term with respect to the entire Premises does not occur on the same day, such Abatement Period shall be determined separately with respect to each space comprising the Premises. 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 one hundred twenty-nine thousand six hundred sixty-two and 41/100 Dollars ($129,662.41), 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. COMMENCEMENT DATE. Effective as of the Effective Date, Section 1.A.4 of the Lease shall be deleted in its entirety and the following inserted in lieu thereof: "4. The "Commencement Date," "Lease Term" and "Termination Date" shall have the meanings set forth in subsection l.A.4.a. below or subsection l.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 (i) with respect to the Initial Space, the date on which Landlord delivers the Initial Space to Tenant free from occupancy by (x) NationsCredit Commercial Corporation ("Nations"), the existing tenant in the Second Floor Space; (y) Coopers, the existing tenant in Space A or (z) other party; and (ii) with respect to Space B, the date on which Landlord delivers Space B to Tenant free from occupancy by Coopers, the existing tenant in Space B, 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 Second Floor Space 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. Tenant also acknowledges that Coopers is currently leasing the Third Floor Space pursuant to the terms of the Coopers Lease, which lease is currently scheduled to expire on November 17, 1998. 3 4 Furthermore, Tenant acknowledges that Space A is currently sublet by Coopers to Nations. Landlord agrees to use good faith efforts to negotiate an agreement with Coopers pursuant to which the Landlord would be able to terminate the Coopers Lease with respect to Space A before the stated expiration date thereof. In the event Landlord enters into such agreements accelerating the expiration dates of the Nations Lease and the Coopers Lease, Landlord shall provide Tenant with written notice (the "Early Commencement Notice") setting forth the date on which Landlord intends to provide Tenant with possession of the Initial Space (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 Initial Space. Notwithstanding the foregoing, in no event shall the Commencement Date occur prior to May 1, 1998 without the written consent of Tenant. In addition, Tenant acknowledges that Space B is currently sublet by Coopers to Howard Systems and that Landlord shall have the right to permit Howard Systems to remain in Space B beyond the expiration of the Coopers Lease. As of the date hereto it is anticipated that Howard Systems may need to remain in Space B until December 31,1998 (i.e. the targeted Commencement Date of Space B is January 1, 1999). Landlord shall provide Tenant with written notice (the "Space B Notice") setting forth the date on which Landlord intends to provide Tenant with possession of Space B. Such Space B Notice shall be delivered to Tenant not less than ten (10) days prior to the date on which Landlord intends to provide Tenant with possession of Space B. Notwithstanding the foregoing, in no event shall the Commencement Date for Space B occur prior to May 1, 1998 without Tenant's consent. b. Intentionally Omitted." 4. PRO RATA SHARE. Effective as of the Effective Date, Section 1 .A.8 of the Lease shall be deleted in its entirety and the following inserted in lieu thereof "8. "Tenant's Pro Rata Share" shall mean TWENTY AND NINETY-EIGHT ONE HUNDREDTHS PERCENT (20.98%), which is the quotient (expressed as a percentage), derived by dividing the Rentable Area of the Premises by the Rentable Area of the Building. Notwithstanding the foregoing, if the Commencement Date with respect to the entire Premises does not occur on the same day, Tenant's Pro Rata Share shall be calculated only with respect to the portion of the Premises for which the Commencement Date has occurred. Based upon the assumption that Space B will not be delivered until after the delivery of the Initial Space, Tenant's Pro Rata Share as of the Commencement Date for the Initial Space would be 16.89%. Upon the occurrence of the Commencement Date with respect to Space B, Tenant's Pro Rata Share would increase by 4.09% to be 20.98%. 4 5 5. ALLOWANCE. Effective as of the Effective Date, the first and second sentences of Section l.B of Exhibit D of the Lease shall be deleted in its entirety and the following inserted in lieu thereof: "Provided Tenant is not in default, Landlord agrees to contribute the sum of four hundred fifty-six thousand two hundred ninety and 00/100 dollars ($456,290.00) (the "Allowance") toward the cost of performing the Initial Alterations in preparation of Tenant's occupancy of the Premises." 6. RIGHT OF FIRST OFFER. Effective as of the Effective Date, Section 2 of Exhibit E of the Lease shall be deleted in its entirety. 7. EXHIBITS A AND A-1. Effective as of the Effective Date, the Exhibit A attached to this Amendment shall be substituted for the Exhibit A attached to the Lease and all references to Exhibit A in the Lease shall be deemed to be a reference to the Exhibit A attached hereto. Effective as of the Effective Date, the Exhibit A-1 attached to this Amendment shall be substituted for the Exhibit A-1 attached to the Lease and all references to Exhibit A-1 in the Lease shall be deemed to be a reference to the Exhibit A-1 attached hereto. 8. SUBSTITUTION OPTION: PARKING. Effective as of the Effective Date and in accordance with the provisions contained in the Lease and this Amendment, Landlord and Tenant hereby acknowledge and agree that Tenant has effectively exercised ifs Substitution Option and any references in the Lease to Tenant's exercise of its Substitution Option shall be deemed to have occurred. Tenant hereby exercises its right to lease all of the additional non-reserved parking spaces to which Tenant is entitled pursuant to Section 1.A. of Exhibit E of the Lease as a result of Tenant's exercise of the Substitution Option and its lease of additional space on the third floor of the Building. 9. MISCELLANEOUS. A. This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any Rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment. B. Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect. C. In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control. D. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant. 5 6 E. The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment. F. Tenant hereby represents to Landlord that Tenant has dealt with no broker other than the Broker (as defined in the Lease) in connection with this Amendment. Tenant agrees to indemnify 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 from all claims of any brokers other than the Broker claiming to have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with no broker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its members, principals, beneficiaries, partners, officers, directors, employees, and agents, and the respective principals and members of any such agents (collectively, the "Tenant Related Parties") harmless from all claims of any brokers claiming to have represented Landlord in connection with this Amendment. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment 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 s/Sarah L. Willis - ----------------- By: s/Thomas Q. Bakke Name: Sarah Willis --------------------- Name: Thomas Q. Bakke Title: Vice President 6 7 WITNESS/ATTEST: TENANT: TRENWICK AMERICA CORPORATION, a Delaware corporation s/Michelle R. Diener By: s/James F. Billett, Jr. - -------------------- --------------------------- Name: Michelle R. Diener Name: James F. Billett, Jr. - ------------------------ --------------------------- s/Deborah L. Nichols Title: Chairman, President & - ----------------------- Chief Executive Officer Name: Deborah L. Nichols - ------------------------ 7 EX-10.12 5 EXHIBIT 10.12 1 Exhibit 10.12 UNDERLEASE OF PART WITH SERVICE CHARGE DATED 22ND MAY 1991 WERELDHAVE PROPERTY CORPORATION PLC(1) AND SOREMA (UK) UNDERWRITING MANAGEMENT LIMITED AND SOREMA (UK) GROUP LIMITED AND SOREMA (UK) REINSURANCE LIMITED ---------------------------- UNDERLEASE of Premises known as the third floor of Sixteen Eastcheap London EC3 ---------------------------- STEPHENSON HARWOOD One, St. Paul's Churchyard London EC4M 8SH (Ref: 262/65/AB36988) 1/YY426 2 CONTENTS
CLAUSE PROVISION 1. Definitions 2. Demise and Rent 3. Tenant's Covenants 3.1 Rent 3.2 Insurance 3.3 Outgoings 3.4 Maintenance and Repair 3.5 Internal Decoration 3.6 Cleaning 3.7 Party Structures 3.8 Entry 3.9 Yielding Up 3.10 Alterations and Additions 3.11 Disrepair and Breach of Covenant 3.12 Signs and Name of Building 3.13 Statutory and Planning Requirements 3.14 Notices 3.15 Overloading 3.16 Encroachment 3.17 Nuisance and General Prohibitions 3.18 User 3.19 Rights of Light 3.20 Refuse 3.21 Dangerous Substances 3.22 Pipes
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CLAUSE PROVISION 3.23 Control of Common Parts 3.24 Disputes 3.25 Indemnity 3.26 Support 3.27 Sale and Letting Boards 3.28 Dilapidations and Section 146 Law of Property Act 1925 3.29 Alienation 3.30 Registration of Dealings 3.31 Landlord's Costs 3.32 Value Added Tax 3.33 Regulations 3.34 Windows 3.35 Fire Control 3.36 Interest on Late Payments 3.37 Superior Title 3.38 Rates 4. Landlord's Covenants 4.1 Quiet Enjoyment 4.2 Insurance 4.3 Provision of Services 4.4 Headlease 5. Provisos 5.1 Re-entry 5.2 Rent Suspension 5.3 Base Rate 5.4 Arrears
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CLAUSE PROVISION 5.5 Settlement of Disputes 5.6 Exclusion of Implied Rights 5.7 Unrestricted Use of Adjoining Property 5.8 Exclusion of Liability 5.9 Party Walls 5.10 Compensation 5.11 Perpetuity Period 5.12 No Planning Warranty 5.13 Notices 5.14 No Waiver 5.15 Variation in Insurance and Service Charge Percentage 5.16 Option to Determine 6. Surety 7. Interpretation First Schedule The Demised Premises Second Schedule Easements and Rights Granted Third Schedule Exceptions and Reservations Fourth Schedule Provisions for Rent Review Fifth Schedule The Service Charge Sixth Schedule Regulations
5 THIS UNDERLEASE made the 22nd day of May 1991 BETWEEN (1) WERELDHAVE PROPERTY CORPORATION PLC whose registered office is at 19 Sloane Street London SWIX 9NE ("the Landlord" which expression where the context admits includes the estate owner for the time being of the reversion of the premises hereby demised expectant on the term hereby granted) (2) SOREMA (UK) UNDERWRITING MANAGEMENT LIMITED whose registered office is at 51 Eastcheap London EC3M IJP ("the Tenant" which expression where the context admits includes its successors in title) and (3) SOREMA (UK) GROUP LIMITED and SOREMA (UK) REINSURANCE LIMITED both of whose registered offices are at 51 Eastcheap London EC3M IJP ("the Surety") WITNESSETH as follows: DEFINITIONS 1. In this Lease the following expressions shall have the following meanings: - "Building" the building known as Sixteen Eastcheap London EC3 and shown edged blue on Plan A annexed hereto "common parts" all the Building except the demised premises and other areas let or lettable or occupied or intended to be let or occupied "demised premises" the premises described in the First Schedule "Enactment" any and every Act of Parliament already or hereafter to be passed and any and every order regulation and bye-law already or hereafter to be made under or in pursuance of any such Act "Headlease" the superior lease or leases under which the Landlord holds the Building from time to time
6 "Insured Risks" fire (including subterranean fire) explosion impact riot strike civil commotion and malicious damage storm flood tempest including lightning earthquake aircraft (except hostile aircraft) and other aerial devices and articles dropped therefrom missiles and projectiles bursting or overflowing of water pipes tanks and apparatus and such other risks as the Landlord shall from time to time require to have insured "Pipes" supply pipes soilpipes waste pipes sewers drains ducts conduits downpipes gutters watercourses wires cables channels flues service corridors trunking and all other conducting media and includes any fixing louvres cowls and any other ancillary apparatus "Planning Acts" the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act 1990 the Planning (Hazardous Substances) Act 1990 and the Planning (Consequential Provisions) Act 1990 and any modification or re-enactment thereof and any and every order regulation and byelaw already or hereafter to be made under or in pursuance of any such Act "these presents" this Underlease and any document which is supplemental hereto or which is expressed to be collateral herewith or which is entered into pursuant to or in accordance with the terms hereof "Superior Lessor" the person(s) for the time being entitled to the reversion expectant on the term created by the Headlease "Term" the term of years hereby granted together with any continuation thereof (whether under an Act of Parliament or by the Tenant holding over or for any other reason) "Working Hours" the hours of 8:30 a.m. to 6:00 p.m. on Mondays to Fridays (except public holidays) and such other times or days as the Landlord shall decide
2 7 DEMISE AND RENT 2. In consideration of the rents hereinafter reserved and of the tenant's covenants hereinafter contained the landlord hereby demises unto the tenant all those the demised premises together with the rights set out in the second schedule but excepting and reserving as mentioned in the third schedule to hold the same unto the tenant subject to all rights of light and air and all other easements rights quasi-easements matters and covenants (if any) affecting the demised premises including those appearing in the headlease and the registers of title number ngl 334633 for the term of twenty-five years commencing on the 29th day of september 1990 (subject to determination as hereinafter provided) yielding and paying therefor unto the landlord yearly during the term and so in proportion for any less time than a year the following sums: - 2.1 Firstly a yearly rent of two hundred and six thousand eight hundred and five pounds (pound sterling206,805.00) until 23rd June 1992 and thereafter two hundred and seventy-eight thousand eight hundred and five pounds (pound sterling278,805.00) or such other yearly rent as shall be determined in accordance with the provisions of the Fourth Schedule such rent to be paid clear of all deductions counterclaims or set-offs whatsoever by equal quarterly payments in advance on the usual quarter days in every year the first of such payments for the period from 25th December 1991 to 24th March 1992 to be made on 25th December 1991 2.2 Secondly by way of further rent on demand 2.2.1 15.07 per cent of the sum or sums of money (including the costs of any professional valuation required for insurance purposes) expended or to be expended by the Landlord in complying with its obligations as to insurance (other than in respect of loss of rent) hereinafter contained or in effecting and maintaining such other insurance as the Landlord shall from time to time require and 2.2.2 the amount (if any) expended or to be expended by the Landlord in respect of increased premiums occasioned by the nature of the occupation or business of the Tenant or use of the demised premises and 2.2.3 an amount equal to all sums expended or to be expended by the Landlord in complying with its obligations as to loss of rent insurance hereinafter contained 2.3 Thirdly by way of further rent on demand 15.07 per cent of all sums expended or to be expended by the Landlord in doing the things and providing the services set out in the Fifth Schedule Provided that if so required by the Landlord the Tenant shall pay to the Landlord on account quarterly in advance on the usual quarter days in every year such sum as the Landlord's Surveyor shall reasonably estimate to be the correct figure for that quarter (all necessary adjustments between estimated and actual figures to be made as soon as practicable after the end of each year (ending on such date) or such other period as the Landlord requires) TENANT'S COVENANTS 3. The Tenant hereby covenants with the Landlord as follows: - 3 8 RENT 3.1 To pay the rents hereinbefore reserved and made payable without any deduction counterclaim or set-off whatsoever at the times and in the manner aforesaid and if so requested by banker's order or credit transfer and for value on the date of receipt of payment INSURANCE 3.2.1 Not to effect any further or other insurance in respect of the demised premises or any other part of the Building in duplication of the cover effected by the Landlord but if in breach of this covenant the Tenant does so to hold the same on trust for the Landlord and pay to the Landlord all moneys received under such policy immediately upon receipt 3.2.2 To comply with all recommendations and requirements made in or under any policy of insurance relating to the demised premises or otherwise by any insurer 3.2.3 To comply with all recommendations and requirements made by any appropriate authority with regard to fire health safety or otherwise 3.2.4 As often as the demised premises or any other part of the Building shall be destroyed or damaged forthwith upon the Tenant becoming aware thereof to notify the Landlord in writing stating whether and to what extent such destruction or damage was brought about directly or indirectly by any of the Insured Risks so far as the Tenant is able to ascertain the same 3.2.5 Not to carry on or do on the demised premises any trade or act in consequence of which the Landlord would or might be prevented from insuring the demised premises or any other part of the Building or any other adjoining property for the time being owned by the Landlord at the ordinary rate of premium or whereby any insurance effected in respect of the demised premises or the Building or any such other property would or might be vitiated or prejudiced and not to do anything whereby any additional premium may become payable for such insurance 3.2.6 That in the event of the demised premises or any other part of the Building or any adjoining or neighbouring property for the time being owned by the Landlord or any part thereof being destroyed or damaged by any Insured Risk and the insurance money under any insurance against the same effected thereon by the Landlord being wholly or partly irrecoverable by reason solely or in part of any act or default of the Tenant or any undertenant or their respective officers agents employees invitees licensees or visitors then and in every such case the Tenant will forthwith pay to the Landlord the whole or (as the case may require) the irrecoverable proportion of the costs and expenses incurred by the Landlord (including legal costs and surveyors' fees and other professional costs and fees and disbursements) of completely rebuilding and reinstating the same PROVIDED THAT in the event of such insurance money being wholly or partly irrecoverable as a result in part only of any act or default of the Tenant or any undertenant or their respective officers agents employees invitees licensees or visitors the Tenant shall be required to pay a fair proportion only of the whole or (as the case may require) the irrecoverable portion of the costs and expenses aforesaid 4 9 OUTGOINGS 3.3 To pay and discharge all existing and future rates taxes duties charges assessments impositions and outgoings whatsoever (including water and environmental services rates and charges and charges for the supply of electricity to the demised premises) whether Parliamentary parochial local or otherwise and whether or not of an annual or recurring nature (other than any such arising in respect of any ownership of or dealing with the reversion mediately or immediately expectant on the Term or the right to receive the rent payable hereunder except Value Added Tax properly payable in accordance with the terms of these presents or any such arising by reason of any default on the part of the Landlord) which are now or which may at any time during the Term be charged assessed or imposed upon or payable in respect of the demised premises or any part thereof or on the owner or occupier thereof whether the same shall be in the nature of those now in being or not and/or to refund to the Landlord on demand (in case any of the same are payable charged assessed or imposed in respect of the Building as a whole or any part thereof which includes the demised premises) a proper proportion thereof attributable to the demised premises to be determined by the Landlord's Surveyor MAINTENANCE AND REPAIR 3.4.1 From time to time and at all times during the Term well and substantially to repair renew cleanse maintain uphold and keep in good and substantial repair and condition the demised premises (including landlord's fixtures and tenant's and trade fixtures and fittings) (but excluding from this covenant any structural parts of the Building and landlord's fixtures and fittings mentioned in the Fifth Schedule) and the appurtenances thereof and including any internal plastering and other finishes of walls and ceilings and the screed and finish of floors and the finish of all structural parts of the Building including (but without limitation) all carpets and suspended ceilings therein (damage by any of the Insured Risks (in excess of any policy excesses) excepted unless the policy or policies of insurance effected by the Landlord shall be vitiated or payment of the policy moneys refused by reason of the act or default of the Tenant or any undertenant or their respective officers agents employees invitees licensees or visitors) and to renew or replace the demised premises or any part or parts thereof if the same shall so require or become beyond repair or if the same shall require renewal or replacement by reason of any defect therein whether latent inherent or otherwise AND to inform the Landlord in writing at once if the Tenant becomes aware of any defect in the demised premises or the Building 3.4.2 Not to remove or dispose of any landlord's machinery or plant located within or accessible from the demised premises whether or not in the course of renewing or replacing the same (except to the extent that the same are comprised in a permitted dealing with the demised premises) 3.4.3 From time to time and at all times during the Term to maintain and repair in good working order and if and when necessary (but subject to Clause 3.4.2) to renew or replace the electrical water and sanitary installations and all other plant machinery and equipment within the demised premises and forming part thereof (landlord's fixtures and fittings mentioned in the Fifth Schedule and damage as aforesaid excepted) and to procure that the same are properly and regularly serviced by qualified persons approved by the manufacturers of such plant machinery and equipment 5 10 3.4.4 Not to overload the electrical wiring installations and apparatus in or serving the demised premises and at all times during the Term to ensure that the same comply with the standards terms and conditions laid down by the Institution of Electrical Engineers and the regulations 3.4.5 To carry out all work required to be carried out under these presents in accordance with good modern practice from time to time INTERNAL DECORATION 3.5 In every fifth year of the Term and also in the last six months of the Term (howsoever determined) having first carried out thoroughly all usual or necessary preparatory work to ensure a high quality finish to paint polish paper or otherwise treat as appropriate all the internal parts (usually or requiring to be painted polished papered or otherwise treated) of the demised premises and all additions thereto with two coats at least of good quality paint good quality polish or other suitable material of good quality in a good and workmanlike manner and to the satisfaction of the Landlord PROVIDED ALWAYS that in the last six months of the Term such work of painting and decoration shall be in tints colours and designs previously approved in writing by the Landlord such approval not to be unreasonably withheld CLEANING 3.6 At all times during the Term to keep the demised premises in a clean and tidy condition and at least once in every month to clean the inside of the windows and window frames of the demised premises and as often as occasion may require to wash down all tiles and other washable surfaces within the demised premises PARTY STRUCTURES 3.7 To pay on demand a proper contribution towards the costs and expenses (whether incurred by the Landlord or any other person) (including legal costs surveyors' fees and other professional costs fees and disbursements) in making constructing repairing rebuilding renewing lighting cleaning and maintaining any party walls and all Pipes and other structures conveniences and appurtenances (whether or not similar to those specifically hereinbefore mentioned) and all things the use of which is common to or capable of being used or enjoyed in common with the demised premises and other premises such contribution to be assessed by the Landlord's Surveyor or by whom he may appoint whose decision shall be final and binding on all parties hereto (save on any question of law) ENTRY 3.8.1 To permit the Landlord and all others authorised by it at all reasonable times on reasonable prior notice (and at all times without notice in case of emergency) to enter upon the demised premises to view the state of repair and condition thereof and to take a Schedule of the Landlord's fixtures and of any defects or dilapidations and to investigate whether anything has been done therein which constitutes or may in the reasonable opinion of the Landlord tend to constitute a breach of any of the covenants contained in these presents 3.8.2 To permit the Landlord and (if authorised in writing by the Landlord) the owners lessees or occupiers of adjoining or neighbouring premises and their respective agents servants contractors licensees and workmen with all necessary appliances at all reasonable times on 6 11 reasonable prior notice (and at all times without notice in case of emergency) to enter upon the demised premises for all or any of the purposes mentioned in the Third or Fifth Schedules 3.8.3 To permit the Landlord and all others authorised by it at all reasonable times on reasonable prior notice (and at all times without notice in case of emergency) to enter upon the demised premises with materials and equipment to inspect maintain repair renew replace relay or remove any attachments to the Building or to inspect repair maintain or renew the Building or any adjoining or neighbouring property and to clean maintain repair or renew any Pipes or other structures conveniences or appurtenances belonging thereto 3.8.4 To permit the Landlord and all others authorised by it at all reasonable times on reasonable prior notice (and at all times without notice in case of emergency) to enter upon the demised premises for the purpose of valuing or measuring the demised premises and also to do anything which the Landlord shall deem necessary or prudent to prevent a forfeiture of the Headlease or to obtain relief against any such forfeiture PROVIDED ALWAYS that the Landlord or other person or persons exercising such rights shall cause as little damage to the demised premises as possible and shall as soon as reasonably practicable make good any damage nevertheless caused YIELDING UP 3.9 At the expiration or sooner determination of the Term quietly to yield up unto the Landlord the demised premises with actual vacant possession and together with all additions and improvements thereto and all fixtures which during the Term may be affixed or fastened to or upon the demised premises (tenant's fixtures and fittings only excepted) in such state and condition as shall in all respects be consistent with the full performance by the Tenant of the covenants contained in these presents and in case any of the Landlord's fixtures and fittings shall be missing worn out broken damaged or destroyed forthwith to replace them with others of a similar character and of at least equal value and to remove the Tenant's fixtures and fittings including every moulding sign writing or painting of the name or business of the Tenant or other occupiers from the demised premises and to make good all damage caused by such removal to the Landlord's satisfaction ALTERATIONS AND ADDITIONS 3.10.1 Not at any time during the Term to make any alterations or additions to the electrical installation of the demised premises save in accordance with the standards terms and conditions laid down by the Institution of Electrical Engineers and the regulations of the electricity supply authority and not to make any such alteration or addition without the prior written consent of the Landlord 3.10.2.1 Not at any time during the Term to make any alteration or addition whatsoever structural or otherwise (save as hereinafter provided) in or to the demised premises or any part thereof or change the existing design elevation or the external decorative scheme thereof or cut maim or remove any of the walls horizontal or vertical partitions beams columns or other structural parts thereof 7 12 3.10.2.2 Not to make any alterations or additions to any air conditioning or alarm systems in the demised premises or the Pipes within or serving the demised premises 3.10.3 Subject to prior compliance with the following conditions the Tenant may carry out non-structural internal alterations to the demised premises:- 3.10.3.1 the Tenant shall not interfere with any Pipes or mechanical and electrical services which may at any time be or run under in or through the demised premises other than electrical services solely serving the demised premises or cause access to the same to be or become more difficult than it now is 3.10.3.2 the Tenant shall supply to the Landlord at the cost of the Tenant five copies of all plans and specifications and any further information which the Landlord may reasonably require 3.10.3.3 the external appearance of the demised premises shall not be affected and the walls dividing the demised premises from the adjoining premises shall not be altered or affected in any way and 3.10.3.4 the prior written consent of the Landlord shall have been obtained such consent not to be unreasonably withheld or delayed 3.10.4 That if the Tenant shall have made or shall make any addition or alteration to the demised premises or the electrical installation thereof either before or after the commencement of the Term then at the expiration or sooner determination thereof the Tenant will (if so required by the Landlord but not otherwise) at the Tenant's own cost and expense reinstate and make good to the satisfaction of the Landlord the demised premises and the electrical installation thereof and restore the same to the plan and design as if such addition or alteration (or such of them as may be specified by the Landlord) had not been made and will pay the costs and expenses incurred by the Landlord (including legal costs and surveyors' fees and other professional costs and fees and disbursements) of and incidental to the superintendence of such reinstatement and making good DISREPAIR AND BREACH OF COVENANT 3.11.1 Well and substantially to commence and then proceed diligently and expeditiously to repair remedy reinstate and make good all defects dilapidations unauthorised works and other breaches of covenant of which notice in writing shall be given to or left on the demised premises for the Tenant by the Landlord within two calendar months (or sooner if requisite) after the giving or leaving of such notice 3.11.2. If the Tenant shall fail to comply with Clause 3.11.1 to allow the Landlord with all necessary workmen tools materials equipment and appliances (without prejudice to any other right or remedy of the Landlord) to enter the demised premises to repair reinstate and make good the same and to pay to the Landlord on demand the costs and expenses incurred (including all legal costs and surveyors' fees and other professional costs and fees and disbursements) 8 13 SIGNS AND NAME OF BUILDING 3.12.1 Not to erect or install any hanging sign projecting sign or other sign aerial or other thing whatsoever on the exterior of the demised premises or in or on the Building 3.12.2 Not to change or object to a change of the name of the Building STATUTORY AND PLANNING REQUIREMENTS 3.13.1 At all times during the Term to observe and comply in all respects with the provisions and requirements of any and every Enactment so far as it may relate to or affect the demised premises or any works additions or improvements therein or thereto or the user thereof or the employment therein of any person and to execute all works and provide and maintain all arrangements and make all payments which by or pursuant to any Enactment are or may be directed or required to be executed provided maintained or made at any time during the Term and to indemnify the Landlord at all times against all actions proceedings claims costs charges and expenses of or incidental to the execution of any works or the provision or maintenance of any arrangements or payments so directed or required as aforesaid or otherwise arising from any contravention of any Enactment 3.13.2 Not at any time during the Term to do or fail to do on or about the demised premises any act or thing by reason of which the Landlord may under any Enactment incur or have imposed upon it or become liable to pay any penalty damages compensation costs charges or expenses 3.13.3 Not without the Landlord's prior written consent which shall not be unreasonably withheld or delayed to make any application for planning permission relating to the demised premises or any part thereof or the user thereof 3.13.4 Unless the Landlord shall otherwise direct in writing to carry out before the expiration or sooner determination of the Term any works stipulated to be carried out to the demised premises as a condition of any planning permission obtained by or on behalf of the Tenant or any permitted undertenant of the Tenant by a date subsequent to such expiration or sooner determination 3.13.5 Not to make any objection to any planning application in respect of any other premises in the Building by the Landlord or to which the Landlord may consent 3.13.6 Not to make any objection to any planning application by the Landlord in respect of any other adjoining or neighbouring property or any development in the locality by the Landlord or to which the Landlord may consent without the Landlord's prior written consent which shall not be unreasonably withheld NOTICES 3.14 Within five working days of the receipt of notice of the same (whether by advertisement or not) to give full particulars to the Landlord of any permission notice or order or any proposal for a notice or order relating to the demised premises made given or issued to the Tenant or the owner or occupier of the demised premises pursuant to any Enactment and if so required by the Landlord to 9 14 produce such permission notice or order or proposal for a notice or order to the Landlord and also without delay to take all steps to comply with any such notice or order and also at the request of the Landlord but at the cost and expense of the Tenant to make or join with the Landlord in making such objections or representations against or in respect of any such notice order or proposal as the Landlord shall reasonably think fit OVERLOADING 3.15.1 Not to overload any floor or roof of the demised premises or the Building or suspend any excessive weight from the roofs ceilings walls stanchions or structure of the demised premises or the Building 3.15.2 Not to do anything which may subject the demised premises or the Building to any strain beyond that which it is designed to bear with due margin for safety and unless the opinion of a qualified structural engineer commissioned by or on behalf of the Tenant or any permitted undertenant of the Tenant is available to pay to the Landlord on demand all costs reasonably incurred by the Landlord in obtaining the opinion of a qualified structural engineer as to whether the structure of the demised premises or the Building is being or is about to be overloaded 3.15.3 To observe the weight limits prescribed for all lifts in the Building 3.15.4 Not to do anything which adversely affects the heating cooling or ventilation of the demised premises or the Building or which imposes an additional load on the heating cooling or ventilation plant and equipment or any such system beyond that which it is designed to bear ENCROACHMENT 3.16 Not to permit or suffer any encroachment upon or against the demised premises or the acquisition of any new right of light way drainage or other easement on over under or against the demised premises for the benefit of other property not being the property of the Landlord and if any such encroachment or easement shall be made or acquired or threatened to be made or acquired forthwith to give notice in writing thereof to the Landlord and at the cost of the Tenant to do all such things AS may be necessary to prevent the making of such encroachment or the acquisition of such easement or right provided always that if the Tenant shall omit or neglect to do all such things it shall be lawful for the Landlord or any persons authorised by it to enter the demised premises and to do the same and any expenses so incurred by the Landlord shall be repaid to the Landlord by the Tenant on demand NUISANCE AND GENERAL PROHIBITIONS 3.17.1 Not to do or permit to be done anything in the demised premises which may in the opinion of the Landlord be waste spoil or destruction or be prejudicial or detrimental to the Landlord or the Building or be or become a nuisance annoyance disturbance or cause damage or inconvenience to the Superior Lessor or the Landlord or their respective tenants or the owners tenants or occupiers of adjoining or nearby premises or which in the reasonable opinion of the Landlord or the Superior Lessor may prejudicially affect or depreciate the demised premises or any adjoining or neighbouring property or which may damage any Pipes which now are or may hereafter be placed on or near the demised premises 10 15 3.17.2 Not to use the demised premises or any part thereof for any sale by auction or for residential purposes or for any illegal or immoral purpose or for any dangerous noxious noisy or offensive nature trade or business and not to put outside the demised premises any clothing or other articles 3.17.3 Not to misuse or damage in any way the lifts installed in the Building 3.17.4 Not to use any radio or other sound producing apparatus so as to be audible from outside the demised premises 3.17.5 Not to erect or set up on the demised premises or any part thereof any machinery of any kind or any external posts wires aerials or other works Provided that the Tenant may install or use usual office machinery and computers in connection with the normal use of the demised premises for the purposes hereby envisaged so long as such installation and use does not affect the structure or the external appearance of the demised premises 3.17.6 Not to install in or upon the demised premises any paraffin burning apparatus whether for heating purposes or otherwise nor cause the emission of any smoke effluvia vapour grit smell or odour from any apparatus on the demised premises 3.17.7 On a written notice being served by the Landlord requiring the abatement of any emission of smoke effluvia vapour grit smell or odour to abate such emission accordingly as soon as possible thereafter 3.17.8 To pay on demand all costs charges and expenses incurred by the Landlord in abating a nuisance caused by the Tenant or any undertenant or their respective officers agents employees invitees licensees or visitors and in executing all such works as may be necessary for abating such a nuisance whether or not in obedience to a notice served by the local authority 3.17.9 Not without the prior written consent of the Landlord to prepare or cook any food in the demised premises and to take all necessary steps to ensure that all smells and fumes caused by permitted cooking refuse or food shall be removed from the demised premises in a manner and by mechanical means approved by the Landlord and in any event so as to ensure that in the reasonable opinion of the Landlord no nuisance or annoyance shall be caused to the Landlord or any of the tenants or occupiers of the demised premises or or any adjoining or neighbouring property USER 3.18 Not to use the demised premises or any part thereof otherwise than as high class professional or commercial offices RIGHTS OF LIGHT 3.19 Not to stop up darken or obstruct any windows or lights belonging to the demised premises or any other buildings belonging to the Landlord nor to give to any third party any acknowledgment that the Tenant enjoys the access of light to any of the windows or openings in the demised premises by 11 16 the consent of such third party nor to pay to such third party any sum of money nor to enter into any agreement with such third party for the purpose of inducing or binding such third party to abstain from obstructing the access of light to any of such windows or openings And that in case the owners of adjacent land or buildings do or threaten to do anything which obstructs the access of light to any of the windows or openings in the demised premises the Tenant will give immediate notice thereof to the Landlord and will adopt such means as may be required or deemed proper for preventing the same And in the event of a breach by the Tenant of this covenant it shall be lawful for the Landlord or its agents and others to enter upon the demised premises and take such action and bring such proceedings as the Landlord may think fit in the name of the Tenant and at the expense of the Tenant for the purpose of remedying the same REFUSE 3.20.1 Not to form a rubbish dump on the demised premises or in the common parts of the Building and to keep all rubbish and refuse within the demised premises and in properly covered receptacles to the reasonable satisfaction of the Landlord 3.20.2 To comply with all reasonable directions and regulations made by the Landlord from time to time relating to the removal storage and disposal of rubbish and refuse DANGEROUS SUBSTANCES 3.21 Not to bring into the demised premises or to place keep handle or store in or about the demised premises any petrol or substance or material of a radio-active explosive dangerous offensive combustible or inflammable nature PIPES 3.22 Not to stop up or obstruct in any way whatsoever or permit oil grease or other noxious or deleterious matter or substance to enter the Pipes serving the demised premises or the Building and to employ such plant for treating any noxious or deleterious effluent before permitting the same to enter such Pipes as may be required by the Landlord from time to time in accordance with the best modern practice and in the event of any such obstruction or injury being caused to the Pipes forthwith to make good all such damage to the satisfaction of the Landlord CONTROL OF COMMON PARTS 3.23.1 Not to obstruct the common parts in any manner whatsoever 3.23.2 Not to use the common parts for the parking of vehicles 3.23.3 To co-operate with the Landlord so as to prevent the common parts from being obstructed or being used for the parking of vehicles DISPUTES 3.24 To permit all questions and disputes relating to easements rights privileges or boundaries arising with the owner or occupier of any property adjoining adjacent to or opposite the demised premises or the Building to be settled by the Landlord on behalf of the Tenant at the expense of the Tenant 12 17 INDEMNITY 3.25.1 To indemnify the Landlord in respect of all actions proceedings liability costs claims and demands which might be instituted incurred or made by any person (including officers and employees of the Landlord) or any competent authority by reason of: 3.25.1.1 any injury to or the death of any person or damage to any property moveable or immoveable caused by or in any way arising out of the user of the demised premises or the state of repair and condition of the demised premises or anything therein or caused by or in any way arising out of the execution of any works at or alterations or additions to the demised premises during the Term or through any failure by the Tenant to observe and perform the covenants on the Tenant's part contained in these presents 3.25.1.2 any interference or alleged interference with or obstruction of any right or alleged right of light air drainage or other right or alleged right now or hereafter existing for the benefit of any adjoining or neighbouring property arising from any act or neglect of the Tenant any undertenant or their respective officers agents employees invitees licensees or visitors 3.25.1.3 any stoppage of or damage to the Pipes or other conveniences and services used in common with the owner tenant or occupier of any adjoining neighbouring or nearby property arising from any act or neglect of the Tenant any undertenant or their respective officers agents employees invitees licensees or visitors 3.25.2 Without prejudice to any covenant or liability of the Tenant under this Underlease to indemnify the Landlord against all liability to tax including corporation tax capital gains tax development charges and any other present or future tax duty charge assessment or imposition (whether Parliamentary Parochial local or otherwise and whether in the nature of those now in being or not) and all costs and expenses in relation thereto which may be payable by the Landlord or in respect of the reversion to this Lease by virtue of any works development or change of use carried out by the Tenant (or any undertenant) in or to the demised premises or any part thereof and also against any further liability to such taxation flowing from the indemnities contained in this Clause or any payment pursuant to them 3.25.3 To pay and make good to the Landlord all and every loss and damage whatsoever incurred or sustained by the Landlord as a consequence of every breach or non observance of the Tenant's covenants herein contained and to indemnify the Landlord from and against all actions proceedings costs claims and demands thereby arising SUPPORT 3.26 Not to do anything on the demised premises which would remove support from any adjoining premises or endanger such premises in any way 13 18 SALE AND LETTING BOARDS 3.27 To permit the Landlord and its agents to enter upon the demised premises and affix and retain without interference upon any part thereof at any time during the last six months of the Term a notice for letting the demised premises and at any time during the Term for selling or disposing of the Landlord's interest therein and during such periods to permit all persons with authority from the Landlord at all reasonable times during the daytime upon notice to enter and view the demised premises or any part thereof DILAPIDATIONS AND SECTION 146 LAW OF PROPERTY ACT 1925 3.28 To pay all costs charges and expenses (including legal costs surveyors' fees and other professional fees and disbursements and commission payable to a bailiff) properly incurred by the Landlord: - 3.28.1 in or in contemplation of the preparation and service of any notice pursuant to or any proceedings under Sections 146 and/or 147 of the Law of Property Act 1925 or otherwise (whether or not any right of re-entry or forfeiture has been waived by the Landlord or a notice served under the said Section 146 is complied with by the Tenant or the Tenant has been relieved under the provisions of the said Act and notwithstanding that forfeiture may be avoided otherwise than by relief granted by the Court) 3.28.2 in relation to the preparation and service of any notice demand and/or Schedule of Dilapidations whether during or after the expiration or prior determination of the Term 3.28.3 in the supervision or superintendence of any works to be carried out in pursuance of any notice demand and/or Schedule of Dilapidations whether or not such works shall be carried out during or after the expiration or prior determination of the Term 3.28.4 in connection with or procuring the remedying of any breach of covenant on the part of the Tenant contained in these presents ALIENATION 3.29.1.1 Not to assign nor (save as hereinafter provided) underlet part only of the demised premises and not to mortgage or charge the whole or any part of the demised premises 3.29.1.2 Save by way of a duly authorised assignment or underletting not to part with or share the possession or occupation of the whole or any part of the demised premises Provided that the Tenant may share occupation of the demised premises with any company or companies which is or are a member or members of the same group as the Tenant (within the meaning of Section 42 of the Landlord & Tenant Act 1954) for so long as the Tenant and the other company or companies shall remain members of that group and otherwise than in a manner that creates any tenancy or other interest in the demised premises or any rights under Part 11 of the Landlord & Tenant Act 1954 3.29.1.3 Not to hold the whole or any part of the demised premises on trust for another 14 19 3.29.2.1 In this sub-clause the expression "Permitted Assignee" shall mean a respectable and responsible person of good financial standing who has entered into a direct covenant with the Landlord to pay the rents reserved and other moneys made payable by these presents and to be bound by and perform and observe the covenants and conditions contained in these presents for the balance of the Term then unexpired and who (if the Landlord reasonably so requires) has obtained a guarantor or guarantors approved by the Landlord (such approval not to be unreasonably withheld or delayed) to enter into covenants with the Landlord (being where there is more than one guarantor joint and several covenants) in the terms (mutatis mutandis) of Clauses 6.1 to 6.6 3.29.2.2 Not to assign the demised premises as a whole to any person who is not a Permitted Assignee 3.29.2.3 Not without the prior written consent of the Landlord such consent not to be unreasonably withheld to assign the demised premises as a whole to a Permitted Assignee 3.29.3.1 In this sub-clause the expression "Permitted Undertenant" shall mean a respectable and responsible person of good financial standing and the expression "Permitted Part" shall mean one of two parts of the demised premises such that the two parts together comprise the whole of the demised premises (excluding only those areas required for the common use of a Permitted Undertenant and any other occupier of the demised premises) 3.29.3.2 Not to create any underlease of the whole or any part of the demised premises upon payment of a fine or premium nor at a rent of less than the full yearly market rent obtainable without taking a fine or premium to be approved in writing by the Landlord prior to the underlease and in any event at a rent not less than the rent for the time being reserved under these presents or that reasonably attributable to the Permitted Part 3.29.3.3 Not to create any underlease save by instrument in writing containing the following covenants agreements and stipulations (an instrument containing the same being hereinafter called a "Permitted Underlease") namely: - 3.29.3.3.1 unqualified covenants on the part of the undertenant that the undertenant will not assign part only of the premises underlet and will not mortgage charge underlet or part with or share the possession or occupation of or hold on trust for another the whole or any part thereof (in each case by way of absolute prohibition) and 3.29.3.3.2 a covenant on the part of the undertenant that the undertenant will not assign the whole of the premises underlet without the prior written consent of the Landlord under these presents (such consent not to be unreasonably withheld) and 3.29.3.3.3 similar agreements covenants and stipulations (mutatis mutandis) which are no less onerous than those contained in these presents including in particular but without limitation provisions for payment of all payments due to be made by the Tenant hereunder or a part thereof reasonably attributable to the Permitted Part and to give to the Tenant full reimbursement for the cost of all services provided 15 20 by the Tenant to the undertenant and provisions for rent reviews at least as often as those herein contained to the full yearly market rent obtainable without taking a fine or premium calculated as at the dates on which the rent hereby reserved is to be reviewed 3.29.3.3.4 a condition of re-entry on breach of any covenant by the undertenant 3.29.3.3.5 an agreement excluding the Permitted Underlease from the provisions of Sections 24-28 (inclusive) of the Landlord and Tenant Act 1954 3.29.3.4 Not to underlet the whole or any part of the demised premises to any person who is not a Permitted Undertenant nor so as to result in more than two parts being in separate exclusive possession (whether by the Tenant or a Permitted Undertenant) 3.29.3.5 Not without the prior written consent of the Landlord such consent not to be unreasonably withheld to underlet the demised premises as a whole or a Permitted Part to a Permitted Undertenant 3.29.3.6 Not to vary the terms of any Permitted Underlease without the Landlord's prior written consent which shall not be unreasonably withheld provided such terms as varied continue to comply with the requirements hereinbefore contained and in the event of any breach non-performance or non-observance of any of the covenants conditions agreements or provisions contained in these presents by any undertenant to inform the Landlord in writing and at the Landlord's request but at the Tenant's cost take all steps to enforce such breach non-performance or non-observance 3.29.3.7 To procure that in any Permitted Underlease the rent is reviewed in accordance with the provisions of the Permitted Underlease but not to agree any such reviewed rent without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) and if the rent is to be determined by an independent person not to determine whether such person is to act as an expert or as an arbitrator without the prior written consent of the Landlord and to procure that the Landlord's representations as to the rent payable thereunder are made to such independent person 3.29.3.8 To procure that the rents reserved by any Permitted Underlease shall not be commuted or payable more than one quarter in advance and not to permit the reduction of any rents reserved by any such underlease REGISTRATION OF DEALINGS 3.30.1 At the cost of the Tenant within fourteen days next after the execution of every assurance assignment underletting surrender mortgage or charge affecting the demised premises or devolution of the estate of the Tenant whether by act of parties or by operation of law or of any estate created directly or indirectly (however remotely) out of the Tenant's estate or of the termination by any means of any such estate or of the commencement or termination of any such sharing as is mentioned in Clause 3.29.1.2 to give separate notices thereof in writing with particulars thereof to the Landlord and the Superior Lessor and deliver to the Landlord and the Superior Lessor certified copies of any instrument effecting the same including the 16 21 Probate of the Will or Letters of Administration or other document or evidence of such devolution or termination and produce the same to the Landlord and the Superior Lessor paying at the same time to the Landlord a reasonable registration fee of not less than twenty pounds for each such instrument or transaction and paying to the Superior Lessor the registration fee payable under the Headlease 3.30.2 It is hereby agreed that such registration shall be evidence of notification to the Landlord of such matter but shall not require the Landlord to consider the terms of such matter and shall not be evidence that it has done so 3.30.3 Whenever requested by the Landlord to give the Landlord full details of all underleases (direct and indirect) (however remote) in respect of the demised premises and of the persons in actual occupation or possession of the demised premises and of the right in which they are in such occupation or possession and of the terms thereof and of the rents payable from time to time and of the stage reached in any rent review negotiations or determination thereunder LANDLORD'S COSTS 3.31 To pay the legal costs surveyors' or architects' fees and any other costs and expenses properly incurred by the Landlord (including stamp duty on licences and counterparts) resulting from all applications for any consent under these presents including those incurred in cases where consent is refused or the application is withdrawn VALUE ADDED TAX 3.32.1 Where by virtue of any of the provisions of these presents the Tenant is required to pay repay or reimburse to the Landlord or any person or persons any rents costs charges fees expenses or any other sums or amounts whatsoever in respect of the supply of any goods and/or services by the Landlord or any other person or persons the Tenant shall also be required in addition to pay or (as the case may be) keep the Landlord indemnified against:- 3.32.1.1 the amount of any Value Added Tax which may be chargeable on such rents costs charges fees expenses or other sums or amounts whatsoever in respect of the supply of any goods and/or services as aforesaid to the Tenant 3.32.1.2 the amount of Value Added Tax chargeable on any other person (or chargeable on the Landlord in the case of supplies which the Landlord is deemed to make to itself) in respect of supplies the cost of which is included in the calculation of the sums which the Tenant is required to pay repay or reimburse to the Landlord save to the extent that such Value Added Tax is recoverable by the Landlord by virtue of the supply by the Landlord of any goods and/or services in respect of this Lease being subject to Value Added Tax 3.32.2 For the avoidance of doubt the Landlord shall not be under a duty to exercise or not exercise any option or right conferred on the Landlord by the legislation relating to Value Added Tax (including any regulations made thereunder) so as to reduce or avoid any liability to Value Added Tax 17 22 REGULATIONS 3.33 To observe and perform and to ensure that the servants agents workmen and visitors of the Tenant shall observe and perform the regulations set out in the Sixth Schedule and any and all other reasonable regulations and instructions from time to time made or given by the Landlord in respect of the conduct and use of the Building provided that the same shall not impair the Tenant's use and enjoyment of the demised premises WINDOWS 3.34 Not except in emergency to attempt to repair or replace any windows or glass in the exterior walls of the demised premises but to inform the Landlord forthwith upon the Tenant becoming aware of any such repair or replacement being required and to allow the Landlord and its agents and workmen to enter to repair or replace the same and to pay to the Landlord on demand the reasonable costs and expenses thereof FIRE CONTROL 3.35 To keep any fire alarm and fire prevention and control apparatus installed in the demised premises open to the inspection and maintained to the satisfaction of the Landlord and not to obstruct the access to or means of working such apparatus INTEREST ON LATE PAYMENTS 3.36 If and so often as any rent or other moneys due from the Tenant under these presents shall be unpaid after the due date or shall be declined by the Landlord so as not to waive a breach of covenant the Tenant shall (without prejudice to the Landlord's right of re-entry hereinafter contained or any other right or remedy of the Landlord) pay (in the case of rent by way of additional rent) interest thereon (as well after as before any judgment) from the due date until payment or (as the case may be) acceptance following the remedying of the breach compounded with quarterly rests on the usual quarter days at the rate of 4% per annum above the Base Rate for the time being declared by Lloyds Bank PLC (or other bank for the time being specified by the Landlord) PROVIDED THAT in the case of rent paid by banker's order such rent shall be deemed to have been paid on the date on which the same is received by the Landlord's bank SUPERIOR TITLE 3.37 To observe and perform the agreements covenants and stipulations (other than payment of rent) contained or referred to in the Registers of Title Number NGL 334633 and in the Headlease so far as they relate to the demised premises and to keep the Landlord indemnified against all actions proceedings costs claims and demands relating thereto RATES 3.38.1 Not whether by proposal agreement or default to allow to be altered or settled the rating assessment of the demised premises or any part thereof or allow the same to be divided without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) provided that it shall be deemed to be reasonable for the Landlord to withhold consent if the Landlord shall receive professional advice that any proposal which the Tenant may intend to make or any settlement which 18 23 the Tenant may propose to accept could reasonably be expected not to result in a reduction in the assessment 3.38.2 Fully to co-operate with the Landlord in any negotiations with the Valuation Officer and/or the rating authority or proceedings regarding the rating assessment of the demised premises or any part thereof 3.38.3 To indemnify the Landlord against any loss of relief from rates if a period during which such relief may be available in respect of the demised premises or any part thereof shall occur during the Term LANDLORD'S COVENANTS 4. the Landlord hereby covenants with the Tenant:- QUIET ENJOYMENT 4.1 That the Tenant paying the rents and other moneys and performing and observing the covenants agreements conditions and stipulations as herein provided may peaceably and quietly hold and enjoy the demised premises for the Term without any interruption from or by the Landlord or any person lawfully claiming under or in trust for it INSURANCE 4.2.1 To insure the Building (except tenants' fixtures and fittings) at all times during the Term against loss or damage by the Insured Risks (unless such insurance shall be prevented by the act or default of the Tenant or any undertenant or their respective officers agents employees invitees licensees or visitors) with some insurance office or underwriters of repute upon the usual terms and conditions of such insurance office or underwriters (all commissions and discounts payable in respect of such insurance belonging to the Landlord for its own use and benefit) in the full reinstatement cost thereof (together with an allowance for inflation and Architects' Surveyors' and other professional fees and demolition and clearance expenses in such amounts and including Value Added Tax as the Landlord shall from time to time determine) and also four years' (or such longer period as the Landlord may from time to time require) full rent and service charge payable under these presents (including any increased rent and service charge) 4.2.2 In case of damage to or destruction of the demised premises by any of the Insured Risks to use all reasonable endeavours to employ the insurance moneys (other than for loss of rent and service charge third party risks property owners' liability professional fees and Value Added Tax) received by it (subject to all consents having been obtained and which the Landlord shall use all reasonable endeavours to obtain) in reinstating and making good the demised premises with such variations as may be necessary or desirable having regard to statutory provisions bye-laws and regulations then in force and any planning approval necessary and also to building standards then prevailing and the requirements of the Superior Lessor and to make up any deficiency out of its own moneys provided that if the rebuilding and reinstatement of the demised premises or any part thereof shall be frustrated or become impossible all moneys payable pursuant to any policy of insurance effected hereunder shall belong to the Landlord absolutely for its own use and benefit and the Tenant 19 24 shall upon expiry of the Landlord's loss of rent insurance or at any time thereafter be entitled to terminate this underlease by serving notice to that effect upon the Landlord and the Term shall thereupon absolutely cease and determine but without prejudice to any rights or remedies that may have accrued to either party against the other including (but without limitation) any right that the Tenant may have against the Landlord in respect of any breach of the Landlord's obligations set out in Clause 4.2.1 and 4.2.2 4.2.3 At the Tenant's cost to supply the Tenant with a copy or full details of the Landlord's insurance policy or policies upon reasonable request from time to time (but not more frequently than once every year) and in any event forthwith to notify the Tenant in writing of any material changes from time to time in the terms of the Landlord's insurance PROVISION OF SERVICES 4.3 To use all reasonable endeavours to do such of the things and provide such of the services mentioned in the Fifth Schedule as the Landlord shall from time to time be deem appropriate in accordance with the principles of good estate management save that where such services are expressed to be provided at the Landlord's discretion the Landlord may but shall not be obliged to provide them provided nevertheless that: 4.3.1 The Landlord shall be entitled to employ and pay such agents servants contractors or such other persons as the Landlord may from time to time think fit 4.3.2 The Landlord shall not be liable to the Tenant or any of its officers agents employees invitees licensees or visitors for or in respect of any loss damage or inconvenience occasioned or caused by delay suspension breakdown inclement weather shortage of fuel or water or stoppage due to any cause or circumstance not within the Landlord's control or any act neglect default misfeasance or omission of any attendant porter or other servant or employee of the Landlord or the stoppage of any service which the Landlord reasonably considers is no longer appropriate 4.3.3 The Landlord shall not be liable to the Tenant for any defect or want of repair unless the Landlord has had written notice thereof or ought to have been aware thereof in accordance with the principles of good estate management or (except in case of emergency) during such period thereafter as the Landlord shall reasonably take to obtain professional advice as to the work required and competitive tenders from contractors competent to carry out such work nor be liable in respect of any matter mentioned in the Fifth Schedule that falls within the ambit of any of the covenants on the part of the Tenant contained in these presents HEADLEASE 4.4.1 During the continuance of the Term to pay the rent reserved by the Headlease and to indemnify the Tenant in respect of any failure to perform the lessee's covenants contained therein in so far as the Tenant is not liable for such performance under the covenants on its part contained in these presents 4.4.2 To use all reasonable endeavours at the Tenant's expense to obtain the consent of the Superior Lessor whenever the Tenant makes application for any consent required under this 20 25 Underlease and the consent of both the Landlord and the Superior Lessor is required by virtue of this Underlease and the Headlease PROVISOS 5. PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED THAT:- RE-ENTRY 5.1 Notwithstanding and without prejudice to any other remedy and power herein contained or otherwise available to the Landlord if 5.1.1 the rents or other moneys hereby reserved and made payable or any part thereof respectively shall be unpaid for twenty-one days after becoming payable (whether formally or legally demanded or not) or 5.1.2 any covenant agreement or obligation on the Tenant's part contained in these presents shall not be performed or observed or 5.1.3 the Tenant shall permit any execution or distress to be levied on any goods for the time being in the demised premises or 5.1.4 the Tenant (being a company) shall enter into liquidation whether compulsory or voluntary (not being merely a voluntary liquidation while solvent for the purposes of amalgamation or reconstruction) or a provisional liquidator shall be appointed under the Insolvency Act 1986 or a receiver or manager or administrative receiver or administrator shall be appointed or a proposal shall be made for a voluntary arrangement or a proposal shall be made for a scheme of arrangement or 5.1.5 the Tenant (being an individual) shall apply for an interim order or shall propose a voluntary arrangement under the Insolvency Act 1986 or shall suffer a bankruptcy order to be made under the said Act or shall petition the Court for his own bankruptcy or shall enter into a deed of arrangement or 5.1.6 the Tenant (being a company) shall be struck off the Register of Companies or dissolved or (being a company incorporated outside Great Britain) dissolved or cease to exist under the laws of the country or the state of its incorporation then in every such case it shall be lawful for the Landlord at any time thereafter to re-enter upon the demised premises or any part thereof in the name of the whole and thereupon this demise shall absolutely determine but without prejudice to any right of action of the Landlord in respect of any breach non-observance or non-performance of the Tenant's covenants agreements or obligations herein contained RENT SUSPENSION 5.2 If during the Term the demised premises or any part thereof shall be destroyed or damaged by any of the Insured Risks so as to render the demised premises or any part thereof unfit for occupation or use then (if the Tenant shall have duly carried out the Tenant's obligations under Clauses 3.1 21 26 and 3.2 and if no insurance of the demised premises or rent and service charge shall have been vitiated or payment of the policy moneys refused in whole or in part in consequence of some act or default of the Tenant or any undertenant or their respective officers agents employees invitees licensees or visitors) the rent first hereby reserved or a fair and just proportion thereof according to the nature and extent of the damage sustained shall be suspended to the extent (but not otherwise) that the insurers meet the Landlord's claim under the policy for loss of rent at the rate which would from time to time be payable hereunder if the demised premises were undamaged until the demised premises shall again be rendered fit for occupation and use or the earlier expiration of four years or such longer period as may be covered by the Landlord's loss of rent insurance from the date of the damage or destruction and any dispute as to the extent proportion or period of such suspension shall be determined by a single arbitrator to be appointed by the Landlord and the Tenant and in case of difference by the President for the time being of the Royal Institution of Chartered Surveyors and such arbitration shall act in accordance with the provisions of the Arbitration Acts 1950 to 1979 BASE RATE 5.3 In the event of the Base Rate of Lloyds Bank PLC (or other bank for the time being specified by the Landlord) being abolished or ceasing to be published and no alternative rate being presented by law to replace the said Base Rate for the purpose (inter alia) of construing existing leases then any reference to the said Base Rate shall have effect as if there had been substituted from time to time for the Base Rate such rate of interest as shall be most closely comparable with the said Base Rate such rate of interest to be reasonably determined by the Landlord's Surveyor ARREARS 5.4 Any moneys due to the Landlord from the Tenant under any covenant condition or provision contained in these presents shall be due as a debt from the Tenant to the Landlord payable on demand and in the event of non-payment such moneys shall be recoverable by distress or otherwise in the same way as rent in arrear SETTLEMENT OF DISPUTES 5.5 Any dispute arising as between the Tenant and the tenant or occupier of any other property of the Landlord as to any easement right or privilege in connection with the use of the demised premises and such other property or as to the walls separating the demised premises from such other property or as to the amount of any contribution towards the expenses of works to services used in common with such other property shall be decided by the Landlord's Surveyor for the time being whose decision shall be binding on all parties (save on any question of law) and whose costs shall be paid by such of the parties to the dispute in such proportions as he shall decide EXCLUSION OF IMPLIED RIGHTS 5.6 Nothing herein contained (save as may be expressly granted by this Underlease) shall by implication of law or otherwise operate to confer on the Tenant any easement right or privilege whatsoever over or against any adjoining or other property of the Landlord (whether in the Building or not) either for an estate in fee simple or for a term of years 22 27 UNRESTRICTED USE OF ADJOINING PROPERTY 5.7 The Tenant shall not be entitled to the benefit of any restrictions which the Landlord or the Superior Lessor may have imposed or may hereafter impose on any owner or lessee of any property not comprised in the demised premises (whether in the Building or not) and nothing herein contained or implied shall impose or be deemed to impose any restrictions on the use of any such property or give the Tenant the right to enforce or to have enforced or to prevent the release or modification of any covenant agreement or condition entered into by any purchaser from or any lessee tenant or occupier of the Landlord or the Superior Lessor in respect of such property EXCLUSION OF LIABILITY 5.8 Save to the extent that the Landlord may be insured in respect thereof the Landlord shall not be liable to the Tenant or any of its officers agents employees invitees licensees or visitors for any injury death damage destruction inconvenience or financial or consequential loss which may be caused by reason of the failure stoppage leakage bursting or defect of any water sanitary gas electricity or other apparatus or by reason of a breakdown or defect of any plant or machinery in the demised premises or serving the demised premises or due directly or indirectly to the act neglect or default of any other tenant or occupier for the time being of the Building or of any officer agent employee or other person authorised by the Landlord to enter the demised premises or to the condition of the demised premises PARTY WALLS 5.9 All internal walls separating the demised premises from any adjoining premises shall be deemed to be party walls and repairable as such COMPENSATION 5.10 Subject to the provisions of Section 38(2) of the Landlord and Tenant Act 1954 neither the Tenant nor any assignee or underlessee shall be entitled on quitting the demised premises or any part thereof to any compensation under Section 37 of the said Act PERPETUITY PERIOD 5.11 All rights granted and all reservations made in respect of Pipes not in existence at the date hereof shall be limited to those which shall come into existence during the Term within eighty years from the date hereof (which shall be deemed to be the perpetuity period for the purposes of this Underlease) NO PLANNING WARRANTY 5.12.1 Nothing in this Lease shall be deemed to constitute any representation or warranty by the Landlord that the demised premises or any part thereof are or will remain authorised for use under the Planning Acts or otherwise for any specific purpose nor shall any consent which the Landlord may in its absolute discretion give to any change of use be taken as including any such representation or warranty 23 28 5.12.2 Notwithstanding that any such use might not be a permitted use under the Planning Acts the Tenant shall remain fully bound and liable to the Landlord in respect of the obligations undertaken by the Tenant under these presents without being entitled to any compensation recompense or relief or any kind whatsoever NOTICES 5.13 Section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery Service Act 1962 shall apply to any notices required or authorised to be given hereunder NO WAIVER 5.14 No demand for or acceptance of rent by the Landlord or its agents with knowledge of a breach of any of the covenants on the part of the Tenant contained in these presents shall be or be deemed to be a waiver wholly or partially of any such breach but any such breach shall be deemed to be a continuing breach of covenant and the Tenant and any person taking any estate or interest under or through the Tenant shall not be entitled to set up any such demand for or acceptance of rent by the Landlord or its agent as a defence in any action for forfeiture or otherwise VARIATION IN INSURANCE AND SERVICE CHARGE PERCENTAGE 5.15 If at any time the Landlord considers it fair and reasonable that the Tenant should pay a different proportion of the expenditure by reference to which rent secondly and thirdly reserved is calculated the Landlord will from time to time by serving written notice on the Tenant make such variation therein as may be fair and reasonable in all the circumstances OPTION TO DETERMINE 5.16 If the Tenant shall desire to determine the Term at the expiration of the fifteenth year of the Term and shall give to the Landlord not less than six calendar months' previous notice in writing thereof then this demise shall upon the expiration of the fifteenth year of the Term absolutely determine but without prejudice to any right of action of either party in respect of any antecedent breach non-observance or non-performance of the other's covenants agreements or obligations herein contained SURETY 6.1 In consideration of the Landlord's granting these presents to the Tenant at the Surety's request the Surety covenants with and guarantees to the Landlord as a primary obligation and with joint and several liability as if the Surety were the Tenant or a co-tenant that: 6.1.1 The Tenant or the Surety will at all times during the Term (including any continuation or renewal thereof whether under Act of Parliament or by the Tenant holding over or for any other reason) and also thereafter during such period as the Tenant remains in occupation of the demised premises duly pay the rents and all other sums payable under these presents at the times and in the manner prescribed in these presents including all increases in the rents (whether such increases are effected in accordance with the provisions of these presents or are otherwise agreed or settled between the Landlord and the Tenant - here meaning SOREMA (UK) Underwriting Management Limited or any company which is a member of the same group as SOREMA (UK) Underwriting Management Limited within the meaning of Section 42 of the Landlord and Tenant 24 29 Act 1954) and will duly perform and observe all the covenants and obligations on the part of the Tenant and conditions contained in these presents 6.1.2 The Surety will make good to the Landlord on demand and indemnify the Landlord against all claims demands losses damages liability costs fees and expenses whatsoever sustained by the Landlord by reason of or arising in any way directly or indirectly out of any default in the payment of any such rent or other sum or the performance or observance of any of the Tenant's covenants and obligations or of the conditions contained in these presents 6.1.3 In the event that - (i) the Tenant or a liquidator or trustee-in-bankruptcy or other person shall disclaim or surrender these presents under any statutory or other power or (ii) these presents shall be forfeited or determined or (iii) the Tenant shall cease to exist (whether by being wound up or struck off the Register of Companies or otherwise howsoever) 6.1.3.1 then if the Landlord by notice in writing given to the Surety within six months after such event so requires the Surety will forthwith accept from and execute and deliver to the Landlord a counterpart of a new underlease of the demised premises for a term commencing on the date of the disclaimer or other event and continuing for the residue then remaining unexpired of the Term at the same rents or increased rents (including rent reviews) and subject to the same covenants conditions and provisions as are contained in these presents and indemnify the Landlord on a solicitor and own client basis against all costs and expenses stamp duty and Value Added Tax incurred by the Landlord in connection with the giving of notice and the granting of the new underlease and counterpart thereof 6.1.4 The Surety will not claim in any liquidation bankruptcy composition or arrangement of the Tenant in competition with the Landlord and will remit to the Landlord the proceeds of all judgments and all distributions it may receive from any liquidator trustee-in-bankruptcy or supervisor of the Tenant and shall hold for the behalf of the Landlord all security and rights the Surety may have over assets of the Tenant whilst any liabilities of the Tenant or the Surety to the Landlord remain outstanding 6.2 None of the following or any combination thereof shall release exonerate or discharge or in any way determine lessen or affect the liability of the Surety as principal debtor under these presents or otherwise prejudice or affect the right of the Landlord to recover from the Surety to the full extent of this guarantee: - 6.2.1 any neglect delay or forbearance of the Landlord or its agents in endeavouring to obtain payment of the rents or the amounts required to be paid by the Tenant when the same become payable or in enforcing the performance or observance of any of the obligations of the Tenant under these presents 6.2.2 any refusal by the Landlord to accept rent tendered by or on behalf of the Tenant at a time when the Landlord was entitled (or would after the service of a notice under Section 146 of the Law of Property Act 1925 have been entitled) to re-enter the demised premises 25 30 6.2.3 any extension of time or other indulgence given by the Landlord to the Tenant 6.2.4 any licences consents approvals agreements or arrangements which may be given by the Landlord to the Tenant or agreed between them or any variation of the terms of these presents (including any reviews of the rent payable under these presents) or the transfer of the Landlord's reversion or any part thereof or the assignment of these presents or any part thereof 6.2.5 any change in the constitution structure or powers of the Tenant the Surety or the Landlord or the liquidation administration bankruptcy or insolvency (as the case may be) of either the Tenant or the Surety 6.2.6 any legal limitation or any immunity disability or incapacity of the Tenant (whether or not known to the Landlord) or the fact that any dealings with the Landlord by the Tenant may be outside or in excess of the powers of the Tenant 6.2.7 the avoidance under any enactment relating to bankruptcy of any assurance security or payment or any release settlement or discharge which may have been given or made on the face of any such assurance security or payment 6.2.8 any other act omission matter or thing whatsoever whereby but for this provision the Surety would be exonerated either wholly or in part from its obligations hereunder (other than a release under seal given by the Landlord) 6.3 In the event of the Tenant surrendering part of the demised premises the liability of the Surety shall continue in respect of the remainder after making any necessary apportionments under Section 140 of the Law of Property Act 1925 6.4 The Surety hereby waives any right the Surety may have of first requiring the Landlord to proceed against or claim payment from the Tenant before the Surety and the Surety hereby agrees to subordinate and does hereby subordinate any and all claims that the Surety may have against the Tenant existing now or arising hereafter (whether in respect of payment made under this guarantee or otherwise) to- any or all claims by the Landlord under these presents 6.5 The Surety shall not be entitled to participate in security held by the Landlord in respect of the Tenant's obligations to the Landlord under these presents or to stand in the place of the Landlord in respect of any such security until all the obligations on the part of the Tenant or the Surety to the Landlord under these presents shall have been performed or discharged 6.6 This guarantee shall enure for the benefit of the successors in title and assigns of the Landlord under these presents without the necessity for any express assignment thereof INTERPRETATION 7.1 In this Lease where the context so admits:- 7.1.1 words importing one gender shall be deemed to include all other genders 26 31 7.1.2 where there are two or more persons included in the expression "the Tenant" or "the Surety" covenants expressed to be made by the Tenant or the Surety shall be deemed to be made by such persons jointly and severally 7.1.3 covenants and obligations made or assumed by any party shall be binding on and enforceable against his personal representatives 7.2 Reference in this Underlease to any right exercisable by the Landlord or any right exercisable by the Tenant shall be construed as including (where appropriate) the exercise of such right: - 7.2.1 in the first case by the Superior Lessor and all persons authorised by the Superior Lessor and 7.2.2 in both cases in common with the Landlord the Superior Lessor and all other persons having a like right or to whom such right may be granted 7.3 Reference in this Underlease to any consent or approval required from the Landlord shall be construed as also including the consent or approval from the Superior Lessor where the Superior Lessor's consent would be required except that nothing herein shall be construed as either imposing on the Superior Lessor any obligation (or indicating that such an obligation is imposed on the Superior Lessor) or relieving the Superior Lessor from any obligation expressly or impliedly imposed by the Headlease not unreasonably to refuse any such consent or approval 7.4 Any negative covenant by the Tenant in this Underlease shall be construed as if it were also a covenant not to permit or suffer the act or thing in question to be done by any licensees invitees agents employees or visitors of the Tenant or of any sub-tenant or other occupier of the demised premises and any positive covenant by the Tenant in this Underlease shall where applicable be construed as if it were also a covenant to procure that the act or thing in question be done by licensees invitees agents employees and visitors of the Tenant and of any sub-tenant or other occupier of the demised premises 7.5 A consent or approval to be given by the Landlord shall not be effective for the purposes of this Underlease unless it is in writing and signed by or on behalf of the Landlord 7.6 Reference in this Underlease to a statute shall include any modification or re-enactment thereof and any instrument order regulation or bye-law made thereunder for the time being in force 7.7 Headings in this Underlease shall not be deemed to form part of this Lease and accordingly shall not be taken into account in the construction or interpretation thereof 7.8 For the avoidance of doubt and notwithstanding the domicile or place of business of any party from time to time having an interest in these presents these presents shall be governed by and construed in all respects in accordance with the Laws of England and proceedings in connection herewith shall be subject (and the parties hereby submit) to the non-exclusive jurisdiction of the English Courts IN WITNESS whereof this deed has been duly executed the day and year first before written 27 32 THE FIRST SCHEDULE THE DEMISED PREMISES 1. All those premises forming part of the Building at basement and third floor levels for the purpose of identification only shown edged red on Plans B and C annexed hereto excluding the part of the Building shown edged green on Plan B 2. There shall be included in this demise:- 2.1 The entirety of all boundary walls (other than structural or exterior walls) or those parts thereof which serve exclusively to enclose the demised premises 2.2 One half (severed vertically) of those non-structural walls or partitions (or parts thereof) which serve to divide the demised premises from other premises 2.3 The internal plastering or other surface or finish attached or applied to the ceilings floors and walls of the demised premises and to the frames and entrance doors to all lifts serving the demised premises 2.4 The internal plastering or other surface or finish attached or applied to any structural columns and beams which are situate within (or partly within to the extent of such part) the demised premises 2.5 The suspended ceilings light fittings raised floors and carpets fitted or laid in the demised premises 2.6 All doors and door frames and internal window sills in or serving the demised premises 2.7 All fixtures and fittings in and about the demised premises 2.8 All additions (except tenant's and trade fixtures) at any time hereafter made to the demised premises 3. There shall be excluded from this demise:- 3.1 The floor slabs and the air space between the fourth floor slab and the suspended ceilings and between the third floor slab and the raised floors 3.2 The foundations of the Building 3.3 Any structural columns beams and joists and all other structural load-bearing or exterior parts of the Building 3.4 All lift doors and door frames windows and window frames 3.5 All air-conditioning heating and ventilating plant and equipment 28 33 THE SECOND SCHEDULE EASEMENTS AND RIGHTS GRANTED 1. The right at all times for all reasonable purposes connected with the demised premises but not for any other purposes to pass and repass by foot only to and from the demised premises and the toilet for disabled persons in the basement of the Building over and along the entrance halls staircases passageways entrances lift lobbies and all other parts of the Building giving access to and from the demised premises and the said toilet for disabled persons Provided that outside Working Hours such right shall be exercised in such manner as the Landlord's security arrangements may reasonably require 2. The free and uninterrupted passage and running of water soil electricity telephone and other services from and to the demised premises in and through the Pipes now or at any time hereafter during the Term in or under other parts of the Building 3. The right of support shelter and protection from the remainder of the Building 4. The right to use the toilet for disabled persons in the basement of the Building and all necessary rights of access thereto and egress therefrom including the use of the lift between the third floor and the basement 5. Subject to the Landlord's prior written approval (which shall not be unreasonably withheld or delayed) the right to run Pipes through the airspace between the fourth floor slab and the suspended ceiling of the third floor and between the third floor slab and the raised floor THE THIRD SCHEDULE EXCEPTIONS AND RESERVATIONS There are excepted and reserved to the Landlord and its lessees and assigns and all persons to whom the Landlord shall hereafter grant any such right or rights: 1. The free and uninterrupted passage of and running of water soil gas oil electricity telephone heating and other services to and from other parts of the Building in and through the Pipes now or at any time in the future in or under the demised premises 2. The right at all reasonable times upon reasonable prior notice (and at all times with or without notice in case of emergency) to enter upon the demised premises for the purpose of connecting laying inspecting repairing cleansing maintaining altering replacing relaying or renewing any Pipes and to erect construct or lay in under over or across the demised premises any Pipes or works for the drainage of or for the supply of water gas electricity telephone heating and other services to the Building the person exercising such right doing as little damage to the demised premises as possible and making good any damage to the demised premises thereby occasioned but without payment of compensation for any annoyance nuisance noise vibration or inconvenience caused to the Tenant or any other person in connection with the use of the demised premises or otherwise 29 34 3. The right at all reasonable times upon reasonable prior notice (and at all times with or without notice in case of emergency) to enter upon the demised premises to view the state and condition of the Building and to carry out the works and provide the services set out in the Fifth Schedule the person exercising such right doing as little damage to the demised premises as possible and making good any damage to the demised premises thereby occasioned but without payment of compensation for any annoyance nuisance noise vibration or inconvenience caused to the Tenant or any other person in connection with the use of the demised premises or otherwise 4. The right to the passage of light and air and any other easement to which the Landlord may be or become entitled in respect of any adjoining or neighbouring property of the Landlord (whether in the Building or not) 5. The right to erect scaffolding erect build rebuild and/or alter as it may think fit at any time and from time to time any buildings or bays or projections to buildings on any property adjoining or neighbouring the demised premises including the right to build into any existing boundary wall of the demised premises or make use of any column of the demised premises and the right to use and/or develop any adjoining or neighbouring property of the Landlord (whether in the Building or not) in such manner as the Landlord may think fit in each case notwithstanding that the access of light or air to the demised premises may thereby be obstructed or affected and without payment of compensation for any annoyance nuisance noise vibration or inconvenience caused to the Tenant or any other person in connection with the use of the demised premises or otherwise 6. The right of support shelter and protection for the Building from the demised premises 7. The right to enter upon the demised premises in the circumstances in which in the covenants by the Tenant herein contained the Tenant covenants to permit such entry THE FOURTH SCHEDULE PROVISIONS FOR RENT REVIEW 1. In this Schedule the following expressions shall have the following meanings: - 1.1 "review date" means the fifth anniversary of the date provided herein for the commencement of the Term and every subsequent fifth anniversary thereof and (unless the Tenant gives notice pursuant to Section 27(l) of the Landlord and Tenant Act 1954) three calendar months prior to the date on which the Term would expire by effluxion of time but for any continuation thereof (whether under an Act of Parliament or by the Tenant holding over or for any other reason) or in the event of notice being given by the Landlord pursuant to Clause 5.16 three calendar months prior to the fifteenth anniversary of the date provided. herein for the commencement of the Term 1.2 "rent" shall not include the rent secondly and thirdly reserved and made payable under Clause 2 of this Underlease 1.3 "the relevant review date" means that review date at which the rent is to be agreed or determined pursuant to the provisions of this Schedule 1.4 "the open market rent" means the full yearly market rent for which the demised premises might reasonably be expected to be let as a whole at the relevant review date:- 30 35 1.4.1 on the open market 1.4.2 by a willing landlord to a willing tenant 1.4.3 with vacant possession 1.4.4 without taking a fine or premium 1.4.5 for any use authorised under these presents 1.4.6 for a term of Fifteen (15) years and otherwise upon the terms and conditions of this Underlease (save as to the amount of rent but including the provisions for rent reviews herein contained) 1.4.7 on the assumption (whether or not it is a fact) that at the relevant review date 1.4.7.1 the demised premises are fully fitted out and equipped and ready for immediate occupation and use in a manner that is suitable for and acceptable to the said willing tenant for the user for the time being authorised by these presents and no capital is required to be expended to enable them to be so used 1.4.7.2 no work has been carried out thereon by the Tenant or its predecessors in title or any undertenant or any other person which has diminished the rental value of the demised premises 1.4.7.3 in case the demised premises or the services or the accesses thereto have been destroyed or damaged they have been fully restored 1.4.7.4 all the Tenant's covenants and obligations in this Underlease have been complied with 1.4.7.5 the demised premises and the said willing tenant enjoy planning permission and all other necessary consents for the user of the demised premises for the time being authorised under these presents for the Term 1.4.7.6 the said willing tenant does not seek a rent free period nor any reduction in rent to allow it the equivalent of a rent free period nor any other form of inducement to occupy the demised premises and in considering any comparable rents the existence of any rent free period or any reduction in rent calculated to allow for any rent free period or any other form of inducement as aforesaid shall be ignored 1.4.7.7 if Value Added Tax or other similar tax is charged on the rents and/or any other moneys payable from time to time under these presents the said willing tenant would be able to recover such Value Added Tax or other similar tax in full 1.4.8 but disregarding: 1.4.8.1 any goodwill attached to the demised premises by reason of the carrying on thereon of the authorised trade or business of the Tenant 31 36 1.4.8.2 any improvements carried out after the date hereof by the Tenant during the Term and completed within a period of twenty-one years preceding the relevant review date with the prior written consent of the Landlord otherwise than in pursuance of an obligation to the Landlord or at the expense or partly at the expense of the Landlord 1.4.8.3 any diminution in the net lettable area of the demised premises resulting from the installation by the Tenant of any additional plant machinery or equipment or structures for housing the same or any partitioning works 1.4.8.4 any statutory limitation or control of rents for the time being in force 1.4.8.5 the adverse effect upon rent of the taxable status of the said willing tenant for the purpose of Value Added Tax or any other tax 1.4.8.6 any adverse effect upon rent of any temporary works operations or other activities on any adjoining or neighbouring property 1.4.8.7 any adverse effect upon rent of the option to determine contained in Clause 5.16 1.5 "revised rent" means the new or increased yearly rent payable in substitution for the previous rent 1.6 "the current rent" means the yearly rent payable (but for any suspension) in the year ending on the relevant review date 1.7 "the Surveyor" means the independent surveyor required to be appointed pursuant to Paragraph 3 of this Schedule 2. From and after each review date the rent shall be the rent agreed in writing between the Landlord and the Tenant or in the absence of such agreement shall be whichever is the higher of:- 2.1 the current rent and 2.2 the open market rent 3. If the Landlord and the Tenant shall not have agreed in writing the open market rent by the relevant review date the Landlord or the Tenant may at any time thereafter require in writing to the other of them an independent surveyor to be appointed to determine the open market rent 4. The Surveyor (who shall be a Fellow of the Royal Institution of Chartered Surveyors and be experienced in the valuation of premises of a like nature to and in the location of the demised premises) may be agreed upon by the Landlord and the Tenant and in default of such agreement within two months of a requirement being made pursuant to Paragraph 3 of this Schedule shall be appointed by the President for the time being of the Royal Institution of Chartered Surveyors (or any body for the time being performing the functions of the said Institution) on the application of the Landlord or the Tenant made at any time after the said period of two months and if the said President shall for any reason not be available or be unable to make such appointment then the appointment may be made by the Vice President or next available senior officer of the said Institution (or any other body as aforesaid) then available Provided that at any time before the earlier of the Landlord suggesting in writing who the Surveyor should be or the Landlord 32 37 responding to the Tenant's suggestion in writing who the Surveyor should be the Landlord may elect by notice in writing to the Tenant that the Surveyor shall act as an arbitrator in the manner hereinafter described and not as an expert and in that case this Paragraph shall be deemed to be a submission to arbitration within the Arbitration Acts 1950 to 1979 5. In the absence of an election by the Landlord under Paragraph 4 of this Schedule:- 5.1 Notice in writing of his appointment shall be given by the Surveyor to the Landlord and the Tenant and he shall invite each to submit within a specified period (which shall not exceed four weeks) a valuation accompanied if the Landlord or the Tenant so desire by a statement of reasons 5.2 The Surveyor shall act as an expert and not as an arbitrator. He shall consider any valuation and reasons submitted to him within the said period but shall not be in any way limited or fettered thereby and shall determine the open market rent in accordance with his own judgment 5.3 The Surveyor shall give notice in writing of his decision to the Landlord and the Tenant within two months of his appointment or within such extended period as the Landlord may at any time allow 5.4 The decision of the Surveyor shall be final on all matters referred to him 6. If the Surveyor shall fail to determine the open market rent and to give notice thereof within the time and in manner hereinbefore provided or if he shall relinquish his appointment or die or otherwise fail or be unable to determine the same the Landlord may apply to the President or such other officer of the Royal Institution of Chartered Surveyors (or other body as aforesaid) as aforesaid for a substitute to be appointed in his place which procedure may be repeated as many times as necessary 7. The fees of the Surveyor and of the Royal Institution of Chartered Surveyors (or other body as aforesaid) shall be shared equally between the Landlord and the Tenant save where the rent proposed by either (but not both) of them (whether or not during without prejudice negotiations) prior to the reference to the Royal Institution of Chartered Surveyors (or other body as aforesaid) is within 10% of that determined by the Surveyor in which case such fees shall be borne by the other and if the Tenant shall fail to pay its share thereof the Landlord shall be entitled to make such payment and the amount thereof shall be immediately due and payable by the Tenant to the Landlord 8. In the event that by the relevant review date the Landlord and the Tenant shall not have agreed in writing the rate of the rent to be payable from and after such date or the Surveyor (if appointed) shall not have determined the same or given the notice provided for in Paragraph 5.3 of this Schedule then the Tenant shall continue to pay (but on account of any revised rent) rent at the rate of the current rent until the quarter day immediately following the reaching of such agreement or determination or the giving of the said notice whichever shall first occur If such agreement or determination or the giving of the said notice shall result in a revised rent there shall be added to and be payable with the instalment of the revised rent due on such quarter day (notwithstanding that the provisions of Paragraph 9 of this Schedule remain to be complied with) the amount representing the difference between the current rent and the revised rent from the relevant review date until such quarter day together with interest on such amount (compounded with monthly rests) at a rate equivalent to 4% per annum above the Base Rate of Lloyds Bank PLC (or other bank for the time being specified by the Landlord) from time to time from the relevant review date until payment. If such agreement or determination or the giving of the said notice shall not have resulted in a revised rent then rent at the rate of the current rent shall continue to be payable 33 38 9. Immediately after the open market rent shall have been agreed or determined as aforesaid a memorandum of the revised rent (if any) in such form as the Landlord may reasonably require shall be signed recording the amount of the revised rent on behalf of the Landlord and the Tenant and each party shall pay its own costs and expenses in respect thereof 10. If at any time or times there shall be in force any Enactment which shall restrict or in any way affect the Landlord's right to have the rent reviewed as hereinbefore provided or which shall restrict or in any way affect the Landlord's right to payment of a revised rent the Landlord shall be entitled following the repeal termination or modification of such Enactment (but in the event of a modification of such Enactment only to the extent permitted by such modification) to serve notice upon the Tenant requiring the Tenant to pay to the Landlord as from the first quarter day ("the interim review date") occurring not less than twenty-eight days after the date of service of the Landlord's notice until such rent shall next be varied in accordance with the provisions of this Schedule the rent stated in the Landlord's notice and such rent shall become payable accordingly unless the Tenant shall have served upon the Landlord within twenty-eight days of the date of service of the Landlord's notice a counter notice requiring in substitution for the rent stated in the Landlord's notice whichever is the higher of the yearly rent payable hereunder immediately before the interim review date and the open market rent of the demised premises on the interim review date whereupon in the absence of agreement a Surveyor shall be appointed to determine the open market rent in accordance with the foregoing provisions of this Schedule so far as the same shall be applicable with the substitution of the interim review date for the relevant review date 11. For the avoidance of doubt it is hereby agreed and declared that time shall not be of the essence of any of the provisions of this Schedule THE FIFTH SCHEDULE THE SERVICES 1. The repair (including rebuilding where necessary or desirable) of the structure and exterior of the Building so far as that is not the Tenant's responsibility and the decoration to such standard as the Landlord's Surveyor shall consider appropriate of the exterior and the common parts and the cleaning of the outside stonework of the Building and the maintenance of the appurtenances of the Building including any boundary walls fences and gates and any trees shrubs flowers and other vegetation and landscaping in the Building or its curtilage and the repair maintenance rebuilding renewing making lighting connecting into and cleansing (or contribution to the cost of any such) of all ways roads pavements sewers drains channels watercourses wires cables fences party walls and structures and other conveniences which shall belong to or be used for the Building in common with other premises near or adjoining the Building 2. The repair (including replacement where necessary or desirable) and maintenance of the lifts boilers or other central heating apparatus hot water supply systems air-conditioning and ventilating systems and appliances fire fighting systems and equipment which are are not expressly stated to be the Tenant's responsibility under these presents pumps building management systems and all other plant equipment apparatus and machinery serving the Building 3. At the Landlord's discretion the establishment and maintenance in the Landlord's absolute discretion of a sinking and/or reserve fund based on normal commercial principles for the replacement (but not upgrading) from time to time of the lifts boilers or other central heating apparatus hot water supply systems air-conditioning and ventilating systems and appliances fire-fighting systems and equipment pumps building management systems and all other plant equipment machinery and apparatus serving the Building 34 39 4. The employment of housekeepers cleaners porters receptionists security personnel managers and other staff for the Building including salaries wages insurances pensions National Insurance contributions the provision of uniforms and/or protective clothing compensation for unfair dismissal or redundancy 5. The cleaning lighting furnishing and maintenance of the entrance halls stairways passages common washrooms lavatories and lifts such windows and plate glass as do not form part of premises which are let or occupied or intended to be let or occupied and any other common parts 6. Refuse disposal (excluding specialist refuse or waste arising from the Tenant's particular trade or business at the demised premises) 7. The payment of all charges for water gas oil electricity and other like services and also all existing and future rates taxes duties charges assessments impositions and outgoings whatsoever to the extent that the same do not relate to lettable areas within the Building 8. The provision of hot water and heating and cooling during such periods as the Landlord may reasonably determine from time to time having regard to weather conditions 9. If so requested by the Tenant at any time during the Term but subject to obtaining any necessary consents therefor the provision of a satellite dish or such further satellite dishes as can in the Landlord's opinion be accommodated on the roof of the Building for receiving and/or transmitting signals to such satellites as the Landlord may in its absolute discretion decide having regard to the wishes of the Tenant and such other tenants (if any) in the Building as may from time to time wish to share the use of any such dish together with appropriate connections to the demised premises all installation and maintenance costs in connection therewith to be apportioned between the Tenant and such other tenants in the same proportions as their respective service charge percentages bear to each other 10. The carrying out of all works to the Building which shall be necessary to comply with and the doing of anything which is reasonably necessary or prudent to contest the incidence of any requirements of any Enactment 11. The insurance of the common parts of the Building against the Insured Risks and any insurance against employers' liability public liability and third party risks boiler escalator and lift insurances and other insurances which in the opinion of the Landlord shall be appropriate 12. The execution of any works that the Landlord shall reasonably consider necessary for the protection and safety of the Building or members of the public visiting or passing the Building 13. The payment of reasonable management and other professional costs (including surveyors' builders' architects' engineers' accountants' and solicitors' costs) and expenses including Value Added Tax or other similar tax incurred by the Landlord from time to time by virtue of or in relation to any matter provided for in these presents including this Schedule (and if the Landlord shall not employ managing agents to manage some or all of the matters set out in this Schedule the payment of a reasonable sum to the Landlord as a management fee) 14. At the Landlord's discretion the payment of commitment fees interest and any other cost of borrowing money to finance some or all of the matters set out in this Schedule 35 40 15(a) At the Landlord's discretion the provision and maintenance of furniture, furnishings and plants in the entrance foyer of the Building and the installation and maintenance of security and entry systems serving the entrances to the Building (b) The payment of any charges in connection with the rental thereof and the provision in the entrance foyer of the Building of a tenants' directory board showing the names (inter alia) of up to three persons or companies carrying on business in the demised premises 16. The performance and observance of the covenants in the Headlease on the part of the tenant thereunder so far as the Tenant and other tenants in the Building are not made specifically responsible therefor 17. The prevention by any means of a forfeiture of the Headlease or the obtaining of relief therefrom (except where the Tenant is hereby made wholly responsible for the Landlord's expenses thereof and except where such forfeiture or the possibility thereof is caused solely by any act or default on the part of the Landlord) 18. At the Landlord's discretion the provision maintenance and renewal of such other services facilities or amenities and the carrying out of such works to the Building and its appurtenances as the Landlord's Surveyor shall from time to time reasonably consider necessary or desirable provided the same shall be in accordance with the principles of good estate management THE SIXTH SCHEDULE REGULATIONS 1. Loading unloading delivery and despatch of goods shall be carried out only by means of the entrances designated for such purposes and at reasonable times stipulated by the Landlord 2. No sound amplification equipment shall be used in a manner which is audible outside the demised premises 3. Precautions shall be taken to avoid water freezing in the Pipes within the demised premises 4. Fire escape doors and corridors shall not to be obstructed or used except in emergency 5. The demised premises shall be secured against intrusion when not in use 6. If the Tenant is permitted to use the common parts for transporting goods or materials such transport shall only be by means of soft-wheeled trolleys or trucks which leave no blemish on carpets and floor surfaces and which are used in a manner which does not result in damage to the walls or doors of the common parts 36 41 THE COMMON SEAL of ) WERELDHAVE PROPERTY ) CORPORATION PLC was ) hereunto affixed in ) the presence of-.- ) Director Secretary 37 EX-10.26 6 EXHIBIT 10.26 1 Exhibit 10.26 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and COLOGNE LIFE REINSURANCE COMPANY (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 10.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 5.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 1.00% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 1.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 1 - 2 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: ________________________________________________________________________________ ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: ____________________________ Attest: ______________________________ Date: ____________________________ and Signed by: COLOGNE LIFE REINSURANCE COMPANY Signature: ______________________________ Title: ____________________________ Attest: ______________________________ Date: ____________________________ - 2 - 3 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and CONNECTICUT GENERAL LIFE INSURANCE COMPANY (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 0.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 20.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 20.00% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 25.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 1 - 4 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: ________________________________________________________________________________ ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: ____________________________ Attest: ______________________________ Date: ____________________________ and Signed by: CONNECTICUT GENERAL LIFE INSURANCE COMPANY Signature: ______________________________ Title: ____________________________ Attest: ______________________________ Date: ____________________________ - 2 - 5 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and DONNELLY SKRTICH UNDERWRITERS, LLC for and on behalf of CONTINENTAL ASSURANCE COMPANY (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 0.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 0.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 21.50% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 30.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the - 1 - 6 Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 2 - 7 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: _______________________________________________________________________________ _______________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ and Signed by: DONNELLY SKRTICH UNDERWRITERS, LLC for and on behalf of CONTINENTAL ASSURANCE COMPANY Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ - 2 - 8 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and INSURANCE SERVICES ASSOCIATES, LTD. for and on behalf of MANULIFE REINSURANCE CORPORATION (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 25.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 35.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 25.00% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 25.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the - 1 - 9 Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 2 - 10 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: ________________________________________________________________________________ ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ and Signed by: INSURANCE SERVICES ASSOCIATES, LTD. for and on behalf of MANULIFE REINSURANCE CORPORATION Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ - 2 - 11 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and LLOYD'S UNDERWRITERS per Schedule(s) attached hereto (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 30.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 15.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 17.50% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 10.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the - 1 - 12 Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 2 - 13 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: ________________________________________________________________________________ ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ and Signed by: LLOYD'S POLICY SIGNING OFFICE for and on behalf of UNDERWRITERS AT LLOYD'S per Schedule(s) attached hereto Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ - 2 - 14 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and LONDON LIFE REINSURANCE COMPANY (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 5.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 10.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 10.00% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 5.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 1 - 15 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: ________________________________________________________________________________ ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ and Signed by: LONDON LIFE REINSURANCE COMPANY Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ - 2 - 16 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and NEW HAMPSHIRE INSURANCE COMPANY (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 10.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 10.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 5.00% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 4.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 1 - 17 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: ________________________________________________________________________________ ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ and Signed by: NEW HAMPSHIRE INSURANCE COMPANY per AIG EUROPE (UK) LTD Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ - 2 - 18 INTERESTS AND LIABILITIES CONTRACT attaching to and forming a part of the CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and RELIANCE NATIONAL INSURANCE COMPANY (hereinafter called the "Subscribing Reinsurer") It is hereby mutually understood and agreed by and between the Company and the Subscribing Reinsurer that effective 12:01 a.m. January 1, 1998, through December 31, 1998, both days inclusive, Local Standard Time, the Subscribing Reinsurer's share in the interests and liabilities of the Reinsurer on the attached Agreement will be: 20.00% as respects the liability and premium set forth in EXHIBIT A, FIRST LAYER. 5.00% as respects the liability and premium set forth in EXHIBIT B, SECOND LAYER. 0.00% as respects the liability and premium set forth in EXHIBIT C, THIRD LAYER. 0.00% as respects the liability and premium set forth in EXHIBIT D, FOURTH LAYER.
The share of the Subscribing Reinsurer will be separate and apart from the shares of the other Reinsurers and will not be joint with those of the other Reinsurers, and the Subscribing Reinsurer will in no event participate in the interests and liabilities of the other Reinsurers. - 1 - 19 If the Subscribing Reinsurer wishes to designate an alternate party to that named in the Service of Suit Article contained in the attached Agreement, then service of process will be made upon the party hereinafter named: ________________________________________________________________________________ ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have caused this Interests and Liabilities Agreement to be executed in duplicate by their duly authorized representatives. TRENWICK AMERICA REINSURANCE CORPORATION Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ and Signed by: RELIANCE NATIONAL INSURANCE COMPANY Signature: ______________________________ Title: _____________________________ Attest: ______________________________ Date: _____________________________ 20 CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and THE SUBSCRIBING REINSURER(S) SPECIFIED IN THE INTERESTS AND LIABILITIES CONTRACT(S) ATTACHED TO THIS AGREEMENT (hereinafter referred to collectively as the "Reinsurers") Term: January 1, 1998 through December 31, 1998, Local Standard Time, both days inclusive. 21 CONTENTS ARTICLE PAGE - ------- ---- WITNESSETH:........................................................1 I COVERAGE...........................................................1 II TERM...............................................................2 III EXTENDED EXPIRATION................................................2 IV EXCLUSIONS.........................................................3 V TERRITORY..........................................................3 VI NET RETAINED LINES.................................................3 VII ULTIMATE NET LOSS..................................................4 VIII REPORTS AND REMITTANCES............................................5 IX NOTICE OF LOSS AND LOSS SETTLEMENTS................................5 X OFFSET.............................................................6 XI SALVAGE AND SUBROGATION............................................6 XII ERRORS AND OMISSIONS...............................................7 XIII CURRENCY...........................................................8 XIV ACCESS TO RECORDS..................................................8 XV TAXES..............................................................8 XVI FEDERAL EXCISE TAX.................................................9 XVII ARBITRATION........................................................9 XVIII SERVICE OF SUIT...................................................11 XIX INSOLVENCY........................................................13 XX FUNDING OF LOSS RESERVES..........................................14 XXI COMMUTATION AND SUNSET............................................18 XXII INTERMEDIARY......................................................18 EXECUTION.........................................................19 22 EXHIBITS EXHIBIT A - FIRST LAYER.....................................................20 RETENTION AND LIMIT.............................................20 RATE AND PREMIUM................................................20 REINSTATEMENT...................................................21 EXHIBIT B - SECOND LAYER....................................................22 RETENTION AND LIMIT.............................................22 RATE AND PREMIUM................................................22 REINSTATEMENT...................................................23 EXHIBIT C - THIRD LAYER.....................................................24 RETENTION AND LIMIT.............................................24 RATE AND PREMIUM................................................24 REINSTATEMENT...................................................25 EXHIBIT D - FOURTH LAYER....................................................26 RETENTION AND LIMIT.............................................26 RATE AND PREMIUM................................................26 REINSTATEMENT...................................................27 23 CATASTROPHE FIRST, SECOND, THIRD AND FOURTH EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION Stamford, Connecticut (hereinafter referred to as the "Company") and THE SUBSCRIBING REINSURER(S) SPECIFIED IN THE INTERESTS AND LIABILITIES CONTRACT(S) ATTACHED TO THIS AGREEMENT (hereinafter referred to collectively as the "Reinsurers") 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 Reinsurer will indemnify the Company, subject to the limits set forth in the Retention and Limit Sections of Exhibits A, B, C and D attaching to and forming part of this Agreement for the Company's participation on any loss or losses occurring during the term of this Agreement under all policies, binders, contracts, or - 1 - 24 agreements of insurance or reinsurance, whether written or oral, (hereinafter called "policies") underwritten by Duncanson and Holt Group. 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 policies of the Company to which this Agreement 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 The term of this Agreement shall be the twelve month period commencing January 1, 1998, through, December 31, 1998, Local Standard Time, both days inclusive and this Agreement shall apply to losses occurring during the aforementioned term. "Local Standard Time" is defined as where the loss occurs. ARTICLE III EXTENDED EXPIRATION Should this Agreement expire while a loss occurrence covered hereunder is in progress, the Reinsurers will be responsible for their portion of the entire loss or damage caused by such loss occurrence, subject to the other conditions of this - 2 - 25 Agreement, and provided that no part of said loss occurrence is claimed against any renewal or replacement of this Agreement. ARTICLE IV EXCLUSIONS No reinsurance indemnity will be afforded under this Agreement for: A. Employers Liability. B. Loss or liability excluded under the subject policies. ARTICLE V TERRITORY This Agreement shall provide coverage wherever the subject policies apply. ARTICLE VI NET RETAINED LINES This Agreement applies to only that portion of any reinsurance which the Company retains net for its own account, and in calculating the amount of loss hereunder and also in computing the amount or amounts in excess of which this Agreement attaches, only loss in respect of that portion of any reinsurance which the Company retains net for its own account shall be included. The amount of the Reinsurer's liability hereunder shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any - 3 - 26 amounts which may have become due from them, whether such inability arises from the insolvency of such other Reinsurers or otherwise. ARTICLE VII ULTIMATE NET LOSS The term "Ultimate Net Loss" as used in this Agreement shall mean the amount paid or payable by the Company in settlement of claims or losses after deduction for all recoveries, all salvages and all claims upon other reinsurances, whether collectible or not, and shall include expenses of litigation, if any, and all other loss adjustment expenses of the Company including a pro rata share of the salaries and expenses of the Company's outside employees according to time occupied in adjusting such claims and losses and expenses of the Company's officials incurred in connection therewith, but excluding salaries of the Company's officials and any normal overhead charges. All salvages, recoveries, or payments recovered or received by the Company after a loss settlement hereunder shall be applied as if recovered or received before such settlement, and all necessary adjustments shall be made by the parties hereto. However, nothing herein shall be construed to mean that losses under this Agreement shall not be recoverable until the Company's Ultimate Net Loss has been ascertained. The Company shall be permitted to carry underlying excess reinsurance, recoveries under which shall inure solely to the benefit of the Company and be - 4 - 27 entirely disregarded in applying all of the provisions of this Agreement. Nothing in this clause, however, shall be construed to mean that losses under this Agreement are not recoverable until the Company's Ultimate Net Loss has been ascertained. ARTICLE VIII REPORTS AND REMITTANCES As soon as possible following the close of the annual period, the Company will furnish the Reinsurers with a report of reinsurance premium due them for that period. Such report will show and properly segregate the Company's premium to which the reinsurance rate applies as well as contain such other information as may be required by the Reinsurer for completion of their NAIC interim and/or annual statements. The premium due the Reinsurers will be balanced against the minimum and deposit premium set forth in the Rate and Premium Sections of Exhibits A, B, C and D attaching to and forming part of this Agreement, and any balance shown to be due the Reinsurers will be paid within 75 days following the close of the annual period. ARTICLE IX NOTICE OF LOSS AND LOSS SETTLEMENTS In the event of a loss occurrence taking place which either results in or appears to be of a serious enough nature as to result in a loss involving this Agreement, the Company shall give notice as soon as reasonably practicable to the - 5 - 28 Reinsurers, and the Company shall keep the Reinsurer advised of all subsequent developments in connection therewith. The Reinsurers agree to abide by all loss settlements of the Company under this Agreement, such settlements to be construed as satisfactory proof of loss, and amounts falling to the share of the Reinsurers shall be immediately payable upon reasonable evidence of the amount paid or to be paid by the Company. ARTICLE X OFFSET Each party hereto shall have, and may exercise at any time and from time to time, the right to offset any balance or balances, whether on account of premiums or on account of losses or otherwise, due from each party to the other (or, if more than one, any other) party hereto under this Agreement; provided, however, that in the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of the Applicable Insurance Regulation. ARTICLE XI SALVAGE AND SUBROGATION The Reinsurers will be credited with their share of salvage and/or subrogation in respect of claims and settlements under this Agreement, less their share of recovery expense. Unless the Company and Reinsurers agree to the contrary, the Company will enforce its right to salvage and/or subrogation and will prosecute all - 6 - 29 claims arising out of such right. Should the Company refuse or neglect to enforce this right, the Reinsurers are hereby empowered and authorized to institute appropriate action in the name of the Company. Amounts recovered from salvage and/or subrogation will always be used to reimburse the excess reinsurers (and the Company, should it carry a portion of excess coverage net) in the reverse order of their participation in the loss before being used in any way to reimburse the Company for its primary loss. If the amount recovered exceeds the recovery expense, the recovery expense will be borne by each party in proportion to its benefit from the recovery. If the recovery expense exceeds the amount recovered, the amount recovered (if any) will be applied to the reimbursement of recovery expense and the remaining expense as well as any originally incurred loss expense will be added to the ultimate net loss. ARTICLE XII ERRORS AND OMISSIONS Inadvertent delay, error or omission made in connection with this Agreement shall not relieve either party from any liability which should have attached to either party had such delay, error or omission not occurred. Such delay, error or omission shall be rectified upon discovery. - 7 - 30 ARTICLE XIII CURRENCY Wherever the word "Dollars" and the sign "$" appear in this Agreement, they shall be construed to mean United States Dollars, and all premiums and losses hereunder shall be payable in United States Currency. ARTICLE XIV ACCESS TO RECORDS The Company shall place at the disposal of the Reinsurers and the Reinsurers shall have the right to inspect, through its authorized representatives, at all reasonable times, the books, records and papers of the Company pertaining to the reinsurance provided hereunder and all claims made in connection therewith. ARTICLE XV TAXES The Company shall not claim a deduction in respect of the premium hereon 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. - 8 - 31 ARTICLE XVI FEDERAL EXCISE TAX (This Article is applicable only to a Reinsurer who is domiciled outside the United States of America, excepting an Underwriter at Lloyd's London and other Reinsurer exempt from Federal Excise Tax.) The Reinsurer has agreed to allow for the purpose of paying the 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 the Federal Excise Tax. In the event of any return of premium becoming due hereunder, the Reinsurer will deduct the applicable percentage of the return premium payable hereon as imposed under Section 4371 of the Internal Revenue Service Code from the amount of the return, and the Company or its agent should take steps to recover the tax from the United States government. ARTICLE XVII ARBITRATION As a condition precedent to any right of action hereunder, any dispute arising out of this Agreement, whether arising before or after termination, shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in Stamford, Connecticut unless otherwise agreed. - 9 - 32 The members of the board of arbitration shall be active or retired, disinterested officials of insurance or reinsurance companies or Lloyd's of London Underwriters, or underwriting members of any Exchange formed for the purpose of writing insurance or reinsurance. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the claimant shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 20 days from the appointment of the umpire. The respondent shall submit its brief within 20 days thereafter, and the claimant may submit a reply brief within 10 days after filing of the respondent's brief. The board shall make its decision with due 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 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the - 10 - 33 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 Article, and communications shall be made by the Company to each of the reinsurers constituting the one party, provided that nothing therein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers 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 XVIII SERVICE OF SUIT (This Article is applicable only to an unauthorized Reinsurer in the Company's State of Domicile or to the Reinsurer who is domiciled outside the United States of America.) It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States of America. - 11 - 34 Nothing in this clause 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 Messrs. Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, and that in any suit instituted against any one of them upon this contract, the Reinsurer will abide by the final decision of the 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 Reinsurer's in any such suit and/or upon the request of the Company to give written undertaking to the Company 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 successors in office, as their 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 - 12 - 35 arising out of this contract or reinsurance, and hereby designate the above-named as the person to whom the said officer is authorized to mail such process or true copy thereof. ARTICLE XIX INSOLVENCY In the event of 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 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 Reinsurers 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 Reinsurers 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 Reinsurers 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 it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurers shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or - 13 - 36 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 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. It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Agreement shall be payable directly by the Reinsurers to the Company or to its liquidator, receiver, conservator or statutory successor, except (1) where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and (2) where the Reinsurers with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurers to the payees under such policies and in substitution for the obligations of the Company to such payees. ARTICLE XX FUNDING OF LOSS RESERVES (Applies only to the Reinsurer who is unlicensed or unaccredited by the insurance regulatory authority having jurisdiction over the Company's outstanding loss reserves.) - 14 - 37 As regards all business coming within the scope of this Agreement, the Company agrees to forward to the Reinsurer a statement showing their proportion of outstanding loss reserves, if any, when the Company files reserves with the insurance department or sets up on its book reserves which are required by law. Under no circumstance shall any amount relating to reserves in respect of losses or loss expenses Incurred But Not Reported be included in the calculation of the reserves hereunder. The Reinsurer hereby agrees that within 30 days of receiving the reserve statement they will, at their option, either: 1. apply for and secure delivery to the Company a clean, irrevocable and unconditional Letter of Credit; or 2. provide a Cash Advance to the Company (which shall be deposited by the Company in a bank acceptable to the insurance regulatory authorities, in a separate account for the benefit of the Company apart from its general assets and in trust for such uses and purposes as specified herein). The Company agrees that the Reinsurer shall be credited with the interest thereon at the prevailing rates, not to exceed the prime rate); or 3. provide assets for the benefit of the Company and enter into a Trust Agreement with the Company (which shall comply with the requirements of the insurance regulatory authorities, for a New York licensed Company the applicable regulation is No. 114) in an amount equal to the Reinsurer's proportion of said reserves. The Letter of Credit shall be issued or confirmed by a bank acceptable to the governmental authorities having jurisdiction over said reserves. The terms and - 15 - 38 conditions of the Letter of Credit shall comply with all requirements of said authorities, including but no limited to the following: The Letter of Credit shall be issued for an initial period of not less than one year and shall automatically extend for an additional period of at least one year at each and every expiry date, unless and until, the Company has received at least 30 days prior notice from the issuing bank (at least 60 days prior notice from a confirming bank) by certified mail, registered mail, or receipted hand delivery), of its intention not to extend said Letter of Credit. If the insurance regulatory authority requires the Reinsurer to fund their proportion of outstanding loss reserves, if any, by Cash Advances or a combination of Cash Advance and Letter of Credit, the Reinsurer agrees to provide their proportion of said reserves in an amount and of such nature as to be acceptable to the insurance regulatory authority. The Company and any of its successors in interest, undertakes to use and apply any amounts which it may draw upon such Letter of Credit, Trust Agreement or Cash Advance, without diminution because of insolvency on the part of the Company or the Reinsurer, for the following purposes only: 1. to pay or reimburse the Company for the Reinsurer's share of any losses and allocated loss expenses paid by the Company, but not recovered from the Reinsurer; - 16 - 39 2. to make refund of any sum which is in excess of the actual amount required by the insurance regulatory authority to fund the Reinsurer's share of any liability reinsured by this Agreement; 3. to create a Cash Advance account, in the event the issuing bank gives notice of its intention not to extend the Letter of Credit or cancel the Trust Agreement and provided that the obligations secured by the Letter of Credit or Trust Agreement remain unliquidated and undischarged at the time of receipt by the Company of such notice. That cash advance account shall be established and utilized in accordance with the provisions herein. The bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to see that withdrawals are made only upon the order of properly authorized representatives of the Company and it is understood that the Company shall incur no obligation to said bank in acting upon said credit, other than as appears in the express terms thereof. All Letters of Credit, Cash Advances or Trust Agreements for the benefit of the Company under this Agreement shall be adjusted at annual intervals, or more frequently as agreed (but never more frequently than quarterly), to reflect the current balance of the Reinsurer's proportion of the Company's outstanding loss reserves. The Company shall forward to the Reinsurer a statement showing their proportion of said reserves. If the statement shows the Reinsurer's share of said reserves to be either in excess of or less than the current amount of the Letter of Credit, Cash Advance or Trust Agreement, an adjustment shall be made within 30 days of receipt of the statement by the Reinsurer in order to have the amount of the Letter of Credit, - 17 - 40 Cash Advance or Trust Agreement equal to the obligations of the Reinsurer hereunder. ARTICLE XXI COMMUTATION AND SUNSET This Agreement shall follow the Commutation and Sunset provisions of the Company's policies. Commutation under such policies shall not exceed one hundred and twenty months (120) months from the date of loss or the end of the Company's policy and shall include losses first notified to the Reinsurers no later than one hundred and twenty months (120) months from the date of loss or the end of the Company's policy ARTICLE XXII INTERMEDIARY Aon Re Inc., an Illinois corporation, or one of its affiliated corporations duly licensed as a reinsurance intermediary, 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 to this Agreement will be transmitted to the Company or the Reinsurers through the Intermediary. Payments by the Company to the Intermediary will be deemed payment to the Reinsurers. Payments by the Reinsurers to the Intermediary will be - 18 - 41 deemed payment to the Company only to the extent that such payments are actually received by the Company. EXECUTION This Agreement is executed by the Company and each Subscribing Reinsurer by the signing, in duplicate, of the Interests and Liabilities Contract(s) attached to this Agreement. This Agreement to be agreed by Lead Subscribing Reinsurer on behalf of all Subscribing Reinsurers. Amendments and or alterations to this Agreement are to be agreed by two lead Subscribing Reinsurers on behalf of all Subscribing Reinsurers. - 19 - 42 EXHIBIT A -FIRST LAYER RETENTION AND LIMIT No claim will be made hereunder unless the Company has first sustained, by reason of any one loss, an ultimate net loss in excess of $1,000,000. The Reinsurer will then be liable for the amount of ultimate net loss in excess of $1,000,000 any one loss, but the limit of liability of the Reinsurer will not exceed $4,000,000 with respect to any one loss. RATE AND PREMIUM For the term of this Agreement, there will be a minimum and deposit premium hereon of $128,000, payable in equal quarterly installments of $32,000 on January 1, 1998, April 1, 1998, July 1, 1998 and October 1, 1998. At Agreement expiration, the Company will adjust the minimum and deposit premium against a rate of 1.25% of its applicable net earned premium. "Net earned premium" as used herein is the gross earned premium of the Company for the classes of business reinsured hereunder as specified in the Coverage Article, less the earned portion of premium paid for per risk reinsurance that inures to the benefit of this Agreement. - 20 - 43 REINSTATEMENT In the event of the whole or any portion of the indemnity given hereunder being exhausted the amount so exhausted shall be automatically reinstated from the time of commencement of any loss occurrence subject to the payment of any additional premium calculated Pro Rata as to amount and as to time, such additional premium to be paid at the time the loss settlement is made by Reinsurer. If the loss settlement is made prior to the adjustment of premium the reinstatement premium shall be calculated provisionally on the deposit premium. Nevertheless, the liability under this Exhibit A shall never be more than $4,000,000 in respect of any loss nor more than $12,000,000 in all during the period of this Agreement representing two fully reinstatements only of the above limit of indemnity. - 21 - 44 EXHIBIT B - SECOND LAYER RETENTION AND LIMIT No claim will be made hereunder unless the Company has first sustained, by reason of any one loss, an ultimate net loss in excess of $5,000,000. The Reinsurer will then be liable for the amount of ultimate net loss in excess of $5,000,000 any one loss, but the limit of liability of the Reinsurer will not exceed $20,000,000 with respect to any one loss. RATE AND PREMIUM For the term of this Agreement, there will be a minimum and deposit premium hereon of $50,000, payable in equal quarterly installments of $12,500 on January 1, 1998, April 1, 1998, July 1, 1998 and October 1, 1998. At Agreement expiration, the Company will adjust the minimum and deposit premium against a rate of 0.50% of its applicable net earned premium. "Net earned premium" as used herein is the gross earned premium of the Company for the classes of business reinsured hereunder as specified in the Coverage Article, less the earned portion of premium paid for per risk reinsurance that inures to the benefit of this Agreement. - 22 - 45 REINSTATEMENT In the event of the whole or any portion of the indemnity given hereunder being exhausted the amount so exhausted shall be automatically reinstated from the time of commencement of any loss occurrence subject to the payment of any additional premium calculated Pro Rata as to amount and as to time, such additional premium to be paid at the time the loss settlement is made by Reinsurers. If the loss settlement is made prior to the adjustment of premium the reinstatement premium shall be calculated provisionally on the deposit premium. Nevertheless, the liability shall never be more than $20,000,000 in respect of any loss nor more than $60,000,000 in all during the period of this Agreement representing two full reinstatements only of the above limit of indemnity. - 23 - 46 EXHIBIT C - THIRD LAYER RETENTION AND LIMIT No claim will be made hereunder unless the Company has first sustained, by reason of any one loss, an ultimate net loss in excess of $25,000,000. The Reinsurer will then be liable for the amount of ultimate net loss in excess of $25,000,000 any one loss, but the limit of liability of the Reinsurer will not exceed $25,000,000 with respect to any one loss. RATE AND PREMIUM For the term of this Agreement, there will be a minimum and deposit premium hereon of $34,000, payable in equal quarterly installments of $8,500 on January 1, 1998, April 1, 1998, July 1, 1998 and October 1, 1998. At Agreement expiration, the Company will adjust the minimum and deposit premium against a rate of 0.33% of its applicable net earned premium. "Net earned premium" as used herein is the gross earned premium of the Company for the classes of business reinsured hereunder as specified in the Coverage Article, less the earned portion of premium paid for per risk reinsurance that inures to the benefit of this Agreement. - 24 - 47 REINSTATEMENT In the event of the whole or any portion of the indemnity given hereunder being exhausted the amount so exhausted shall be automatically reinstated from the time of commencement of any loss occurrence subject to the payment of any additional premium calculated Pro Rata as to amount and as to time, such additional premium to be paid at the time the loss settlement is made by Reinsurers. If the loss settlement is made prior to the adjustment of premium the reinstatement premium shall be calculated provisionally on the deposit premium. Nevertheless, the liability shall never be more than $25,000,000 in respect of any loss nor more than $75,000,000 in all during the period of this Agreement representing two full reinstatements only of the above limit of indemnity. - 25 - 48 EXHIBIT D - FOURTH LAYER RETENTION AND LIMIT No claim will be made hereunder unless the Company has first sustained, by reason of any one loss, an ultimate net loss in excess of $50,000,000. The Reinsurer will then be liable for the amount of ultimate net loss in excess of $50,000,000 any one loss, but the limit of liability of the Reinsurer will not exceed $50,000,000 with respect to any one loss. RATE AND PREMIUM For the term of this Agreement, there will be a minimum and deposit premium hereon of $34,000, payable in equal quarterly installments of $8,500 on January 1, 1998, April 1, 1998, July 1, 1998 and October 1, 1998. At Agreement expiration, the Company will adjust the minimum and deposit premium against a rate of 0.33% of its applicable net earned premium. "Net earned premium" as used herein is the gross earned premium of the Company for the classes of business reinsured hereunder as specified in the Coverage Article, less the earned portion of premium paid for per risk reinsurance that inures to the benefit of this Agreement. - 26 - 49 REINSTATEMENT In the event of the whole or any portion of the indemnity given hereunder being exhausted the amount so exhausted shall be automatically reinstated from the time of commencement of any loss occurrence subject to the payment of any additional premium calculated Pro Rata as to amount and as to time, such additional premium to be paid at the time the loss settlement is made by Reinsurers. If the loss settlement is made prior to the adjustment of premium the reinstatement premium shall be calculated provisionally on the deposit premium. Nevertheless, the liability shall never be more than $50,000,000 in respect of any loss nor more than $150,000,000 in all during the period of this Agreement representing two full reinstatements only of the above limit of indemnity. - 27 - EX-10.27 7 EXHIBIT 10.27 1 Exhibit 10.27 INTERESTS AND LIABILITIES CONTRACT (hereinafter referred to as "Contract") to the COINSURED AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION (hereinafter referred to as the "Reinsured") and CENTRE INSURANCE COMPANY (hereinafter referred to as "Subscribing Reinsurer") It is mutually agreed by and between the Reinsured on the one part, and the Subscribing Reinsurer on the other part that the Subscribing Reinsurer's share in the Interests and Liabilities of the Reinsurer as set forth in the COINSURED AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT, effective 12:01 a.m., Eastern Standard Time, January 1, 1999 attached hereto and forming a part of this Contract shall be for 80%. The share of the Subscribing Reinsurer signed hereon in the Interests and Liabilities of all 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 Subscribing Reinsurer signed hereon shall be several and not joint with those of the other reinsurers and in no event shall the Subscribing Reinsurer signed hereon participate in the Interests and Liabilities of the other reinsurers. This Contract shall be effective for the period commencing 12:01 a.m., Eastern Standard Time, January 1, 1999 and ending 11:59 p.m., Eastern Standard Time, December 31, 1999. 2 IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed, in triplicate, Executed this _______________ day of ____________, 1999 TRENWICK AMERICA REINSURANCE CORPORATION By: ___________________ By: ___________________ Name: Name: Title: Title: Executed this _______________ day of ____________, 1999 CENTRE INSURANCE COMPANY By: ___________________ By: ___________________ Name: Name: Title: Title: 3 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") 4 ARTICLE AND PAGE NUMBER 1. BUSINESS COVERED 3 2. TERM 4 3. TERRITORY 4 4. RETENTION, REINSURER'S SHARE, AND LIMIT 5 5. LOSS SETTLEMENTS 6 6. REINSURANCE PREMIUM 5 7. ADDITIONAL PREMIUM 7 8. EXPERIENCE ACCOUNT 8 9. REINSURER'S MARGIN 9 10. FUNDS WITHHELD 10 11. COMMUTATION 12 12. REPORTS AND REMITTANCES 13 13. TAXES 14 14. COVENANTS OF THE REINSURED 15 15. DEFINITIONS 15 16. ULTIMATE NET LOSS 16 17. NET RETAINED LINES 17 18. RIGHT OF OFFSET 17 19. ERRORS AND OMISSIONS 18 20. CURRENCY 18 21. EXTRA CONTRACTUAL OBLIGATIONS 18 22. EXCESS OF ORIGINAL POLICY LIMITS LOSS 19 23. ARBITRATION 19 24. ACCESS TO RECORDS 20 25. INSOLVENCY 20 26. GOVERNING LAW 21 27. SERVICE OF SUIT 22 28. AMENDMENTS AND ALTERATIONS 23 29. ASSIGNMENT 23 30. NO THIRD PARTY RIGHTS 23 31. NO IMPLIED WAIVER 23 32. MERGERS AND ACQUISITIONS 23 33. INTERMEDIARY 24 34. SECURITY 24 5 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. 6 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, 1999 (the "EFFECTIVE DATE") through to and including the earlier of 11:59 p.m., Eastern Standard Time, December 31, 1999 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 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. 7 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 a Retention equal to 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: "A" is equal to 32.0% of Subject Earned Premium; 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 32.0% OF SUBJECT EARNED PREMIUM. 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 a Retention equal to 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 3.5% of Subject Earned Premium; 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 8 LOSS UNDER THIS LIMIT B EXCEED 3.5% OF SUBJECT EARNED PREMIUM. FOR THE PURPOSE OF CALCULATING THE REINSURER'S SHARE UNDER LIMIT A AND LIMIT B ABOVE, ULTIMATE NET LOSS SHALL NOT BE SUBJECT TO THE SUB-LIMITS SET FORTH IN ARTICLE 16 "ULTIMATE NET LOSS" . 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 (the "TOTAL AGGREGATE LIMIT") shall be equal to the lesser of: (1) 35.5% of Subject Earned Premium; or (2) $55 million; or (3) The greater of: (a) the aggregate amount of ceded Ultimate Net Loss as reported in the Reinsured's 1999 Statutory Financial Statement, or (b) 32% of Subject Earned Premium. 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 - 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 as set forth in the article entitled "REPORTS AND REMITTANCES". 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. Appropriate adjustments shall be made to the Reinsurer's Share and the Ultimate Net Loss paid by the Reinsurer to the Reinsured based on ceded paid Ultimate Net Loss reported to the Reinsurer (and agreed to by the Reinsurer) pursuant to Article 12 - "REPORTS AND REMITTANCES" and Article 16 - "ULTIMATE NET LOSS". 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 9 limitations of this Agreement. ARTICLE 6 - REINSURANCE PREMIUM Subject to the article entitled "FUNDS WITHHELD", the Reinsured shall pay to the Reinsurer a premium (the "REINSURANCE PREMIUM") equal to 10.0% 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 $20,000,000. Within thirty (30) days following the end of each calendar quarter the Reinsured shall make appropriate adjustments for the amount by which 10.0% 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 7 - ADDITIONAL PREMIUM Subject to the article entitled "FUNDS WITHHELD", the Reinsured shall pay to the Reinsurer an additional premium (the "ADDITIONAL PREMIUM") in an amount equal to: 1) 50% of the excess of Ultimate Net Loss over 73% of Subject Earned Premium, but such Additional Premium not to exceed the lesser of 2% of Subject Earned Premium, or $3,250,000, plus 2) 55% of the excess of Ultimate Net Loss over 77% of Subject Earned Premium, but such Additional Premium not to exceed 2.2% of Subject Earned Premium or $3,550,000. 3) 67.5% of the excess of Ultimate Net Loss over 81% of Subject Earned Premium, but such Additional Premium not to exceed 2.7% of Subject Earned Premium or $4,350,000. 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 50% of the Ultimate Net Loss covered under Limit A between 73% and 77% of Subject Earned Premium and 55% of the Ultimate Net Loss covered under Limit A between 77% and 81% of Subject Earned Premium and 67.5% of the Ultimate Net Loss covered under Limit A between 81% and 85% of Subject Earned Premium, exceeds or is less than the amounts of Additional Premiums previously paid by the Reinsured. 10 ARTICLE 8 - EXPERIENCE ACCOUNT A notional account (the "EXPERIENCE ACCOUNT") shall be calculated by the Reinsurer from the Effective Date of this Agreement and maintained until there is a complete and final release of all of the Reinsurer's obligations to the Reinsured under this Agreement. The balance of the Experience Account (the "EXPERIENCE ACCOUNT BALANCE") as of any December 31 shall be defined as: (1) Cumulative Reinsurance Premium plus Additional Premium, if any, received by the Reinsurer (or Funds Withheld in accordance with the article entitled "FUNDS WITHHELD"), less (2) the Cumulative Reinsurer's Margin paid to the Reinsurer, less (3) Cumulative Ultimate Net Loss paid (or offset) by the Reinsurer, plus (4) the Cumulative Experience Account Investment Credit. The Reinsurance Premium, and Additional Premium, if any, shall be credited to the Experience Account on the day said monies are received by the Reinsurer's designated bank, or credited to the Funds Withheld Balance in accordance with the article entitled "FUNDS WITHHELD", as the case may be. The Ultimate Net Loss due from the Reinsurer shall be charged against the Experience Account on the day said monies are received by the Reinsured's designated bank, or offset against the Funds Withheld Balance in accordance with the article entitled "FUNDS WITHHELD", as the case may be, and further subject to the article entitled "REPORTS AND REMITTANCES". 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, 1999, multiplied by 8.75% (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. 11 ARTICLE 9 - REINSURER'S MARGIN The Reinsurer's margin (the "REINSURER'S MARGIN") shall be equal to 12.0% of the Reinsurance Premium payable under this Agreement, payable in equal quarterly installments in advance on the first day of each calendar quarter. Within thirty (30) days following the end of each calendar quarter the Reinsured or the Reinsurer shall make appropriate adjustments for the amount by which 12.0% of the Reinsurance Premium for that calendar quarter exceeds or is less than the amounts previously paid by the Reinsured as Reinsurer's Margin for that calendar quarter. Any such balance due either party shall be due and payable within thirty (30) days. ARTICLE 10 - FUNDS WITHHELD Subject to the terms herein, the Reinsured shall retain the Reinsurance Premium and Additional Premium, if any, due hereunder on a funds withheld basis, provided however, that the Reinsurer's Margin shall be paid in cash to the Reinsurer and shall not be affected by the terms of this "Funds Withheld" article. The amount of such withheld Reinsurance Premium, net of Reinsurer's Margin, and Additional Premium, if any, shall be called "FUNDS WITHHELD". In consideration of the Reinsurer agreeing to the Funds Withheld, the Reinsured agrees (i) to calculate a notional Funds Withheld account from the Effective Date of this Agreement until there is a complete and final release of all of the Reinsurer's obligations to the Reinsured under this Agreement and (ii) that the Funds Withheld Balance may be set off by the Reinsurer against liability of any nature whatsoever (whether then contingent, due and payable, or in the future becoming due) that the Reinsurer may then have, or in the future may have under this Agreement and (iii) that such setoff shall occur as a condition precedent to any payments by the Reinsurer hereunder. The balance of the Funds Withheld account (the "FUNDS WITHHELD BALANCE") as of any December 31 shall be defined as: (1) Cumulative Reinsurance Premium plus Additional Premium, if any, due hereunder, less (2) the Cumulative Reinsurer's Margin paid to the Reinsurer, less (3) Cumulative 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". 12 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, 1999, 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 shall pay to the Reinsurer the Funds Withheld Balance immediately upon request or upon the happening of any of the following events : 1) commutation of this Agreement, 2) an Event of Default, 3) a downgrade of the Reinsured by AM Best to A- or lower, or 4) December 31, 2014. If the Reinsured pays the Reinsurer the Funds Withheld Balance the Reinsured will no longer be required to credit the Funds Withheld Balance with investment income and the Experience Account Investment Credit, as defined in Article 8 - Experience Account, shall, from the time of payment of the Funds Withheld Balance, equal the One-Year Treasury Note rate as posted in the Wall Street Journal on the first business day following such payment. Such rate shall be reset each 12 months to equal the One-Year Treasury Note prevailing at that time. 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 (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 13 or other similar law or seeking the appointment of an administrator or a trustee, receiver, manager, receiver-manager, liquidator, custodian, curator or other similar official of it or any substantial part of the Reinsured's assets, or the Reinsured consents to any such relief (including any bankruptcy petition) or appointment in involuntary proceedings taken against it, or makes a bulk sale of its assets or a general assignment or proposal for the benefit of creditors, or fails or admits its inability to pay its debts as they become due, or suspends or ceases or threatens to suspend or cease carrying on business; or it takes any action in furtherance of any of the foregoing. ARTICLE 11 - COMMUTATION Subject to the terms of this article, and provided the Experience Account balance is positive, the Reinsured may, at its sole option, commute this Agreement at any December 31, beginning on December 31, 2003 and on or before December 31, 2014, 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, January 1, 1996, January 1, 1997, and January 1, 1998. 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 positive balance, if any, in the Experience Account as of the date of commutation within sixty (60) business days of the date of commutation: Payment of the Experience Account balance 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, 2004, the Reinsured shall pay to the Reinsurer in cash each January 1, beginning January 1, 2005, an annual fee (the "Non-Commute Fee") of $200,000 until such time as this Agreement is commuted or until such time as all losses due under this Agreement are paid, whichever comes first. The Non-Commute Fee shall not be included in the calculation of the Experience Account balance or the Funds Withheld Account balance and shall be retained 100% by the Reinsurer. ARTICLE 12 - REPORTS AND REMITTANCES 1. The Reinsured shall furnish to the Reinsurer within fifteen (15) days prior to the close of the calendar quarter an estimate of the amount of Ultimate Net Loss ceded under this Agreement as of the close of that calendar quarter broken out between loss and Allocated Loss Adjustment Expense. 14 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) and broken out between Y2K Loss and non-Y2K loss (loss, Allocated Loss Adjustment Expense, ECO and XPL). (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 broken out between Y2K Loss and non-Y2K loss (loss, Allocated Loss Adjustment Expense, ECO and XPL) 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, broken out between Y2K Loss and non-Y2K loss (loss, Allocated Loss Adjustment Expense, ECO and XPL), and 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 13 - TAXES The Reinsured shall pay all taxes of any nature associated with this Agreement and undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits tax returns, to any State or Territory of the United States of America or the District of Columbia. Provided, however, that this Article shall not impose any liability on the Reinsured for any income, capital gains, profits or other similar 15 taxes payable by the Reinsurer in respect of its operations or this Agreement. ARTICLE 14 - COVENANTS OF THE REINSURED The Reinsured agrees not to change claims handling procedures, loss reserving process, levels of ceding commissions in its underlying contracts, or the levels of reinsurance protection in any manner from that in effect at the inception of this Agreement which materially affects this Agreement or the obligations of the parties hereunder, unless the Reinsured has received the prior written approval of the Reinsurer to such changes, such approval not to be unreasonably withheld. In the event that the Reinsured does not adhere to these Covenants, the Reinsurer shall have the right to immediately cancel this Agreement by mailing the Reinsured a written notice of cancellation and the remaining unpaid Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be immediately reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) as of the date of cancellation. The mailing of such notice shall be sufficient notice and the effective date of cancellation shall be the date the notice of cancellation was posted. In the event that the Reinsurer learns about a violation of these Covenants after the Expiration Date of this Agreement, the remaining unpaid Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) upon written notice by the Reinsurer to the Reinsured by registered or certified mail. 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 until the Reinsurer is called upon to pay Ultimate Net Loss under this Agreement which is in excess of the Funds Withheld Balance. ARTICLE 15 - DEFINITIONS All words and phrases that have a capitalized initial letter in this Agreement have a special meaning which is either introduced in certain Articles or which is defined below and which shall include the plural as well as the singular. "AGREEMENT" means this agreement as the same may be amended from time to time in accordance with the terms hereof and all instruments supplemental hereto or in amendment or confirmation hereof; additionally, the expressions "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. 16 "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 $140 million for the Term of this Agreement. "Y2K LOSS" shall mean all Ultimate Net Loss (including ALAE, ECO and XPL) on Business Covered howsoever arising and regardless of any other cause or occurrence contributing concurrently or in any sequence with: 1) the rendering of date or time sensitive data, including but not limited to the recording, storing, processing, calculating, comparing, sequencing or presenting by electronic means of calendar dates or spans of time from, into and between the twentieth and twenty-first centuries (including 1999 to 2000 and leap year calculations); and 2) the generation, transmission, delivery, receipt of and any use or reliance on information or calculations dependent on or relating to calendar dates or spans of time from, into and between the twentieth and twenty-first centuries (including 1999 to 2000 and leap year calculations). ARTICLE 16 - ULTIMATE NET LOSS "ULTIMATE NET LOSS" shall mean the actual loss incurred by the Reinsured and Allocated Loss Adjustment Expense ("ALAE") on Business Covered on the Reinsured's Net Retained Lines, and shall include 80% of the amounts of any Extra Contractual Obligations ("ECO") and 80% of the amounts of any Excess of Original Policy Limits Loss ("XPL") 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, excluding Declaratory Judgement Expense) 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. The foregoing definition of ALAE shall apply notwithstanding how such expenses may be classified by the Reinsured for statutory accounting purposes. 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 and its components (loss (including Y2K Losses) and Allocated Loss Adjustment Expense, and ECO and XPL) 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 17 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. For the purposes of this Agreement, the maximum amount that Y2K losses (loss, ALAE, ECO and XPL combined) may contribute to the Ultimate Net Loss shall be equal to the lessor of: (i) 5% of Subject Earned Premium, or (ii) $7.5 million, provided however, that no such sub-limit shall apply to Y2K Losses if the ratio of: [Ultimate Net Loss prior to the application of the sub-limits set forth in this Article 16 divided by Subject Earned Premium] is less than or equal to 81%. ARTICLE 17 - NET RETAINED LINES This Agreement applies only to that portion of any policy which the Reinsured retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of the Retentions, only loss or losses in respect of that portion of any policy which the Reinsured retains net for its own account shall be included. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Reinsured to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. ARTICLE 18 - RIGHT OF OFFSET The Reinsured and the Reinsurer may offset any balance or amount due from one party to the other under this Agreement or any other contract heretofore or hereafter entered into between the Reinsured and the Reinsurer, whether acting as assuming reinsurer or ceding company or in any other capacity. 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 18 such notice shall be sufficient notice and the effective date of cancellation shall be the date the notice of cancellation was posted. In the event that the Reinsured fails to remit to the Reinsurer the Funds Withheld Balance that is due and payable in accordance with the provisions in this article after the Expiration Date of this Agreement within 15 days of the date such payment is due, the Reinsurer shall notify the Reinsured in writing via registered mail of the overdue amounts. In the event that the Reinsured does not remit the overdue amounts to the Reinsurer within 15 days of receiving such notification from the Reinsurer, the remaining unpaid Total Aggregate Limit, notwithstanding any provision to the contrary contained herein, shall be immediately reduced to an amount equal to the positive balance in the Experience Account (or zero if the Experience Account Balance is negative) without further notice. ARTICLE 19 - ERRORS AND OMISSIONS Any omission or error by either party to this Agreement will not relieve either party of liability hereunder, provided such act, omission, or error is not prejudicial to the other party and is rectified promptly upon discovery by the responsible party. ARTICLE 20 - CURRENCY The provisions of this Agreement involving dollar-designated amounts are expressed in United States currency and all payments shall be made in this currency. ARTICLE 21 - EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall indemnify the Reinsured within the limits hereof, where the Ultimate Net Loss includes 80% of any Extra Contractual Obligations. "EXTRA CONTRACTUAL OBLIGATIONS" (ECO), 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. 19 However, this Article shall not apply and there shall be no recovery hereunder where the loss has been incurred due to the fraud by a member of the Board of Directors, a corporate officer, or a supervisory employee of the Reinsured acting individually or collectively or in collusion with a member of the Board of Directors, a corporate officer, supervisory employee or partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of the Reinsured. ARTICLE 22 - EXCESS OF ORIGINAL POLICY LIMITS LOSS This Agreement shall indemnify the Reinsured, within the limits hereof, where the Ultimate Net Loss includes 80% of any Excess of Original Policy Limits Loss. "EXCESS OF ORIGINAL POLICY LIMITS LOSS" (XPL), 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 23 - ARBITRATION Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration must be in writing and sent certified or registered mail, return receipt requested. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator (the "Umpire") who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the Umpire within thirty (30) days of their appointment, the two arbitrators shall request the American Arbitration Association ("AAA") to provide a list of possible Umpires with the qualifications set forth in this Article and the parties shall then mutually agree upon an Umpire from this list. If the parties are unable to agree upon 20 the Umpire within thirty (30) days of the receipt of the AAA list or if the AAA fails to provide such a list within thirty (30) days of the request, either party may apply to the United States Federal Court for the Southern District of New York to appoint an Umpire with those qualifications. The Umpire shall promptly notify in writing all parties to the arbitration of his selection. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies or Underwriters at Lloyd's of London. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in New York, New York, but the venue may be changed when deemed by the panel to be in the best interest of the arbitration proceeding. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of New York. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. To the extent, and only to the extent, that the provisions of this Agreement are ambiguous or unclear, the panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business. The panel shall render its decision within sixty (60) days following the termination of hearings, which decision shall be in writing, stating the reasons thereof. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. ARTICLE 24 - ACCESS TO RECORDS The Reinsurer or its duly appointed representatives shall have free access to the books, records and papers of the Reinsured or its agents at all reasonable times during the continuance of this Agreement or any liability hereunder, for the purpose of obtaining information concerning this Agreement or the subject matter thereof. ARTICLE 25 - INSOLVENCY In the event of the insolvency of the Reinsured, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Reinsured under Policy or Policies reinsured without diminution because of the insolvency of the Reinsured, to the Reinsured or to its liquidator, receiver, or statutory successor except as provided by Section 4118(a) of the New York Insurance Law or except when the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Reinsured and when the Reinsurer with the consent of the direct insured or insureds has assumed such Policy obligations of the Reinsured as 21 direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Reinsured so such payees. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Reinsured shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Reinsured on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding when such claim is to be adjudicated, any defense or defenses which it may deem available to the Reinsured or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Reinsured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reinsured solely as a result of the defense undertaken by the Reinsurer. When two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the insolvent Reinsured. Should any party hereto be placed in rehabilitation or liquidation or should a rehabilitator, liquidator, receiver, conservator or other person or entity of similar capacity be appointed as respects such party, all amounts due any of the parties hereto whether by reason of premiums, losses or otherwise under this Agreement or any other contract(s) of reinsurance heretofore or hereafter entered into between the parties (whether or not any such contract(s) be assumed or ceded) shall at all times be subject to the right of offset at any time and from time to time, and upon the exercise of same, only the net balance shall be due and payable in accordance with Section 7427 of the Insurance Law of the State of New York to the extent such statute or any other applicable law, statute or regulation governing such offset shall apply. ARTICLE 26 -GOVERNING LAW This Agreement shall be interpreted and governed by the laws of the State of New York without regard to its principles of choice of law. ARTICLE 27 - SERVICE OF SUIT (This Article only applies to reinsurers domiciled outside of the United States and/or unauthorized in any state, territory, or district of the United States having jurisdiction over the Reinsured). It is agreed that in the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder or to perform any other obligation under the Agreement, the Reinsurer, at the request of the Reinsured, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. It is further agreed that service of process in such suit may be made upon Willkie Farr and Gallagher, 787 Seventh Avenue, New York, New York, 10019, and that in any suit 22 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 successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Reinsured or any beneficiary hereunder arising out of this Agreement of reinsurance, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. The foregoing is not intended to conflict with or override the obligation of the parties hereto to arbitrate their disputes as provided in the Arbitration clause. ARTICLE 28 - AMENDMENTS AND ALTERATIONS This Agreement may be changed, altered or amended as the parties may agree, provided such change, alteration or amendment is evidenced in writing or by endorsement executed by the Reinsured and the Reinsurer. ARTICLE 29 - ASSIGNMENT Except as expressly provided otherwise in the article entitled "INSOLVENCY", neither party may assign or transfer any rights, interests or obligations under this Agreement to any person or entity without the written consent of the other party and any effort to so assign such rights, interests or obligations without the consent of the other party shall be null and void. ARTICLE 30 - NO THIRD PARTY RIGHTS This Agreement is solely between the Reinsured and the Reinsurer, and in no instance shall any other party have any rights under this Agreement except as expressly provided otherwise in the Insolvency Article. ARTICLE 31 - NO IMPLIED WAIVER The failure of any party to enforce any of the provisions herein shall not be construed to be a waiver of the right of such party to enforce any such provision. ARTICLE 32 - MERGERS AND ACQUISITIONS 23 It is understood and agreed that if Reinsured acquires (by acquisition, reinsurance, 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. If Reinsured is acquired by or merges with another company, this Agreement shall survive such acquisition or 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. Notwithstanding any other provisions of this Agreement, in the event that the reinsured acquires another company or is acquired by or merges with another company, this Agreement shall survive such acquisition and/or merger and the book of business which was covered by this Agreement prior to such merger and/or acquisition shall be covered hereunder. ARTICLE 33 - INTERMEDIARY Guy Carpenter & Company, Inc. and Balis & Co., Inc. are 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 either Guy Carpenter & Company, Inc. or 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. ARTICLE 34 - 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. EX-10.28 8 EXHIBIT 10.28 1 Exhibit 10.28 SPECIFIC RETROCESSION AGREEMENT ARTICLE PAGE ------- ---- TERM AND CANCELLATION I 3 CONCURRENCY OF CONDITIONS II 4 PREMIUM AND CEDING COMMISSION III 4 RESERVES AND FUNDING IV 5 SETTLEMENTS AND SALVAGE V 7 OFFSET VI 7 DELAYS, ERRORS, OR OMISSIONS VII 8 ENTIRE AGREEMENT/AMENDMENTS VIII 8 ACCESS TO RECORDS IX 9 INSOLVENCY X 9 ARBITRATION XI 11 SERVICE OF SUIT XII 13 FOLLOW THE FORTUNES XIII 14 INTERMEDIARY XIV 14 1 2 SPECIFIC RETROCESSION AGREEMENT (hereinafter referred to as the "Agreement") between TRENWICK AMERICA REINSURANCE CORPORATION a CONNECTICUT corporation (hereinafter referred to as the "Retrocedent") and INTERNATIONAL SURETY AND CASUALTY COMPANY a TEXAS corporation (hereinafter referred to as the "Retrocessionaire") as respects the 100% QUOTA SHARE REINSURANCE AGREEMENT AR 11148 (hereinafter referred to as the "Original Agreement") Effective July 1, 1998 issued by the Retrocedent to STATE AND COUNTY MUTUAL FIRE INSURANCE COMPANY (hereinafter referred to as the "Original Reinsured") By this Agreement the Retrocedent agrees to retrocede to the Retrocessionaire, and the Retrocessionaire agrees to accept retrocession from the Retrocedent a 37% share of the Retrocedent's 27% share in the Original Agreement a copy of which is attached hereto and made a part of this Agreement. This Agreement and any modification or endorsement hereto shall be governed and interpreted in accordance with the laws of the State of New York, U.S.A. Nothing hereinafter shall in any manner create any obligations or establish any rights against Retrocessionaire in favor of any third parties or any persons not parties to this Agreement except as provided in the Insolvency Article. 2 3 ARTICLE I TERM AND CANCELLATION This Agreement will apply to all business subject to the Original Agreement effective July 1, 1998. This Agreement may be canceled (or the Retrocessionaire's participation may be reduced) any June 30th by either party giving at least 120 days prior notice by certified or registered mail to the other party. During any such period of notice the Retrocessionaire will remain bound by the terms of this Agreement. In the event this Agreement is canceled (or the Retrocessionaire's participation is reduced) in accordance with the aforementioned procedure, the Retrocessionaire will remain liable for all losses under policies in force until their expiration or renewal dates. In the event the Original Reinsured's policies are written in a jurisdiction where cancellation, renewal, or nonrenewal is regulated by the insurance authorities, and the Original Reinsured and the Retrocedent are bound to continue coverage by such regulations and statutes of said jurisdiction or by a judicial decision, the Retrocessionaire will remain liable on any such policies in force at cancellation date of this Agreement (and will receive the premium therefor) until the date each expires or until the first renewal date when the Original Reinsured can lawfully nonrenew said policies, whichever occurs first. Alternatively, the Retrocedent may elect to cancel (or reduce) the Retrocessionaire's liability on a cut-off basis as of the date of cancellation, and the Retrocessionaire will not be liable for any losses occurring (or the percentage thereof 3 4 equal to the amount of participation reduction) on or after the cancellation date and will return immediately to the Retrocedent the unearned premium less ceding commission as of that date, computed on a monthly pro rata basis. Notwithstanding the foregoing, in the event the Original Agreement attached hereto is cancelled for whatever reason, this Agreement will be cancelled concurrently with the cancellation of said Original Agreement. Notwithstanding the cancellation 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 II CONCURRENCY OF CONDITIONS This Agreement will follow in all respects the terms and conditions of the Original Agreement (including letters of understanding and/or addenda attached thereto when accepted by the Retrocedent), provided the terms and conditions of the Original Agreement are not inconsistent with the terms and conditions of this Agreement. The Retrocedent agrees to transmit to the Retrocessionaire all notices and information pertaining to the subject matter of this Agreement as promptly as possible after receipt thereof by the Retrocedent. ARTICLE III PREMIUM AND CEDING COMMISSION 4 5 As premium for the reinsurance provided hereunder, the Retrocedent will retrocede to the Retrocessionaire its proportional share of the net earned premium ceded to the Retrocedent in respect of the Original Agreement, less the ceding commission set forth below. The Retrocessionaire will allow the Retrocedent a ceding commission in accordance with Article IX of the Original Agreement plus brokerage paid to the Intermediary of 1.5% of the gross ceded earned premium under the Original Agreement. ARTICLE IV RESERVES AND FUNDING As regards business 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 losses (including loss and loss expense paid by the Retrocedent but not recovered from the Retrocessionaire, and loss and loss expense reported and outstanding but not including any amount relating to reserves in respect of incurred but not reported losses) and/or unearned premium, which it is required by law to set up (hereinafter referred to as "Retrocessionaire's Obligations"), it will forward to the Retrocessionaire a statement showing the proportion of such reserves applicable to it. The unearned premium held by the Retrocedent on behalf of the Retrocessionaire will be deposited into a Trust Account at Texas State Bank, McAllen, Texas by the Intermediary. This Trust Account will be established in accordance with the terms of the Trust Agreement, a copy of which is attached hereto and made a part of this Agreement. The interest earned on funds 5 6 deposited in the Trust Account will be shared equally between the Retrocedent and the Retrocessionaire and will be remitted quarterly with the corresponding monthly account under the Original Agreement. Notwithstanding any other provisions of this Agreement, the Retrocedent or its court-appointed successor in interest may draw upon the Trust Account at any time without diminution because of the insolvency of the Retrocedent or of the Retrocessionaire for one or more of the following purposes only: A. To pay or reimburse the Retrocedent for the Retrocessionaire's Obligations under this Agreement which have not otherwise been paid by the Retrocessionaire; B. To make payment to the Retrocessionaire of any amounts held in the Trust Account that exceed one hundred two percent (102%) of the actual amount required to fund the Retrocessionaire's Obligations; or C. Where the Retrocedent has received notification of termination of the Trust Account and where any of the Retrocessionaire's entire Obligations remain unliquidated and discharged ten (10) days prior to such termination date, to withdraw amounts equal to such Obligations and deposit such amounts in a separate account, in the name of the Retrocedent, in any United States bank or trust company, apart from its general assets, in trust for such uses and purposes specified in (a) and (b) above as may remain executory after such withdrawal and for any period after such termination date. At annual intervals, or more frequently as agreed but never more frequently than semi-annually, the Retrocedent will prepare and forward to the Retrocessionaire a statement to reflect the Retrocessionaire's share of reserves for losses and/or unearned premium. If the statement shows that the Retrocessionaire's share of such reserves exceeds the balance available in the Trust Account as of the statement date, then the Retrocessionaire will, within 30 days after receipt of notice of such excess, deposit with 6 7 the Trustee under the Trust Agreement assets having a value on the date of deposit equal to such excess. If, however, the statement shows that the Retrocessionaire's share of such reserves is less than the balance available in the Trust Account as of the statement date, 7 8 then the Retrocedent will, within 30 days after receipt of written request from the Retrocessionaire, make a withdrawal from the Trust Account in the amount of such excess and remit the same to the Retrocessionaire. ARTICLE V SETTLEMENTS AND SALVAGE The Retrocedent will have the right to settle all claims under the Original Agreement. The Retrocessionaire will be liable for its proportional share of loss and loss expense that the Retrocedent pays or allows under the Original Agreement, including loss expense directly incurred by the Retrocedent, if any. The Retrocessionaire agrees that settlements hereunder will take place at the same time as under the Original Agreement. All settlements, provided they are within the terms of this Agreement, will be unconditionally binding on the Retrocessionaire in proportion to its participation in this Agreement. The Retrocessionaire will receive its proportional share of all salvage recovered and/or recoveries made by the Retrocedent in respect of losses subject to this Agreement. ARTICLE VI OFFSET The Retrocedent and the Retrocessionaire will each be entitled to deduct from amounts due the other party under this Agreement any amounts due itself from the other party under this Agreement or under any other reinsurance or retrocession agreement 8 9 heretofore or hereafter entered into by and between them through the reinsurance intermediary designated in ARTICLE XIV of this Agreement. In the event of the insolvency of a party hereto, however, offset shall only be allowed in accordance with the provisions of Section 7427 of the Insurance Laws of the State of New York. ARTICLE VII DELAYS, ERRORS, OR OMISSIONS The Retrocedent will not be prejudiced in any way by any delay or by any omission, through error, accident, or oversight, to cede to the Retrocessionaire any reinsurance correctly falling to its share under the terms of this Agreement. Neither will the Retrocedent be prejudiced by erroneous cancellation (either partial or total) of any cession, by omission to report or erroneously reporting any losses, or by any other error or omission. Further, delays, errors, or omissions inadvertently made will not invalidate the liability of the Retrocessionaire. Any such error or omission, however, will be corrected immediately upon discovery. ARTICLE VIII ENTIRE AGREEMENT/AMENDMENTS This Agreement constitutes the entire agreement between the parties. This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the Retrocedent and the Retrocessionaires either by addenda hereto or by an exchange of letters; such addenda or letters will then constitute a part of this Agreement. 9 10 ARTICLE IX ACCESS TO RECORDS Provided the Retrocedent has received prior notice, the Retrocessionaire or its designated representatives will have the right to inspect, at any reasonable time, all records of the Retrocedent that pertain in any way to this Agreement. ARTICLE X INSOLVENCY In the event of the Retrocedent's insolvency, the reinsurance afforded by this Agreement will be payable by the Retrocessionaire on the basis of the Retrocedent's liability under the Original Agreement without diminution because of the Retrocedent's insolvency or because its liquidator, receiver, conservator, or statutory successor has failed to pay all or a portion of any claims, subject however to the right of the Retrocessionaire to offset against such funds due hereunder, any sums that may be payable to them by said insolvent Retrocedent in accordance with the Offset Article. The reinsurance will be payable by the Retrocessionaire directly to the Retrocedent, or to its liquidator, receiver, conservator, or statutory successor except (a) where this Agreement specifically provides another payee of such reinsurance in the event of the Retrocedent's insolvency or (b) where the Retrocessionaire, with the consent of the direct insured or insureds, has assumed such policy obligations of the Retrocedent as direct obligations of itself to the payees under such policies in substitution for the Retrocedent's obligation to 10 11 such payees. Then, and in that event only, the Retrocedent, with the prior approval of the liquidator, receiver, conservator, or statutory successor is entirely released from its obligation and the Retrocessionaire will pay any loss directly to payees under such policies. The Retrocedent's liquidator, receiver, conservator, or statutory successor will give written notice of the pendency of a claim against the Retrocedent under the Original Agreement within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Retrocessionaire may investigate said claim and interpose in the proceeding where the claim is to be adjudicated, at its own expense, any defense that it may deem available to the Retrocedent, or to its liquidator, receiver, conservator, or statutory successor. The expense thus incurred by the Retrocessionaire 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 Retrocessionaire. In the event of insolvency, bankruptcy, receivership, rehabilitation or liquidation of the Retrocessionaire, the Retrocedent may immediately take possession of all of the assets held in the Trust Account maintained in connection herewith, and may retain all or any portion of any amount then due or which may become due to the Retrocessionaire under this Agreement. Such amounts shall be used for the purpose of paying any and all liability of the Retrocessionaire hereunder until all such liabilities have been discharged, at which time the Retrocedent shall pay to the Retrocessionaire, its conservator, 11 12 liquidator, receiver or statutory successor the balance of such amounts withheld as may remain, provided no 12 13 default of the Retrocessionaire has occurred hereunder, in which case the Retrocessionaire, its conservator, liquidator, receiver or statutory successor forfeits any amounts which may remain. ARTICLE XI ARBITRATION In the event of any arbitration between the Retrocedent and the Original Reinsured under the terms of the Original Agreement attached hereto, the Retrocessionaire agrees to abide by the results of such arbitration or any settlement arising therefrom. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, will be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested. One arbitrator will be chosen by each party and the two arbitrators will, before instituting the hearing, choose an impartial third arbitrator who will preside at the hearing. If either party fails to appoint its arbitrator within 30 days after being requested to do so by the other party, the latter after 10 days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. 13 14 If the two arbitrators are unable to agree upon the third arbitrator within 30 days of their appointment, they will request the American Arbitration Association to appoint a third arbitrator with the qualifications set forth below in this Article. All arbitrators will be disinterested active or former executive officers of insurance or reinsurance companies or Underwriters at Lloyd's, London. Within 30 days after notice of appointment of all arbitrators, the panel will meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel will be relieved of all judicial formality and will not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration will take place in Stamford, Connecticut, but the venue may be changed when deemed by the panel to be in the best interest of the arbitration proceeding. The decision of any two arbitrators when rendered in writing will 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 will make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible, but within 60 days following the termination of the hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party will bear the expense of its own arbitrator and will jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration will be allocated by the panel. The panel may, at its discretion, award such 14 15 further costs and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. ARTICLE XII SERVICE OF SUIT In the event the Retrocessionaire hereon fails to pay any amount or perform any obligation claimed due hereunder, such Retrocessionaire, at the request of the Retrocedent, will submit to the jurisdiction of a court of competent jurisdiction within the United States and will comply with all requirements necessary to give that court jurisdiction. 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. 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. 15 16 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 XIII FOLLOW THE FORTUNES The liability of the Retrocessionaire will commence as of the effective date of this Agreement and, unless otherwise specifically provided herein, will follow in all respects the terms and conditions of the Original Agreement and any amendments thereto. The Retrocessionaire agrees that it is the true intent of this Agreement that the Retrocessionaire will, in every case to which this Agreement applies, follow the fortunes of the Retrocedent. ARTICLE XIV INTERMEDIARY Aon Re Inc., an Illinois corporation, or one of its affiliated corporations duly licensed as a reinsurance intermediary, is hereby recognized as the Intermediary 16 17 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 to this Agreement will be transmitted to the Retrocedent or the Retrocessionaire through the Intermediary. Payments by the Retrocedent to the Intermediary will be deemed payment to the 17 18 Retrocessionaire. Payments by the Retrocessionaire to the Intermediary will be deemed payment to the Retrocedent only to the extent that such payments are actually received by the Retrocedent. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized representatives. Signed at STAMFORD, CONNECTICUT TRENWICK AMERICA REINSURANCE CORPORATION Signature: ___________________________ Title: ________________________ Attest: ___________________________ Date: ________________________ Signed at DALLAS, TEXAS INTERNATIONAL SURETY AND CASUALTY COMPANY Signature: ___________________________ Title: ________________________ Attest: ___________________________ Date: ________________________ 18 EX-10.29 9 EXHIBIT 10.29 1 Exhibit 10.29 SPECIAL ACCIDENT REINSURANCE FACILITY QUOTA SHARE REINSURANCE RETROCESSION (hereinafter referred to as "Agreement") In consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinafter set forth UNUM LIFE INSURANCE COMPANY (hereinafter referred to as the "Retrocessionaire(s)") does hereby indemnify, as herein provided and specified business underwritten by DUNCANSON & HOLT, INC. (hereinafter referred to as "Underwriting Manager") on behalf of TRENWICK AMERICA REINSURANCE CORPORATION (hereinafter referred to as the "Retrocedant") Article I - INSURING CLAUSE The Retrocessionaire shall indemnify the Retrocedant for Reinsurance paid under benefits classified as Special Accident Programs reinsured by the Retrocedant. Article II - TERRITORY This Agreement shall apply to losses occurring within the territorial limits of the Retrocedant's contracts. Article III - TERM AND CANCELLATION 2 This Agreement shall take effect for a one year period commencing October 1, 1996 and is continuous in nature and shall apply to all policies coming within the scope of the Agreement and to claims incurred, on and after October 1, 1996. The Retrocedant or the Retrocessionaire(s) may cancel this Agreement at 12:01 A.M. at September 30, 1997, or any September 30th thereafter, by giving the other at least ninety (90) days prior notice in writing by Certified Mail. The Retrocessionaire(s) shall continue to participate in all business coming within the terms of the Agreement during the said period of ninety (90) days. In the event of cancellation of this Agreement, the Retrocessionaire's(s') liability on business in force shall continue in connection with any policy the subject of cession hereunder and any endorsement thereto whether issued after the date of cancellation or not and whether subject to additional premium or not. Notwithstanding the foregoing, the Retrocessionaire(s) shall be liable for their share of any loss reported during a discovery period granted to the original Insured under a policy which expires or is cancelled during or at the end of the period of the Retrocessionaire's(s') liability hereunder. Article IV - UNDERWRITING MANAGER The business subject to this Agreement shall be underwritten by Duncanson & Holt, Inc. on behalf of the Trenwick America Reinsurance Corporation (Retrocedant). Article V - RETENTION The Retrocedant agrees to cede and the Retrocessionaire(s) agrees to accept under this Agreement the quota share percentage specified in the attached Interest and Liabilities Agreement for liability as identified in the attached Exhibit I assumed by the Retrocedant for Special Accident Programs. Article VI - LIABILITY OF RETROCESSIONAIRE(S) The liability of the Retrocessionaire(s) shall begin obligatorily and simultaneously with that of the Retrocedant and all reinsurance ceded hereunder shall be subject to the same clauses, rates, terms, conditions and endorsements as the original policies, binders, or contracts insofar as they relate to the business Reinsured hereunder, the true intent of this Agreement being that the Retrocessionaire(s) shall, in every case to which this Agreement applies and in the proportions specified herein, follow the fortunes of the Retrocedant. 2 3 Article VII - PREMIUM AND COMMISSIONS The premium payable to the Retrocessionaire(s) will be calculated on the original gross reinsurance rates less the following: Retrocedant Expense: 2 % of Gross Written Premium Underwriting Manager's Fee: Up to 7 1/2% of Gross Written Premium. Article VIII - PROFIT COMMISSION Annually, the Retrocessionaire(s) will pay the Retrocedant Profit Commission equal to twenty (20%) of the profits accruing on business ceded under this Agreement. Computation of the Profit Commission shall be on an Underwriting Year basis. Each Underwriting Year shall encompass all transactions relating to reinsurance ceded under this Agreement during the period. The first calculation of a Profit Commission shall be made following September 30, 1997, for the Underwriting Year ending that date. Calculation of the Profit Commission shall be made following September 30th of each Underwriting Year that this Agreement remains in effect until each Underwriting Year is fully developed. The profits, for each Underwriting Year to which the 20% Profit Commission will apply, shall be equal to the excess of A over B where: (A) INCOME is equal to the sum of: 1. Gross Written Premium during the Underwriting Year; and 2. Unearned premium reserve at beginning of period; and 3. A reserve for incurred, but not reported, loss development at beginning of period; and 4. A reserve for outstanding losses at beginning of period; and 5. Recoveries from any excess of loss protection contracts that may be arranged by 3 4 the Underwriting Manager to protect the Retrocedant; and 6. Investment Income on the average amount of reserve funds held by the Retrocessionaire(s) during the current Underwriting Year, valued as of the date of distribution, based on the monthly prime interest rate during the subject period published in The Wall Street Journal less one-half percent. (B) OUTGO is equal to the sum of: 1. All losses and loss expenses paid less salvages applicable to the Underwriting Years; and 2. Outstanding Loss Reserve at the close of the Underwriting Year; and 3. Loss Development Reserve at the close of the Underwriting Year; and 4. Acquisition Cost (Commission and Brokerage Earned); and 5. Unearned Premium Reserve for the current Underwriting Year; and 6. An allowance of 2% for all business for Retrocedant's Expense. 7. An allowance of up to seven and one half (7 1/2%) of the Gross Written Premium for Underwriting Managers Fee. 8. An allowance of 3/4 of 1% of Gross Written Premium for Retrocessionaires Expense. In the event of an underwriting loss on the total results of any one Underwriting Year, the amount of such loss shall be debited to the profit commission statement for the ensuing Underwriting Year. Should a debit balance still remain, such balance shall be reduced by 50% and debited against further Underwriting Year(s), but not exceeding three years in all, and no profit commission shall be considered as earned under this Agreement until a credit balance is restored. The first calculation of profit commission under this Agreement shall be made as of September 30, 1997 and shall apply to all business transacted from the inception of this Agreement. Subsequent calculations and recalculations of each year's profit commission shall be made as of the last day of each Underwriting Year. In this Agreement, no further calculation of profit commission shall be made until all liability has been terminated and all claims settled. Article IX - CURRENCY 4 5 Wherever the sign "$" appears in this Agreement it shall mean United States Dollars. Premiums and losses are payable hereunder in United States Dollars. Article X - RETROCESSIONAL PREMIUM, CLAIMS, AND REPORTS The Retrocedant shall report to the Retrocessionaires within seventy-five (75) days following the close of each quarter the gross premiums collected for the quarter less claims paid, acquisition expense, Retrocedant's and Underwriting Manager's Fee, and at such time any balances due the Retrocessionaires or Retrocedant shall be due and immediately payable. In addition, the Retrocedant shall furnish such other information as may be required by the Retrocessionaires for the completion of the Retrocessionaires quarterly and annual statements. Article XI - LOSSES The Retrocedant alone and at its full discretion shall adjust, settle or compromise all claims and losses. All such adjustments, settlements and compromises shall be binding on the Retrocessionaire in proportion to its participation. The Retrocedant shall likewise at its sole discretion commence, continue, defend, compromise, settle or withdraw from actions, suits or proceedings and generally make decisions involving all aspects and matters relating to any claim or loss as in its judgement may be beneficial or expedient; and all loss payments made shall be shared by the Retrocessionaire(s) proportionately. The Retrocessionaire(s) shall, on the other hand, benefit proportionately from all reductions of losses by salvage, compromise or otherwise. The Retrocessionaire(s) shall be liable for its proportionate share of all expenses incurred by the Company in connection with the investigation and settlement or contesting the validity of specific claims or losses or alleged losses. Losses due by the Retrocessionaire(s) to the Retrocedant shall be carried to account. Article XII - CLAIMS CO-OPERATION CLAUSE The Retrocedant shall advise the Retrocessionaire(s) with reasonable promptitude of any loss or losses in which the Retrocessionaire(s) is likely to be involved and shall provide the Retrocessionaire(s) with full information relative thereto. However, inadvertent failure to give such reasonably prompt advice shall not affect the Retrocedant's rights under this Agreement. 5 6 The Retrocessionaire(s), through its appointed representatives, shall have the right to cooperate at its own expense with the Retrocedant in the defense and/or settlement of any claims in which they may be interested. All settlements made by the Retrocedant shall be binding on the Retrocessionaire(s) and the Retrocessionaire(s) agrees to pay any amounts that may be recoverable under this Agreement as soon as reasonably practical after the receipt of the necessary papers proving the loss. Article XIII - OFFSET The Retrocedant or the Retrocessionaire(s) may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between the Retrocedant and the Retrocessionaire. Article XIV - TAX PROVISIONS In consideration of the terms under which the agreement is issued, the Retrocessionaire(s) shall participate up to its proportionate share in State Taxes which might be applicable for business ceded hereunder. Article XV - ACCESS TO RETROCEDANT'S RECORDS The Retrocessionaire or its designated representatives shall have free access at any reasonable time to all records of the Retrocedant which pertain in any way to this Agreement. Article XVI - EXTRA CONTRACTUAL AND PUNITIVE DAMAGES In no event shall the Retrocessionaire(s) participate in any extra or non-contractual damages, nor legal fees and expenses attendant to the defense thereof, including but not limited to compensatory, exemplary and punitive damages, nor fines or Statutory Penalties which are awarded against the original reinsured as a result of an act, omission or course of conduct committed by or for which the original reinsured shall be held responsible in connection with the reinsurance retroceded under this Agreement, unless the Retrocessionaire(s) shall have concurred in writing with the proposed act, omission or course 6 7 of conduct to be taken by the original reinsured which lead to the awarding of such damages. If the Retrocessionaire(s) furnishes such written concurrence, payment of such awarded damages will be shared by the Retrocedant and the Retrocessionaire(s) in the same proportion as the parties are sharing the claim out of which such extra contractual obligation arises. Article XVII - ERRORS AND OMISSIONS Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. Article XVIII - INSOLVENCY In the event of the insolvency of the Retrocedant, this Reinsurance shall be payable directly (except where the policy of insurance or this Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Retrocedant) to the Retrocedant or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Retrocedant without diminution because of the insolvency of the Retrocedant or because the liquidator, receiver, conservator or statutory successor of the Retrocedant 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 Retrocedant shall give written notice to the Retrocessionaire(s) of the pendency of a claim against the Retrocedant indicating the policy retroceded, which claim would involve a possible liability on the part of the Retrocessionaire(s) 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(s) may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Retrocedant or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Retrocessionaire(s) shall be chargeable, subject to the approval of the court, against the Retrocedant as part of the expense of conservation or liquidation to the extent of a proportionate share of the benefit which may accrue to the Retrocedant solely as a result of the defense undertaken by the Retrocessionaire(s). Article XIX - ARBITRATION 7 8 All differences between the Retrocedant and the Retrocessionaire(s) on which agreement cannot be reached will be decided by arbitration. The arbitrators will determine the interpretation of this Agreement in accordance with usual business and reinsurance practices rather than strict technicalities. Three arbitrators will decide any differences. They must be professionals of the life or Property and Casualty insurance industry and other than the two parties to this Agreement. One of the arbitrators is to be appointed by the Retrocedant and one by the Retrocessionaire(s) and these two will select a third. If the two are not able to agree on a third, the choice will be left to the President of the American Council of Life Insurance or its successors. The arbitration procedure shall follow the rules of the American Arbitration Association. The arbitration shall be conducted in the State of New York and under mutually agreed upon procedures. If the parties cannot reach agreement on procedures, either party may petition the American Arbitration Association, or its' successor, to conduct such arbitration. Any required filing fee will be the sole responsibility of the petitioner. This Agreement shall be deemed binding upon the arbitrators for terms expressly agreed to herein. The arbitrator's decision will be by majority vote, and no appeal will be taken from it. The judgment rendered by the arbitrators may be entered in any court having proper jurisdiction. Expenses and fees for the arbitrators shall be borne equally by the Retrocedant and Retrocessionaire(s) except as mentioned concerning petitioning fee to the American Arbitration Association. Article XX - PROPORTION This Agreement of the undersigned Retrocessionaire(s) is for and covers its share of the foregoing interests and liabilities. The share of the Retrocessionaire(s) shall be separate and apart from the shares of any other reinsurers, and Retrocessionaires(s) shall in no event participate in the interests and liabilities of such other reinsurers. 8 9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed, in duplicate, by their duly authorized representatives this day of 19 . UNUM LIFE INSURANCE COMPANY BY: _______________________________________ TITLE: ____________________________________ Signed on this day of 19 . By DUNCANSON & HOLT, INC. On Behalf of: TRENWICK AMERICA REINSURANCE CORPORATION (Retrocedant) BY: _______________________________________ TITLE: ____________________________________ 9 10 INTEREST AND LIABILITIES AGREEMENT It is hereby mutually agreed by UNUM LIFE INSURANCE COMPANY (hereinafter referred to as the "Subscribing Retrocessionaire(s)") and TRENWICK AMERICA REINSURANCE CORPORATION (hereinafter referred to as the "Retrocedant") That the Subscribing Retrocessionaire(s) shall have a 100% participation in the Interest and Liabilities underwritten on behalf of the Retrocedant as set forth in the instrument attached hereto entitled, Special Accident Reinsurance Facility Quota Share Reinsurance Retrocession. Such participation shall be several and not joint with the participation of other Subscribing Retrocessionaire(s) and the Subscribing Retrocessionaire(s) shall under no circumstances participate in the Interest and Liabilities of the other Retrocessionaire(s) in said instrument. The Retrocedant shall pay to the Subscribing Retrocessionaire(s) 100% of all premiums due or which may become due the Retrocessionaire(s) under the provisions of the instrument attached. This Agreement shall attach October 1, 1996 and is subject to the Term provision contained in Article III of the attached instrument 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 Interest and Liabilities of the Subscribing Retrocessionaire(s) therein, 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 Retrocedant and the Subscribing Retrocessionaire(s). 10 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed, in duplicate, by their duly authorized representatives. THE SUBSCRIBING RETROCESSIONAIRE(S) Signed in this day of 19 . UNUM LIFE INSURANCE COMPANY BY: _______________________________________ TITLE: ____________________________________ AND THE RETROCEDANT Signed in this day of 19 . By DUNCANSON & HOLT, INC. On Behalf of: TRENWICK AMERICA REINSURANCE CORPORATION (Retrocedant) BY: _______________________________________ TITLE: ____________________________________ 12 EXHIBIT I of the SPECIAL ACCIDENT REINSURANCE FACILITY QUOTA SHARE REINSURANCE RETROCESSION between TRENWICK AMERICA REINSURANCE CORPORATION and UNUM LIFE INSURANCE COMPANY Business Covered: Occupational Accident Insurance and Reinsurance 100% Authorized Limits $ 5,000,000 Per Life $10,000,000 Per Occurrence 13 Addendum No. 1 to the SPECIAL ACCIDENT REINSURANCE FACILITY QUOTA SHARE REINSURANCE RETROCESSION (hereinafter referred to as "Agreement") In consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinafter set forth UNUM LIFE INSURANCE COMPANY (hereinafter referred to as the "Retrocessionaire(s)") does hereby indemnify, as herein provided and specified business underwritten by DUNCANSON & HOLT, INC. (hereinafter referred to as "Underwriting Manager") on behalf of TRENWICK AMERICA REINSURANCE CORPORATION (hereinafter referred to as the "Retrocedant") It is hereby mutually understood and agreed that the following changes are made to this Agreement effective October 1, 1998: Article VIII - PROFIT COMMISSION Annually, the Retrocessionaire(s) will pay the Retrocedant Profit Commission equal to thirty (30%) of the profits accruing on business ceded under this Agreement. Computation of the Profit Commission shall be on an Underwriting Year basis. Each Underwriting Year shall encompass all transactions relating to reinsurance ceded under this Agreement during the period. The first calculation of a Profit Commission shall be made following September 30, 1999, for the Underwriting Year ending that date. Calculation of the Profit Commission shall be made following September 30th of each Underwriting Year that this Agreement remains in effect until each Underwriting Year is fully developed. 14 The profits, for each Underwriting Year to which the 30% Profit Commission will apply, shall be equal to the excess of A over B where: (A) INCOME is equal to the sum of: 1. Gross Written Premium during the Underwriting Year; and 2. Unearned premium reserve at beginning of period; and 3. A reserve for incurred, but not reported, loss development at beginning of period; and 4. A reserve for outstanding losses at beginning of period; and 5. Recoveries from any excess of loss protection contracts that may be arranged by the Underwriting Manager to protect the Retrocedant; and 6. Investment Income on the average amount of reserve funds held by the Retrocessionaire(s) during the current Underwriting Year, valued as of the date of distribution, based on the monthly prime interest rate during the subject period published in The Wall Street Journal less one-half percent. (B) OUTGO is equal to the sum of: 1. All losses and loss expenses paid less salvages applicable to the Underwriting Years; and 2. Outstanding Loss Reserve at the close of the Underwriting Year; and 3. Loss Development Reserve at the close of the Underwriting Year; and 4. Acquisition Cost (Commission and Brokerage Earned); and 5. Unearned Premium Reserve for the current Underwriting Year; and 6. An allowance of up to 2% for all business for Retrocedant's Expense. 7. An allowance of seven and one half (7 1/2%) of the Gross Written Premium for Underwriting Managers Fee. 8. An allowance of 3/4 of 1% of Gross Written Premium for Retrocessionaires Expense. 2 15 In the event of an underwriting loss on the total results of any one Underwriting Year, the amount of such loss shall be debited to the profit commission statement for the ensuing Underwriting Year. Should a debit balance still remain, such balance shall be reduced by 50% and debited against further Underwriting Year(s), but not exceeding three years in all, and no profit commission shall be considered as earned under this Agreement until a credit balance is restored. The first calculation of profit commission under this Agreement shall be made as of September 30, 1999 and shall apply to all business transacted from the inception of this Agreement. Subsequent calculations and recalculations of each year's profit commission shall be made as of the last day of each Underwriting Year. In this Agreement, no further calculation of profit commission shall be made until all liability has been terminated and all claims settled. 3 16 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed, in duplicate, by their duly authorized representatives. THE SUBSCRIBING RETROCESSIONAIRE(S) Signed in this day of 19 . UNUM LIFE INSURANCE COMPANY BY: _______________________________________ TITLE: ____________________________________ AND THE RETROCEDANT Signed in this day of 19 . By DUNCANSON & HOLT, INC. On Behalf of: TRENWICK AMERICA REINSURANCE CORPORATION (Retrocedant) BY: _______________________________________ TITLE: ____________________________________ 4 17 EXHIBIT I of the SPECIAL ACCIDENT REINSURANCE FACILITY QUOTA SHARE REINSURANCE RETROCESSION between UNUM LIFE INSURANCE COMPANY and TRENWICK AMERICA REINSURANCE CORPORATION Business Covered: Occupational Accident Insurance and Reinsurance 100% Authorized Limits $10,000,000 Per Life $10,000,000 Per Occurrence EX-10.30 10 EXHIBIT 10.30 1 Exhibit 10.30 RETROCESSION AGREEMENT PERSONAL ACCIDENT & OCCUPATIONAL ACCIDENT QUOTA SHARE REINSURANCE AGREEMENT BETWEEN TRENWICK AMERICA REINSURANCE CORPORATION (hereinafter referred to as the "Company") AND THE MEMBERS OF THE AMERICAN ACCIDENT REINSURANCE GROUP (hereinafter referred to as the "Retrocessionaires") 2 WHEREAS, TRENWICK AMERICA REINSURANCE CORPORATION ("Company") is the issuing Company for the American Accident Reinsurance Group under a Participation and Management Agreement between the Company and the manager of the American Accident Reinsurance Group, DUNCANSON & HOLT (the "Contract Operator"); and WHEREAS, the Company desires to retrocede a portion of their liability as the issuing Company in such Personal Accident and Occupational Accident reinsurance business produced, underwritten and administered by the Contract Operator; and WHEREAS, the RETROCESSIONAIRES, as members of the American Accident Reinsurance Group, desire to reinsure the Company in those amounts designated as their participation percentage in Schedule "A" of the Participation and Management Agreement; and NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Company, the Retrocessionaires, and the Contract Operator agree as follows: ARTICLE I - INSURING CLAUSE The Company agrees to cede and the Retrocessionaires agree to accept automatically, on an obligatory basis, 100% of the Company's Personal Accident and Occupational Accident Treaty reinsurance business which is produced, underwritten, bound and administered by the Contract Operator. The terms, conditions, and limitations of this Agreement and the Participation and Management Agreement shall determine the rights and obligations of the parties. The Participation and Management Agreement is incorporated herein by reference and binding upon the Retrocessionaires as if they were the Company to the extent of their participation percentage described in Schedule "A" of such Agreement. The Contract Operator agrees to furnish the Retrocessionaires with any material changes in the Participation and Management Agreement. ARTICLE II - SCOPE OF AGREEMENT This Agreement is solely between the Company and the Retrocessionaires. Performance of the respective obligations of each party under this Agreement shall be rendered solely to the other parties. However, in the instance of the insolvency of the Company, the liability of the Retrocessionaires shall be modified to the extent set forth in Article X entitled, "Insolvency." In no instance shall any Reinsured of the Company or any claimant against a Reinsured of the Company have any rights under this Agreement. ARTICLE III - GENERAL CONDITIONS, DEFINITIONS, AND INTERPRETATIONS a. Personal Accident and Occupational Accident reinsurance business - The term "business" shall have the meaning 2 3 described in Article II of the Participation and Management Agreement. The term "policy(ies)" shall mean the contracts, both treaty and facultative, of the Company affording reinsurance with respect to such business. b. Reinsured - The term "Reinsured" shall mean original ceding client of the Company. c. Errors and Omissions - The Retrocessionaires shall not be relieved of liability by reason of an error or omission by the Company or the Contract Operator in reporting any claim or loss on any business reinsured under this Agreement, provided the Company or Contract Operator attempts to rectify such error or omission after discovery. d. Special Acceptance - Business which is beyond the terms, conditions or limitations of this Agreement may be submitted to the Retrocessionaires for special acceptance hereunder and such business, if accepted by the Retrocessionaires, shall be subject to all of the terms, conditions and limitations of this Agreement except as modified by the special acceptance. e. Contract Operator - It is understood and agreed that the business subject hereunder is produced, underwritten, administered, and otherwise managed by Duncanson & Holt on behalf of the Company and the American Accident Reinsurance Group. It is further understood and agreed that this Agreement has been entered into in contemplation of the continuation of the Contract Operator performing the aforementioned duties. f. Participation and Management Agreement - The contract and any exhibits, schedules, amendments and supplements thereto, entered into between the Company and the Contract Operator dated as of December 1, 1996 for reinsurance management services relating to the business reinsured by the Company and retroceded to the Retrocessionaires. ARTICLE IV - RETROCESSIONAIRES' LIABILITY All reinsurance provided hereunder shall be subject to the same clauses, terms and conditions, and endorsements as the Company's original reinsurance binders, certificates, policies or contracts, including any amendments, modifications, alterations and interpretations thereof, insofar as they relate to the business underwritten, produced, bound and administered by the Contract Operator pursuant to Article II, Section 3(a) and (b) of the Participation and Management Agreement covered hereunder. Each Subscribing Retrocessionaire shall follow the fortunes of the Company and shall be liable unconditionally for its quota share participation percentage (stated in Schedule "A" of the Participation and Management Agreement) of all claims, settlements, awards and loss adjustment expenses including declaratory judgment expenses under the terms and conditions or by way of compromise, including "ex gratia" payments, of business reinsured during the period this Agreement remains in force, including amounts assessed 3 4 as extra-contractual damages against the Reinsured or the Company. The intent of this Agreement is that it shall apply to each Retrocessionaire to the extent of their proportion of liability as specified herein, and that each Retrocessionaires' liability to the Company under this Agreement is several and not joint. ARTICLE V - REINSURANCE PREMIUM AND COMMISSION The premium for the reinsurance provided hereunder shall be remitted by the Contract Operator and divided among the Retrocessionaires in the same proportion as their quota share participation percentage of the Company's liability less the following allowances due the company: 1. a 1.5% override commission on the total premium ceded hereunder; and 2. the Retrocessionaires' quota share participation percentage of the: (i) original brokerage commission paid by the Company; (ii) governmental/regulatory assessments and surcharges; (iii) premium and other governmental taxes; and (iv) all fees, commissions and expenses charged by the Contract Operator. ARTICLE VI - REPORTS AND REMITTANCES Within sixty calendar days following completion of each quarter, the Contract Operator shall render accounts to the Retrocessionaires and the Company showing the gross participation of the Company, the identity of the Retrocessionaires for gross written premiums, the name of the Reinsured, the payment period corresponding with the premium collected by account (cash collected basis), losses paid and outstanding, date of loss, loss expenses paid and outstanding, salvage and subrogation, brokerage and override commissions. The Contract Operator will pay to the Retrocessionaires sixty days after the close of each quarter the net balance of the premium collected due the Retrocessionaires less applicable ceding allowances and Retrocessionaires' portion of paid losses at the same time the reports are rendered. Should there be a negative balance, the Retrocessionaires will pay such balance within sixty days from receipt of the report. In addition, the Contract Operator shall furnish such other information as may be required by the Company and Retrocessionaires for the completion of their quarterly and annual statements and internal records. All reports shall be rendered on forms mutually acceptable to the Company and the Retrocessionaires. ARTICLE VII - CLAIMS PAYMENTS AND LOSS ADJUSTMENT EXPENSE 4 5 All payments of claims or losses by the Contract Operator under the terms and conditions of the reinsurance Agreements(s) of the Company, or by way of compromise, including ex gratia payments, shall be unconditionally binding on the Retrocessionaires. The Retrocessionaires shall reimburse the Company through the Contract Operator for the Retrocessionaires' portion of each payment in settlement of claims or losses made by the Contract Operator together with the Retrocessionaires' portion of the Company's loss adjustment expense payments, if any, all as apportioned between the parties in accordance with their participation percentage set forth in Schedule "A" of the Participation and Management Agreement. However, in the instance of the insolvency of the Company, the liability of the Retrocessionaires shall be modified to the extent set forth in Article X entitled, "Insolvency." The Contract Operator shall investigate and settle or defend all claims and losses. Loss adjustment expense shall mean all expenses allocated by the Company, or the Contract Operator, to an individual claim or loss, in connection with the disposition of claims, losses or legal proceedings including investigation, negotiation and legal expenses (including expenses associated with policy coverage and declaratory judgment actions), court costs, and accrued interest. The Retrocessionaires' liability for payments of claims or losses shall include any extra contractual, consequential, punitive, statutory, compensatory or exemplary damages awarded against the reinsured or the Company and legal expenses incurred by the reinsured or the Company in defense of action taken in connection therewith. ARTICLE VIII - INSPECTION OF RECORDS The Contract Operator shall allow the Retrocessionaires to inspect at all reasonable times during normal business hours those records of the Contract Operator relating to the business reinsured under this Agreement with respect to claims or losses which involve or are likely to involve the Retrocessionaires. ARTICLE IX - INSOLVENCY In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company, or its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claims. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Retrocessionaires of the pendency of a claim against the Company indicating the policy reinsured which claim would involve a possible liability on the part of the Retrocessionaires within a reasonable time after such 5 6 claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Retrocessionaires may investigate such claim and interpose, at their own expense, in the proceedings 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. The reinsurance shall be payable by the Retrocessionaires to the Company or to its liquidator, receiver, conservator or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where the Agreement specifically provided another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Retrocessionaires with the consent of the direct reinsured or reinsureds have assumed such policy obligations of the Company as direct obligations of the Retrocessionaires to the payees under such policies and in substitution for the obligations of the Company to such payees. ARTICLE X - TERM AND CANCELLATION This Agreement shall take effect for the twelve month period commencing 12:01 A.M. Eastern Standard Time on December 1, 1996 and shall remain in full force and effect until December 31, 1997 and, thereafter, it shall be automatically renewed for annual periods unless canceled as provided in this Agreement. This Agreement may be cancelled effective 12:01 AM Eastern Standard Time on January 1, 1998 or any subsequent January 1st by either party giving to the other at least one hundred fifty (150) days prior written notice by registered mail. Unless otherwise agreed to by the parties hereto, in the event of termination, reinsurance coverage under this Agreement shall remain in force and the Retrocessionaires shall remain liable to the Company for all losses, including losses with a date of loss after the termination dates on all covered business in force at termination date. It is also agreed that the reinsurance with respect to all covered business in force on the date of termination of this Agreement shall continue until their natural expiration and/or any run-off. The Retrocessionaires shall remain liable for their share of losses on such covered business which commenced prior to the termination date of this Agreement. In the event of cancellation by either of the parties, after a 6 7 period of sixty (60) months from the cancellation date, the future disposition of the business reinsured under this Agreement will be determined by the Company. If the Company elects to portfolio transfer the business reinsured hereunder, the amount payable shall be a dollar for dollar transfer from the Retrocessionaires to the Company in an amount which is equal to the sum of: (I) 100% of the outstanding loss reserves, including incurred but not reported reserves and loss expense reserves, and (ii) unearned premium reserves net of acquisition costs. The amount payable upon a portfolio transfer shall be determined as of the termination date of the Agreement and the valuation of all liabilities surrendered shall be jointly determined by the Company and the Retrocessionaire and shall be binding on all parties. ARTICLE XI - SERVICE OF SUIT In the event of the failure of a Retrocessionaire to pay any amount claimed to be due hereunder, that Retrocessionaire, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States of America and will comply with all requirements necessary to give such court jurisdiction and all matter arising hereunder shall be determined in accordance with the law and practice of such court. It is further agreed that service of process in such suit may be made upon the Contract Manager or the corporate secretary of any United States parent, affiliate or subsidiary companies of the Retrocessionaires (hereinafter, "agent for service of process"), and in suit instituted against a Retrocessionaire upon this Agreement, that Retrocessionaire will abide by the final decision of such court or of any appellate court in the event of an appeal. Service of suit upon the Contract Manager shall be deemed service on all Retrocessionaires named as parties in such suit. The above-named are authorized and directed to accept service of process on behalf of the Retrocessionaire in any such suit and upon the request of the Company to give a written undertaking to the Company that the agent for service of process will enter a general appearance on behalf of the Retrocessionaire in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory or district of the United State of America which make provision therefore, Retrocessionaires hereby designate the Superintendent, Commissioner or Director of Insurance or other officers 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 any 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 agent for service of 7 8 process as the firm to whom the said officer is authorized to mail such process or a true copy thereof. ARTICLE XII - LOSS RESERVES It is agreed that when the Company files with the Insurance Department or establishes reserves for claims covered hereunder, as required by law, the Contract Operator will forward to the Retrocessionaires a statement showing the proportion of such loss reserves which is applicable to Retrocessionaires. The Retrocessionaires hereby agree to comply with any and all terms or conditions required by governmental or other regulatory authorities necessary for the company to take annual statement reserve credit, including but not limited to furnishing security in such form as required and as acceptable to applicable governmental or other regulatory authorities including but not limited to cash or a clean irrevocable Letter of Credit delivered to the Company issued by any bank acceptable to the governmental or other regulatory authority having jurisdiction over the Company's loss reserves in an amount equal to Retrocessionaires' proportion of the loss reserves. The Company agrees to use and apply any amounts which it may draw upon such security for the following purposes only: a. To pay the Retrocessionaires' share or to reimburse the Company for the Retrocessionaires' share of any liability under this Agreement. b. To make refund of any sum which is in excess of the actual amount required to pay Retrocessionaires' share of any liability reinsured by this Agreement. The designated bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to see that withdrawals are made only upon the order of properly authorized representatives of the Company. ARTICLE XIII - CURRENCY All payments made hereunder or pursuant to the Participation and Management Agreement shall be paid in U.S. Dollars. ARTICLE XIV - ARBITRATION If any dispute shall arise between the Reinsurer and the Retrocessionaire with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, the dispute shall be referred 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 8 9 requesting it to do so, the requesting party may nominate two arbitrators, who shall choose the third. In the event that the two arbitrators are unable to agree upon the third arbitrator, each of them shall name three, of whom the other declines two, and the decision shall be made by drawing lots. Each party shall submit its case to the arbitrators within thirty days of the appointment of the arbitrators. The arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies domiciled in the United States. The arbitrators shall consider this Agreement an honorable engagement rather than merely a legal obligation. They are relieved of all judicial formalities and may abstain from following the strict rules of law. However, the arbitrators shall have no authority to consider claims for or to award punitive or exemplary damages. The decision of a majority of the arbitrators in writing shall be final and binding on both the Reinsurer and the Retrocessionaire. The expense of the arbitrators and of the arbitration shall be equally divided between the Reinsurer and the Retrocessionaire. Any such arbitration shall take place in New York, New York unless some other location is mutually agreed upon by the Reinsurer, the Retrocessionaire, and the arbitrators. ARTICLE XV - GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed on the date listed below. DUNCANSON & HOLT, INC. TRENWICK AMERICA REINSURANCE (American Accident CORPORATION Reinsurance Group) By:________________________ By:___________________________ Mary Buono Paul Feldsher Title:_____________________ Title:________________________ Senior Vice President Executive Vice President Date:______________________ Date:_________________________ Place:_____________________ Place:________________________ 9 EX-12 11 EXHIBIT 12 1 \ EXHIBIT 12.0 TRENWICK GROUP INC. COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, --------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (dollars in thousands) Earnings: Net income $34,792 $35,252 $33,848 $29,841 $20,282 Extraordinary loss on debt redemption, net of $558 income tax benefit -- 1,037 -- -- -- Income taxes 8,245 11,241 9,980 8,572 2,753 ------- ------- ------- ------- ------- Income before income taxes and extraordinary item 43,037 47,530 43,828 38,413 23,035 Fixed charges (as below) 14,492 10,140 6,826 6,805 6,785 ------- ------- ------- ------- ------- Earnings (for ratio calculation) $57,529 $57,670 $50,654 $45,218 $29,820 ======= ======= ======= ======= ======= Fixed charges: Interest expense $ 3,954 $ 894 $ 6,503 $ 6,496 $ 6,469 Minority interest 9,702 8,920 -- -- -- Portion of rental expense which approximates the interest factor 836 326 323 309 316 ------- ------- ------- ------- ------- Total fixed charges $14,492 $10,140 $ 6,826 $ 6,805 $ 6,785 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 4.0 5.7 7.4 6.6 4.4 ======= ======= ======= ======= =======
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-13 12 EXHIBIT 13 1 EXHIBIT 13 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 and comprehensive income, of changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Trenwick Group Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. PricewaterhouseCoopers LLP New York, New York February 3, 1999 - 1 - 2 TRENWICK GROUP INC. CONSOLIDATED BALANCE SHEET
December 31, ----------------------------------- 1998 1997 ----------- ----------- (dollars in thousands) Assets Securities available for sale at fair value: Debt securities (amortized cost: $867,552 and $788,727) $ 893,020 $ 812,314 Equity securities (cost: $44,342 and $31,603) 49,188 39,163 Cash and cash equivalents 63,003 12,847 ----------- ----------- Total investments and cash 1,005,211 864,324 Accrued investment income 15,974 10,969 Receivables from ceding insurers 138,550 88,668 Reinsurance recoverable balances, net 140,173 67,593 Prepaid reinsurance premiums 22,632 10,804 Deferred policy acquisition costs 35,261 22,524 Net deferred income taxes 14,101 12,451 Other assets 20,359 8,623 ----------- ----------- Total assets $ 1,392,261 $ 1,085,956 =========== =========== Liabilities and Stockholders' Equity Liabilities: Unpaid claims and claims expenses $ 682,428 $ 518,387 Unearned premium income 152,051 87,020 6.70% senior notes due 2003 75,000 -- Other liabilities 24,753 12,900 ----------- ----------- Total liabilities 934,232 618,307 ----------- ----------- Company-obligated mandatorily redeemable preferred capital securities of subsidiary trust holding solely junior subordinated debentures of Trenwick Group Inc. 110,000 110,000 ----------- ----------- Common stockholders' equity: Common stock, $.10 par value, 30,000,000 shares authorized; 11,051,394 and 11,951,060 shares outstanding 1,105 1,195 Additional paid-in capital 124,180 153,714 Deferred compensation under stock award plan (2,905) (723) Retained earnings 206,312 183,218 Accumulated other comprehensive income 19,337 20,245 ----------- ----------- Total common stockholders' equity 348,029 357,649 ----------- ----------- Total liabilities and stockholders' equity $ 1,392,261 $ 1,085,956 =========== ===========
The accompanying notes are an integral part of these statements. - 2 - 3 TRENWICK GROUP INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands except per share data) Revenues: Net premiums earned $ 245,561 $ 190,156 $ 211,069 Net investment income 56,316 48,402 41,226 Net realized investment gains 9,016 2,304 299 Other income 421 10 -- --------- --------- --------- Total revenues 311,314 240,872 252,594 --------- --------- --------- Expenses: Claims and claims expenses incurred 153,135 109,554 129,316 Policy acquisition costs 74,197 58,549 58,757 Underwriting expenses 23,828 15,425 14,190 General and administrative expenses 3,461 -- -- Interest expense 3,954 894 6,503 Minority interest in subsidiary trust 9,702 8,920 -- --------- --------- --------- Total expenses 268,277 193,342 208,766 --------- --------- --------- Income before income taxes and extraordinary item 43,037 47,530 43,828 Income taxes 8,245 11,241 9,980 --------- --------- --------- Income before extraordinary item 34,792 36,289 33,848 Extraordinary loss on debt redemption, net of $558 income tax benefit -- (1,037) -- --------- --------- --------- Net income $ 34,792 $ 35,252 $ 33,848 ========= ========= ========= BASIC EARNINGS PER SHARE: Income before extraordinary item $ 2.99 $ 3.12 $ 3.40 ========= ========= ========= Net income $ 2.99 $ 3.03 $ 3.40 ========= ========= ========= DILUTED EARNINGS PER SHARE: Income before extraordinary item $ 2.95 $ 3.01 $ 2.85 ========= ========= ========= Net income $ 2.95 $ 3.01 $ 2.85 ========= ========= ========= COMPREHENSIVE INCOME: Net income $ 34,792 $ 35,252 $ 33,848 Other comprehensive income (loss): Unrealized investment gains (losses) 8,183 15,316 (8,252) Realized investment gains included in (9,016) (2,304) (299) net income Foreign currency translation adjustment (553) -- -- Income taxes applicable to other comprehensive income 478 (4,556) 2,994 --------- --------- --------- Total other comprehensive income (loss) (908) 8,456 (5,557) --------- --------- --------- Comprehensive income $ 33,884 $ 43,708 $ 28,291 ========= ========= =========
The accompanying notes are an integral part of these statements. - 3 - 4 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ---- ---- ---- (dollars in thousands except per share data) Common stockholders' equity, beginning of year $ 357,649 $ 265,753 $ 240,776 Common stock, $.10 par value, and additional paid-in capital: Exercise of employer stock options (122,195, 76,750 and 221,028 shares) 1,536 956 4,001 Restricted common stock awarded (82,889, 9,782 and 15,030 shares) 2,952 327 507 Restricted common stock awards cancelled (2,133 and 3,150 shares) -- (42) (91) Income tax benefits from additional compensation deductions allowable for income tax purposes 1,321 626 1,467 Conversion of debentures (1,783,926 shares) -- 57,780 -- Common stock purchased and retired (1,104,750, 5,091 and 30,699 shares) (35,433) (171) (1,031) Deferred compensation under stock award plan: Restricted common stock awarded (2,952) (327) (507) Restricted common stock awards cancelled -- 42 91 Compensation expense recognized 770 543 534 Retained earnings: Net income 34,792 35,252 33,848 Cash dividends ($1.00, $.97 and $.83 per share) (11,698) (11,546) (8,285) Accumulated other comprehensive income: Other comprehensive income (loss) (908) 8,456 (5,557) --------- --------- --------- Common stockholders' equity, end of year $ 348,029 $ 357,649 $ 265,753 ========= ========= =========
The accompanying notes are an integral part of these statements. - 4 - 5 TRENWICK GROUP INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 --------- --------- --------- (in thousands) Cash flows from operating activities: Premiums collected $ 242,620 $ 149,351 $ 171,017 Ceded premiums paid (53,643) (10,026) (6,254) Claims and claims expenses paid (184,386) (117,916) (102,759) Claims and claims expenses recovered 25,815 2,841 34,156 Underwriting expenses paid (27,378) (13,753) (12,765) --------- --------- --------- Cash provided by underwriting activities 3,028 10,497 83,395 Net investment income received 59,443 50,469 42,654 Other income received 91 -- -- General and administrative expense paid (3,461) -- -- Interest expense and subsidiary trust dividends paid (12,276) (5,364) (6,190) Income taxes paid (8,956) (8,592) (9,381) --------- --------- --------- Cash provided by operating activities 37,869 47,010 110,478 --------- --------- --------- Cash flows for investing activities: Purchases of debt securities (537,787) (203,554) (177,611) Sales of debt securities 116,895 33,980 22,460 Maturities of debt securities 445,800 78,770 62,983 Purchases of equity securities (11,538) (12,967) (12,529) Sales of equity securities 15,088 5,009 7,638 Acquisition of subsidiary, net of cash acquired (39,799) -- -- Additions to premises and equipment (4,596) (227) (611) --------- --------- --------- Cash used for investing activities (15,937) (98,989) (97,670) --------- --------- --------- Cash flows for financing activities: Issuance of senior notes 75,000 -- -- Issuance of mandatorily redeemable preferred capital securities -- 110,000 -- Issuance costs of senior notes and capital securities (922) (1,669) -- Redemption of convertible debentures -- (46,997) -- Issuance of common stock 1,536 956 4,001 Repurchase of common stock (34,880) (171) (1,031) Dividends paid (11,698) (11,546) (8,285) --------- --------- --------- Cash provided by (used for) financing activities 29,036 50,573 (5,315) --------- --------- --------- Effect of exchange rate on cash (812) -- -- --------- --------- --------- Change in cash and cash equivalents 50,156 (1,406) 7,493 Cash and cash equivalents, beginning of year 12,847 14,253 6,760 --------- --------- --------- Cash and cash equivalents, end of year $ 63,003 $ 12,847 $ 14,253 ========= ========= =========
The accompanying notes are an integral part of these statements. - 5 - 6 TRENWICK GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ORGANIZATION ORGANIZATION AND SUMMARY Trenwick Group Inc. (Trenwick or the Company) is a OF SIGNIFICANT holding company whose principal subsidiaries, ACCOUNTING Trenwick America Reinsurance Corporation (Trenwick POLICIES America Re) and Trenwick International Limited (Trenwick International), underwrite reinsurance and specialty insurance. Trenwick America Re located in Stamford, Connecticut, reinsures property and casualty risks primarily written by U.S. insurance companies. Trenwick America Re underwrites treaty reinsurance, which accounts for the bulk of its business, as well as facultative reinsurance. Trenwick America Re is domiciled in Connecticut and is licensed, authorized or approved to write reinsurance in all 50 states and the District of Columbia. Trenwick International, headquartered in London, England, underwrites specialty insurance and reinsurance of risks primarily located outside the U.S. Trenwick International's business principally consists of insurance and facultative reinsurance of specialty classes. Trenwick International also underwrites property and casualty treaty reinsurance. A branch office in Paris specializes in facultative reinsurance of large, technically complex property risks. Trenwick International is domiciled in England and is authorized to write insurance in over 30 countries and participates in the London market for worldwide reinsurance. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies. 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 other comprehensive income, 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. The effective yield utilized - 6 - 7 in the interest method is adjusted when sufficient information exists to estimate the probability and timing of prepayments on mortgage-backed and asset-backed securities. 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. Unearned premium income represents the portion of premiums applicable to the unexpired portion of premium coverage with renewal dates later than year end. Premiums on contracts are accrued on an estimated basis throughout the term of such contracts. These estimates may change in the near term. POLICY ACQUISITION COSTS Policy acquisition costs are stated net of policy acquisition costs ceded and primarily 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 - 7 - 8 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 9. EARNINGS PER SHARE Effective December 31, 1997, Trenwick adopted the 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. 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. Accumulated amortization and depreciation was $5,703,000 and $2,693,000 as of December 31, 1998 and 1997, respectively. ISSUANCE COSTS OF CAPITAL SECURITIES AND DEBT The issuance costs of the capital securities and the senior notes are being amortized over the term of the related financial instrument using the interest method. Accumulated amortization was $129,000 and $5,000 as of December 31, 1998 and 1997, respectively. 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 As of January 1, 1998, Trenwick adopted the new accounting standard, "Reporting Comprehensive Income", which establishes standards for reporting and presentation of comprehensive income and its components. Comprehensive income comprises net income and other comprehensive income. Other comprehensive income consists of the change in the net unrealized appreciation of investments and the change in foreign currency translation adjustments, both net of income taxes. Information for periods prior to 1998 is presented on a basis consistent with the 1998 information. - 8 - 9 FOREIGN EXCHANGE The assets and liabilities of foreign operations are translated from the functional currency, the British pound, at the rate of exchange in effect at the balance sheet date. Revenues and expenses of foreign operations are translated at the average exchange rates during the year. The effect of the translation adjustments for foreign operations, net of applicable deferred income taxes, is recorded as a cumulative translation adjustment in accumulated other comprehensive income within stockholders' equity. Investments denominated in foreign currencies are translated into the British pound using the rate of exchange at the balance sheet date and unrealized gains and losses on translation, net of applicable deferred income taxes, are recorded to other comprehensive income. Foreign currency transaction gains and losses are included in net income. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDING ACTIVITIES Trenwick expects to adopt the new accounting standard "Accounting for Derivative Instruments and heding Activities", which requires all derivatives to be recognized on the balance sheet at fair value. Trenwick does not anticipate that the adoption of this standard will have a significant effect on its results of operations or financial position. RECLASSIFICATIONS Certain items in the financial statements have been reclassified to conform with the 1998 presentation. NOTE 2 On February 27, 1998, Trenwick completed the ACQUISITION acquisition of Trenwick International, formerly OF TRENWICK Sorema (UK) Limited, from Sorema S.A. for an INTERNATIONAL aggregate purchase price of $60,843,000 including acquisition costs. On March 31, 1998, the investment in Trenwick International was increased by $67,408,000 to approximately $128,000,000. The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets of approximately $1,638,000 has been recorded as goodwill, which is being amortized on a straight line basis over 25 years. Amortization of goodwill was $33,000 for the year ended December 31, 1998. All assets and liabilities of Trenwick International are consolidated in the balance sheet at December 31, 1998 and its operating results for ten months ended December 31, 1998 are consolidated in Trenwick's results for the year ended December 31, 1998. - 9 - 10 The following unaudited proforma consolidated results of operations for the years ended December 31 assumes the acquisition had occurred on January 1 of each year:
(in thousands, except per share data) 1998 1997 ----------- ----------- Net premiums earned $ 256,090 $ 249,270 Total revenues 323,730 307,362 Income before extraordinary item 34,678 40,898 Net income 34,678 39,861 Basic earnings per share Income before extraordinary item $ 2.97 $ 3.51 Net income $ 2.97 $ 3.42 Diluted earnings per share Income before extraordinary item $ 2.94 $ 3.38 Net income $ 2.94 $ 3.38
The above unaudited proforma financial information is not necessarily indicative either of the results of operations that would have occurred had this transaction been consummated at the beginning of the periods presented or of future operations. - 10 - 11 NOTE 3 The following tables reconcile amortized cost to the INVESTMENTS estimated fair value of debt and equity securities:
DECEMBER 31, 1998 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- (in thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 64,831 $ 3,851 $ (14) $ 68,668 Obligations of states and political subdivisions 380,593 13,544 (120) 394,017 Mortgage-backed and asset-backed securities 206,790 8,648 (3,322) 212,116 Debt securities issued by British government 45,949 587 -- 46,536 Debt securities issued by other foreign governments 8,163 78 -- 8,241 Public utilities 2,864 222 -- 3,086 Corporate securities 55,364 2,011 (65) 57,310 Redeemable preferred stock 2,000 48 -- 2,048 Certificates of deposit 100,998 -- -- 100,998 -------- -------- -------- -------- Total debt securities $867,552 $ 28,989 $ (3,521) $893,020 ======== ======== ======== ======== Equity securities $ 44,342 $ 6,514 $ (1,668) $ 49,188 ======== ======== ======== ========
DECEMBER 31, 1997 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- (in thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 62,418 $ 2,396 $ -- $ 64,814 Obligations of states and political subdivisions 373,867 11,022 (35) 384,854 Mortgage-backed and asset-backed securities 278,271 7,994 (37) 286,228 Debt securities issued by foreign governments 3,111 64 -- 3,175 Public utilities 2,832 138 -- 2,970 Corporate securities 66,108 2,030 -- 68,138 Redeemable preferred stock 2,000 15 -- 2,015 Certificates of deposit 120 -- -- 120 -------- -------- -------- -------- Total debt securities $788,727 $ 23,659 $ (72) $812,314 ======== ======== ======== ======== Equity securities $ 31,603 $ 7,560 $ -- $ 39,163 ======== ======== ======== ========
- 11 - 12 The fair value and amortized cost of debt securities at December 31, 1998 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 $146,008 $145,390 Due after one year through five years 417,662 406,249 Due after five years through ten years 207,440 197,655 Due after ten years 121,910 118,258 -------- -------- Total debt securities $893,020 $867,552 ======== ========
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS During the twelve months ended December 31, 1998, all investments were income producing. The sources of net investment income for the years ended December 31 are as follows:
(in thousands) 1998 1997 1996 -------- -------- -------- Debt securities $ 53,752 $ 47,400 $ 41,332 Equity securities 1,744 1,257 393 Cash and cash equivalents 2,470 1,228 719 -------- -------- -------- Gross investment income 57,966 49,885 42,444 Investment expenses (1,650) (1,483) (1,218) -------- -------- -------- Net investment income $ 56,316 $ 48,402 $ 41,226 ======== ======== ========
Net realized gains (losses) on sales of investments are as follows:
(in thousands) 1998 1997 1996 ------- ------- ------- Debt securities: Gross realized gains $ 2,250 $ 151 $ 137 Gross realized losses (201) (146) (1) Equity securities: Gross realized gains 7,012 2,299 862 Gross realized losses (45) -- (699) ------- ------- ------- Net realized investment gains $ 9,016 $ 2,304 $ 299 ======= ======= =======
- 12 - 13 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) 1998 1997 -------- -------- Net unrealized appreciation of debt securities $ 25,468 $ 23,587 Net unrealized appreciation of equity securities 4,846 7,560 -------- -------- Net unrealized appreciation of investments 30,314 31,147 Deferred income taxes (10,622) (10,902) -------- -------- Net unrealized appreciation of investments available for sale, net of income taxes $ 19,692 $ 20,245 ======== ========
INVESTMENTS AND CASH HELD AS COLLATERAL OR ON DEPOSIT Debt securities with a carrying value of $103,961,000 are being held in trust as collateral for certain reinsurance obligations. In addition, investments with a carrying value of $8,714,000 at December 31, 1998 were on deposit with various state or governmental insurance departments in order to comply with insurance laws. Cash in the amount of $1,967,000 is also being pledged as a letter of credit for reinsurance obligations. - 13 - 14 NOTE 4 The following table presents an analysis of gross and UNPAID net unpaid claims and claims expenses and a CLAIMS AND reconciliation of beginning and ending net unpaid CLAIMS claims and claims expense balances. The gross unpaid EXPENSES claims and claims expense balances at December 31, 1998 and 1997 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.
(in thousands) 1998 1997 1996 --------- --------- --------- Unpaid claims and claims expenses, beginning of year $ 518,387 $ 467,177 $ 411,874 --------- --------- --------- Provision for claims and claims expenses: For claims incurred in the current year 243,670 175,133 161,061 For claims incurred prior to the current year (8,588) (4,098) (3,669) --------- --------- --------- Subtotal 235,082 171,035 157,392 --------- --------- --------- Unpaid claims and claims expenses of Trenwick International at date of acquisition 116,646 -- -- --------- --------- --------- Payment for claims and claims expenses: For claims incurred in the current year (46,835) (22,914) (22,603) For claims incurred prior to the current year (141,578) (96,911) (79,486) --------- --------- --------- Subtotal (188,413) (119,825) (102,089) --------- --------- --------- Effect of exchange rate changes on unpaid claims and claims expenses 726 -- -- Unpaid claims and claims expenses, end of year $ 682,428 $ 518,387 $ 467,177 ========= ========= ========= Unpaid claims and claims expenses, net of reinsurance recoverable, beginning of year $ 379,351 $ 386,887 $ 327,001 --------- --------- --------- Provision for claims and claims expenses, net of reinsurance recoverable: For claims incurred in the current year 165,691 114,920 133,755 For claims incurred prior to the current year (12,556) (5,366) (4,439) --------- --------- --------- Subtotal 153,135 109,554 129,316 --------- --------- --------- Unpaid claims and claims expenses, net of reinsurance recoverable, of Trenwick International at date of acquisition 81,299 -- -- --------- --------- --------- Payments for claims and claims expenses, net of reinsurance: For claims incurred in the current year (42,883) (22,893) (22,570) For claims incurred prior to the current year (122,145) (94,197) (46,860) --------- --------- --------- Subtotal (165,028) (117,090) (69,430) --------- --------- --------- Effect of exchange rate changes on unpaid claims and claims expenses 507 -- -- --------- --------- --------- Unpaid claims and claims expenses, net of reinsurance recoverable, end of year $ 449,264 $ 379,351 $ 386,887 ========= ========= ========= Reinsurance recoverable on unpaid claims and claims expenses, end of year $ 233,164 $ 139,036 $ 80,290 ========= ========= =========
- 14 - 15 In 1998, 1997 and 1996, Trenwick recorded decreases of $12,556,000, $5,366,000 and $4,439,000, respectively, in estimates for claims occurring in prior accident years. The reduction in 1998 is due to favorable development of prior year reserves in both Trenwick America and Trenwick International. In 1998, 1997 and 1996, Trenwick America Re's estimates of prior accident year claims were reduced by approximately $7,175,000, $5,366,00 and $4,439,000, respectively. Trenwick America Re's reduction in 1998 is primarily due to favorable development in accident years 1993 and prior, partially offset by adverse development in accident years 1994 through 1997. In 1998, estimates of Trenwick International's prior year claims were reduced by $5,381,000 as a result of favorable development across all prior years. 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. 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, 1998 are adequate. NOTE 5 Trenwick America Re's exposure to environmental claims, REINSURANCE 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 America Re'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, 1998, claims for environmental liability including IBNR were approximately $8,400,000, less than 2% of Trenwick America Re's total net outstanding reserves. Trenwick International has no known exposure to environmental claims. 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. Trenwick purchases reinsurance to reduce its exposure to catastrophe losses and the frequency of large losses in all lines of business. Reinsurance agreements provide for recovery of a portion of certain claims and claims expenses from reinsurers. Trenwick remains liable in the event that the reinsurer is unable to meet its obligation, however, Trenwick holds partial collateral under these agreements. - 15 - 16 The effects of reinsurance on premiums written and premiums earned for the three years ended December 31 are as follows:
(in thousands) 1998 1997 1996 --------- --------- --------- Direct premiums written $ 60,510 $ -- $ -- Assumed premiums written 262,854 248,662 247,358 Ceded premiums written (73,145) (53,432) (20,994) --------- --------- --------- Net premiums written $ 250,219 $ 195,230 $ 226,364 ========= ========= ========= Direct premiums earned $ 54,605 $ -- $ -- Assumed premiums earned 269,093 233,090 231,960 Ceded premiums earned (78,137) (42,934) (20,891) --------- --------- --------- Net premiums earned $ 245,561 $ 190,156 $ 211,069 ========= ========= =========
The company recorded ceded claims and claims expenses incurred of $81,955,000, $60,789,000 and $27,503,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The components of reinsurance recoverable balances, net on the balance sheet at December 31 are as follows:
(in thousands) 1998 1997 --------- --------- Paid claims $ 17,098 $ 1,267 Unpaid claims and claims expenses 233,164 139,036 Funds held liability (86,614) (60,967) Reinsurance balances payable (23,475) (11,743) --------- --------- Reinsurance recoverable balances, net $ 140,173 $ 67,593 ========= =========
Letters of credit, trust accounts and funds withheld in the aggregate of amount of $91,154,000 (including interest) have been arranged in favor of Trenwick collateralizing reinsurance recoverables with respect to certain retrocessionaires. At December 31, 1998, approximately 79% of Trenwick's reinsurance recoverables on unpaid claims and claims expenses are recoverable from four principal retrocessionaires. These retrocessionaires are Zurich Reinsurance, Continental Casualty Company, Sorema S.A. and Unum Life Insurance Company of America which had reinsurance recoverable balances of $108,939,000, $33,521,000, $20,859,000 and $21,680,000, respectively at December 31, 1998. Such companies are rated A or better by A.M. Best Company. For the years ended December 31, 1998, 1997 and 1996, Trenwick earned commissions on cessions to retrocessionaires of $10,495,000, $4,503,000 and $1,235,000, respectively. - 16 - 17 NOTE 6 Income taxes were established on a consolidated basis for INCOME TAXES all domestic and international operations of Trenwick. 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) 1998 1997 1996 -------- -------- -------- Current expense: Federal $ 4,392 $ 7,197 $ 13,572 Foreign 2,324 -- -- State 200 262 61 -------- -------- -------- Total current expense $ 6,916 $ 7,459 $ 13,633 -------- -------- -------- Deferred expense (benefit): Federal $ 1,110 $ 3,224 $ (3,653) Foreign 219 -- -- -------- -------- -------- Total deferred expense (benefit) 1,329 3,224 (3,653) -------- -------- -------- Total income taxes $ 8,245 $ 10,683 $ 9,980 ======== ======== ========
Trenwick's effective income tax rates were 19% for the year ended December 31, 1998 and 23% for the years ended December 31, 1997 and 1996. 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) 1998 1997 1996 -------- -------- -------- Income before income taxes $ 43,037 $ 45,935 $ 43,828 ======== ======== ======== Income taxes at statutory rate $ 15,063 $ 16,077 $ 15,340 Effect of tax-exempt investment income (5,654) (5,757) (5,286) Other, net (1,164) 363 (74) -------- -------- -------- Income tax provision $ 8,245 $ 10,683 $ 9,980 ======== ======== ========
The components of the net deferred income tax provision for the years ended December 31 are as follows:
(in thousands) 1998 1997 1996 ------- ------- ------- Discounting of unpaid claims $ 1,883 $ 2,782 $(4,541) Unearned premium income 373 (355) (1,071) Employee stock option and compensation plans 87 319 (230) Policy acquisition costs deferred 526 251 1,778 Alternative minimum taxes (1,390) 10 (10) Accretion of market discount on debt securities 71 315 518 Other, net (221) (98) (97) ------- ------- ------- Total deferred income tax provision $ 1,329 $ 3,224 $(3,653) ======= ======= =======
- 17 - 18 Deferred income tax assets (liabilities) are attributable to the following temporary differences as of December 31:
(in thousands) 1998 1997 -------- -------- DEFERRED INCOME TAX ASSET Discounting of unpaid claims $ 27,152 $ 26,455 Unearned premium income 6,862 5,335 Employee stock option and compensation plans 651 738 Alternative minimum taxes 1,390 -- Currency translation adjustments 197 -- Other 632 34 -------- -------- Gross deferred income tax assets 36,884 32,562 -------- -------- DEFERRED INCOME TAX LIABILITY Policy acquisition costs deferred (10,716) (7,883) Unrealized appreciation of investments available for sale (10,622) (10,902) Accretion of market discount on debt securities (1,282) (1,211) Other (163) (115) -------- -------- Gross deferred income tax liabilities (22,783) (20,111) -------- -------- Net deferred income tax assets $ 14,101 $ 12,451 ======== ========
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. - 18 - 19 NOTE 7 LINES OF CREDIT LONG TERM DEBT AND COMMITMENTS Trenwick's international subsidiary has established a line of credit under which it can borrow up to $1,660,000 at a rate of 2-1/2% above the lending bank's base rate. This line of credit is available in the event that funds are required to supplement short-term working capital. There were no material borrowings under this line of credit during 1998. SENIOR NOTES On March 27, 1998 Trenwick completed a private offering of $75,000,000 aggregate principal amount of its 6.70% senior notes due April 1, 2003. Interest is payable semi-annually on April 1 and October 1 of each year, which commenced on October 1, 1998. The notes are not subject to redemption prior to maturity. They are unsecured obligations and will rank senior in right of payment to all existing and future subordinated indebtedness of Trenwick, including Trenwick's obligations with respect to its 8.82% junior subordinated debentures held by Trenwick Capital Trust I in respect of the $110,000,000 8.82% subordinated capital income securities issued by the Trust. Under the terms of the notes, Trenwick is not restricted from incurring indebtedness, but is subject to limits on its ability to incur secured indebtedness for borrowed money. A portion of the net proceeds of the offering were contributed to Trenwick International to support its insurance and reinsurance operations, including increasing its statutory capital to support the anticipated increase in its underwriting capacity. Remaining net proceeds were used primarily for repurchases of its own common stock. 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, - 19 - 20 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. CONVERTIBLE DEBENTURES On February 20, 1997, Trenwick called for redemption all $103,500,000 aggregate principal amount of Trenwick'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 $103,500,000 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 in 1997. OPERATING LEASE AGREEMENTS Trenwick leases office space under non-cancelable operating leases which expire at various dates through 2015. Trenwick's minimum lease commitments totaling $24,637,000 are as follows: 1999 - $2,450,000; 2000 - $2,381,000; 2001 - $2,360,000; 2002 - $2,297,000; 2003 - $2,099,000; thereafter $13,050,000. Total office rent expense for the years ended December 31, 1998, 1997 and 1996 was $2,042,000, $917,000 and $918,000, respectively. - 20 - 21 NOTE 8 PREFERRED STOCK STOCKHOLDERS' EQUITY Trenwick has 2,000,000 shares of $.10 par value preferred stock authorized and none outstanding. COMMON STOCK On September 28, 1998, Trenwick's Board of Directors approved an additional 600,000 shares to its stock repurchase program to a total of 1,600,000 shares. The program was originally adopted on May 21, 1997. As of December 31, 1998, 1,100,500 shares have been repurchased at an average price of $32.06 per share. 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 acquirer accumulates 15% or more of Trenwick's common stock, all rights holders except the acquirer 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 acquirer may purchase the acquirer'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. - 21 - 22 NOTE 9 RETIREMENT PLANS EMPLOYEE BENEFITS AND Trenwick has a pension plan and a 401(k) savings plan for COMPENSATION substantially all U.S. full-time employees. Trenwick ARRANGEMENTS contributes 8% of an eligible employee's total compensation to the pension; no employee contributions are made to the plan. Trenwick matches 100% of employees' contributions to the savings plan up to 6% of each eligible employee's total compensation. Assets of both plans are administered by life insurance companies. Trenwick's contributions to the pension plan were $463,000, $503,000 and $432,000 for 1998, 1997 and 1996, respectively; its contributions to the savings plan were $351,000, $330,000 and $314,000 for 1998, 1997 and 1996, respectively. Trenwick also maintains a money purchase defined contribution pension plan covering substantially all U.K. employees. Contributions under this plan are determined on the basis of salary and age. Trenwick's contribution to this plan in 1998 was $997,000. 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, 1998 is 1,772,262 shares. Transactions under the stock option plans are summarized as follows:
1998 1997 1996 ---------- ---------- ---------- NUMBER OF SHARES Outstanding, beginning of year 911,195 981,195 1,137,528 Granted 124,210 8,250 81,750 Cancelled (6,000) (1,500) (17,055) Exercised (122,195) (76,750) (221,028) ---------- ---------- ---------- Outstanding, end of year 907,210 911,195 981,195 ========== ========== ========== Exercisable, end of year 210,112 312,807 337,770 ========== ========== ========== AVERAGE EXERCISE PRICE Granted $ 36.72 $ 32.88 $ 31.63 Cancelled 29.70 30.92 19.43 Exercised 12.57 12.46 18.10 Outstanding, end of year 29.07 25.82 24.73 Exercisable, end of year 27.87 21.81 18.79
Included in the table above are options granted to certain senior officers under the 1993 Stock Option Plan. The exercise and vesting of these options are accelerated if the price of Trenwick's common stock achieves certain specified levels, subject to certain conditions. - 22 - 23 PRO FORMA INFORMATION 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:
1998 1997 1996 ---------- ---------- ---------- Net income As reported $ 34,792 $ 35,252 $ 33,848 Pro forma $ 34,554 $ 35,056 $ 33,694 Basic earnings per share As reported $ 2.99 $ 3.03 $ 3.40 Pro forma $ 2.96 $ 3.01 $ 3.38
The pro forma adjustments relate to options granted from 1995 to 1998 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:
1998 1997 1996 ------ ------ ------ Valuation Assumptions: Expected volatility Employees 23% -- 27% Non-employee directors 28% 18% 16% Risk-Free interest rate Employees 5.6% -- 6.5% Non-employee directors 5.2% 5.8% 5.7% Dividend Yield 3.1% 2.6% 2.7%
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, under the terms of the 1989 and 1993 Stock Plans. In 1998, 82,889 shares were awarded at an average price of $35.61 per share (approximately $2,952,000), which vest over five years. Shares awarded in 1997 vest over five years while shares awarded in 1996 vest over three to seven years. Shares were repurchased in 1998, 1997 and 1996 in - 23 - 24 connection with the satisfaction of employees' withholding taxes payable upon the vesting of previously awarded shares. During, 1998, 4,250 shares were repurchased at an average price of $35.29 per share (approximately $150,000). Trenwick has recognized compensation expense of $770,000, $543,000 and $534,000 for 1998, 1997 and 1996, respectively, determined by the award value of the shares amortized over the applicable vesting period. The components of accumulated other comprehensive income at December 31 are as follows: NOTE 10 COMPREHENSIVE INCOME
(in thousands) 1998 1997 -------- -------- Unrealized investment gains (losses) $ 39,330 $ 33,451 Realized Investment gains included in net income (9,016) (2,304) Foreign currency translation adjustment (552) -- Deferred income taxes (10,425) (10,902) -------- -------- Accumulated other comprehensive income $ 19,337 $ 20,245 ======== ========
The income taxes applicable to each component of other comprehensive income are as follows:
(in thousands) 1998 1997 1996 ------- ------- ------- Unrealized investment gains (losses) $ 2,810 $(3,750) $ 3,099 Realized investment gains included in net income (3,091) (806) (105) Foreign currency translation adjustment (197) -- -- ------- ------- ------- Income taxes applicable to other comprehensive income $ 478 $(4,556) $ 2,994 ======= ======= =======
- 24 - 25 NOTE 11 Statutory net income and surplus of Trenwick America Re as INSURANCE filed with the insurance regulatory authorities, differs REGULATION in certain respects from the amounts as determined in accordance with GAAP. The following table identifies the significant reconciling differences:
(in thousands) 1998 1997 1996 --------- --------- --------- RECONCILIATION OF NET INCOME Statutory net income of Trenwick America Re $ 40,930 $ 42,797 $ 29,555 Change in deferred policy acquisition costs (1,501) 719 5,080 Provision for deferred income taxes (2,463) (3,021) 3,307 Other -- -- (6) --------- --------- --------- GAAP net income of Trenwick America Re $ 36,966 $ 40,495 $ 37,936 ========= ========= =========
(in thousands) 1998 1997 1996 --------- --------- --------- RECONCILIATION OF SURPLUS Statutory capital and surplus of Trenwick America Re $ 330,496 $ 322,850 $ 286,284 Deferred policy acquisition costs 21,023 22,524 21,805 Unrealized appreciation of investments 27,823 23,981 13,556 Net deferred income taxes 9,524 11,914 19,365 Unauthorized reinsurance 2,607 2,878 2,669 Non-admitted assets 182 210 208 --------- --------- --------- GAAP stockholders' equity of Trenwick America Re $ 391,655 $ 384,357 $ 343,887 ========= ========= =========
Trenwick America Re is domiciled in and subject to the insurance laws and regulations of the state of Connecticut. Effective January 1, 2001, the Connecticut Insurance Department will adopt the Codification of Statutory Accounting Principles. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. Assuming Trenwick America Re had adopted the Codification as of January 1, 1998, the effect of adoption would have been an increase in statutory net income of approximately $25,600,000 and a net increase to statutory surplus of approximately $27,600,000 as a result of recording a deferred tax benefit and a net deferred tax asset. Under the holding company structure, Trenwick is dependent upon the ability of its operating subsidiaries, Trenwick America Re and Trenwick International, for the transfer of funds principally in the form of cash dividends and tax reimbursements. The statutory limitation on dividends which can be paid within any preceding twelve months, 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 for the twelve month period ending December 31 of the preceding year, but shall not include pro rata distributions of any class of Trenwick America Re's own securities both determined in accordance with statutory accounting practices. The amount of dividends or other distributions that could be paid by Trenwick America Re without prior approval as of December 31, 1998 was $40,930,000. During 1998, 1997 and 1996, Trenwick America Re paid dividends of $30,100,000, $8,250,000 and $4,100,000 respectively. - 25 - 26 Under the applicable laws of the United Kingdom, Trenwick International may make shareholder distributions only from accumulated realized profits, net of accumulated realized losses. In addition, under the U.K. Insurance Companies Act, Trenwick International is not permitted to make any distribution that would reduce its net assets below the required minimum margin of solvency which, as determined under the United Kingdom Financial Services Authority's rules, is approximately $11,451,000 as of December 31, 1998. The Company shall also notify the authority of any proposal to declare or pay a dividend on any of its share capital. NOTE 12 A reconciliation of cash provided by operations for the SUPPLEMENTAL three years ended December 31 is as follows: CASH FLOWS INFORMATION
(in thousands) 1998 1997 1996 --------- --------- --------- Net income $ 34,792 $ 35,252 $ 33,848 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premiums on investments, net 4,219 2,557 1,579 Deferred income taxes 1,329 3,224 (3,653) Net realized investment gains (9,016) (2,304) (299) Depreciation expense 998 371 358 Amortization of debt issuance costs 124 32 295 Extraordinary loss on debt redemption -- 1,595 -- Other 908 558 542 Change in assets and liabilities, net of effects from purchase of subsidiary: Receivables from ceding insurers 2,543 (29,178) (13,710) Deferred policy acquisition costs (679) (719) (5,080) Other assets (1,270) (5,268) (340) Unpaid claims and claims expenses, net of reinsurance recoverable balances (3,638) 32,621 75,980 Unearned premium income, net of prepaid reinsurance premiums 3,552 5,073 15,295 Other liabilities 4,007 3,196 5,663 --------- --------- --------- Net cash provided by operating activities $ 37,869 $ 47,010 $ 110,478 ========= ========= =========
- 26 - 27 NOTE 13 The fair value of a financial instrument is defined as the FAIR VALUE OF amount at which the instrument could be exchanged in a FINANCIAL current transaction between willing parties and requires INSTRUMENTS 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. Accrued premiums have estimated payment dates ranging from 1998 to 2003. 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 is estimated using cash flows discounted at an interest rate of 5%. 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:
(in thousands) 1998 1997 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- ASSETS: Debt securities $893,020 $893,020 $812,314 $812,314 Equity securities 49,188 49,188 39,163 39,163 Cash and cash equivalents 63,003 63,003 12,847 12,847 Accrued premiums 126,758 124,832 77,115 74,739 LIABILITIES: Senior notes $ 75,000 $ 78,750 -- -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF TRENWICK GROUP INC $110,000 $110,150 $110,000 $112,160
- 27 - 28 NOTE 14 The following table sets forth the computation of basic EARNINGS and diluted earnings per share: PER SHARE
(in thousands) 1998 1997 1996 ------- ------- ------- INCOME AVAILABLE TO COMMON STOCKHOLDERS: Income before extraordinary item (basic) $34,792 $36,289 $33,848 Add interest on convertible debentures, net of income taxes -- 578 4,228 ------- ------- ------- Income before extraordinary item (diluted) $34,792 $36,867 $38,076 ======= ======= ======= Net income (basic) $34,792 $35,252 $33,848 Add interest on convertible debentures and loss on debt redemption, net of income taxes -- 1,615 4,228 ------- ------- ------- Net income (diluted) $34,792 $36,867 $38,076 ======= ======= ======= WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: 11,657 11,645 9,959 Weighted average shares outstanding (basic) Weighted average shares issuable on exercise of employee stock options, net of assumed repurchases 122 173 192 Weighted average shares issuable on conversion of debt -- 447 3,201 ------- ------- ------- Weighted average shares outstanding (diluted) 11,779 12,265 13,352 ======= ======= ======= Basic earnings per share: Income before extraordinary item $ 2.99 $ 3.12 $ 3.40 ======= ======= ======= Net income $ 2.99 $ 3.03 $ 3.40 ======= ======= ======= Diluted earnings per share: $ 2.95 $ 3.01 $ 2.85 Income before extraordinary item ===== ===== ===== Net income $ 2.95 $ 3.01 $ 2.85 ======= ======= =======
- 28 - 29 NOTE 15 In 1998, Trenwick adopted Statement of Financial SEGMENT Accounting Standard 131, "Disclosures about Segments of an INFORMATION Enterprise and Related Information." This statement requires reporting of information utilizing a management approach. This approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the company's reportable segments. This statement also requires disclosures about products and services, geographic areas and major customers. The adoption of this statement did not affect the results of operations or financial position. Trenwick has determined that its reportable segments are those that are based on the company's method of internal reporting, which desegregates its business by geographic location. Trenwick has two reportable segments: (1) domestic operations and (2) international operations. The domestic operations provide treaty and facultative reinsurance to insurers of property and casualty risks in the United States. The international segment acquired in February 1998, provides treaty and facultative reinsurance as well as specialty insurance on a world-wide basis. The following information presents the reported operating income for Trenwick for the year ended December 31:
(in thousands) 1998 1997 1996 ---- ---- ---- Net premiums earned Domestic $174,443 $190,156 $211,069 International 71,118 - - -------- -------- -------- 245,561 190,156 211,069 -------- -------- -------- Net investment income Domestic 44,490 43,692 40,215 International 10,614 - - Unallocated 1,212 4,710 1,011 -------- -------- -------- 56,316 48,402 41,226 -------- -------- -------- Net realized investment Domestic 6,444 2,304 299 gains International 1,794 - - Unallocated 778 - - -------- -------- -------- 9,016 2,304 299 -------- -------- -------- Total revenues Domestic 225,457 236,162 251,583 International 83,961 - - Unallocated 2,002 4,710 1,011 -------- -------- -------- 311,420 240,872 252,594 -------- -------- -------- Underwriting profit (loss) Domestic (3,167) 6,628 8,806 International (2,432) - - -------- -------- -------- (5,599) 6,628 8,806 -------- -------- -------- Interest expense and Domestic 6 - - minority interest International 3,434 - - Unallocated 10,216 9,814 6,503 --------- --------- --------- 13,656 9,814 6,503 --------- --------- ---------
- 29 - 30
1998 1997 1996 ---------- ---------- --------- Income before income taxes Domestic 44,320 52,644 49,332 and extraordinary item International 6,977 - - Unallocated (8,260) (5,114) (5,504) ---------- ---------- --------- 43,037 47,530 43,828 Income taxes Domestic 9,644 12,514 11,977 International 1,341 - - Unallocated (2,740) (1,273) (1,997) ---------- ---------- --------- 8,245 11,241 9,980 Income before Domestic 34,676 40,130 37,355 extraordinary item International 5,636 - - Unallocated (5,520) (3,841) (3,507) ---------- ---------- --------- 34,792 36,289 33,848 --------- --------- -------- Total investments Domestic 792,868 786,962 and cash International 211,599 - Unallocated 744 77,362 ----------- ----------- 1,005,211 864,324 --------- ---------- Total assets Domestic 1,028,569 1,006,436 International 353,079 - Unallocated 10,613 79,520 ----------- ----------- 1,392,261 1,085,956 ----------- ----------- Unpaid claims and claim Domestic 621,498 605,407 expenses and unearned International 212,981 - premium income ----------- -------------- 834,479 605,407 ----------- --------- Total liabilities and Domestic 634,085 620,459 manditorily redeemable International 286,529 - capital securities Unallocated 123,618 107,848 ----------- ----------- 1,044,232 728,307 ----------- -----------
Substantially all of the domestic segment's business is produced by reinsurance brokers, while the international segment's business is produced from a wide variety of sources, including insurance and reinsurance brokers. Trenwick obtained approximately 41%, 65% and 62% of its gross written premiums from three brokers in 1998, 1997 and 1996, respectively. Trenwick's concentration of business in the domestic market 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. 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 1998, 1997 and 1996, Trenwick obtained approximately 16%, 12% and 10%; 11%, 11% and 10%, 15%, 12% and 10%, respectively, of its gross written premiums from three ceding companies. The domestic operations obtained approximately 57% of its gross written premiums from three brokers and 38% from three ceding companies in 1998. The international operations obtained approximately 27% of its gross written premiums from two brokers in 1998 and no one ceding company accounted for more than 3% of its gross written premiums. - 30 - 31 NOTE 16 Summarized unaudited quarterly financial data is as UNAUDITED follows: QUARTERLY FINANCIAL DATA
(in thousands except per share data) 1998 1997 1996 ---- ---- ---- Quarter ended Earned premiums December 31 $63,612 $45,414 $54,994 September 30 65,161 43,723 55,008 June 30 70,964 47,105 53,376 March 31 45,824 53,914 47,691 Net investment income December 31 14,639 12,372 10,840 September 30 14,317 12,178 10,332 June 30 14,976 12,123 10,185 March 31 12,384 11,729 9,869 Net realized investment December 31 7,572 388 281 gains (losses) September 30 184 - (21) June 30 540 1 (11) March 31 720 1,915 50 Income before December 31 11,329 9,122 8,819 extraordinary item September 30 5,243 8,773 8,520 June 30 8,975 8,593 8,327 March 31 9,245 9,801 8,182 Basic income before December 31 1.03 .77 .88 extraordinary item September 30 .45 .74 .85 per share June 30 .75 .72 .84 March 31 .78 .90 .83 Diluted income before December 31 1.02 .75 .74 extraordinary item September 30 .44 .73 .72 per share June 30 .74 .71 .70 March 31 .77 .81 .69
Amounts for 1998 reflect the results of Trenwick International, accounted for as a purchase, from February 27, 1998, the date of acquisition. In the quarter ended March 31, 1997, Trenwick had an extraordinary loss on debt redemption, net of $558,000 income tax benefit of $1,037,000, or $0.09 per share (basic). - 31 - 32 NOTE 17 Between January 1, 1999 and March 31, 1999 Trenwick has SUBSEQUENT purchased 478,500 shares, under its buyback plan, at an EVENT average price of $29.48 per share. Trenwick has an (UNAUDITED) authorization of 21,000 shares remaining under the plan. - 32 - 33 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDUSTRY OVERVIEW The U.S. property and casualty reinsurance industry has remained highly competitive throughout 1998, across virtually all lines of business. A continued oversupply of capital maintained downward pressure on insurance as well as reinsurance pricing, causing some companies to report a reduction in domestic premium writings as they withdrew from unprofitable business. During 1998, the number of reinsurance companies also continued to decline, primarily as a result of consolidation. Acquisitions by large foreign reinsurers occurred as they increased their position in the U.S. market. The remaining companies are now larger, offer significantly more capacity to ceding companies and have greater access to capital through capital markets or their parent organizations. These factors have resulted in the reinsurance industry experiencing its tenth year of soft market conditions. As a consequence of these conditions, the overall industry reported an increase in the combined ratio, reflecting a reduction in underwriting profitability. Since reinsurance companies derive a significant amount of income from their investment portfolios, the continued low interest rates during 1998 also contributed to a decline in the overall growth in earnings of the industry. Since 1995, Trenwick has established itself as a participant in the top tier of U.S. broker market reinsurers. Trenwick has achieved this position by raising additional capital to augment its underwriting operations to take advantage of market opportunities. In addition, Trenwick has implemented several strategic initiatives which have enabled it to write new business during the current soft market. These initiatives included the hiring of 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 subsidiary of American International Group), a leading reinsurer in healthcare professional liability, and Duncanson & Holt (a wholly-owned subsidiary of UNUM Corporation), the largest provider of accident and health reinsurance in the United States. On February 27, 1998, the Company completed the acquisition of Trenwick International Limited (formerly Sorema (UK) Limited), a London market company which 1 34 underwrites treaty and facultative reinsurance and specialty insurance on a worldwide basis. This acquisition concluded the Company's plan to diversify its products and broaden its sources of business outside of the U.S. Subsequent to the acquisition, the Company increased the capital of Trenwick International Limited by $67.4 million through the issuance of $75 million in senior notes. The additional capital will support the subsidiary's expansion into new lines of business and geographic markets previously limited by its former parent and will enable it to increase its retention of business. RESULTS OF OPERATIONS Operating Results Trenwick's net income was $34.8 million in 1998 or $2.99 per share compared to $35.3 million or $3.03 per share in 1997 and $33.8 million or $3.40 per share in 1996. Included in Trenwick's net income for 1998 are Trenwick International's operating results since its acquisition on February 27, 1998. Net income for 1998 also includes after-tax charges of $5.7 million or $.49 per share associated with catastrophe losses, including Hurricanes Mitch and Georges. There were no material catastrophe losses reflected in Trenwick's operating results in 1997 or 1996. Net income for 1997 includes an after-tax extraordinary loss of $1.0 million or $.09 per share, associated with the redemption of $45.8 million principal amount of its 6% convertible debentures. Also included in Trenwick's net income were after-tax realized investment gains of $5.9 million or $.50 per share, $1.5 million or $.13 per share and $.2 million or $.02 per share in 1998, 1997 and 1996, respectively. 2 35 Trenwick's operating income, excluding realized investment gains, for 1998 was $28.9 million or $2.48 per share compared to $34.8 million or $2.99 per share in 1997 and $33.7 million or $3.38 per share in 1996. Premiums Trenwick's gross and net premium writings for its domestic and international operations are as follows:
Percentage Percentage Increase/ Increase/ 1998 (Decrease) 1997 (Decrease) 1996 -------- -------- -------- -------- -------- GROSS PREMIUMS WRITTEN DOMESTIC Casualty $201,070 (10%) $223,585 4% $214,630 Property 17,179 (32%) 25,077 (23%) 32,728 -------- -------- -------- -------- -------- Subtotal 218,249 (12%) 248,662 1% 247,358 INTERNATIONAL 105,114 -- -- -- -- -------- -------- -------- -------- -------- TOTAL $323,363 30% $248,662 1% $247,358 ======== -------- ======== -------- ========
Percentage Percentage Increase/ Increase/ 1998 (Decrease) 1997 (Decrease) 1996 -------- -------- -------- -------- -------- NET PREMIUMS WRITTEN DOMESTIC Casualty $154,368 (11%) $172,946 (12%) $196,526 Property 14,744 (34%) 22,284 (25%) 29,838 -------- -------- -------- -------- -------- Subtotal 169,112 (13%) 195,230 (14%) 226,364 INTERNATIONAL 81,107 -- -- -- -- -------- -------- -------- -------- -------- TOTAL $250,219 28% $195,230 (14%) $226,364 ======== -------- ======== -------- ========
In 1998, Trenwick reported net premiums written of $250.2 million, a 28% increase compared to 1997. This reflects the inclusion of Trenwick International's business since its acquisition on February 27, 1998. Trenwick's domestic net premiums written decreased 13% in 1998 over 1997 compared to a 14% decrease in 1997 over 1996. The decline in Trenwick's domestic premium volume in 1998 and 1997 is primarily attributable to a decline in net casualty premium writings of 11%. This decline reflects Trenwick America's withdrawal from accounts when pricing fell below what it believed to be acceptable rate levels. 3 36 The decline in net premiums written was magnified by Trenwick's decision to buy increased reinsurance protection in both 1998 and 1997 at more favorable terms than in prior years. Competition among primary companies also 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. Trenwick's domestic net and gross property business declined primarily as a result of PXRE Re's continued conservative response to erosion in pricing in that segment of the reinsurance business. Total gross property writings represented approximately 8% of total gross domestic premiums for 1998 compared to 10% for 1997 and 13% in 1996. Trenwick International reported net premiums of $81.1 million for the post-acquisition period ended December 31, 1998. Trenwick International's net premium writings for the full year 1998 were $100.8 million. While the international business is also highly competitive, growth in this business is expected primarily as the result of an increase in Trenwick International's retention of business owing to a change in its reinsurance programs. Trenwick International is also expanding into new geographic markets previously limited by its former parent. 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 1998, Trenwick recorded an underwriting loss of $5.6 million compared to an underwriting profit of $6.6 million and $8.8 million in 1997 and 1996, respectively. 4 37 The following table sets forth Trenwick's combined ratios and the components thereof calculated on a GAAP basis for the periods indicated:
1998 1997* 1996* ------------------------------------------ ----- ----- Group International Domestic Claims and claims expense ratio 62.4% 67.0% 60.5% 57.6% 61.3% ---- ---- ---- ---- ---- Expense ratio: Policy acquisition expense ratio 30.2 22.3 33.4 30.8 27.8 Underwriting expense ratio 9.7 14.1 7.9 8.1 6.7 ------ ------ ------ ---- ---- Total expense ratio 39.9 36.4 41.3 38.9 34.5 ------ ------ ------ ---- ---- Combined ratio 102.3% 103.4% 101.8% 96.5% 95.8% ===== ===== ===== ==== ====
* Prior to acquisition of Trenwick International 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 increased from 57.6% in 1997 to 62.4% in 1998, due in part to the inclusion of Trenwick International's underwriting results for the first time in 1998. Due to the different types of business underwritten by Trenwick International, underwriting results in that subsidiary reflect a higher claims and claims expense ratio than Trenwick's domestic business. Included in the Group's 1998 claims and claims expense ratio are 3.5 percentage points associated with claims arising from catastrophe losses, including Hurricanes Mitch and Georges. These losses have been offset by favorable development in prior year reserves in both operating companies. The improvement in Trenwick's claims and claims expense ratio in 1997 compared to 1996 reflects the lack of any material adverse impact from property catastrophe claims and favorable development of prior year reserves for claims and claims expense. In 1998, 1997 and 1996, estimates of prior accident year claims were reduced by approximately $12.6 million, $5.4 million and $4.4 million, respectively. Trenwick's domestic claims and claims expense ratio was 60.5% in 1998 compared to 57.6% in 5 38 1997 and 61.3% in 1996. Claims arising from catastrophe losses in 1998 amounted to $5.2 million, while there were no material catastrophe losses reflected in 1997 and 1996. In 1998, 1997 and 1996 estimates of prior accident year claims were reduced by approximately $7.2 million, $5.4 million and $4.4 million, respectively. The reduction in 1998 is primarily due to favorable development in accident years 1993 and prior, partially offset by adverse development in accident years 1994 through 1997. Trenwick International's claims and claims expense ratio of 67.0% in 1998 includes $3.4 million associated with claims arising from catastrophe losses. In 1998, estimates of prior year's claims were reduced by $5.4 million as a result of favorable development across all prior years. 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 1998 to 39.9% as compared to 38.9% in 1997 and 34.5% in 1996. The overall increase in the expense ratio resulted from an increase in costs associated with Trenwick's domestic business. During 1998, insurance companies continued to increase commissions on business ceded to reinsurers. The increase associated with domestic business was partially offset by the inclusion of Trenwick International's underwriting results which carry a lower expense ratio. Trenwick's domestic expense ratio in 1998 was 41.3% compared to 38.9% in 1997. Trenwick International's expense ratio was 36.4% in 1998. Policy acquisition costs, which include brokerage and ceding commissions, vary directly with premium volume and are subject to changes in the mix of business. Underwriting expenses, which generally do not vary with premium volume, were approximately $23.8 million, $15.4 million and $14.2 million in 1998, 1997 and 1996, respectively. The underwriting expense ratio increased 1.6 percentage points in 1998 compared to 1997 primarily as a result of the inclusion of $10.0 million of Trenwick International's underwriting expenses and a decrease in premium writings associated with Trenwick America Re. While Trenwick International's overall expense ratio is comparable to Trenwick's domestic subsidiaries (Trenwick America), ratios associated with policy acquisition costs and underwriting expenses vary. Due to the mix of business underwritten by Trenwick International, primarily insurance business, its policy acquisition ratio is lower, while its underwriting expense ratio is higher. 6 39 Trenwick America Re's statutory combined ratios for 1998, 1997 and 1996 were 102.3%, 95.9% and 95.7%, respectively. Trenwick America Re's statutory combined ratios were 2.2, 6.8 and 8.1 percentage points better, respectively, than the weighted average statutory combined ratios for all reinsurance companies which reported their results to the Reinsurance Association of America (RAA) in those periods. The statutory combined ratios for this group of reinsurance companies in 1998, 1997 and 1996 were 104.5%, 102.7% and 103.8%, respectively. The statutory combined ratios as reported to the RAA by those companies, including Trenwick America Re, which primarily accept business from brokers, for 1998, 1997 and 1996 were 106.2%, 104.6% and 107.6%, respectively. INVESTMENT INCOME Trenwick's net investment income was $56.3 million in 1998 compared to $48.4 million in 1997 and $41.2 million in 1996. The overall increase in investment income in 1998 is due to the continued growth in Trenwick's invested asset base resulting primarily from the acquisition of Trenwick International. Investment income is expected to increase in 1999 as the Company's invested asset base continues to grow. Trenwick America's net investment income in 1998 of $45.7 million decreased 5.6% compared to net investment income of $48.4 million in 1997. Net investment income in 1997 increased 17% compared to net investment income of $41.2 million in 1996. Pre-tax yields on invested assets, excluding equity securities, was 6.1% in 1998 compared to 6.4% in 1997 and 6.3% in 1996. This decline in 1998 resulted primarily from the reinvestment of approximately $73 million of maturities at lower interest rates. The increase in the yield from 1996 to 1997 was due to the composition of the maturing securities. Maturities in 1997 of approximately $79 million had lower yields than approximately $63 million of maturities in 1996. In 1998, maturities included $32 million principal repayments associated with Trenwick America's portfolio of structured and agency pass-through securities compared to $31 million in 1997. As a result of the decrease in interest rates during 1998, principal repayments are expected to remain similar or increase marginally in 1999. The decrease in investment income in 1998 is due to the decrease in Trenwick America's invested asset base resulting also from the sales of approximately $88.1 7 40 million of securities to fund the acquisition of Trenwick International Limited and the repurchase of Trenwick's common stock. Investment income is expected to increase in 1999 as Trenwick America's invested asset base grows. During 1998, Trenwick America sold approximately $20.3 million of tax-exempt securities and reinvested the proceeds primarily in tax-exempt securities with longer expected lives in order to preserve the overall yield of the portfolio. Trenwick International's net investment income in 1998 was $10.6 million. Pre-tax yield on investment assets, excluding equity securities, was 6.7% in 1998. This yield reflects the relatively high interest rates available at the short end of the market in which Trenwick International invests. Investment income is expected to increase in 1999 as Trenwick International's invested asset base continues to grow, although this increase is expected to be tempered by a climate of lower interest rates. During 1998, Trenwick International sold approximately $200 million of debt securities and reinvested the proceeds in securities with shorter average maturities in order to take advantage of higher interest rates and to recognize available gains. YEAR 2000 ISSUE The Year 2000 issue concerns the inability of information systems to properly recognize and process date-sensitive information beyond January 1, 2000. Trenwick began work on the Year 2000 issue in 1995. The scope of the project included: assessment of systems and equipment affected; definition of strategies to address affected systems and equipment; remediation of affected systems and equipment and certification that each is Year 2000 compliant. Trenwick's U.S. operations completed the modification and testing of its internally developed software to be Year 2000 compliant during 1996. Trenwick International Limited completed its modifications in 1998. Trenwick has received certification from the majority of its externally developed software vendors also indicating that their products are Year 2000 compliant. Based 8 41 on this information the Company believes that its internal financial systems are substantially compliant. Due to the interdependent nature of systems and facilities, the Company may be adversely impacted depending upon whether its vendors and business partners address this issue successfully. Therefore, Trenwick is surveying its key business partners and vendors in an attempt to determine their respective level of Year 2000 compliance. Currently, the Company is not aware of any material business vendor or partner that will not be Year 2000 compliant. Where practicable, Trenwick intends to assess and attempt to mitigate its risks in the event that these third parties fail to be Year 2000 compliant and is considering appropriate contingency arrangements for such potential noncompliance by such entities. Trenwick has not developed contingency plans specifically related to the Year 2000 issue. Contingency plans currently contained in Trenwick's existing disaster recovery plan and the expertise of its staff are expected to enable the Company to take appropriate action to mitigate such risks. Depending on the systems affected, these plans include accelerated replacement of affected equipment or software, interim use of backup equipment and software, and increased work hours for company personnel or use of contract personnel to correct, on an accelerated schedule, any Year 2000 problems that arise or to provide manual workarounds for information systems or similar approaches. Trenwick intends to continue to assess the Year 2000 issue as it relates to its internal systems and third parties and will consider developing contingency plans at that time. If the Company is required to implement any of these contingency plans, it could have a material adverse effect on the company's financial condition and results of operations. In addition, property and casualty reinsurance companies may have underwriting exposure to the Year 2000. The Year 2000 issue is a risk for some of the Company's insureds and reinsureds and is therefore considered during the underwriting process similar to any other risk to which Trenwick's clients may be exposed. While the Company continues to review these potential exposures, the Company is unable to determine at this time whether the adverse impact, if any, in connection with these exposures would be material to the Company. Costs specifically associated with modifying internal use software for Year 2000 compliance are 9 42 expensed as incurred. To date, the Company has spent approximately $.8 million on this project. Such costs do not include normal system upgrades and replacements. The Company does not expect the costs relating to Year 2000 software remediation to have a material effect on the results of operations or financial condition. INVESTMENTS At December 31, 1998, Trenwick had investments and cash of $1.0 billion, an increase of 16% compared to investments and cash of $864.3 million at December 31, 1997. This increase resulted principally from the acquisition of Trenwick International. Financing cash flow included $75 million of net funds received in March 1998 from Trenwick's issuance of 6.7% senior notes reduced by dividends paid to stockholders and approximately $34.9 million used to repurchase common stock. 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 other comprehensive income. Since December 31, 1997, the market value of the Company's debt and equity investments decreased by $.8 million. In 1997, Trenwick's investments and cash increased by $110.1 million or approximately 15% when compared to 1996. This increase resulted from cash provided by both financing and operations. 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 reduced by dividends paid to stockholders. Proceeds were also used to redeem the Company's convertible debentures. The average maturity of Trenwick's debt securities at December 31, 1998 was 5.7 years compared to 6.2 years at December 31, 1997. This shortening reflects the addition of Trenwick International's portfolio which has a much shorter average maturity. Trenwick has not invested in derivative financial instruments such as futures, forward contacts, swaps, or options or other financial instruments with similar characteristics such as interest rate caps or floors and fixed-rate loan commitments. Trenwick's portfolio includes market sensitive instruments, such as mortgage-backed and asset-backed securities, which are subject to prepayment risk and changes in market value in connection with changes in interest rates. 10 43 Trenwick's investments in mortgage-backed and asset-backed securities, which amounted to approximately $212.1 million at December 31, 1998 or 21% of cash and invested assets, are classified as available for sale and are not held for trading purposes. At December 31, 1998, Trenwick America had investments and cash of $793.6 million, a decrease of 8% compared to investments and cash of $864.3 million at December 31, 1997. This decrease resulted principally from the use of approximately $63.2 million to acquire Trenwick International combined with the use of $34.9 million to repurchase Trenwick's own common stock. During 1998, the proceeds from sales and maturities of taxable and tax-exempt securities of $197.2 million, together with cash provided by financing and operations were invested primarily in tax-exempt securities in the amount of $74.4 million. Taxable securities were also purchased consisting of mortgage-backed securities of $8.7 million, asset-backed securities of $2.3 million, U.S. government and agency securities of $10.6 million and corporate bonds of $6.0 million. In 1998, $4.0 million of equities were also purchased. Since December 31, 1997, the market value of Trenwick America's debt and equity investments decreased by $.6 million. The average maturity of Trenwick America's debt securities at December 31, 1998 was 6.9 years compared to 6.2 years at December 31, 1997. Debt securities were invested with an average maturity ranging between two to fifteen years. 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 equity securities. At December 31, 1998, Trenwick International had investments and cash of $211.6 million. During 1998, cash of approximately $67 million was received by Trenwick International from Trenwick Group Inc., increasing Trenwick International's share capital to over $125 million. During 1998, the proceeds from sales and maturities of debt securities of $372.7 million, together with cash provided by financing and operations were invested entirely in taxable securities consisting of government securities in U.K. sterling, U.S. dollar and other European 11 44 currencies of $242.9 million and certificates of deposit of $192.9 million. Since acquisition, the market value of Trenwick International's debt and equity investments decreased by $.2 million. The average maturity of Trenwick International's debt securities at December 31, 1998 was ten months. LIQUIDITY AND CAPITAL RESOURCES Trenwick is a holding company whose principal assets are its investments in the common stock of Trenwick America Re and Trenwick International. As a holding company, Trenwick's principal source of funds consists of permissible dividends and tax allocation payments from Trenwick America Re and Trenwick International together with income on the holding company's fixed-income portfolio. Trenwick's principal uses of cash are dividends to its stockholders, servicing its debt obligations and repurchases of its own common stock when the pricing is attractive. Trenwick America Re and Trenwick International receive cash from premiums, investment income and proceeds from sales and maturities of portfolio investments. They utilize cash to pay claims, purchase their own reinsurance protections, meet operating and capital expenses and purchase fixed-income and equity securities. In 1998, Trenwick completed a private offering of $75 million aggregate principal amount of 6.70% senior notes due April 1, 2003. Interest is payable semi-annually on April 1 and October 1 of each year, which commenced on October 1, 1998. The notes are not subject to redemption prior to maturity. They are unsecured obligations and will rank senior in right of payment to all existing and future subordinated indebtedness of Trenwick, including Trenwick's obligations with respect to its 8.82% junior subordinated debentures held by Trenwick Capital Trust I in respect of the $110 million 8.82% subordinated capital income securities issued by the Trust. Under the terms of the notes, Trenwick is not restricted from incurring indebtedness, but is subject to limits on its ability to incur secured indebtedness for borrowed money. A portion of the net proceeds of the offering were contributed to Trenwick International to support its insurance and reinsurance operations, including increasing its statutory capital to support the anticipated increase in its underwriting capacity. Remaining net proceeds were used to repurchase Trenwick's own common stock. 12 45 Cash provided by operating activities of $38 million in 1998 decreased approximately 19% as compared to $47 million in 1997 and decreased 57% as compared to $110.5 million in 1996. The reduction in cash flow from operations in 1998 was due primarily to a decline in premium writing associated with Trenwick America, combined with an expected increase in paid loss activity. In 1996, Trenwick America commuted an aggregate excess of loss retrocessional agreement covering the years 1989 through 1993 for which it 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 1999 and its longer term operating needs. In 1998, cash provided by financing activities decreased to $29.0 million compared to $50.6 million in 1997. Cash provided by financing activities included proceeds from the issuance of $75 million principal amount of 6.7% senior notes partially offset by repurchases of common stock of approximately $34.9 million. Included in the same period last year was $110 million from the issuance of the Subordinated Capital Income Securities, partially offset by the redemption of convertible debt of approximately $47 million. At December 31, 1998, Trenwick's investments and cash of $1 billion exceeded total liabilities, including gross reserves for claims and claims expenses of $682.4 million, by $71.0 million, compared to $246.0 million and $99.2 million at December 31, 1997 and 1996, respectively. At December 31, 1998, 1997 and 1996, Trenwick's net book value amounted to $348.0 million, $357.6 million and $265.8 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, 1998, Trenwick's investments consisted principally of fixed-income securities, 91% 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). 13 46 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. Trenwick America Re's surplus ratios were 0.5:1 for 1998, 0.6:1 for 1997 and 0.8:1 for 1996. Accordingly, Trenwick has sufficient surplus capacity to write additional business without significantly exceeding the industry average. Property and casualty reinsurance companies in the U.S. currently have a surplus ratio of approximately 0.6:1. Trenwick International's surplus ratio for 1998 was 0.8:1. Trenwick America Re's statutory surplus was $330.5 million as of December 31, 1998, compared to $322.9 million at December 31, 1997. Trenwick International's statutory surplus was $131.9 million as of December 31, 1998. Trenwick purchases reinsurance to reduce its exposure to catastrophe claims and the frequency and severity of claims in all lines of business. In 1998, Trenwick America Re's reinsurance treaties consisted principally of an excess of loss treaty for its facultative casualty business and property catastrophe reinsurance treaties. In addition, Trenwick America Re purchased an annual aggregate excess of loss ratio treaty for casualty business effective January 1, 1998. These coverages were renewed effective January 1, 1999. Trenwick International, as is customary with companies operating in the London market, buys larger amounts of reinsurance to protect itself. Reinsurance and retrocessional coverage is customized for each class of business REGULATORY MATTERS Trenwick and its domestic subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business, including all states of the United States. Trenwick International is subject to the regulatory authority of the United Kingdom Financial Services Authority (FSA). These regulations vary from jurisdiction to jurisdiction and are generally designed to protect ceding insurance companies and policyholders by regulating the Company's financial integrity and solvency in its business transactions and operations. Many of the insurance statutes and regulations applicable to Trenwick's subsidiaries 14 47 relate to reporting and enable regulators to closely monitor their performance. Typical required reports include information concerning the Company's capital structure, ownership, financial condition and general business operations. 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, 1998, 1997 and 1996. Trenwick believes its capital will continue to exceed these RBC capital and surplus requirements for the foreseeable future. Trenwick America Re is domiciled in and subject to the insurance laws and regulations of the State of Connecticut. Effective January 1, 2001, the Connecticut Insurance Department will adopt the Codification of Statutory Accounting Principles. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. Assuming Trenwick had adopted the Codification as of January 1, 1998, the effect of adoption would have been an increase in statutory net income of approximately $25.6 million and a net increase to statutory surplus of approximately $27.6 million as a result of recording a deferred tax benefit and a net deferred tax asset. Under the holding company structure, Trenwick is dependent upon the ability of its operating subsidiaries, Trenwick America Re and Trenwick International to transfer funds, principally in the form of cash dividends and tax reimbursements. The statutory limitation on dividends which 15 48 can be paid within any preceding twelve months, 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 for the twelve month period ending December 31 of the preceding year, but shall not include pro rata distributions of any class of Trenwick America Re's own securities, both determined in accordance with statutory accounting practices. The amount of dividends or other distributions that could be paid by Trenwick America Re without prior approval as of December 31, 1998 was $40.9 million. During 1998, 1997 and 1996, Trenwick America Re paid dividends of $30.1 million, $8.3 million and $4.1 million, respectively. In 1998, the increase in dividends was primarily due to the original investment in Trenwick International and to fund repurchases of Trenwick's common stock. Under the applicable laws of the United Kingdom, Trenwick International may make shareholder distributions only from accumulated realized profits, net of accumulated realized losses. In addition, under the U.K. Insurance Companies Act, Trenwick International is not permitted to make any distribution that would reduce its net assets below the required minimum margin of solvency which, as determined under the FSA's rules, is approximately $11.5 million as of December 31, 1998. The Company must also notify the FSA of any proposal to declare or pay a dividend on any of its share capital. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Trenwick is exposed to market risks that are principally interest rate, foreign exchange and equity price. Trenwick is exposed to potential losses from changes in interest rates with respect to its investments and borrowings. The investments also expose Trenwick to potential losses due to changes in foreign exchange rates. Trenwick is exposed to potential losses from changes in equity prices with respect to its investments. The Company is not exposed to material losses from credit risk. The Company has no derivatives and its investments do not contain terms that may result in potential losses due to leverage. 16 49 Trenwick's risk management strategy is to place its investments with high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. The Company selects investments with characteristics such as duration, yield, currency and liquidity to reflect the underlying characteristics of related estimated claim liabilities. The Company views potential exposures to credit losses as immaterial. The potential losses due to market risks quantified below are expected to be offset through the servicing of insurance claims. The investment portfolio and borrowings of Trenwick are summarized in the notes to the financial statements, and Item 1, Business. Interest Rate Risk Trenwick's principal market risk exposure are to change in domestic interest rates. Changes in interest rates may affect the fair value of Trenwick's debt securities. Trenwick's holdings subject it to exposures in the treasury, corporate, structured, municipal and foreign debt security sectors. These sectors consist primarily of investment grade securities whose fair value may fluctuate with changes in interest rates. The only sector that exposes Trenwick to material prepayment risk is the structured sector which includes mortgage-backed and asset-backed securities. These securities have been included in the analysis below. All investment positions are long with no "short" or derivative positions. Trenwick believes that the insurance receivables and payables do not expose it to significant interest rate risk and are excluded from the analysis below. In order to estimate it's exposure to changes in interest rates, Trenwick performed a sensitivity analysis. Potential loss is estimated as a change in fair value. The fair values of the debt security portfolio at year end were re-estimated from the fair values reported in the financial statements assuming a 100 basis point parallel increase in rates across the relevant debt security yield curve. The potential loss in fair value due to interest rate exposure was estimated at $27.7 million. The Company's actual loss in fair value on a quarterly basis never exceeded this amount during the year. The potential loss in this sensitivity analysis does not include a separate estimate of 17 50 potential losses from changes in credit spreads; the Company believes that such potential losses are immaterial based on the portfolio held at year-end. For purposes of this calculation, Trenwick's borrowings were excluded, although changes in interest rates may result in a potential gain/loss from borrowings. The Company expects that the potential loss estimated on this basis would be lower if the borrowings were included in this calculation. The Company excluded the borrowings from the estimate of potential loss because potential losses in fair value of investments are easily realizable upon the sale of securities while the Company expects that its borrowings will remain outstanding through maturity. The fair value estimates shown are based on the debt security portfolio at year-end and these exposures will change as a result of ongoing portfolio activities in response to management's assessment of changing market conditions and available investment opportunities. Foreign Exchange Risk Trenwick's exposure to foreign exchange risk arises primarily from its holdings in foreign denominated securities. Debt securities are denominated in primarily the British pound with durations ranging generally up to ten months. An instantaneous change of 10% in foreign exchange rates from levels prevailing at year-end from these holdings would result in a potential loss in fair value of $18.2 million. The carrying value of certain receivables and payables are also denominated in foreign currencies. This exposure is somewhat mitigated by the fact that Trenwick's reinsurance premiums and invested assets are partially offset by claims incurred and claim liabilities, respectively, denominated in the same currency. In addition, Trenwick has foreign exchange risk exposure in its net investment in its foreign subsidiary, Trenwick International. These exposures are not considered material as of December 31, 1998. Equity Price Risk Trenwick's common equity portfolio of $49.2 million at December 31, 1998, is subject to changes in value based on changes in equity prices. Trenwick's potential exposure from those 18 51 equity securities, estimated in terms of fair value, to an immediate 10% drop in equity prices across all equity securities holdings from those prevailing at December 31, 1998 would be $4.9 million. The Company's actual loss in fair value on a quarterly basis never exceeded this amount during the year. The fair value estimates shown are based on the composition of the equity security portfolio at year-end and these exposures will change as a result of ongoing portfolio activities in response to management's assessment of changing market conditions and available investment opportunities. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In September 1998 the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. Trenwick does not anticipate that the adoption of the statement will have a material effect on its financial position. THE EURO On January 1, 1999, eleven of the fifteen member countries of the European Union established a fixed conversion ratio between their local currencies and a newly formed currency, the "Euro". The Euro began trading on foreign currency exchanges on January 1, 1999. Beginning in January 2002, coins and paper currency denominated in Euros will be issued and local currencies of the eleven countries will be withdrawn from circulation. As the Company conducts a considerable amount of business in countries participating in the Euro, work was undertaken in 1998 to ensure that the introduction of the Euro would have no adverse effect on the Company's business. Consequently, the Company modified its computer systems to accommodate transactions denominated in the Euro. The total costs for implementing these changes was not material. Trenwick believes the Euro conversion will not have a material impact on its consolidated financial position or results from operations. 19 52 SAFE HARBOR DISCLOSURE In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the Act), Trenwick sets forth below cautionary statements identifying important risks and uncertainties that could cause its actual results to differ materially from those that might be projected, forecasted or estimated in its forward-looking statements, as defined in the Act, made by or on behalf of Trenwick in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. Such statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common holders' equity (including book value per share), investments, financing needs, capital plans, dividends, plans relating to products or services of Trenwick and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and generally expressed with words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have," and similar expressions. Trenwick, as a matter of policy, does not make any specific projections as to future earnings nor does it endorse any projections regarding future performance that may be made by others. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Trenwick's results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: - - Changes in the level of competition in the domestic and international reinsurance or primary insurance markets that affect the volume or profitability of Trenwick's property/casualty business. These changes include, but are not limited to, changes in the intensity of price competition, the entry of new competitors, existing competitors exiting the market, and the development of new products by new and existing competitors; - - Changes in the demand for reinsurance, including changes in ceding companies' risk retentions and changes in the demand for excess and surplus lines insurance coverages; 20 53 - - The ability of Trenwick to execute its strategies in its property/casualty operations; - - Catastrophe losses in Trenwick's domestic and international property/casualty businesses; - - Adverse development on property/casualty claims and claims expense liabilities related to business written in prior years, including, but not limited to, evolving case law and its effect on environmental and other latent injury claims, changing government regulations, newly identified toxins, newly reported claims, new theories of liability, such as possible Year 2000 computer-related losses, or new insurance and reinsurance contract interpretations; - - Changes in inflation that affect the profitability of Trenwick's current property/casualty business or the adequacy of its property/casualty claims and claims expense liabilities and policy benefit liabilities related to prior years' business; - - Changes in Trenwick's property/casualty retrocessional arrangements; - - Lower than estimated retrocessional or reinsurance recoveries on unpaid losses, including, but not limited to, losses due to a decline in the creditworthiness of Trenwick's retrocessionaires or reinsurers; - - Increases in interest rates, which cause a reduction in the market value of Trenwick's fixed income portfolio, and its common shareholders' equity; - - Decreases in interest rates causing a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales or maturities of existing investments; - - Decline in the value of Trenwick's equity investments; - - Changes in the composition of Trenwick's investment portfolio; - - Credit losses on Trenwick's investment portfolio; - - Adverse results in litigation matters, including, but not limited to, litigation related to environmental, asbestos and other potential mass tort claims; - - Gains or losses related to changes in foreign currency exchange rates; - - The potential interruption in, or a failure of, certain normal business activities or operations due to Year 2000 problems; and - - Changes in Trenwick's capital needs. 21 54 In addition to the factors outlined above that are directly related to Trenwick's businesses, Trenwick is also subject to general business risks, including, but not limited to, adverse state, federal or foreign legislation and regulation, adverse publicity or news coverage, changes in general economic factors and the loss of key employees. 22 EX-21 13 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF TRENWICK GROUP INC.
Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- Trenwick America Corporation Delaware Trenwick America Reinsurance Corporation Connecticut (subsidiary of Trenwick America Corporation) Trenwick Holdings Limited United Kingdom Trenwick International Limited United Kingdom (subsidiary of Trenwick Holdings Limited) Trenwick Management Services Limited United Kingdom (subsidiary of Trenwick Holdings Limited) Specialist Risk Underwriters Limited United Kingdom (subsidiary of Trenwick Holdings Limited) Trenwick Services, Ltd. Bermuda Trenwick Guaranty Insurance Company, Ltd. Bermuda (subsidiary of Trenwick Services, Ltd.)
EX-23 14 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. 33-31115, No. 33-68112, No. 33-83092 and No. 33-83094) of Trenwick Group Inc. of our report dated February 3, 1999, except as to the subsequent event described in Note 17 which is as of March 26, 1999, appearing on page 53 of the 1998 Annual Report to Stockholders of Trenwick Group Inc., which is incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1998. We also consent to the incorporation by reference of our report dated February 3, 1999 on the financial statement schedules, which appears on page S-5 of this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 26, 1999 EX-27 15 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, 1998 FOR TRENWICK GROUP, INC. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 893,020 0 0 49,188 0 0 942,208 63,003 140,173 35,261 1,392,261 682,428 152,051 0 0 75,000 110,000 0 1,105 346,924 1,392,261 245,561 56,316 9,016 421 153,135 74,197 23,828 43,037 8,245 0 0 0 0 34,792 2.99 2.95 460,650 166,198 (12,556) (42,883) (122,145) 449,264 7,685 REPRESENTS NET REINSURANCE RECOVERABLE BALANCES AFTER OFFSET OF FUNDS HELD AND REINSURANCE BALANCES PAYABLE. REPRESENTS BASIC EARNINGS PER SHARE. REFLECTS NET RESERVE AT BEGINNING OF YEAR FOR UNPAID CLAIMS. ALSO REFLECTS TRENWICK INTERNATIONAL'S NET RESERVE IN THE AMOUNT OF $81,299 AT DATE OF ACQUISITION. INCLUDES EFFECT OF EXCHANGE RATE IN THE AMOUNT OF $507. REFLECTS NET RESERVE AT END OF YEAR FOR UNPAID CLAIMS. REFLECTS GROSS REDUNDANCY IN RESTATED RESERVES.
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