-----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, QQKCkLTSa1XX9wmWZKrT9W0U7IAFDqJrKsS+n31SaKSWy1Una5sE55Dd670V5lHM 1SzSqfXmZmFogt64N2igXg== 0000950162-01-500159.txt : 20010530 0000950162-01-500159.hdr.sgml : 20010530 ACCESSION NUMBER: 0000950162-01-500159 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20010529 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: MUTUAL RISK MANAGEMENT LTD CENTRAL INDEX KEY: 0000826918 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-45057 FILM NUMBER: 1649573 BUSINESS ADDRESS: STREET 1: 44 CHURCH ST STREET 2: BERMUDA CITY: HAMILTON HM 12 BERMU STATE: D0 BUSINESS PHONE: 4412955688 MAIL ADDRESS: STREET 1: PO BOX 2064 STREET 2: BERMUDA CITY: HAMILTON HM HX STATE: D0 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: XL CAPITAL LTD CENTRAL INDEX KEY: 0000875159 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 980058718 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: CUMBERLAND HOUSE STREET 2: 1 VICTORIA ST CITY: HAMILTON HM11 BERMUD STATE: D2 BUSINESS PHONE: 4412928515 MAIL ADDRESS: STREET 1: CAHILL GORDON & REINDEL(IMMANUEL KOHN) STREET 2: 80 PINE STREET CITY: NEW YORKI STATE: NY ZIP: 10005 FORMER COMPANY: FORMER CONFORMED NAME: EXEL LTD DATE OF NAME CHANGE: 19950720 SC 13D 1 xl13d.txt SCHEDULE 13D SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------------- SCHEDULE 13D Under the Securities Exchange Act of 1934 (Amendment No. )* Mutual Risk Management Ltd. - -------------------------------------------------------------------------------- (Name of Issuer) Common Shares, par value $0.01 - -------------------------------------------------------------------------------- (Title of Class of Securities) 628351108 - -------------------------------------------------------------------------------- (CUSIP Number) Paul S. Giordano, Esq. Executive Vice President, General Counsel and Secretary XL Capital Ltd XL House One Bermudiana Road Hamilton, HM11, Bermuda (441) 292-8815 Copy to: Immanuel Kohn, Esq. Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 (212) 701-3000 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) May 17, 2001 - -------------------------------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of ss.ss. 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box [ ]. NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 240.13d-7 for other parties to whom copies are to be sent. *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). CUSIP No. 628351108 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS(entities only) XL CAPITAL LTD I.R.S. Employer Identification No. 98-0191089 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See Instructions) (a)[ ] (b)[ ] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS (See Instructions) WC - -------------------------------------------------------------------------------- 5 CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Cayman Islands - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER Number of 9,417,757 Shares ------------------------------------------------------------- Beneficially 8 SHARED VOTING POWER Owned by Each 0 Reporting Person With ------------------------------------------------------------- 9 SOLE DISPOSITIVE POWER 9,132,043 ------------------------------------------------------------- 10 SHARED DISPOSITIVE POWER 0 - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 9,417,757 - -------------------------------------------------------------------------------- 12 CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (See Instructions) [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 18.5% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON (See Instructions) CO Item 1. Security and Issuer. This statement on Schedule 13D relates to the Common Shares, par value $0.01 per share (the "Common Shares"), of Mutual Risk Management Ltd. ("MRM"), and is being filed pursuant to Rule 13d-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The address of the principal executive offices of MRM is 44 Church Street, Hamilton HM12, Bermuda. Item 2. Identity and Background. - ------ ----------------------- (a) XL Capital Ltd ("XL") (b) XL House, One Bermudiana Road, Hamilton HM 11, Bermuda. (c) XL is a diversified Bermuda-based insurance and reinsurance holding company. (d) XL has not and, to the best of XL's knowledge, none of its directors or executive officers has, during the last five years been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) XL has not and, to the best of XL's knowledge, none of its directors or executive officers has, during the last five years been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. (f) Schedule I attached hereto and incorporated herein by reference sets forth, with respect to each executive officer and director of XL the following information: (a) name; (b) residence or business address; (c) present principal occupation or employment and the name, principal business and address of any corporation or other organization in which such employment is conducted; and (d) citizenship. Item 3. Source and Amount of Funds or Other Consideration. - ------ ------------------------------------------------- The total amount of funds required by XL to purchase the Securities (as defined below) was $52,500,000. The funds necessary to purchase the Securities were obtained from funds available for investment in the ordinary course of business. Item 4. Purpose of Transaction. - ------ ----------------------- The Securities are being held for investment purposes. Depending on market conditions, XL may acquire additional Securities or Common Shares or dispose of some or all of such Securities or Common Shares. As of May 8, 2001, XL Insurance Ltd ("XL Insurance") and certain other investors (collectively, the "Purchasers") entered into a Securities Purchase Agreement (the "Purchase Agreement") with MRM pursuant to which XL Insurance agreed to purchase, subject to certain conditions, $52,500,000 aggregate principal amount of 9 3/8% Convertible Exchangeable Debentures due 2005 (the "Debentures") of MRM. In connection with the purchase of the Debentures, MRM agreed to is- -1- sue to XL Insurance warrants to purchase an additional 1,632,043 Common Shares of MRM (the "Warrants") and 7,500,000 Series A Preferred Shares (the "Preferred Shares" and, together with the Debentures and the Warrants, the "Securities"). The Warrants are exercisable at any time until May 17, 2006 at an exercise price of $7.00 per Common Share. The Preferred Shares have no liquidation preference or dividend rights and are entitled to one vote per share on all matters submitted to the shareholders of MRM. The aggregate purchase price for the Securities was $52,500,000. Pursuant to the Purchase Agreement, MRM agreed to issue the Securities to XL Insurance in consideration of the purchase price. At the closing under the Purchase Agreement on May 17, 2001, XL Insurance purchased the Securities. The Common Shares issuable upon conversion of the Debentures and upon exercise of the Warrants represented beneficial ownership of approximately 18.5% of the outstanding Common Shares of MRM on May 17, 2001, based on MRM's representation that 41,623,198 Common Shares were outstanding as of that date. The Debentures themselves carry no voting rights but have been issued as a unit with the Preferred Shares. The Preferred Shares have voting rights proportionate to the voting rights the holders would have upon conversion of the Debentures into Common Shares, subject to the following restrictions. Prior to receiving required insurance regulatory approvals, the voting rights of each holder of Preferred Shares or Warrants, in the aggregate, will be limited to 9.9% of the total voting rights in MRM. In addition, the voting rights of the holders of the Debentures and the Warrants, in the aggregate, will be limited to 19.9% of the total voting rights in MRM until MRM's shareholders approve the transactions. The Debentures may be converted, in whole or in part, at any time at the option of the holder into Common Shares. The initial conversion price is $7.00 per share, but beginning on September 17, 2001, the conversion price will be reduced by $0.20 per month until all regulatory and shareholder approvals have been obtained and the Restructuring (as defined below) has been completed. The conversion price and number of Common Shares issuable upon conversion of the Debentures also will be adjusted under standard antidilution provisions, including for issuances of Common Shares or Common Share equivalents below the conversion price or current market price of the Common Shares. In addition, the aggregate number of Common Shares issuable upon conversion of the Debentures and exercise of the Warrants will be limited to 19.9% of the outstanding Common Shares of MRM until MRM's shareholders approve the transactions. In addition to the conversion rights discussed above, the holders of Debentures have the option of exchanging the Debentures, at any time, into either senior convertible debentures of Newco (as defined below) with terms comparable to those of the Debentures or Newco common shares representing a percentage of ownership in Newco that is based on the ratio of projected 2001 earnings of MRM to the projected pro forma 2001 earnings of Newco. The exchange right is initially available only upon the exchange of Debentures representing 20% of the principal amount of outstanding unconverted Debentures at the time of the exchange. Following initial exchange, any amount of Debentures may be exchanged and any holder may convert some Debentures and exchange others. The exchange right will terminate if, at any time beginning 90 days after all regulatory and shareholder approvals are obtained and the Restructuring has been completed, the closing sale price of the Common Shares exceeds two times the -2- conversion price of the Debentures for 120 consecutive trading days. If at any time during the 120 consecutive trading day period the Debentures holders demand the registration of the Debentures and/or the Common Shares issuable upon their conversion, the exchange right will terminate only if the closing sale price of the Common Shares exceeds two times the conversion price of the Debentures for 120 consecutive trading days and continues to so exceed the conversion price for a period of 15 days after the effective date of the registration statement filed in connection with the holders' demand. The Debentures holders, as a group, have a minimum of three demand registration rights for the Debentures and/or the Common Shares issuable upon their conversion, any holder having at least $15,000,000 in principal amount of outstanding Debentures or 13% of the then outstanding Common Shares is entitled to at least one demand registration right. In addition, the holders of 20% of the principal amount of outstanding Debentures, including Newco debentures and common shares (the "20% Holders"), have demand registration rights, provided that XL Insurance consents to the registration if it owns at least 20% of the principal outstanding amount of Debentures, including Newco debentures and common shares. In order to create a market for the Newco common shares, the 20% Holders may require the spin-off of up to 20% of the common shares of Newco to shareholders of MRM provided that XL Insurance consents to the spin-off if it owns at least 20% of the principal outstanding amount of Debentures, including Newco debentures and common shares. The Debentures holders also have an unlimited number of piggyback registration rights with respect to any offering of common or debt securities by MRM or Newco. The Warrants have registration rights comparable to the registration rights of the Debentures, including one demand registration right for each of XL Insurance and the other purchasers of Warrants and unlimited piggyback registration rights with respect to any public offering of Common Shares or Common Share equivalents of MRM. In connection with their ownership of the Debentures, MRM has agreed to cause the designees of certain of the Purchasers to be nominated for, and elected to, positions on the boards of directors of MRM and its subsidiaries, and each committee thereof. As long as it holds at least 20% of the principal amount of the outstanding Debentures, XL Insurance has the right to designate at least two representatives to the board of directors and each committee thereof of MRM and each of MRM's subsidiaries. MRM has nominated three representatives designated by XL Insurance to the board of directors of MRM. In connection with the sale of the Debentures, MRM has agreed to restructure its operating units into two separate holding company structures (the "Restructuring"). Following the Restructuring, one holding company subsidiary of MRM will own MRM's insurance operations and managing general agency entities and will operate through its subsidiaries, Legion and Legion Indemnity Ltd., as a specialty insurer writing a selected book of program business. A second holding company subsidiary of MRM ("Newco"), which will be a newly incorporated Bermuda company, will own all of MRM's fee generating businesses that presently comprise its Corporate Risk Management, Specialty Brokerage and Financial Services ("CRM") business segments and all of MRM's insurance operations outside of the United States. In addition, Newco will own MRM's Insurance Profit Center (or "rent-a-captive") companies that are principally dedicated to its CRM business segment, except for Mutual Indemnity (Dublin) Ltd. After the Restructuring, (i) Newco will be entitled to receive all of the fees attributable to the CRM business except that Villanova, where it writes the related policies (i.e., where Villanova is legally authorized to write such policies and the prospective holder of the underlying policy does not object to the use of Villanova), or a new insurer in the case of new or renewal policies, may retain a portion of the premium equal to its actual costs, but not exceeding an amount equal to 1 1/4% of its premium on such policies and (ii) Newco will be given an option to purchase Villanova and/or such new insurer for book value. The Restructuring shall be effected in a -3- manner reasonably acceptable to XL Insurance, including the amount of minimum capital and surplus to be contributed to Newco. The transaction documents relating to the Debentures also contain other representations, warranties, agreements and indemnification obligations of MRM. These include, among other things, covenants regarding the Restructuring, preemptive rights in Newco share offerings for Debenture holders, information rights of the Debentures holders with respect to MRM's financial statements, budgets and other information, restrictions on MRM's use of proceeds from the sale of the Debentures, restrictions on MRM's ability to develop businesses that might compete with those transferred to Newco in the Restructuring and consent rights regarding MRM's operations. Other than as described above, XL does not have any present plans or proposals which relate to or would result in any transaction, change or event specified in clauses (a) through (j) of Item 4 of Schedule 13D. Item 5. Interest in Securities of Issuer. - ------ -------------------------------- (a) Amount beneficially owned: As of May 17, 2001, 9,132,043 Common Shares. These shares are held by XL Insurance Ltd, a wholly-owned subsidiary of XL Capital Ltd. The Common Shares beneficially owned by XL consist of 7,500,000 Common Shares issuable upon conversion of the Debentures, 1,632,043 Common Shares issuable upon exercise of the Warrants and 285,714 Common Shares for which XL Insurance has a voting proxy from Mr. Mulderig. As of May 17, 2001, 9,417,757 Common Shares represented approximately 18.5% of the outstanding Common Shares of MRM, based on MRM's representation that 41,623,198 Common Shares were outstanding as of that date. (b) XL has the sole power to vote and sole authority to dispose or direct the disposition of the Common Shares reported by this Schedule 13D, including any Common Shares which it may acquire upon conversion of the Debentures or upon exercise of the Warrants. In addition, as described in Item 6 below, XL has the right to vote the Common Shares of Mr. Robert A. Mulderig, Chairman of the board of directors and chief executive officer of MRM pursuant to a voting proxy issued by Mr. Mulderig to XL Insurance. (c) Except as reported above, XL has not engaged in any transactions in the Issuer Common Shares during the past 60 days. (d) Not applicable. (e) Not applicable. Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer. - ------ ------------------------------------------------------------------------ For a period beginning on September 17, 2001 and ending on November 17, 2001 (the "Put Term"), either XL Insurance or the holders of a majority in principal amount of the outstanding Debentures has the right to require MRM to repurchase all of the Debentures if all regulatory and shareholder approvals have not been obtained and the Restructuring described in Item 4 above has not been completed. The repurchase price will be equal to the higher of (i) 100% of the face amount of the Debentures and (ii) 100% of the then current market value of the Common Shares into which the De- -4- bentures are convertible, which percentage will increase by 25 basis points per month during the Put Term until all necessary regulatory and shareholder approvals have been secured and the Restructuring has been completed. For the purposes of computing the current market value of the Common Shares, MRM will use the average closing price for a three-day trading period beginning on the second trading day following the public announcement of the exercise of the put right by the holders of the Debentures. XL Insurance has received a voting proxy from Robert A. Mulderig, chairman of the board of directors and chief executive officer of MRM, pursuant to which Mr. Mulderig has assigned to XL Insurance the voting power of the Debentures, Voting Preferred Stock, voting preferred shares and Common Shares of MRM and Newco into which such Debentures are convertible or for which they are exchangeable by Mr. Mulderig. Pursuant to the Securities Purchase Agreement and the Debentures, XL Insurance has the right to approve any proposed transferee of the Debentures by any other Purchaser. Except as described above and in Item 4 hereof, there are no contracts, arrangements, understandings or relationships (legal or otherwise) among XL and any other person with respect to any securities of the Issuer, including but not limited to transfer or voting of any of the securities of the Issuer, finder's fees, joint venture, loan or option arrangements, puts or calls, guarantee of profits, division of profits or loss, or the giving or withholding of proxies. Item 7. Material to Be Filed as Exhibits. - ------ -------------------------------- 1. Securities Purchase Agreement, dated as of May 8, 2001, among Mutual Risk Management Ltd., the guarantors named therein, XL Insurance Ltd and the other investors named therein. 2. Form of 9 3/8% Convertible Exchangeable Debenture due 2006 issued to XL Insurance Ltd. 3. Debenture Registration Rights Agreement, dated may 17, 2001, among Mutual Risk Management Ltd., the guarantors named therein, XL Insurance Ltd and the other investors named therein. 4. Warrant Registration Rights Agreement, dated May 17, 2001, among Mutual Risk Management Ltd., XL Insurance Ltd and the other investors. 5. Voting Proxy to XL Insurance Ltd from Robert A. Mulderig. -5- Signature. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: May 29, 2001. By: /s/ Paul S. Giordano -------------------------------------- Name: Paul S. Giordano, Executive Vice President, General Counsel and Secretary -6- Schedule I The (a) name, (b) business address, (c) principal occupation or employment and the organization in which such occupation or employment is conducted and (d) citizenship of each director and executive officer of XL Capital Ltd are set forth in the following table: 1. (a) Brian M. O'Hara (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (c) President, Chief Executive Officer and Director of XL Capital Ltd, One Bermudiana Road, Hamilton, HM11, Bermuda (d) U.S.A. 2. (a) Michael Esposito Jr. (b) c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (c) Director and Chairman of the Board of XL Capital Ltd (d) U.S.A. 3. (a) Ronald L. Bornhuetter (b) c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (c) Director of XL Capital Ltd (d) U.S.A. 4. (a) John Weiser (b) c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (c) Director of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (d) U.S.A. 5. (a) Ellen E. Thrower (b) The College of Insurance, 101 Murray Street, New York, NY 10007 (c) Director of XL Capital Ltd and President, The College of Insurance, 101 Murray Street, New York, NY 10007 (d) U.S.A. 6. (a) Michael A. Butt (b) c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (c) Director of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda, and Former President and Chief Executive Officer, Mid Ocean Limited (d) U.K. 7. (a) Alan Z. Senter (b) 2 West 67th Street, Apartment 10B, New York, NY 10023 (c) Director of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda (d) U.S.A. 8. (a) John T. Thornton (b) c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda -7- (c) Director of XL Capital Ltd, c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (d) U.S.A. 9. (a) Paul Jeanbart (b) Rolaco Group of Companies, 28 Boulevard du Pont d'Arve, 1205 Geneva, Switzerland (c) Director of XL Capital Ltd and Chief Executive Officer, The Rolaco Group of Companies, 28 Boulevard du Pont d'Arve, 1205 Geneva, Switzerland (d) Canada 10. (a) Cyril Rance (b) c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (c) Director of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda (d) Bermuda 11. (a) Robert S. Parker (b) Georgetown University, 5200 Watson Street, N.W., Washington, D.C. 20016 (c) Director of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda and Dean Emeritus and Professor of the School of Business Administration at Georgetown University (d) U.S.A. 12. (a) Sir Brian Corby (b) c/o XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (c) Director of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda Former Chairman of the Board of The Brockbank Group, plc (d) U.K. 13. (a) John Loudon (b) Caneminster Ltd., Suite B, Bristol House, 67 Lower Sloane Street, London, SW1W 8DD, England (c) Director of XL Capital Ltd and Chairman, Caneminster Ltd., Suite B, Bristol House, 67 Lower Sloane Street, London, SW1W 8DD, England (d) The Netherlands 14. (a) Robert R. Glauber (b) National Association of Securities Dealers, Inc., One Liberty Plaza, New York, New York 10006, U.S.A. (c) Director of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11 Bermuda and President and Chief Executive Officer, NASD (d) U.S.A. 15. (a) Robert Clements (b) Arch Capital Group Ltd, 20 Horseneck Lane, Greenwich, CT 06830 (c) Director of XL Capital Ltd and Chairman, Arch Capital Group Ltd, 20 Horseneck Lane, Greenwich, CT 06830 (d) U.S.A. 16. (a) Nicholas M. Brown, Jr. (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (c) Executive Vice President and Chief Executive of Insurance Operations of XL Capital Ltd, One Bermudiana Road, Hamilton HM 11, Bermuda -8- (d) U.S.A. 17. (a) K. Bruce Connell (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (c) Executive Vice President of XL Capital Ltd, XL House, and President and Chief Executive Officer of XL Capital Products Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (d) U.S.A. 18 (a) Jerry de St. Paer (b) XL Capital, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (c) Executive Vice President and Chief Financial Officer of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda (d) U.S.A. 19. (a) Paul S. Giordano (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (c) Executive Vice President, General Counsel and Secretary of XL Capital Ltd, XL Insurance Ltd and XL Re Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (d) U.S.A. 20. (a) Christopher V. Greetham (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (c) Executive Vice President and Chief Investment Officer of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (d) U.K. 21. (a) Henry C. V. Keeling (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (c) Executive Vice President and Chief Executive of Reinsurance Operations of XL Capital Ltd and Chief Executive Officer of XL Re Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (d) U.K. 22. (a) Fiona E. Luck (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (c) Executive Vice President of Group Operations of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda (d) U.K. 23. (a) Robert R. Lusardi (b) XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda -9- (c) Executive Vice President and Chief Executive of Financial Products and Services, XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM11, Bermuda (d) U.S.A. 24. (a) Clive Tobin (b) XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda (c) Executive Vice President of XL Capital Ltd, XL House, One Bermudiana Road, Hamilton, HM 11, Bermuda (d) U.K. -10- EX-1 2 xlex1.txt SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT dated as of May 8, 2001 among MUTUAL RISK MANAGEMENT LTD. and THE INVESTORS NAMED HEREIN TABLE OF CONTENTS Page ARTICLE I DEFINITIONS SECTION 1.1. Definitions.............................................2 SECTION 1.2. Accounting Terms and Determinations....................13 SECTION 1.3. Rules of Construction..................................13 ARTICLE II PURCHASE AND SALE OF SECURITIES SECTION 2.1. Closing................................................14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE OBLIGORS SECTION 3.1. Corporate Existence and Power..........................16 SECTION 3.2. Authorization, Execution, Enforceability...............16 SECTION 3.3. Capitalization of the Company..........................17 SECTION 3.4. Subsidiaries; Other Interests..........................18 SECTION 3.5. No Contravention, Conflict, Breach, Etc................18 SECTION 3.6. Consents...............................................19 SECTION 3.7. No Existing Violation, Default, Etc....................19 SECTION 3.8. Licenses and Permits...................................20 SECTION 3.9. Title to Properties....................................20 SECTION 3.10. Taxes..................................................20 SECTION 3.11. Litigation.............................................21 SECTION 3.12. Labor Matters..........................................21 SECTION 3.13. Contracts..............................................21 SECTION 3.14. Finder's Fees..........................................22 SECTION 3.15. Financial Statements...................................22 SECTION 3.16. Compliance with ERISA..................................23 SECTION 3.17. Contingent Liabilities.................................23 SECTION 3.18. No Material Change.....................................24 SECTION 3.19. Insurance Matters......................................25 SECTION 3.20. Full Disclosure........................................27 SECTION 3.21. Solicitation...........................................27 -i- Page SECTION 3.22. Governmental Regulation................................28 SECTION 3.23. Reservation of Shares..................................28 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS SECTION 4.1. Organization, Good Standing, Power, Authority, Etc.....29 SECTION 4.2. Investment Intent, Etc.................................29 SECTION 4.3. Accredited Investor....................................29 ARTICLE V CONDITIONS PRECEDENT SECTION 5.1. Conditions to the Purchasers' Obligations..............30 SECTION 5.2. Conditions to the Company's Obligations................33 ARTICLE VI COVENANTS SECTION 6.1. Restructuring..........................................34 SECTION 6.2. Preemptive Rights......................................35 SECTION 6.3. Board Representation...................................35 SECTION 6.4. Information............................................37 SECTION 6.5. Use of Proceeds........................................40 SECTION 6.6. Non-Competition........................................40 SECTION 6.7. Certain Transactions...................................41 SECTION 6.8. Insurance Professional.................................41 SECTION 6.9. Purchase Option........................................41 SECTION 6.10. Employment Agreements..................................41 ARTICLE VII MISCELLANEOUS SECTION 7.1. Notices................................................42 SECTION 7.2. No Waivers; Powers and Remedies Cumulative; Amendments.45 SECTION 7.3. Indemnification........................................46 SECTION 7.4. Expenses; Documentary Taxes............................48 SECTION 7.5. Register...............................................48 SECTION 7.6. Termination............................................49 -ii- Page SECTION 7.7. Successors and Assigns.................................49 SECTION 7.8. Governing Law; Waiver of Jury Trial; Submission to Jurisdiction; Net Payments...........................49 SECTION 7.9. Survival...............................................51 SECTION 7.10. Independence of Representations, Warranties and Covenants........................................51 SECTION 7.11. Severability...........................................51 SECTION 7.12. Counterparts...........................................52 SECTION 7.13. Entire Agreement; Benefit..............................52 SECTION 7.14. Headings...............................................52 SECTION 7.15. Execution by Newco.....................................52 Schedule 3.3(c) Outstanding Debt Schedule 3.4 Subsidiaries Schedule 3.10 Taxes Schedule 3.11 Litigation Matters Schedule 3.13 Contracts Schedule 3.18 Certain Material Changes Schedule 3.19(d) Loss Experience Schedule 3.19(e) Certain Reinsurance Collectibles Schedule 3.19(f) Governmental Consents and Approvals Annex I - Projected and Pro Forma Financial Statements Exhibit A-1 - Form of Convertible Exchangeable Debenture Exhibit A-2 - Form of Newco Debenture Exhibit B - Form of Collateral Agreement Exhibit C - Form of Debenture Registration Rights Agreement Exhibit D - Form of Warrant Registration Rights Agreement Exhibit E - Form of Subordination Agreement Exhibit F - Form of Lock-Up Agreement Exhibit G - Form of Voting Preferred Stock Exhibit H - Form of Warrant -iii- SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "Agreement") dated as of May 8, 2001 among MUTUAL RISK MANAGEMENT LTD., MUTUAL GROUP LTD., the ADDITIONAL GUARANTORS NAMED HEREIN, XL INSURANCE LTD, FIRST UNION MERCHANT BANKING 2001, LLC, HIGH RIDGE CAPITAL PARTNERS II, L.P., CENTURY CAPITAL PARTNERS II, L.P., ROBERT A. MULDERIG, TARACAY INVESTORS COMPANY AND INTREPID FUNDING MASTER TRUST. R E C I T A L S : WHEREAS, the parties hereto desire to enter into certain financing arrangements pursuant to the terms and subject to the conditions hereinafter set forth; WHEREAS, the Purchasers (other than Intrepid), pursuant to the terms and subject to the conditions herein, severally desire to purchase convertible exchangeable debentures of the Company (the "Convertible Exchangeable Debentures") in an aggregate principal amount of $112,500,000 and the Company desires to contribute, after completion of the Restructuring, approximately $80,000,000 of such proceeds to the statutory capital and surplus of its U.S. Insurance Subsidiaries; WHEREAS, the parties hereto have agreed that the remaining amount of the net proceeds from the issuance and sale of the Convertible Exchangeable Debentures hereunder will be held in the Collateral Account until such time as they are released, in accordance with the terms of this Agreement and the Collateral Agreement; WHEREAS, Intrepid, pursuant to the terms and subject to the conditions herein, desires to exchange $30,000,000 liquidation preference of RHINOS for Convertible Exchangeable Debentures in an aggregate principal amount of $30,000,000; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: -2- ARTICLE I DEFINITIONS SECTION 1.1. Definitions. The following terms, as used herein, have the following meanings: "Affiliate" means, with respect to any Person (the "Subject Person"), (i) any other Person (a "Controlling Person") that directly, or indirectly through one or more intermediaries, Controls the Subject Person or (ii) any other Person which is Controlled by or is under common Control with a Controlling Person; provided, however, that the Purchasers and their respective Affiliates (other than any officers or directors (other than any XL Designees) of the Company and their respective Affiliates) shall not be deemed Affiliates of the Company or any of its Subsidiaries. "Audited Statutory Financial Statements" has the meaning set forth in Section 3.15(a). "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Business Day" means any day except a Saturday, Sunday or other day on which (i) commercial banks in The City of New York are authorized or required by law to close or (ii) the New York Stock Exchange is not open for trading. "Capital Stock" means, with respect to any Person, any and all shares, partnership interests or equivalents (however designated and whether voting or non-voting) of such Person's capital stock, whether outstanding on the date hereof or hereafter issued. "Century" means Century Capital Partners II, L.P. "Century Warrants" means warrants to purchase initially an aggregate of 103,112 shares of Common Stock of the Company. The Century Warrants shall (i) be immediately exercisable, initially at an exercise price of $7.00 per share of Common Stock of the Company, (ii) be exercisable for five years from the date of issuance, (iii) contain provisions for adjustment of the exercise price and the number of shares of Common Stock of the Company issuable upon exercise of the Century Warrants comparable to the antidilution provisions applicable to the Debentures and (iv) have the benefit of registration rights comparable to the registration rights -13- applicable to the Debentures, including one demand registration right and -3- unlimited piggyback registration rights. The Century Warrants shall be in the form of Exhibit H hereto. "Closing Date" has the meaning set forth in Section 2.1. "Collateral Account" means the Collateral Account established and maintained pursuant to the Collateral Agreement between the Company and the Collateral Agent named therein. "Collateral Agreement" means a Collateral Agreement in the form of Exhibit B hereto between the Company and the Collateral Agent named therein. "Common Stock" means the common stock or common shares of the referenced Person. "Company" means Mutual Risk Management Ltd., a company organized under the laws of Bermuda. "Contributed Amounts" has the meaning set forth in Section 6.5. "Control" (including, with correlative meanings, the terms "Controlling," "Controlled by" and "under common Control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or interests, by contract or otherwise. "Convertible Exchangeable Debentures" means the 9-3/8% Convertible Exchangeable Debentures Due 2006 of the Company in the form of Exhibit A-1 hereto. "CRM" has the meaning set forth in the definition of "Restructuring." "D&O Proxies" has the meaning set forth in Section 5.1(r). "Debentures" means, collectively, the Convertible Exchangeable Debentures and the Newco Debentures. All references to Debentures in this Agreement shall be deemed to include the shares of Voting Preferred Stock issued in connection therewith. "Debenture Registration Rights Agreement" means a registration rights agreement in the form of Exhibit C hereto. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, -4- debentures, Debentures or other similar instruments issued by such Person, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person under any Financing Lease, (v) all reimbursement obligations of such Person in respect of letters of credit or other similar instruments, (vi) Disqualified Capital Stock of such Person, (vii) Preferred Stock of any Subsidiary of such Person (other than preferred shares of the IPC (i.e., rent-a-captive) subsidiaries of the Company or Newco issued to policyholders in connection with the CRM business), (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (ix) all Debt of others Guaranteed by such Person. "Designees" means, collectively, the First Union and High Ridge Designee and the XL Designees and "Designee" means any one of them. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, or requires the payment of any dividends, in each case, at any time that any obligation under the Transaction Documents is outstanding. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Group" means the Company and its Subsidiaries and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Internal Revenue Code. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Bank Agreement" means the Credit Agreement dated as of September 21, 2000 among the Company, Mutual Group Ltd., Bank of America, N.A., as Administrative Agent and a lender and the Lenders party thereto from time to time, as in effect on the date hereof or as amended or amended and restated. "Existing Bank Lenders" means the Lenders under the Existing Bank Agreement. -5- "Financing Lease" means any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "First Union" means First Union Merchant Banking 2001, LLC. "First Union Warrants" means warrants to purchase initially an aggregate of 263,965 shares of Common Stock of the Company. The First Union Warrants shall (i) be immediately exercisable, initially at an exercise price of $7.00 per share of Common Stock of the Company, (ii) be exercisable for five years from the date of issuance, (iii) contain provisions for adjustment of the exercise price and the number of shares of Common Stock of the Company issuable upon exercise of the First Union Warrants comparable to the antidilution provisions applicable to the Debentures and (iv) have the benefit of registration rights comparable to the registration rights applicable to the Debentures, including one demand registration right and unlimited piggyback registration rights. The First Union Warrants shall be in the form of Exhibit H hereto. "First Union and High Ridge Designee" has the meaning set forth in Section 6.3(b). "Fully Diluted Basis" means after giving effect to the exercise of all outstanding options, warrants and other rights to purchase Capital Stock of the relevant Person and the conversion or exchange of all securities convertible or exchangeable into Capital Stock of the relevant Person (whether or not then exercisable, exchangeable or convertible and whether or not "in the money"). "GAAP" has the meaning set forth in Section 1.2. "Governmental Entity" means any court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency, including any insurance regulatory authority or agency or Insurance Department. "Guarantee" by any Person means (a) any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing (whether by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain a minimum net worth, financial ratio or similar requirements, or otherwise) any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to -6- protect such holder against loss in respect thereof (in whole or in part). The term "Guarantee" used as a verb has a corresponding meaning. "Guarantors" means each of the Subsidiaries of the Company listed on Schedule 3.4 (other than the Insurance Subsidiaries) and each other Subsidiary guaranteeing the obligations hereunder and the Debentures pursuant to the terms of the Debentures. "High Ridge" means High Ridge Capital Partners II, L.P. "High Ridge Warrants" means warrants to purchase initially an aggregate of 148,481 shares of Common Stock of the Company. The High Ridge Warrants shall (i) be immediately exercisable, initially at an exercise price of $7.00 per share of Common Stock of the Company, (ii) be exercisable for five years from the date of issuance, (iii) contain provisions for adjustment of the exercise price and the number of shares of Common Stock of the Company issuable upon exercise of the High Ridge Warrants comparable to the antidilution provisions applicable to the Debentures and (iv) have the benefit of registration rights comparable to the registration rights applicable to the Debentures, including one demand registration right and unlimited piggyback registration rights. The High Ridge Warrants shall be in the form of Exhibit H hereto. "Holders" has the meaning set forth in Section 7.5. "Indemnified Parties" and "Indemnified Party" have the meanings set forth in Section 7.3. "Insurance Acts" means all applicable insurance laws and the applicable rules and regulations thereunder. "Insurance Departments" means the Bermuda Registrar of Companies and the Departments of Insurance of the States of Illinois and Pennsylvania. "Insurance License" means a license or permit from an Insurance Department or any other department of insurance of any other jurisdiction. "Insurance Subsidiaries" means (i) Legion Insurance Company, Legion Indemnity Ltd. and Villanova Insurance Company and (ii) each other Subsidiary of the Company that is a licensed insurance company. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended. -7- "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, advance, time deposit or otherwise. "Intrepid" means Intrepid Funding Master Trust. "IPC" means Insurance Profit Center. "Judgment Currency" has the meaning set forth in Section 7.8(c). "Lien" means any lien, mechanic's lien, materialmen's lien, lease, easement, charge, encumbrance, mortgage, conditional sale agreement, title retention agreement, voting trust agreement, assignment by way of security, restriction on voting or transfer, agreement to sell or convey, option, claim, title imperfection, encroachment or other survey defect, pledge, restriction, security interest or adverse claim of any kind, whether arising by contract or under law or otherwise (including any Financing Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "Lock-Up Agreements" means the lock-up agreements of the inside directors and executive officers of the Company in the form of Exhibit F hereto. "Material Adverse Effect" has the meaning set forth in Section 3.1(b). "Multiemployer Plan" means at any time a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five-year period. "NAIC" means the National Association of Insurance Commissioners. "Newco" has the meaning set forth in the definition of "Restructuring." "Newco Debenture" means a 9 3/8% Convertible Debenture due 2006 of Newco substantially in the form of Exhibit A-2 hereto; provided, however, that the final terms of the covenants and events of default to be included in the Newco Debenture shall be determined by XL and Newco prior to the issuance thereof. "Newco Voting Preferred Stock" means shares of preferred stock of Newco having a nominal liquidation preference and par value, no dividend rights and aggregate voting rights equal to the aggregate voting rights of the Common Stock issuable upon conversion of all Newco Debentures and otherwise substantially the same as the Voting Preferred Stock. -8- "Non-Competition Period" has the meaning set forth in Section 6.6. "Obligors" means, collectively, the Company, Newco, the Guarantors and any additional Person that is required to become a party to this Agreement; and "Obligor" means any of them. "Observer" has the meaning set forth in Section 6.3(b). "Officers' Certificate" means a certificate executed on behalf of the Company by the Chief Executive Officer or President and by its Chief Financial Officer, its Treasurer or any other officer acceptable to the Purchasers; provided, however, that the Officers' Certificate with respect to the compliance with a condition precedent to the Closing Date shall include (i) a statement that the signers have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that in the opinion of the signers, they have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with and (iii) a statement as to whether, in the opinion of the signers, such condition has been complied with. "PBGC" means the Pension Benefit Guaranty Corporation. "Permits" means all domestic and foreign licenses, permits, consents, franchises, orders, authorizations, clearances, certificates, Insurance Licenses and approvals from Governmental Entities. "Person" means an individual or a corporation, company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or any agency or political subdivision thereof) or other entity of any kind. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at the time a member of such ERISA Group for employees of any Person which was at the time a member of the ERISA Group. "Preferred Stock" means, with respect to any Person, any Capital Stock of such Person that has preferential rights over any other Capital Stock of such Person with respect to dividends, distributions or redemptions or upon liquidation. -9- "Program Business" means the business of MRM in which it acts as a conduit between producers of specialty books of business and reinsurers of such business. "Purchase Price" means the aggregate amount paid to the Company by the Purchasers (other than Intrepid) hereunder in respect of the Convertible Exchangeable Debentures and the Voting Preferred Stock pursuant to Section 2.1(a) of this Agreement. "Purchasers" means XL Insurance Ltd, First Union, High Ridge, Century, Robert A. Mulderig, Taracay, Intrepid and any other purchasers of Convertible Exchangeable Debentures for cash approved by XL, such approval not to be unreasonably withheld (it being understood that it is reasonable for XL to withhold its approval of any proposed Purchaser that is a competitor of the Company, XL or any of their respective Subsidiaries or of any proposed Purchaser whose purchase might, in the judgment of XL, adversely affect the tax status of MRM, Newco, XL or any of their respective Subsidiaries or shareholders); provided, however, that XL's consent shall not be required for the issuance of RHINOS Debentures to existing holders of RHINOS in exchange for such RHINOS. "Qualified Offering" means the registration and sale of Common Stock of Newco with a stated offering price of not less than $20.0 million registered under the United States securities laws with the intent that a liquid trading market therein develop. "Register" has the meaning set forth in Section 7.5. "Registration Rights Agreements" means, collectively, the Debenture Registration Rights Agreement and the Warrant Registration Rights Agreement. "Reinsurance Arrangements" has the meaning set forth in Section 3.19(e). "Related Person" means any director, officer or employee of the Company or any of its Subsidiaries who is also an equity or debt holder of the Company or any of its Subsidiaries. "Required Approvals" means all federal, state and local government regulatory (including any Form A approvals and all other approvals relating to insurance) and shareholder approvals necessary for consummation of the Transactions, including all approvals necessary in order to remove any restrictions or limitations on voting rights or conversion contained in any of the Transaction Documents. "Requisite Holders" means the Holders of a majority of the principal amount of outstanding Debentures; provided, however, that (i) the principal amount of Debentures that have been converted into or exchanged for Common Stock of the Company and/or Newco shall, solely for purposes of this definition, be deemed to be outstanding and held by -10- the respective holders of such Common Stock, (ii) at any time when XL holds, or has the right to vote, a majority of the principal amount of outstanding Debentures (other than RHINOS Debentures), "Requisite Holders" shall mean a majority of the principal amount of the outstanding Debentures other than the RHINOS Debentures and (iii) so long as XL holds or has the right to vote at least $50.0 million of the principal amount of Debentures, it will be deemed to own a majority of the principal amount of the outstanding Debentures. "Restructuring" means the restructuring of the operating units of the Company into two separate holding company structures, resulting in (i) one holding company owning the Company's U.S. insurance operations and managing general agency entities and operating through subsidiaries as a specialty insurer writing a selected book of Program Business and (ii) the second holding company, a newly formed company organized under the laws of Bermuda ("Newco"), owning (A) all of the Company's fee generating businesses that presently comprise its Corporate Risk Management ("CRM"), Specialty Brokerage and Financial Services business segments and all of the Company's non-U.S. insurance operations and (B) the Company's IPC (i.e., rent-a-captive) companies, other than Mutual Indemnity (Dublin) Limited (which will be confined solely to its present business), that are principally dedicated to its CRM business segment. As part of the Restructuring, (x) Newco will be entitled to receive all of the fees attributable to the CRM business except that MRM's U.S. Insurance Subsidiaries that write the related policies (which will only be Villanova Insurance Company ("Villanova") where Villanova is legally entitled to write such policies and the prospective holder of the underlying policy does not object to the use of Villanova or a new company in the case of new or renewal policies) may retain a portion of the premium equal to its actual costs, but not more than 1-1/4% and (y) Newco will be given an option to purchase Villanova and/or such new company for book value. The Restructuring shall be effected in a manner reasonably acceptable to XL, including with respect to capitalization and minimum capital and surplus of Newco. In addition to the foregoing, the Restructuring shall not be deemed to have been completed until the Company has complied with its obligations set forth in Section 6.1 hereof. "RHINOS" means the Auction Rate Reset Preferred Securities of the Trust, known as "RHINOS," including the related documentation. "RHINOS Debentures" means Debentures issued to any current or former holders of RHINOS or any of their respective Affiliates in exchange for an equal principal amount of RHINOS. "Securities" means the Debentures, the Voting Preferred Stock, the Newco Voting Preferred Stock, the Common Stock of the Company and Newco issued or issuable upon exchange or conversion of the Debentures and the Warrants. -11- "Securities Act" means the Securities Act of 1933, as amended. "Significant Subsidiary" has the meaning set forth in Section 1-02(w) of Regulation S-X under the Securities Act. "Statutory Accounting Principles" means generally accepted statutory accounting principles for property and casualty insurance companies domiciled in the States of Illinois and Pennsylvania, as applicable. "Statutory Financial Statements" has the meaning set forth in Section 3.15(b). "Subordination Agreement" means a subordination agreement in the form of Exhibit E hereto. "Subsidiary" means, with respect to any Person, (i) any corporation or other entity of which more than 50% of the Capital Stock or other ownership interests having ordinary voting power to elect more than 50% of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person and (ii) any partnership, association, joint venture or other entity in which such Person, directly or indirectly through Subsidiaries, has a greater than 50% equity interest; provided, however, that for all purposes of this Agreement references to Subsidiaries of the Company shall not include such entities designated by the Company that, in the aggregate, would not constitute a Significant Subsidiary of the Company. "Transaction Documents" means (i) the Debentures, (ii) this Agreement, (iii) the Collateral Agreement, (iv) the Registration Rights Agreements, (v) the Subordination Agreement, (vi) the Certificate of Designations relating to the Voting Preferred Stock, (vii) the Voting Preferred Stock, (viii) the Newco Voting Preferred Stock, (ix) the Warrants, (x) the Lock-Up Agreements, (xi) the D&O Proxies and (xii) each other document executed in connection with or pursuant to this Agreement. "Transactions" means the issuance and sale of the Convertible Exchangeable Debentures, the Voting Preferred Stock and the Warrants and each of the other transactions contemplated by the Transaction Documents, both before and after giving effect to permitted exchanges and/or conversions of the Debentures, including the Restructuring and the exercise of all of the rights of the Purchasers under the Transaction Documents and fulfillment of all obligations of the Obligors under the Transaction Documents. "Trust" means MRM Trust I, a Delaware statutory business trust, the issuer of the RHINOS and a Subsidiary of the Company. "Taracay" means Taracay Investors Company. -12- "Taracay Warrants" means warrants to purchase initially an aggregate of 4,342 shares of Common Stock of the Company. The Taracay Warrants shall (i) be immediately exercisable, initially at an exercise price of $7.00 per share of Common Stock of the Company, (ii) be exercisable for five years from the date of issuance, (iii) contain provisions for adjustment of the exercise price and the number of shares of Common Stock of the Company issuable upon exercise of the Taracay Warrants comparable to the antidilution provisions applicable to the Debentures and (iv) have the benefit of registration rights comparable to the registration rights applicable to the Debentures, including one demand registration right and unlimited piggyback registration rights. The Taracay Warrants shall be in the form of Exhibit H hereto. "Unaudited Statutory Financial Statements" has the meaning set forth in Section 3.15(b). "U.S. Insurance Subsidiaries" means Legion Insurance Company, Legion Indemnity Ltd. and Villanova Insurance Company. "Voting Preferred Stock" means shares of preferred stock of the Company having a liquidation preference and par value of U.S. $.01 per share, no dividend rights and aggregate voting rights equal to the aggregate voting rights of the Common Stock issuable upon conversion or exchange of all Convertible Exchangeable Debentures. The Voting Preferred Stock shall be in the form of Exhibit G hereto. "Warrant Registration Rights Agreement" means a registration rights agreement in the form of Exhibit D hereto. "Warrants" means, collectively, the XL Warrants, the First Union Warrants, the High Ridge Warrants, the Century Warrants and the Taracay Warrants. "XL" means XL Insurance Ltd. "XL Designees" has the meaning set forth in Section 6.3(a). "XL Warrants" means warrants to purchase initially an aggregate of 1,632,043 shares of Common Stock of the Company. The XL Warrants shall (i) be immediately exercisable, initially at an exercise price of $7.00 per share of Common Stock of the Company, (ii) be exercisable for five years from the date of issuance, (iii) contain provisions for adjustment of the exercise price and the number of shares of Common Stock of the Company issuable upon exercise of the XL Warrants comparable to the antidilution provisions applicable to the Debentures and (iv) have the benefit of registration rights comparable to the registration rights -13- applicable to the Debentures, including one demand registration right and unlimited piggyback registration rights. The XL Warrants shall be in the form of Exhibit H hereto. SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect in the United States on the date hereof applied on a consistent basis ("GAAP"). SECTION 1.3. Rules of Construction. (a) The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." (b) Unless the context shall otherwise require, all references herein to (i) Articles, Sections, Exhibits, Schedules and Annexes shall be deemed references to Articles and Sections of, and Exhibits, Schedules and Annexes to, this Agreement, (ii) Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons, (iii) agreements and other contractual instruments include subsequent amendments, assignments, and other modifications thereto to the date hereof and thereafter, but in the case of any amendment, assignment or modification after the date hereof, only to the extent such amendments, assignments or other modifications thereto are not prohibited by their terms or the terms of any Transaction Document, (iv) statutes and related regulations include any amendments of same and any successor statutes and regulations, (v) time shall be deemed to be to New York City time and (vi) "ordinary course of business" (and similar phrases) shall mean the ordinary course of business of the Company and its Subsidiaries consistent with past practice. ARTICLE II PURCHASE AND SALE OF SECURITIES SECTION 2.1. Closing. (a) Subject to the prior satisfaction of all the terms and conditions set forth herein and unless this Agreement shall have been earlier terminated in accordance with its terms, each Purchaser (other than Intrepid) severally agrees to purchase from the Company and the Company agrees to issue and sell to each Purchaser (other than Intrepid), on a date to be mutually agreed upon by the Company and XL, which date shall be no later than five Business Days after the date hereof (the "Closing Date"), the aggregate prin- -14- cipal amount of Convertible Exchangeable Debentures (together with the related Voting Preferred Stock) set forth on the signature page to this Agreement for such Purchaser, at a purchase price equal to the aggregate principal amount of Convertible Exchangeable Debentures purchased by such Purchaser, less the aggregate par value of the related Voting Preferred Stock issued to such Purchaser in connection with its purchase of Convertible Exchangeable Debentures. Subject to the prior satisfaction of all the terms and conditions set forth herein and unless this Agreement shall have been earlier terminated in accordance with its terms, Intrepid and the Company agree to exchange, on the Closing Date, $30,000,000 liquidation preference of RHINOS currently owned beneficially and of record by Intrepid for the aggregate principal amount of Convertible Exchangeable Debentures (together with the related Voting Preferred Stock) set forth on the signature page to this Agreement for Intrepid. The Convertible Exchangeable Debentures shall be convertible as provided therein into Common Stock of the Company and exchangeable as provided therein for, at the option of the Holder thereof, Newco Debentures or Common Stock of Newco. In connection with the purchase of the Convertible Exchangeable Debentures, the Company shall issue to each Purchaser (other than Intrepid), for additional consideration equal to the par value thereof, a percentage of the total number of shares of Voting Preferred Stock equal to the percentage of the principal amount of all Convertible Exchangeable Debentures purchased by such Purchaser. In connection with the exchange for the Convertible Exchangeable Debentures, the Company shall issue to Intrepid a percentage of the total number of shares of Voting Preferred Stock equal to the percentage of the principal amount of all Convertible Exchangeable Debentures purchased by Intrepid. The Voting Preferred Stock will provide that it may only be transferred with a proportional amount of the Convertible Exchangeable Debentures and the Convertible Exchangeable Debentures will provide that they may only be transferred with a proportional amount of Voting Preferred Stock. (b) On the Closing Date, the Purchasers (other than Intrepid) shall deliver the Purchase Price in immediately available funds by wire transfer to the account of the Company (which account shall be specified by the Company in writing no later than 9:00 a.m. on the second Business Day preceding the Closing Date). On the Closing Date, Intrepid shall deliver to the Company for cancellation certificates representing $30,000,000 liquidation preference of RHINOS. (c) On the Closing Date, against payment and delivery as set forth in Section 2.1(b), the Company shall deliver to each Purchaser one or more Convertible Exchangeable Debentures representing an aggregate principal amount equal to the amount set forth on the signature page to this Agreement opposite the name of such Purchaser and the related Voting Preferred Stock, each registered in the name or names, and in such denominations, as shall be designated by the applicable Purchaser by notice to the Company at least two Business Days prior to the Closing Date. -15- (d) On the Closing Date, the Company shall issue the XL Warrants to XL, the First Union Warrants to First Union, the High Ridge Warrants to High Ridge, the Century Warrants to Century and the Taracay Warrants to Taracay, in each case, for no additional consideration. (e) The Company and the Purchasers, having adverse interests and as a result of arm's-length bargaining, agree that neither the Purchasers nor any of their Affiliates has rendered or has agreed to render any services to the Company in connection with this Agreement or the issuance of the Convertible Exchangeable Debentures and the related Voting Preferred Stock to be issued on the Closing Date. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE OBLIGORS Each of the Obligors represents and warrants, as of the date hereof and the Closing Date, to the Purchasers and to each Holder, as set forth below: SECTION 3.1. Corporate Existence and Power. (a) The Company and each of its Subsidiaries is a company, corporation or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and has all organizational power and authority and all Permits required to own, lease or operate its respective properties and carry on its respective business as now conducted and as proposed to be conducted. (b) The Company and each of its Subsidiaries is, where applicable, duly qualified to transact business as a foreign corporation or partnership and is in good standing in each jurisdiction in which the conduct of its business or its ownership, leasing or operation of property requires such qualification, other than any failure to be so qualified or in good standing as would not, singly or in the aggregate, have a material adverse effect on the assets, liabilities, business, results of operations, condition (financial or otherwise), prospects or Permits of the Company and its Subsidiaries, taken as a whole, or of Newco and its Subsidiaries, taken as a whole, on a pro forma basis for the Restructuring (each, a "Material Adverse Effect"). SECTION 3.2. Authorization, Execution, Enforceability. Each Obligor has the corporate power and authority to execute and deliver, and to perform its obligations under, each of the Transaction Documents to which it is or is to be a party. Subject to receipt of regulatory approval from each Insurance Department (which approvals the Obligors hereby -16- agree to use their best efforts to obtain as soon as practicable), each Obligor has taken all action required by law, organizational documents or otherwise required to be taken by it to authorize the execution, delivery and performance by it of each Transaction Document to which it is or is to be a party. Each of the Transaction Documents is, or upon execution and delivery will be, a valid and binding obligation of each Obligor (to the extent each is a party thereto), enforceable against each Obligor in accordance with their respective terms except to the extent that the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights and remedies generally and by general equitable principles (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law). True and complete copies of the organizational documents of each Obligor have been made available by the Company to the Purchasers. SECTION 3.3. Capitalization of the Company. (a) The authorized Capital Stock of the Company (before giving effect to the Securities being issued and sold hereunder) consists of 180,000,000 shares of Common Stock, of which 41,618,331 shares are issued and outstanding as of March 31, 2001, and 20,000,000 shares of Preferred Stock, of which none are outstanding as of the date hereof. All outstanding shares of Common Stock have been duly authorized, are validly issued, fully paid and nonassessable and have been issued in compliance with applicable federal and state securities laws. (b) Except for the RHINOS and the Securities, no more than $14.0 million aggregate principal amount of Zero Coupon Convertible Exchangeable Subordinated Debentures due 2015 of the Company and no more than $5.0 million aggregate principal amount of convertible notes issued in connection with the Company's acquisition of the Valmet Group Ltd., and except as disclosed in the periodic reports filed by the Company under the Exchange Act prior to the date hereof, there are no (i) securities or obligations of the Company convertible into or exchangeable for any Capital Stock of the Company, (ii) warrants, options or other rights to purchase or acquire from the Company any such Capital Stock or any such convertible or exchangeable securities or obligations or (iii) obligations of the Company to issue such Capital Stock, any such convertible or exchangeable securities or obligations or any such warrants, rights or options. No Person has any preemptive or similar rights with respect to any Capital Stock of the Company or any rights to require registration of any securities of the Company. (c) Schedule 3.3(c) sets forth a complete list of all of the outstanding Debt of the Company or any of its Subsidiaries as of the date hereof, together with the names of the holders thereof, the principal amount, interest rate, issue date, stated maturity date and any other material terms. Schedule 3.3(c) also sets forth an accurate description of all Debt of the Company or any of its Subsidiaries that was repaid since December 31, 2000. -17- SECTION 3.4. Subsidiaries; Other Interests. (a) Schedule 3.4 sets forth a true, complete and correct list of each Significant Subsidiary of the Company. Except as indicated on Schedule 3.4, each such Significant Subsidiary is wholly owned by the Company. Schedule 3.4 sets forth the jurisdictions in which the Company's Significant Subsidiaries are domiciled (both by incorporation and as a "commercial domiciliary" under applicable law), which are the only jurisdictions in which the Company's Significant Subsidiaries are required to be so licensed. All of the outstanding Capital Stock of the Company's Subsidiaries has been duly authorized and validly issued and is fully paid and nonassessable and owned by the Company, directly, free and clear of all Liens (other than (x) such transfer restrictions as may exist under federal and state securities laws, (y) arising under the RHINOS or the documents executed in connection therewith and (z) Liens on the shares of the Company's IPC Subsidiaries and the special purpose mutual company Subsidiaries and the assets thereof, in each case, arising under letter of credit facilities entered into in connection with the CRM business); and there are no warrants, options or other rights granted to or in favor of any third party (whether acting in an individual, fiduciary or other capacity), other than the Company, to acquire any such Capital Stock, any additional Capital Stock or any other securities of the Company's Subsidiaries except for such options or rights arising under the RHINOS or the documents executed in connection therewith and pursuant to the Company's and its Subsidiaries existing stock option and benefit plans, as described in the Company's filings made pursuant to the Exchange Act prior to the date hereof. (b) Except for interests in the Subsidiaries, neither the Company nor any of its Subsidiaries, directly or indirectly, holds, or has any contractual or other commitment to make, any Investment in any Person, except for Investments made by the Insurance Subsidiaries in the ordinary course of their business and in accordance with the Company's investment policy in effect on the date hereof. SECTION 3.5. No Contravention, Conflict, Breach, Etc. The execution, delivery and performance of each of the Transaction Documents and the consummation of the Transactions will not (i) conflict with, or result in a breach or violation of, any provision of the memorandum of association, bye-laws or other organizational documents of the Company or any of its Subsidiaries, (ii) upon receipt of regulatory approvals from the Insurance Departments, result in risk of loss of, or limitation on, any Insurance License or other Permit held by the Company or any of its Subsidiaries, or the right of the Company or of any of its Subsidiaries to conduct business in any jurisdiction as currently conducted, or (iii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, or result in the creation or imposition of any Lien upon any assets or properties of the Company or any of its Subsidiaries under, any statute, rule, regulation, order or decree of any Governmental Entity, or any agreement or instrument evidencing Debt or any material lease, Permit or other material agreement or instrument to which the Company or any of its -18- Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or to which any of their respective properties, assets or operations are subject. SECTION 3.6. Consents. Except for consents that have been obtained and the consents required from the Existing Bank Lenders, the Trust and the holders of the RHINOS as set forth in Section 5.1(a) and, with respect to the Restructuring and the issuance of Common Stock of Newco upon exchange of the Debentures, any Form A approvals and all other regulatory approvals and necessary shareholder approvals, no consent, approval, authorization, order, registration, filing or qualification of or with any (i) Governmental Entity or (ii) other third party (whether acting in an individual, fiduciary or other capacity) is necessary for the issuance and sale of the Debentures, the Voting Preferred Stock and the Warrants, the execution, delivery and performance of the Transaction Documents and the consummation of the Transactions. SECTION 3.7. No Existing Violation, Default, Etc. (a) Neither the Company nor any of its Subsidiaries is in violation of (i) its memorandum of association, bye-laws or other organizational documents, (ii) any applicable law, ordinance, administrative or governmental rule or regulation except to the extent that any such violations, in the case of this clause (ii), would not, singly or in the aggregate, have a Material Adverse Effect or (iii) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any of its Subsidiaries. (b) No event of default or event that, but for the giving of notice or the lapse of time or both, would constitute an event of default exists under any indenture, mortgage, loan agreement, note or other agreement or instrument for borrowed money, any guarantee of any agreement or instrument for borrowed money or any material lease, Permit or other agreement or instrument to which the Company or any of its Subsidiaries is party or by which the Company or any of its Subsidiaries is bound or to which any of their respective properties, assets or operations is subject. SECTION 3.8. Licenses and Permits. Except as would not have a Material Adverse Effect, the Company and its Subsidiaries have such Permits from appropriate Governmental Entities (including, Insurance Licenses) as are necessary to own, lease or operate their properties as currently owned, leased or operated and to conduct their businesses as currently conducted and all such Permits are valid and in full force and effect. The Company and its Subsidiaries are in compliance in all respects with their respective obligations under such Permits, with such exceptions as would not, singly or in the aggregate, have a Material Adverse Effect. No event has occurred that allows, or after notice or lapse of time would allow, revocation or termination of such Permits and no insurance regulatory agency or body has issued any order or decree impairing, restricting or prohibiting the payment of dividends by the Company or any of its Subsidiaries to their respective parent companies or shareholders. -19- SECTION 3.9. Title to Properties. The Company and its Subsidiaries each have sufficient title or right to all properties (real and personal) owned or used by the Company and its Subsidiaries or reflected in their financial statements which are necessary for the conduct of the business of the Company and its Subsidiaries as currently conducted, free and clear of any Lien that may interfere with the conduct of the business of the Company and its Subsidiaries, taken as a whole, except for those Liens created by the Transaction Documents, and to the best of the Company's knowledge, all properties held under lease by the Company or any of its Subsidiaries are held under valid, subsisting and enforceable leases. SECTION 3.10. Taxes. Except as specifically set forth on Schedule 3.10, all United States Federal income tax returns and all other tax returns (including foreign tax returns) which are required to be filed by or on behalf of the Company and its Subsidiaries have been filed and all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries have been paid. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes or other governmental charges have been established in accordance with GAAP (or, in the case of the Insurance Subsidiaries, in accordance with Statutory Accounting Principles). SECTION 3.11. Litigation. Other than as disclosed in the reports of the Company filed pursuant to the Exchange Act or on Schedule 3.11, there are no pending or, to the Company's knowledge, threatened actions, suits, proceedings, arbitrations or investigations (including any market conduct investigations) against or affecting the Company or any of its Subsidiaries or any of their respective properties, assets or operations or with respect to which the Company or any of its Subsidiaries is responsible by way of indemnity or otherwise, that question the validity of any of the Transaction Documents, or that would, singly or in the aggregate, if adversely determined have a Material Adverse Effect or would have an adverse effect on the ability of the Company or any of its Subsidiaries to perform its obligations under this Agreement or any of the other Transaction Documents to which they are party; and the Company is not aware of any basis for any such action, suit, proceeding or investigation. SECTION 3.12. Labor Matters. No labor disturbance by the employees of the Company or any of its Subsidiaries exists or is threatened. Neither the Company nor any of its Subsidiaries is party to any collective bargaining or other union contract. The Company is not aware of the existence of any effort to unionize employees of either the Company or any of its Subsidiaries. SECTION 3.13. Contracts. Except as listed on Schedule 3.13: (a) neither the Company nor any of its Subsidiaries is party to any (written or oral) stockholder agreement, employment agreement with executive officers or material advisors' agreement, consulting agreement or similar agreement; -20- (b) neither the Company nor any of its Subsidiaries is a party to or bound by (i) any agreement containing "change in control" or similar provisions relating to change in control of the Company or any of its Subsidiaries; (ii) any powers of attorney or binding authorities other than those made in the ordinary course of the Insurance Subsidiaries' business; or (iii) any agreements (other than insurance policies, leases or other similar agreements issued or made by the Company or any of its Subsidiaries in the ordinary course of its business) pursuant to which the Company or any of its Subsidiaries is obligated to indemnify any other Person; and (c) no agreement, contract or other document of the Company or any of its Subsidiaries will require increased payments (in either amount or frequency) or changed terms or permits the termination thereof by any of the other parties thereto as a result of the transactions contemplated by the Transaction Documents. The Company has heretofore made available to the Purchaser complete and correct copies of the contracts, agreements and instruments listed on Schedule 3.13. Schedule 3.13 further contains a list of all insureds the gross written premiums of which (together with the gross written premiums derived from any of its Affiliates) represented more than (or are expected to represent more than) 2% of the Company's consolidated gross written premiums in any such fiscal year. SECTION 3.14. Finder's Fees. Except for fees payable to Banc of America Securities LLC and Credit Suisse First Boston Corporation, no broker, finder or other party is entitled to receive from the Company or any of its Subsidiaries any brokerage or finder's fee or any other fee, commission or payment as a result of the Transactions. SECTION 3.15. Financial Statements. (a) The audited statutory financial statements and related schedules and notes of the U.S. Insurance Subsidiaries for the years ended December 31, 1999 and 2000 (the "Audited Statutory Financial Statements") fairly present the financial condition, results of operations, cash flows and changes in capital and surplus of the U.S. Insurance Subsidiaries at December 31, 1999 and 2000 and for the years then ended and were prepared in accordance with Statutory Accounting Principles as permitted or prescribed by the applicable U.S. Insurance Acts. The Statements of Actuarial Opinion with respect to the Audited Statutory Financial Statements were determined in accordance with generally accepted actuarial standards and met the requirements of the Illinois and Pennsylvania Insurance Acts. (b) The unaudited statutory financial statements and related schedules and notes of the U.S. Insurance Subsidiaries for periods commencing subsequent to December 31, 2000 (the "Unaudited Statutory Financial Statements", and together with the Audited Statu- -21- tory Financial Statements, the "Statutory Financial Statements") fairly present the financial condition, results of the operations, cash flows and changes in capital and surplus of the U.S. Insurance Subsidiaries at the dates and for the periods presented and were prepared in accordance with Statutory Accounting Principles prescribed or permitted by the applicable U.S. Insurance Acts, subject to year-end audit adjustments (consisting only of normal recurring accruals) and full footnote disclosures which have been omitted. (c) The audited consolidated and consolidating financial statements and the related notes of the Company and its Subsidiaries for the years ended December 31, 1999 and 2000 fairly present the financial condition, results of operations and cash flows of the Company and its Subsidiaries at the dates and for the periods presented and were prepared in accordance with GAAP applied on a consistent basis. (d) The projected and pro forma consolidated financial data attached hereto as Annex I have been prepared by the Company in good faith and, among other things, reflect the Transactions and the Restructuring and contain all material assumptions relating to such projections and data. The Company believes such projections and the assumptions upon which they are based are reasonable. SECTION 3.16. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance, in all material respects, with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 3.17. Contingent Liabilities. Neither the Company nor any of its Subsidiaries have any material liabilities (including tax liabilities), absolute or contingent, that are required to be reserved against in a financial statement prepared in accordance with GAAP or Statutory Accounting Principles that are not so adequately reserved against. Neither the Company nor any of its Subsidiaries has any material reinsurance receivable that is required to be reserved against in accordance with GAAP or Statutory Accounting Principles other than those provided for in the reserve against reinsurance recoverables reflected in the Financial Statements and the consolidated financial statements of the Company and its Subsidiaries prepared in accordance with GAAP. At December 31, 2000, neither the Company nor any of its Subsidiaries had any material liabilities (absolute or contingent) other than those reflected -22- in the Financial Statements and the consolidated financial statements prepared in accordance with GAAP. Since December 31, 2000, the Company and its Subsidiaries have not incurred any material liabilities (absolute or contingent) other than with respect to claims under insurance policies written by the Insurance Subsidiaries and reported in the ordinary course of business. The frequency and severity of such claims within the individual lines of business of the Company and its Subsidiaries since December 31, 2000, are consistent with those reported for comparable periods prior to December 31, 2000. SECTION 3.18. No Material Change. Since December 31, 2000, except as listed on Schedule 3.18, (a) neither the Company nor any of its Subsidiaries has relinquished or incurred any material liability or obligation (indirect, direct or contingent), or entered into any oral or written agreement or other transaction that is not in the ordinary course of business; (b) neither the Company nor any of its Subsidiaries has sustained any material loss or interference with its respective businesses or properties from fire, flood, windstorm, accident or other calamity (whether or not covered by insurance); (c) there has been no material change in the Debt of the Company or any of its Subsidiaries, and no material change in the Capital Stock of the Company (except as contemplated hereby); (d) the Company has not permitted or allowed any of its or its Subsidiaries' assets to be subjected to any Liens; (e) the Company has not transferred or otherwise disposed of any of its or its Subsidiaries' assets, except in the ordinary course of business; (f) the Company has not made any single capital expenditure or commitment for a capital expenditure relating to its or its Subsidiaries' assets in excess of $500,000; (g) there has not been any change in any method of accounting or accounting practice or policy (including any reserving method, practice or policy) by the Company or any of its Subsidiaries; (h) there has not been, to the extent payable directly or indirectly by the Company or any of its Subsidiaries, any (i) employment, deferred compensation, severance, retirement or other similar agreement entered into with any director, officer or employee (or any amendment to any such existing agreement) outside of the ordinary course of business, (ii) grant of any severance or termination pay to any director, officer or employee outside of the ordinary course of business, (iii) change in compensation or other benefits payable to any Related Person or change in compensation or other benefits payable to any director, officer or employee outside of the ordinary course of business or (iv) loans or advances to any directors, officers or employees except for ordinary travel and business expenses in the ordinary course of business and advances of salary (not exceeding one month's pay); (i) there has been no material damage, theft or casualty loss by the Company or any of its Subsidiaries; (j) there has not been any change by the Company or any of its Subsidiaries in underwriting practices or standards; (k) there has not been (i) any entering into of any facultative reinsurance contract outside of the ordinary course of business, or (ii) any commutation of any facultative reinsurance contract outside of the ordinary course of business, or (iii) any entering into or any commutation of any reinsurance treaty by the Company or any of its Subsidiaries outside of the ordinary course of business; (l) there has not been any insurance transaction by the Company -23- or any of its Subsidiaries other than in the ordinary course of business; (m) there has not been any change by the Company or any of its Subsidiaries in the compensation structure of, or benefits available to, any agent or with respect to agents generally; and (n) there has been no event or circumstance causing a Material Adverse Effect, nor any development that would, singly or in the aggregate, result in a Material Adverse Effect. SECTION 3.19. Insurance Matters. (a) The Company and its Subsidiaries are each in compliance in all material respects with the requirements of all Insurance Acts and have filed all material reports, documents or other information required to be filed thereunder; and neither the Company nor any of its Subsidiaries has received any notification from any insurance regulatory authority, commission or other insurance regulatory body in the United States or elsewhere to the effect that the Company or any of its Subsidiaries is not in compliance in any material respect with the Insurance Acts. (b) Neither the Company nor any of its Subsidiaries has made any change in its insurance reserving practices, either on a gross or net of reinsurance basis, since December 31, 2000, that would, singly or in the aggregate, have (i) a Material Adverse Effect or (ii) a material adverse effect on the ability of any of the Insurance Subsidiaries to pay dividends or the amount thereof. (c) All insurance policies issued by the Company and each Insurance Subsidiary, as now in force, are, to the extent required under applicable law, in a form acceptable to applicable regulatory authorities or have been filed and not objected to by such authorities within the period provided for objection other than any failure to be in such form or to have been so filed as would not, singly or in the aggregate, have a Material Adverse Effect. All premium rates, rating plans and policy forms established or used by the Company or any Insurance Subsidiary that are required to be filed with or approved by insurance regulatory authorities have been so filed or approved, the premiums charged conform in all respects to the premiums so filed or approved and comply in all respects with the insurance laws applicable thereto and no such premiums are subject to any review or investigation by any insurance regulatory authority other than any failure to be so filed or approved or to so comply or any review or investigation as would not, singly or in the aggregate, have a Material Adverse Effect. (d) Except as specifically set forth on Schedule 3.19(d), no loss experience has developed, within any individual lines of business or on an aggregate basis for all lines, that would require or make it appropriate for the Company or any of its Subsidiaries to alter or modify its reserving methodology or assumptions since December 31, 2000. (e) All material reinsurance treaties, contracts, agreements and arrangements ("Reinsurance Arrangements") to which the Company or any of its Subsidiaries is a party are -24- in full force and effect and are valid and binding in accordance with their terms on the insurance company party thereto. The Company believes that, except as disclosed in its periodic reports filed with the U.S. Securities and Exchange Commission under the Exchange Act prior to the date hereof or as disclosed on Schedule 3.19(e), all amounts recoverable by the Company or any of its Subsidiaries pursuant to any Reinsurance Arrangement are fully collectible in due course. Except as disclosed in its periodic reports filed with the U.S. Securities and Exchange Commission under the Exchange Act prior to the date hereof, neither the Company nor any of its Subsidiaries nor any other party thereto is in default as to any Reinsurance Arrangement and there is no reason to believe that the financial condition of any such other party is impaired to the extent that a default thereunder may reasonably be anticipated. None of the Reinsurance Arrangements contains any provision that may permit the other party thereto to terminate such Reinsurance Arrangement by reason of the transactions contemplated by the Transaction Documents. (f) The only Permits required under the Insurance Acts for the consummation of the transactions contemplated by this Agreement or the Transaction Documents are those listed on Schedule 3.19(f). (g) All material filings required under any Insurance Act to have been made with state insurance regulatory authorities by the Company and its Subsidiaries have been duly and timely made, and when filed were in compliance in all material respects with the requirements of each such Insurance Act. (h) No Insurance Department has taken, or stated (orally or in writing) that it intends to take or that it may take, any action to seize control of the Company or any of its Subsidiaries through rehabilitation, liquidation or otherwise, and has not otherwise precluded, or stated (orally or in writing) that it intends to preclude or may preclude, the Insurance Subsidiaries from writing. SECTION 3.20. Full Disclosure. The information heretofore furnished by or on behalf of any Obligor to the Purchasers for purposes of or in connection with the consummation of the Transactions does not, and all such information hereafter furnished by or on behalf of any Obligor to the Purchasers will not (in each case taken together and on the date as of which such information is furnished), contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they are made, not misleading. The Obligors have disclosed to the Purchasers any and all facts which materially and adversely affect or may affect the business, results of operations, condition (financial or otherwise), prospects or Permits of the Company and its Subsidiaries or the ability of the Company and its Subsidiaries to perform their respective obligations under the Transaction Documents to which they are party. -25- SECTION 3.21. Solicitation. No form of general solicitation or general advertising was used by the Company or any of its Subsidiaries or any other Person acting on their behalf in respect of the Securities or in connection with the offer and sale of the Securities. None of the Company or any of its Subsidiaries and no Person acting on any of their behalf has, either directly or indirectly, sold or offered for sale to any Person any of the Securities or, within the six months prior to the date hereof, any other similar security of the Company or any of its Subsidiaries, and none of the Company or any of its Subsidiaries and no Person authorized to act on any of their behalf (except that neither the Company nor any of its Subsidiaries make any representation as to the Purchasers and their Affiliates) will sell or offer for sale any such security to, or solicit any offers to buy any such security from, or otherwise approach or negotiate in respect thereof with, any Person or Persons so as thereby to cause the issuance or sale of any of the Securities to be in violation of any of the provisions of Section 5 of the Securities Act. Assuming the accuracy of the representations and warranties of the Purchasers in Sections 4.2 and 4.3, it is not necessary in connection with the issuance and sale of the Securities pursuant to this Agreement to register any of the Securities under the Securities Act. SECTION 3.22. Governmental Regulation. (a) Neither the Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act or to any federal or state statute or regulation limiting its ability to issue and perform its obligations under any Transaction Document. (b) Neither the Company nor any of its Subsidiaries is, or will be after giving effect to the transactions contemplated by the Transaction Documents, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (c) Neither the Company nor any of its Subsidiaries has taken or will take any action that would cause this Agreement, the issuance and sale of the Securities or the use of the proceeds therefrom to violate the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. SECTION 3.23. Reservation of Shares. Prior to the Closing Date, the Company shall have duly reserved for issuance a sufficient number of shares of Common Stock of the Company for conversion of the Convertible Exchangeable Debentures and exercise of the Warrants. -26- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each of the Purchasers severally represents and warrants (as to itself only), as of the date hereof and the Closing Date, to the Obligors as set forth below: SECTION 4.1. Organization, Good Standing, Power, Authority, Etc. Such Purchaser is duly formed and registered, validly existing and in good standing under the laws of its jurisdiction of organization and has the power and authority (corporate or otherwise) to own, lease and operate its properties and to conduct its business as currently owned, leased and conducted. Such Purchaser has the power and authority (corporate or otherwise) to execute and deliver, and to perform its obligations under, this Agreement and each Transaction Document to which it is (or is to be) a party. Such Purchaser has taken all action required by law, its organizational documents or otherwise required to be taken by it to authorize the execution, delivery and performance of this Agreement and each Transaction Document to which it is (or is to be) a party and the consummation of the transactions contemplated to be performed by it hereunder and thereunder. This Agreement is, and each Transaction Document to which such Purchaser is, or is to be, a party will be, a valid and binding agreement of such Purchaser, enforceable in accordance with its terms except to the extent that the enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights and remedies generally and by general equitable principals (regardless of whether the issue of enforceability is considered in a proceeding in equity or at law). SECTION 4.2. Investment Intent, Etc. Such Purchaser is purchasing or otherwise acquiring the Securities for its own account and not with a view to, or for a sale in connection with, any distribution in violation of the Securities Act. Such Purchaser has had the opportunity to ask questions and receive answers from the Obligors concerning the Securities and the business, financial condition, operations and prospects of the Obligors and has been furnished with all other information about the Obligors which it has requested (it being understood that the foregoing shall not affect the Company's representations and warranties in this Agreement or any other Transaction Document or any of the Purchasers' rights and remedies thereunder or available as a matter of law or otherwise). Such Purchaser will not transfer any of the Securities except in accordance with applicable federal and state securities laws. -27- SECTION 4.3. Accredited Investor. Such Purchaser is an "Accredited Investor" within the meaning of Rule 501(a) under the Securities Act and has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of such Purchaser's investment in the Securities, and such Purchaser is capable of bearing the economic risks of such investment and is able to bear a complete loss of such Purchaser's investment in the Securities. ARTICLE V CONDITIONS PRECEDENT SECTION 5.1. Conditions to the Purchasers' Obligations. The Purchasers' respective obligations to purchase or otherwise acquire the Convertible Exchangeable Debenture to be purchased or acquired by them on the Closing Date pursuant to Section 2.1 are subject to the prior satisfaction in full of each of the following conditions: (a) (i) The Existing Bank Lenders shall have consented in writing, in form and substance satisfactory to the Purchasers, to the Transaction Documents, the Restructuring, the other Transactions and the exercise by the Purchasers of all of their rights under the Transaction Documents; (ii) the Trust and the holders of the RHINOS shall have consented, in form and substance satisfactory to the Purchasers, to the Transaction Documents, the Restructuring, the other Transactions and the exercise by the Purchasers of all of their rights under the Transaction Documents; (iii) the Purchasers shall have received a copy of the Subordination Agreement duly executed by each of the parties thereto, including each of the Existing Bank Lenders, the holder of the RHINOS, the holders of the RHINOS Debentures, the Trust, the applicable trustees and the Obligors; (iv) there shall have been obtained in form and substance satisfactory to the Purchasers all other consents and waivers that are necessary in connection with the execution of the Transaction Documents and the execution and delivery of the Convertible Exchangeable Debentures hereunder; (v) the Bermuda Monetary Authority and the Bermuda Registrar of Companies shall have consented in form and substance satisfactory to the Purchasers to the Transactions, the Restructuring and the other transactions contemplated hereby; and (vi) the holders of the RHINOS shall have either (x) committed to exchange RHINOS for RHINOS Debentures or (y) forfeited their rights to exchange RHINOS for RHINOS Debentures with respect to all RHINOS, in each case on terms and conditions satisfactory to XL. (b) The capital and surplus of the U.S. Insurance Subsidiaries under Statutory Accounting Principles (not including any amounts attributable to the Purchase Price) shall not -28- be less than $365.0 million (without giving effect to no more than $15.0 million of adjustments required by FASB 115). (c) The representations and warranties of the Obligors in the Transaction Documents shall be true and correct in all material respects at such time (without giving effect to any qualifications as to materiality or knowledge contained therein). The Company shall have performed and complied with all covenants and agreements required by such Transaction Documents to be performed or complied with by it at such time. Before and after giving effect to the use of proceeds of the Purchase Price, no Default or Event of Default (as defined in the Debentures) shall have occurred and be continuing. The Purchasers shall have received an Officers' Certificate dated as of the Closing Date to the effect that the conditions in this clause (c) and clauses (i)(i) and (j) of this Section 5.1 have been satisfied. (d) The Purchasers shall have received an opinion, dated the Closing Date, of each of Mayer, Brown & Platt, special counsel to the Company, Conyers Dill & Pearman, Bermuda counsel to the Company, and Richard O'Brien, General Counsel of the Company, in each case, covering such matters as are requested by the Purchasers and in form and substance satisfactory to the Purchasers. (e) The Purchasers shall have received the Convertible Exchangeable Debentures, together with the related Voting Preferred Stock, to be issued on the Closing Date, duly executed by the Company and in the denominations and registered in the names specified in or pursuant to Section 2.1(c). (f) The Collateral Agreement shall have been duly executed and delivered by the Company and the Collateral Agent thereunder. (g) The Registration Rights Agreements shall have been duly executed and delivered by the Company and its Subsidiaries party thereto and the Purchasers. (h) The Company and each of its Subsidiaries shall have taken such requisite action necessary to ensure that it will be able to comply with Section 6.3 and have implemented any requests made pursuant to Section 6.3. (i) (i) There shall not have occurred or become known to the Purchasers any events or changes (A) since December 31, 2000 that, individually or in the aggregate, have had or could reasonably be expected to have a Material Adverse Effect, or (B) that have had or could reasonably be expected to have an adverse effect on the rights or remedies of the Purchasers, or on the ability of any of the Obligors to perform their respective obligations hereunder or under the other Transaction Documents, (ii) the Purchasers shall not have become aware after the date hereof of any information or other matter affecting the Company, -29- any of its Subsidiaries or the transactions contemplated hereby which is inconsistent in a material and adverse manner with any such information or other matter disclosed to the Purchasers prior to the date hereof, (iii) trading in securities generally on the New York Stock Exchange, American Stock Exchange or the Nasdaq National Market shall not have been suspended or limited and minimum or maximum prices or maximum ranges for prices shall not have been established on any such exchange; (iv) a banking moratorium shall not have been declared by New York or United States authorities; and (v) there shall not have been (A) an outbreak or escalation of material hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other material insurrection or armed conflict involving the United States or any other national or international calamity or emergency or (C) any material change or disruption in the general financial banking or capital markets of the United States. (j) Since the date of this Agreement, neither A.M. Best Company nor Standard & Poor's Ratings Services shall have downgraded the ratings ascribed to the Company or any of its Subsidiaries on the date of this Agreement; and since the date of this Agreement, neither A.M. Best Company nor Standard & Poor's Ratings Services shall have issued any warning of or announced that it is considering a possible downgrade. (k) The Purchasers shall have received confirmation to their satisfaction that the transactions contemplated hereby will not trigger any payments under any of the Company's employment arrangements or loss of benefits under any of the Company's reinsurance or other material contracts. (l) The fees and expenses of the Purchasers' counsel, accountants and other advisors and consultants, including, with respect to XL, Cahill Gordon & Reindel, Am-Re Consultants, Inc. and PriceWaterhouseCoopers, LLP, shall have been paid in accordance with Section 7.4 hereof. (m) No insurance regulatory department shall have indicated that it may take any action to seize control of the Company. (n) The Purchasers shall have received a duly executed Lock-Up Agreement from each of the directors (other than outside directors) and executive officers of the Company. (o) The Purchasers shall have received a certificate of the Secretary or Assistant Secretary of the Company, dated as of the Closing Date, certifying (A) (i) that attached thereto is a true, complete and correct copy of resolutions duly adopted by the Board of Directors of the Company, authorizing (1) the execution, delivery and performance of the Transaction Documents to which it is a party and (2) the Transactions and (ii) that such resolutions -30- have not been amended, modified, revoked or rescinded; (B) as to the incumbency and specimen signature of each officer executing any Transaction Documents on its behalf and (C) that attached thereto are true and complete copies of its constituent documents; and such certificate and the resolutions attached thereto shall be in form and substance satisfactory to the Purchasers. (p) On the Closing Date, in addition to any Convertible Exchangeable Debentures purchased by Century, directors and officers of the Company or their Affiliates shall purchase Convertible Exchangeable Debentures in an aggregate principal amount of at least $2.0 million and no more than $2.5 million; provided, however, that no individual director or officer (or affiliate thereof) of the Company may purchase Convertible Exchangeable Debentures in a principal amount of less than $500,000. (q) XL shall have received a duly executed voting proxy (the "D&O Proxies"), in form and substance satisfactory to XL, from each of the directors and officers of the Company that purchase Convertible Exchangeable Debentures (other than any outside directors of the Company that purchase Convertible Exchangeable Debentures indirectly through Century) pursuant to which such directors and officers shall assign to XL the voting power of the Debentures, Voting Preferred Stock, Newco Voting Preferred Stock and Common Stock of the Company and Newco into which such Debentures are convertible or for which they are exchangeable. SECTION 5.2. Conditions to the Company's Obligations. The Company's obligations to issue the Convertible Exchangeable Debentures to be purchased or otherwise acquired by the Purchasers on the Closing Date pursuant to Section 2.1 are subject to the prior satisfaction in full of each of the following conditions: (a) The representations and warranties of the Purchasers in the Transaction Documents shall be true and correct in all material respects at such time (without giving effect to any qualifications as to materiality or knowledge contained therein). The Purchasers shall have performed and complied with all covenants and agreements required by such Transaction Documents to be performed or complied with by the Purchasers at such time. The Company shall have received an Officers' Certificate dated as of the Closing Date to the effect that the conditions in this clause (a) of this Section 5.2 have been satisfied. (b) Not less than $100.0 million in principal amount of Convertible Exchangeable Debentures shall be purchased by XL, First Union and High Ridge, in the aggregate, on the Closing Date. -31- ARTICLE VI COVENANTS SECTION 6.1. Restructuring. The Company will use its best efforts, as promptly as practicable after the Closing Date, to obtain all Required Approvals and to complete the Restructuring. At such time as the Company believes that the Restructuring has been completed, the Company shall deliver to the Purchasers (a) an Officer Certificate certifying that (i) the Restructuring has been completed in accordance with the description thereof in this Agreement and all applicable laws and regulations, (ii) after giving effect to the Restructuring, neither the Company and its Subsidiaries on the one hand nor Newco and its Subsidiaries on the other hand will be insolvent or otherwise unable to pay their debts as they come due and (iii) the Restructuring will not be voidable under fraudulent conveyance, fraudulent transfer or other similar laws affecting creditors' rights generally and (b) written opinions, in form and substance reasonably satisfactory to the Purchasers, from an independent investment banking or appraisal firm satisfactory to the Purchasers as to the solvency of the Company and its Subsidiaries on the one hand and Newco and its Subsidiaries on the other hand. SECTION 6.2. Preemptive Rights. If, at any time or from time to time, Newco offers or proposes to offer any equity interests or debt that is convertible into or exercisable or exchangeable for equity interests in Newco or any of its Subsidiaries, Newco shall offer, or shall cause to be offered (and the Company, if then Controlling Newco, shall cause Newco to offer), to each Holder such interests or such convertible debt on a pro rata basis in accordance with its ownership interest in Newco on terms and conditions no less favorable than the most favorable terms offered to others. Newco will give the Holders at least 20 days' written notice of the purchase right set forth in the paragraph above. Such notice shall set forth a description of the securities, the proposed number of such securities and the form of consideration to be paid for such securities and the other expected terms and conditions of the offer. To the extent that the Holders have elected to exercise such rights within such 20-day period, any sales to such Holders shall be consummated concurrently and, in any case, within 45 days from the date the offer is first made. To the extent that the Holders have not elected to exercise such rights within such 20-day period, Newco shall have 180 days from the date on which the offer is first made to consummate the transactions contemplated by the offering on no more favorable terms to the purchasers thereof than offered to the Holders. The foregoing notwithstanding, this Section 6.2 shall not apply to the offer or issuance of any Common Stock of Newco (i) upon the grant or exercise of any options issued under a plan for employees of Newco approved by Newco's board of directors not to exceed -32- 5% of Newco's outstanding Capital Stock on a Fully Diluted Basis, (ii) in a Qualified Offering or (iii) pursuant to the Company's obligation to spin off shares of Common Stock of Newco to its existing shareholders arising under the Debenture Registration Rights Agreement. SECTION 6.3. Board Representation. (a) From the Closing Date until XL no longer owns at least 20% of the principal amount of the outstanding Debentures, (x) the Company shall cause all of the XL Designees (as defined below) to be nominated for election to the board of directors of the Company at the Company's next stockholders' meeting and the Company shall support and use its best efforts to cause the election of such individuals to the board of directors of the Company and (y) XL shall have the right to request, and upon such request the Company shall cause, the XL Designees to be elected to serve on the boards of directors of each of the Company's direct and indirect Subsidiaries. In addition, all such XL Designees will be permitted to serve on any committees, including any executive committee of the board of directors of the Company and each Subsidiary, unless such XL Designee is not qualified therefor under applicable law, rule or regulation, in which event XL shall have the right to select one individual to observe all such meetings in substitution therefor. "XL Designees" shall mean a number of individuals designated by XL equal to the greater of (x) two and (y) the number derived from multiplying the number of seats on the applicable board of directors times a fraction the numerator of which is the number of shares of Common Stock of the Company owned by XL (assuming conversion of all Debentures held by XL) and the denominator of which is the number of outstanding shares of Common Stock of the Company on a Fully Diluted Basis (rounding up in the case of any fractions). At any time while an XL Designee is not a member of the Company's and each such Subsidiary's boards of directors, at the sole discretion of XL, XL may appoint a representative of XL, and the Company and each such Subsidiary will permit such representative, to attend all meetings of the boards of directors of the Company and each such Subsidiary and any committees thereof. XL will continue to have the right to designate the XL Designees for election or appointment to the boards of directors of the Company and each such Subsidiary in lieu of any representative of XL. (b) From the Closing Date until First Union and High Ridge, in the aggregate, no longer own at least 20% of the principal amount of the outstanding Debentures, (x) the Company shall cause the First Union and High Ridge Designee (as defined below) to be nominated for election to the board of directors of the Company at the Company's next stockholders' meeting and the Company shall support and use its best efforts to cause the election of such persons to the board of directors of the Company and (y) First Union and High Ridge shall have the right to request, and upon such request the Company shall cause, the First Union and High Ridge Designee to be elected to serve on the boards of directors of each of the Company's direct and indirect Subsidiaries. In addition, the First Union and High Ridge -33- Designee will be permitted to serve on any committees, including any executive committee of the board of directors of the Company and each Subsidiary, unless such First Union and High Ridge Designee is not qualified therefor under applicable law, rule or regulation, in which event First Union and High Ridge shall have the right to select one Person (in addition to the Observer) to observe all such meetings in substitution therefor. "First Union and High Ridge Designee" shall mean an individual designated by First Union and High Ridge for nomination to the board of directors of the Company, following consultation by First Union and High Ridge with Century. In addition, First Union and High Ridge will together have the right to select one individual to observe all meetings of the board of directors of the Company and each of the Company's direct and indirect Subsidiaries and each committee thereof (the "Observer"). At any time while the First Union and High Ridge Designee is not a member of the Company's and each such Subsidiary's boards of directors, at the sole discretion of First Union and High Ridge, First Union and High Ridge may together appoint a representative of First Union and High Ridge, and the Company and each such Subsidiary will permit such representative, to attend all meetings of the boards of directors of the Company and each such Subsidiary and any committees thereof. First Union and High Ridge will continue to have the right to designate the First Union and High Ridge Designee for election or appointment to the boards of directors of the Company and each such Subsidiary in lieu of any representative of First Union and High Ridge. (c) At the end of the term of any Designee, the Person who designated such Designee shall have the right to designate the same or another Designee for the next term and the Company shall then support and use its best efforts to cause the election of such individual to such board of directors. In the event that a Designee shall cease to serve as a director for any reason, the vacancy resulting therefrom shall be filled by a Designee selected by the Person that selected the Designee whose vacancy is to be filled according to the procedures described above. Any such director shall comply with all applicable statutory requirements of the Insurance Departments. (d) The Company and each Subsidiary will provide the Designees, the Observer, any other observers selected pursuant to Sections 6.3(a) or (b) above or any representatives of XL and First Union and High Ridge with all information provided to such boards of directors and any committees thereof. -34- SECTION 6.4. Information. Each of the Company and Newco hereby agrees for the benefit of the Purchasers and the Holders that, from and after the date hereof, so long as any Securities may be issued or remain outstanding and unpaid or any other amount is owing to any of the Holders under any Transaction Document, it will deliver or cause to be delivered the following materials and information to the respective parties listed below: (a) to the Holders, as soon as available and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year, (i) consolidated and consolidating balance sheets of the Company and Newco and their Subsidiaries as of the end of such quarter and the related consolidated statements of income, cash flows and stockholders' equity (deficit) for such quarter and for the portion of the fiscal year ended at the end of such quarter, setting forth, in each case, in comparative form the figures for the corresponding quarter and the corresponding portion of the previous fiscal year, accompanied by a certificate of the chief financial officer or the chief accounting officer of the Company and Newco, as applicable, to the effect that they fairly present the financial condition at such dates and the results of operations and cash flows and stockholders' equity (deficit) for such periods and were prepared in accordance with GAAP (or, in the case of the Insurance Subsidiaries, Statutory Accounting Principles prescribed or permitted by the Insurance Acts), subject to year-end audit adjustments (consisting only of normal recurring accruals), (ii) in the case of any Holder of at least 10% of the outstanding Securities, such operating information of the Company and Newco as may be reasonably requested by any Holder and (iii) in the case of any Holder of at least 10% of the outstanding Securities, a comparison of the results of such quarter against the operating plan and budget, together with an explanation of any deviations therefrom; (b) to the Holders, as soon as available and in any event within 90 days after the end of each fiscal year, (i) consolidated and consolidating balance sheets of the Company and Newco and their Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and stockholders' equity (deficit) for such fiscal year, setting forth, in each case, in comparative form the figures for the previous fiscal year, accompanied by a certificate of the chief financial officer or the chief accounting officer of the Company and Newco, as applicable, to the effect that they fairly present the financial condition at such dates and the results of operations and cash flows and stockholders' equity (deficit) for such periods and were prepared in accordance with GAAP (or, in the case of the U.S. Insurance Subsidiaries, Statutory Accounting Principles prescribed or permitted by the Insurance Acts), and a report (unqualified as to scope) of a firm of independent public accountants of nationally recognized standing and, in the case of any Holder of at least 10% of the outstanding Securities, a "management letter" from such firm regarding the internal control structure of the Company and Newco and (ii) in the case of any Holder of at least 10% of the outstanding Securities and in exchange for the express agreement of such Holder to keep such information confidential, an opinion in form and substance reasonably satisfactory to the Purchasers as to -35- the loss reserves of the Insurance Subsidiaries as of the end of such fiscal year by Tillinghast, Towers & Perrin or another actuarial consultant selected by the Company and acceptable to the Purchasers and the Holders; (c) to any Holder of at least 10% of the outstanding Securities and in exchange for the express agreement of such Holder to keep such information confidential, as soon as available and in any event within 60 days after the end of each fiscal quarter, the results of the "early warning" tests described in Section 7(m) of the Debentures and any supporting documentation requested by such Holder; (d) to any Holder of at least 10% of the outstanding Securities, as soon as available, prior to the beginning of each fiscal year and in exchange for the express agreement of such Holder to keep such information confidential, an annual budget and operating plan of the Company and Newco, including an investment policy and plan, presented on a quarterly basis for such fiscal year; (e) to any Holder of at least 10% of the outstanding Securities and in exchange for the express agreement of such Holder to keep such information confidential, as soon as available, annual financial projections (including forecasted consolidated and consolidating balance sheets of the Company and Newco and their Subsidiaries and the related consolidated statements of income, cash flows and stockholders' equity (deficit)) for the fiscal years ending December 31, 2001 through December 31, 2006 (including monthly financial projections) containing all material assumptions relating to such projections, accompanied by a statement by the Company and Newco that its projections are based on assumptions believed by it in good faith to be reasonable as to the future financial performance of the Company or Newco, as the case may be; (f) to any Holder of at least 10% of the outstanding Securities and in exchange for the express agreement of such Holder to keep such information confidential, as soon as available, and in any event within 30 days after the filing thereof, copies of annual and quarterly reports and all other filings of the Insurance Subsidiaries filed with the Insurance Departments; (g) to XL, so long as it continues to own at least 10% of the outstanding Securities and in exchange for the express agreement of XL to keep such information confidential, copies of the monthly and quarterly reports provided to the boards of directors of the Company and Newco and the Insurance Subsidiaries, at or about the same time such reports are distributed to such boards; (h) to each Holder, and in exchange for the express agreement of such Holder to keep such information confidential, promptly following the occurrence thereof, notice and a -36- description in reasonable detail of any material adverse change in the assets, liabilities, business, results of operations, condition (financial or otherwise), Permits or prospects of the Company and its Subsidiaries taken as a whole, or of Newco and its Subsidiaries taken as a whole; (i) to any Holder of at least 10% of the outstanding Securities, and in exchange for the express agreement of such Holder to keep such information confidential, from time to time such additional information regarding the financial position or business of the Company or any of its Subsidiaries or of Newco or any of its Subsidiaries as such Holder may reasonably request; (j) to the Holders, as soon as available, copies of all reports and memoranda relating to the current status of the Restructuring and copies of all related applications, agreements and other documents executed in connection with the Restructuring; and (k) to each Holder and in exchange for the express agreement of such Holder to keep such information confidential, copies of any presentation made by the Company or any of its Subsidiaries to Standard & Poor's Ratings Services, Moody's, A.M. Best Company or any other rating agency. SECTION 6.5. Use of Proceeds. Upon completion of the Restructuring and the receipt by the Company of all Required Approvals, the Company will contribute $80.0 million of the net proceeds from the issuance and sale of the Convertible Exchangeable Debentures and the Voting Preferred Stock to the statutory capital and surplus of the U.S. Insurance Subsidiaries (the "Contributed Amounts"). The remainder of the net proceeds shall be deposited into the Collateral Account for the benefit of the Holders on the Closing Date. Upon the 90th day after consummation of the Restructuring and the receipt by the Company of all Required Approvals, provided, however, that no Default or Event of Default (as defined in the Debentures) shall have occurred and be continuing, all amounts in the Collateral Account shall be released to the Company and the Company will retain all of such proceeds and will not contribute, loan or otherwise transfer or dispose of any such amounts disbursed from the Collateral Account to any Insurance Subsidiary. SECTION 6.6. Non-Competition. (a) From and after the date on which the Restructuring is consummated until the third anniversary of the date on which the Company ceases to own, directly or indirectly, any Common Stock or other ownership interests of Newco (the "Non-Competition Period"), the Company will not, and will cause each of its Affiliates not to, directly or indirectly, engage in or own any interest in any business substantially similar to the businesses transferred to Newco; provided, however, that (i) this Section 6.6(a) shall not be construed to prevent or restrict the Company or any of its Affiliates from, directly or indirectly, acquiring, owning or investing in securities representing less than 5% of -37- the outstanding voting power of the securities of a publicly traded company and (ii) this Section 6.6(a) shall not prevent or restrict the Company from owning Common Stock or other ownership interests of Newco. (b) During the Non-Competition Period, the Company will not, and will not cause or permit any of its Subsidiaries to, transfer or reassign any of its employees who are primarily dedicated to the CRM business to any other business or division of the Company or any of its Subsidiaries, solicit for employment or hire any Person who, at the time of such solicitation or hiring, is employed by Newco or any of its Subsidiaries or induce or encourage any such Person to leave the employ of Newco or any of its Subsidiaries or to become employed by any Person other than Newco or any of its Subsidiaries. SECTION 6.7. Certain Transactions. The Company shall not, and shall not cause or permit any of its Subsidiaries (other than Subsidiaries of Newco) to, engage in any intercompany transactions outside of the ordinary course of business with Newco or any other action that would adversely affect Newco, without the prior written consent of XL. SECTION 6.8. Insurance Professional. The Company shall use its best efforts to hire an insurance professional approved by XL for the Company's specialty insurance operations as successor to its Program Business as promptly as practicable. SECTION 6.9. Purchase Option. In connection with the Restructuring, the Company shall grant to Newco an option to purchase, at book value, Villanova Insurance Company and/or any new Insurance Subsidiary of the Company formed in connection with the writing of new or renewal insurance policies underlying the CRM business relating to the Company's IPC (i.e., rent-a-captive) Subsidiaries. SECTION 6.10. Employment Agreements. The Company shall use its best efforts to enter into written employment agreements and non-compete agreements with such executive officers of the Company as shall be identified in writing by XL and shall be reasonably acceptable to the Company within a reasonable time following receipt of such request, in each case on terms reasonably acceptable to XL. ARTICLE VII MISCELLANEOUS SECTION 7.1. Notices. All notices, demands and other communications to any Person shall be in writing (including telecopier or similar writing) and shall be given to such Person at the address set forth below: -38- if to any Holder, at its address set forth in the Register; if to XL, at: XL Insurance Ltd c/o XL Capital Ltd. XL House One Bermudiana Road Hamilton HM 11 Bermuda Attention: Paul Giordano Telephone: (441) 294-7162 Facsimile: (441) 292-5280 with a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn Telephone: (212) 701-3000 Facsimile: (212) 269-5420 if to First Union, at: First Union Merchant Banking 2001, LLC One First Union Center - 12th Floor 301 South College Street Charlotte, North Carolina 28288-0732 Attention: Wellford Tabor Telephone: (704) 374-4540 Facsimile: (704) 374-6711 -39- with a copy to: Robinson, Bradshaw & Hinson, P.A. 101 North Tryon Street Suite 1900 Charlotte, North Carolina 28246 Attention: Steve Lynch Telephone: (704) 377-8355 Facsimile: (704) 373-3955 if to High Ridge, at: High Ridge Capital Partners II, L.P. 105 Rowayton Avenue Rowayton, Connecticut 06853 Attention: James L. Zech Telephone: (203) 831-0104 Facsimile: (203) 831-0480 with a copy to: Robinson, Bradshaw & Hinson, P.A. 101 North Tryon Street Suite 1900 Charlotte, North Carolina 28246 Attention: Steve Lynch Telephone: (704) 377-8355 Facsimile: (704) 373-3955 if to Century, at : Century Capital Partners II, L.P. c/o Century Capital Management Inc. One Liberty Square Boston, Massachusetts 02109 Attention: Craig Eisenacher Telephone: (617) 482-3060 Facsimile: (617) 542-9398 -40- with a copy to: Palmer & Dodge LLP One Beacon Street Boston, Massachusetts 02108 Attention: Ron Eppen Telephone: (617) 573-0322 Facsimile: (617) 227-4420 if to Taracay Investors Company, at : Taracay Investors Company 104 Wallacks Point Stamford, Connecticut 06902 Attention: Robert Clements Telephone: (203) 862-4343 Facsimile: (203) 625-8366 if to Intrepid, at: Intrepid Funding Master Trust c/o Wilmington Trust Company, as Owner-Trustee Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Mary Kay Pupillo Telephone: (302) 651-8558 Facsimile: (302) 651-8882 if to the Obligors, at: Mutual Risk Management Ltd. 44 Church Street Hamilton HM12 Bermuda Attention: Chief Executive Officer Telephone: (441) 295-5688 Facsimile: (441) 292-1867 -41- with a copy to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603 Attention: Richard W. Shepro Telephone: (312) 782-0600 Facsimile: (312) 701-7711 or such other address as such Person may hereafter specify (in accordance with this Section 7.1) for the purpose to the other parties. Each such notice, demand or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to such Person's telecopy number and receipt thereof is confirmed by telephone or in writing, (ii) if given by mail, three Business Days after such communication is deposited in the mail with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in or pursuant to this Section. SECTION 7.2. No Waivers; Powers and Remedies Cumulative; Amendments. (a) No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. (b) No right or remedy herein conferred upon or reserved to the Purchasers or the Holders from time to time of Securities is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Every power and remedy given by any Transaction Document or by law may be exercised from time to time, and as often as shall be deemed expedient, by the Obligors, the Purchasers or the Holders from time to time of Securities. (c) Any provision of this Agreement may be amended, supplemented or waived if, but only if such amendment, supplement or waiver is in writing and is signed by the Company and the Purchasers, if such proposed amendment, supplement or waiver is effective on or prior to the Closing Date, and the Requisite Holders, if such proposed amendment, supplement or waiver is effective after the Closing Date. In determining whether the Requisite Holders have concurred in any direction, consent, or waiver as provided in any Transaction Document, Debentures which are owned by the Company or any of its Affiliates -42- shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, however, that any amendment, supplement or waiver which adversely affects the rights of any Holder hereunder shall require such Holder's consent unless the amendment, supplement or waiver adversely affects the rights of all Holders in the same manner. SECTION 7.3. Indemnification. The Obligors, jointly and severally, agree to indemnify and hold harmless the Purchasers and each Holder, their respective Affiliates, directors, officers and employees and each Person, if any, who controls any Purchaser and each Holder, or any of their Affiliates, within the meaning of the Securities Act or the Exchange Act (a "Controlling Person"), and the respective partners, agents, employees, officers and directors of the Purchasers and each Holder, their respective Affiliates and any such Controlling Person (each, an "Indemnified Party" and, collectively, the "Indemnified Parties"), from and against any and all losses, claims, damages, liabilities and expenses (including, as incurred, reasonable costs of investigating, preparing or defending any such claim or action, whether or not such Indemnified Party is a party thereto), that arise out of, or are in connection with (i) any breach of representation or warranty (including any misrepresentation in, or omission from, any certificate or other document furnished or to be furnished by it to any Purchaser and/or the Holders hereunder) or nonfulfillment of any covenant or agreement on the part of the Obligors under any Transaction Document (without giving effect to any qualifications of any representation or warranty with respect to knowledge) or (ii) any pending or threatened claims, actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing or to the Transaction Documents or the Transactions; provided, however, that the Obligors will not be responsible for any losses, claims, damages, liabilities or expenses that are determined by final judgment of a court of competent jurisdiction to result solely from such Indemnified Party's gross negligence or willful misconduct. The Obligors and the Purchasers also agree that no Indemnified Party shall have any liability (except for breach of provisions of this Agreement) for losses, claims, damages, liabilities or expenses, including legal fees, incurred by the Obligors in connection with this Agreement unless they are determined by final judgment of a court of competent jurisdiction to result from such Indemnified Party's gross negligence or willful misconduct. In case any action shall be brought against an Indemnified Party with respect to which indemnity may be sought against the Obligors under this Agreement, such Indemnified Party shall promptly notify the Obligors in writing and the Obligors shall, if requested by such Indemnified Party or if the Obligors desire to do so, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Obligors shall not affect any obligations the Obligors may have to such Indemnified Party under this Agreement or otherwise unless the Obligors are materially adversely affected by such failure. Such Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense -43- thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party, unless: (i) the Obligors have failed to assume the defense and employ counsel reasonably satisfactory to such Indemnified Party or (ii) the named parties to any such action (including any impleaded parties) include such Indemnified Party, and one or more of the Obligors, and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to such Obligor, in which case, if such Indemnified Party notifies the Obligors in writing that it elects to employ separate counsel at the expense of the Obligors, the Obligors shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party; provided, however, that the Obligors shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the reasonable fees and expenses of more than one such firm of separate counsel, in addition to any local counsel, which counsel shall be designated by XL if XL is at such time an Indemnified Party with respect to such matter and otherwise by such Indemnified Party. The Obligors shall not be liable for any settlement of any such action effected without the written consent of the Obligors (which shall not be unreasonably withheld or delayed) and the Obligors agree to indemnify and hold harmless each Indemnified Party from and against any loss or liability by reason of settlement of any action effected with the consent of the Obligors. In addition, the Obligors will not, without the prior written consent of XL, if XL is at such time and Indemnified Party with respect to such matter and otherwise by such Indemnified Party, settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, suit or proceeding in respect to which indemnification or contribution may be sought hereunder (whether or not any Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination includes an express, unconditional release of the Purchasers and the other Indemnified Parties, satisfactory in form and substance to the Purchasers, from all liability arising out of such action, claim, suit or proceeding. The indemnification and expense reimbursement obligations set forth in this Section 7.3 (i) shall be in addition to any liability the Obligors may have to any Indemnified Party at common law or otherwise, (ii) shall survive the termination of this Agreement and the other Transaction Documents and the payment, conversion and/or exchange in full of the Debentures and (iii) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Purchasers or any other Indemnified Party. SECTION 7.4. Expenses; Documentary Taxes. The Obligors, jointly and severally, agree to pay, whether or not the closing in respect of the issuance and sale of the Convertible Exchangeable Debenture to the Purchasers occurs, the costs, fees and expenses of the Purchasers incurred in connection with the Transaction Documents, including the fees and -44- expenses of its legal counsel, actuaries, accountants and other advisors and consultants, including in connection with any amendments, modifications or waivers of the provisions of any of the Transaction Documents, or any enforcement of the rights of the Purchasers under any of the Transaction Documents or in connection with any collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. Furthermore, the Obligors agree to pay any and all stamp, transfer and other similar taxes, assessments or charges payable in connection with the execution and delivery of any Transaction Document or the issuance of the Securities. SECTION 7.5. Register. Each of the Company and Newco shall keep at its principal office a register (the "Register") in which shall be entered the names and addresses of the registered holders of the Securities issued by it and particulars of the respective Securities held by them and of all transfers of such Securities. References to the "Holder" or "Holders" shall mean the Person or Persons listed in the Register as the payee of any Security. The ownership of the Securities shall be proven by the Register. SECTION 7.6. Termination. This Agreement may be terminated (i) by the parties hereto by mutual agreement or (ii) if the Closing Date does not occur by May 17, 2001, by any party by written notice to the other parties hereto. Sections 7.3, 7.4, 7.8 and 7.9 shall survive any such termination. SECTION 7.7. Successors and Assigns. This Agreement shall be binding upon the Company and upon the Purchasers and their respective successors and assigns, including, in the case of the Company, any transferee of substantially all of the business or assets of the Company; provided, however, that the Company shall not assign or otherwise transfer its rights or obligations under this Agreement to any other Person without the prior written consent of the Requisite Holders. The Company shall not be permitted to circumvent the rights of the Purchasers under any Transaction Document by reorganization, recapitalization, transfer of business or assets or otherwise, any attempt to do so shall be void, and any entity or entities surviving any reorganization, recapitalization, transfer or other similar transaction shall be deemed the Company. In the event of a transfer of any Debenture, the rights of a Holder under this Agreement, respectively, shall pass to such transferee. SECTION 7.8. Governing Law; Waiver of Jury Trial; Submission to Jurisdiction; Net Payments. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. ANY DISPUTE UNDER THIS AGREEMENT THAT IS NOT SETTLED BY MUTUAL CONSENT SHALL BE FINALLY ADJUDICATED BY ANY FEDERAL OR STATE COURT SITTING IN THE CITY, COUNTY AND STATE OF NEW YORK, AND THE COMPANY CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS (OR ANY APPELLATE COURT THEREFROM) OVER ANY SUCH DISPUTE. -45- THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN NEW YORK COUNTY IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (b) By the execution and delivery of this Agreement, the Company and each of the Guarantors (i) acknowledges that it will, by separate written instrument, designate and appoint The CT Corporation System, Inc., 111 Eighth Avenue, New York, New York 10011 (and any successor entity) as its authorized agent upon which process may be served in any suit or proceeding arising out of or relating to any of the Transaction Documents that may be instituted in any Federal or state court in the State of New York, New York County or brought under Federal or state securities laws, and acknowledges that The CT Corporation System, Inc. will accept such designation, (ii) waives trial by jury, (iii) agrees that service of process upon The CT Corporation System, Inc. and written notice of said service to the Company or such Guarantor, as the case may be, in accordance with Section 7.1 shall be deemed in every respect effective service of process upon the Company or such Guarantor, as the case may be, in any such suit or proceeding and (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law. (c) All payments made or required to be made hereunder shall be made in U.S. dollars. The Obligors agree to indemnify the Holder against any loss incurred by such party as a result of any judgment or order being given or made against the Obligors, for any U.S. dollar amount due under this Agreement and such judgment or order being expressed and paid in a currency (the "Judgment Currency") other than United States dollars and as a result of any variation as between (i) the rate of exchange at which the United States dollar amount is converted into the Judgment Currency for the purpose of such judgment or order and (ii) the spot rate of exchange in The City of New York at which such party on the date of payment of such judgment or order is able to purchase United States dollars with the amount of the Judgment Currency actually received by such party if such party had utilized such amount of Judgment Currency to purchase United States dollars as promptly as practicable upon such party's receipt thereof. The foregoing indemnity shall continue in full force and effect not- -46- withstanding any such judgment or order as aforesaid. The term "spot rate of exchange" shall include any premiums and costs of exchange payable in connection with the purchase of, or conversion into, United States dollars. All amounts paid by the Company or any Guarantor hereunder shall be paid free and clear of, and without any deduction or withholding for or on account of, any present or future taxes, duties, assessments or other governmental charges of whatever nature imposed or levied by or on behalf of Bermuda or any political subdivision thereof or by any authority therein or thereto or within any other jurisdiction in which the Company or any of its Subsidiaries is organized or engaged in business for tax purposes having power to tax, unless such deduction or withholding is required by applicable law, in which event, each of the other parties hereto agrees to pay additional amounts so that the persons entitled to such payments will receive the amount that such persons would otherwise have received but for such deduction or withholding. SECTION 7.9. Survival. (a) All covenants, agreements, representations and warranties in any Transaction Document and in the certificates or other instruments prepared or delivered in connection with or pursuant to any Transaction Document shall be considered to have been relied upon by the Purchasers and shall survive the purchase of the Securities regardless of any investigation made by or on behalf of the Purchasers, and shall continue in full force and effect in accordance with their terms. (b) All indemnities set forth herein, including in Section 7.3, shall survive the execution and delivery of this Agreement, the issuance and purchase of the Securities and the repayment and cancellation of the Debentures. SECTION 7.10. Independence of Representations, Warranties and Covenants. The representations, warranties and covenants contained herein shall be independent of each other, and no exception to any representation, warranty or covenant (including any exception contained in a schedule hereto) shall be deemed to be an exception to any other representation, warranty or covenant contained herein unless expressly provided, nor shall any such exception be deemed to permit any action or omission that would be in contravention of applicable law. SECTION 7.11. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. SECTION 7.12. Counterparts. This Agreement may be executed in any number of counterparts each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same instrument. -47- SECTION 7.13. Entire Agreement; Benefit. This Agreement and the other Transaction Documents constitute the entire agreement among the parties relating to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Transaction Documents. Nothing in any Transaction Document is intended to confer upon any Person (other than the parties thereto and any Indemnified Party) any rights, remedies, obligations or liabilities under or by reason of the Transaction Documents. SECTION 7.14. Headings. Article and Section headings and the Table of Contents are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 7.15. Execution by Newco. Promptly after the formation of Newco, the Company will cause Newco to execute and deliver a counterpart to this Agreement pursuant to which Newco shall, by so executing this Agreement, become a party to this Agreement as if Newco were an original party hereto and upon which this Agreement shall constitute a valid and binding agreement of Newco, enforceable in accordance with its terms. Upon execution of this Agreement by Newco in accordance with this Section 7.15, Newco shall be deemed to have made, as of the date of such execution, the representations and warranties contained in Sections 3.1, 3.2, 3.5, 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.19, 3.20, 3.22 and 3.23 of this Agreement to the holders as if all references contained therein to the Company were references to Newco. S-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers. Executed: May 8, 2001 MUTUAL RISK MANAGEMENT LTD. By: /s/ Richard E. O'Brien --------------------------------------------- Name: Richard E. O'Brien Title: Senior Vice President MUTUAL GROUP LTD. By: /s/ Richard E. O'Brien --------------------------------------------- Name: Richard E. O'Brien Title: Senior Vice President LEGION FINANCIAL CORP. By: /s/ Richard E. O'Brien --------------------------------------------- Name: Richard E. O'Brien Title: Senior Vice President MGL INVESTMENTS LTD. By: /s/ Richard E. O'Brien --------------------------------------------- Name: Richard E. O'Brien Title: Senior Vice President MRM SECURITIES LTD. By: /s/ Richard E. O'Brien --------------------------------------------- Name: Richard E. O'Brien Title: Senior Vice President S-2 MUTUAL FINANCE LTD. By: /s/ Elizabeth B. Price --------------------------------------------- Name: Elizabeth B. Price Title: Secretary MUTUAL RISK MANAGEMENT (HOLDINGS) LTD. By: /s/ Elizabeth B. Price --------------------------------------------- Name: Elizabeth B. Price Title: Secretary S-3 PRINCIPAL AMOUNT OF CONVERTIBLE EXCHANGEABLE PURCHASERS: DEBENTURES PURCHASED: XL INSURANCE LTD $52,500,000 By: /s/ Clive Tobin ------------------------------- Name: Clive Tobin Title: President & Chief Executive Officer FIRST UNION MERCHANT BANKING 2001, LLC $30,400,000 By: /s/ Frederick W. Eubank II ------------------------------------- Name: Frederick W. Eubank II Title: Partner HIGH RIDGE CAPITAL PARTNERS II, L.P. $17,100,000 By: /s/ Steve Tynan -------------------------------------- Name: Steve Tynan Title: President, Liberty Street Corp., as general partner of Liberty Street Partners, LP, as member of High Ridge GP II LLC, as general partner of High Ridge Capital Partners II, L.P. S-4 CENTURY CAPITAL PARTNERS II, L.P. $10,000,000 BY: CCP CAPITAL II LLC, its general partner By: /s/ Craig Eisenacher -------------------------------------- Name: Craig Eisenacher Title: Managing Member /s/ Robert A. Mulderig $2,000,000 - ------------------------------------------- Robert A. Mulderig TARACAY INVESTORS COMPANY $500,000 By: /s/ Robert Clements -------------------------------------- Name: Robert Clements Title: ------------ Total for Purchasers (other than Intrepid)......... $112,500,000 ============ INTREPID FUNDING MASTER TRUST $30,000,000 By: /s/ Mary Kay Pupillo ------------------------------------------- Name: Mary Kay Pupillo Title: Senior Financial Services Officer EX-2 3 xlex2.txt FORM OF DEBENTURE EXHIBIT A-1 THIS DEBENTURE IS INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS, CONSISTING OF CONVERTIBLE EXCHANGEABLE DEBENTURES DUE 2006 AND SHARES OF SERIES A PREFERRED STOCK OF MUTUAL RISK MANAGEMENT LTD. THIS DEBENTURE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, AND MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, SHARES OF SERIES A PREFERRED STOCK REPRESENTING THE SAME PERCENTAGE OF THE TOTAL AMOUNT OF OUTSTANDING SHARES OF SERIES A PREFERRED STOCK THAT THE PRINCIPAL AMOUNT OF CONVERTIBLE EXCHANGEABLE DEBENTURES DUE 2006 PROPOSED TO BE TRANSFERRED OR ASSIGNED REPRESENTS OF THE TOTAL PRINCIPAL AMOUNT OF OUTSTANDING CONVERTIBLE EXCHANGEABLE DEBENTURES DUE 2006. THIS CONVERTIBLE EXCHANGEABLE DEBENTURE AND THE SECURITIES ISSUABLE UPON CONVERSION OR EXCHANGE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT UNDER ANY CIRCUMSTANCES BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS. MUTUAL RISK MANAGEMENT LTD. CONVERTIBLE EXCHANGEABLE DEBENTURE DUE 2006 No. [ ] U.S.$[ ] May 17, 2001 The undersigned, Mutual Risk Management Ltd., a company organized under the laws of Bermuda with offices at 44 Church Street, Hamilton HM 12 Bermuda (the "Issuer"), unconditionally promises to pay to [Name of Holder] or its permitted assigns, transferees and successors as provided herein (each, a "Holder"), on May 17, 2006 (the "Maturity Date"), at such place as may be designated by the Holder to the Issuer, the principal amount outstanding hereunder, or such lesser amount as shall then be payable pursuant to the terms of Section 3 hereof, together with all accrued and unpaid interest thereon. -2- This Debenture is issued pursuant to a Securities Purchase Agreement, dated as of May 8, 2001, by and among the Issuer, the guarantors named therein, XL Insurance Ltd., First Union Merchant Banking 2001, LLC, High Ridge Capital Partners II, L.P., Century Capital Partners II, L.P., Robert A. Mulderig, Taracay Investors Company and Intrepid Funding Master Trust (as such agreement may be amended at any time, the "Securities Purchase Agreement"), and the Holder hereof is intended to be afforded the benefits thereof, including the representations and warranties set forth therein. The Issuer shall use the proceeds of the issuance and sale of this Debenture solely in accordance with the provisions set forth therein and as required thereby. Section 11 contains definitions of certain of the terms used herein. Capitalized terms used but not otherwise defined herein shall, unless otherwise indicated, have the meanings given such terms in the Securities Purchase Agreement. SECTION 1. interest. Interest on this Debenture shall accrue at a rate per annum equal to 9 3/8%, from and after the date of the disbursement of funds hereunder (the "Original Issue Date"); provided, however, that (x) from and after the 120th day after the Original Issue Date to but excluding the date on which the Issuer has received all Required Approvals and the Restructuring has been consummated, the interest rate applicable to this Debenture shall increase by an additional 0.25% per annum, such increased interest rate to further increase by an additional 0.25% per annum for each subsequent 30-day period during which the Required Approvals have not been obtained or the Restructuring has not been consummated up to a maximum total rate of interest on the Debentures of 11.0% per annum (it being understood that from and after such time as all Required Approvals have been obtained and the Restructuring shall have been completed, the interest rate applicable to this Debenture shall return to 9 3/8% per annum) and (y) from and after the occurrence of an Event of Default and for so long as such Event of Default continues, the interest rate applicable to the Debenture shall increase by an additional 1.00% per annum over the otherwise then applicable rate. Interest shall be compounded quarterly and payable quarterly in cash in arrears on each March 20, June 20, September 20, and December 20 (each, an "Interest Payment Date"), beginning on June 20, 2001, to the holder of this Debenture at the close of business on the immediately preceding March 1, June 1, September 1 and December 1, respectively (whether or not a Business Day). Interest shall be calculated on the basis of a year of twelve 30-day months and the actual number of days elapsed. SECTION 2. PAYMENTS of principal and interest. Unless earlier converted or exchanged in accordance with the terms of Section 4 or 5 below, or repaid in accordance with the terms hereof or redeemed pursuant to Section 3 below, the entire outstanding principal amount of this Debenture, together with any accrued and -3- unpaid interest thereon, shall be due and payable on the Maturity Date. The parties agree that any payment of interest due to the Holder hereunder shall be net of any applicable withholding taxes due in respect of this Debenture. SECTION 3. REDEMPTION. (a) At the Option of the Issuer. This Debenture shall not be redeemable at the option of the Issuer at any time prior to the Maturity Date. (b) Mandatory Redemption At the Option of the Holders. At any time during the Put Term, the Requisite Holders and XL each have the right (the "Redemption Right") to require the Issuer or any Guarantor to redeem and repay all of the Debentures, at a redemption price (the "Redemption Price") initially equal to the higher of (i) 100% of the aggregate principal amount of the Debentures and (ii) 100% of the aggregate of the then current market price of the Issuer's Common Shares into which the Debentures would be convertible pursuant to Section 5 at such time (calculated using the average closing price for a three-day trading period beginning on the second trading day following the public announcement of the exercise of such mandatory redemption right), in each case, plus accrued and unpaid interest thereon to the applicable redemption date; provided, however, that the Redemption Price shall increase by an additional 25 basis points for each subsequent 30-day period during the Put Term until all Required Approvals have been obtained and the Restructuring has been completed. (c) In the event the Requisite Holders or XL, as the case may be, desires to exercise the Redemption Right, such exercising party shall provide written notice thereof to the Issuer during the Put Term, setting forth (i) the fact that such Holder intends to exercise the Redemption Right and (ii) the date for such redemption, which shall be a Business Day and be between 10 and 15 days after the date of such notice. Upon receipt by the Issuer of any request to exercise a Redemption Right, the Issuer shall promptly provide written notification thereof to all Holders of Debentures. (d) On the applicable redemption date, (i) the holders of all Debentures shall tender the Debentures and the related MRM Voting Preferred Stock to the Issuer for cancellation, duly endorsed or assigned to the Issuer or in blank, at the principal executive office of the Issuer and (ii) the Issuer shall deliver to the address of the Holder described in Section 10 hereof immediately available funds in an amount equal to the aggregate principal amount of all Debentures tendered for redemption by such Holder. SECTION 4. EXCHANGE. (a) Exchange of Debenture for Newco Debentures. (i) The Holder shall have the right (the "Debenture Exchange Right") to exchange this Debenture, in whole or in part, at any time prior to the Newco Exchange Right Termination Date, for an equal principal amount -4- of senior convertible debentures due 2006 of Newco (each, a "Newco Debenture" and, collectively, the "Newco Debentures"); provided, however, that only holders of Debentures in an aggregate principal amount of at least 20% of the principal amount of the Debentures then outstanding may exercise the first Debenture Exchange Right. The Newco Debentures shall be convertible into shares of common stock of Newco and otherwise have substantially the same terms and provisions of this Debenture (other than with respect to the exchange rights set forth in this Section 4). The Newco Debenture shall be substantially in the form of Exhibit A-2 attached to the Securities Purchase Agreement. (ii) In order to exercise the Debenture Exchange Right, the Holder shall provide written notice thereof to the Issuer and Newco, in the form of Annex I attached hereto, and setting forth (A) the fact that the Holder intends to exercise a Debenture Exchange Right, (B) the aggregate principal amount of this Debenture for which the Holder is exercising a Debenture Exchange Right and (C) the date for such exchange (the "Debenture Exchange Date"), which shall be a Business Day and be between 15 and 30 days after the date of such notice. (iii) On the Debenture Exchange Date, (A) the Holder shall tender this Debenture and the related MRM Voting Preferred Stock to the Issuer for cancellation, duly endorsed or assigned to the Issuer or in blank, at the principal executive office of the Issuer, (B) the Issuer shall cause Newco to issue, execute and deliver to the Holder, at the expense of Newco, (I) one or more Newco Debentures, registered in the name of the Holder (or its nominee or assignee), in an aggregate principal amount equal to the aggregate principal amount of this Debenture tendered to the Issuer in connection with the exercise of such Debenture Exchange Right and (II) a certificate representing shares of Newco Voting Preferred Stock entitling the holder thereof to voting rights in Newco equal to the aggregate voting rights of the Common Stock of Newco issuable to the Holder upon conversion of the Newco Debentures owned by such Holder, (C) in case this Debenture is exchanged in part only, upon such exchange, the Issuer shall execute and deliver to the Holder, at the expense of the Issuer, (I) a new Debenture of an authorized denomination in aggregate principal amount equal to the unexchanged portion of the aggregate principal amount of the Debenture tendered to the Issuer in connection with the exercise of such Debenture Exchange Right and (II) a certificate representing the related MRM Voting Preferred Stock and (D) the Issuer shall deliver to the Holder an opinion of counsel satisfactory to the Holder, in form and substance satisfactory to the Holder, to the effect that (w) Newco has been duly organized, is validly existing and in good standing, (x) the Newco Debenture has been duly authorized, executed and delivered to the Holder by Newco, (y) the Newco Debenture is a valid and binding obligation of Newco, enforceable against Newco in accordance with its terms (y) the Newco Voting Preferred Stock issued to such Holder has been duly authorized and will, upon issuance, be validly issued, fully paid and nonassessable. -5- (b) Exchange of Debenture for Newco Common Stock. (i) The Holder shall have the right (the "Newco Common Stock Exchange Right") to exchange this Debenture, in whole or in part, at any time prior to the Newco Exchange Right Termination Date, for Common Stock of Newco; provided, however that only holders of Debentures in aggregate principal amount of at least 20% of the aggregate principal amount of the Debentures then outstanding may exercise the first Newco Common Stock Exchange Right. The number of shares of Common Stock of Newco issuable to the Holder upon each exchange of this Debenture pursuant to any exercise of a Newco Common Stock Exchange Right shall be equal to the amount that will result in the percentage ownership of the equity of Newco, on a Fully Diluted Basis (calculated as of the first such exchange), of the Holder following such exchange to be equal to the Newco Ownership Percentage. (ii) In order to exercise the Newco Common Stock Exchange Right, the Holder shall provide written notice thereof to the Issuer and Newco, setting forth (A) the fact that the Holder intends to exercise a Newco Common Stock Exchange Right, (B) the aggregate principal amount of this Debenture for which the Holder is exercising a Newco Common Stock Exchange Right and (C) the date for such exchange (the "Newco Common Stock Exchange Date"), which shall be a Business Day and be between 15 and 30 days after the date of such notice. (iii) On the Newco Common Stock Exchange Date, (A) the Holder shall tender this Debenture and the related MRM Voting Preferred Stock to the Issuer for cancellation, duly endorsed or assigned to the Issuer or in blank, at the principal executive office of the Issuer, (B) the Issuer shall cause Newco to issue, execute and deliver to the Holder, at the expense of Newco, shares of Common Stock of Newco, registered in the name of the Holder (or its nominee or assignee), in an amount equal to the Newco Ownership Percentage for the Holder, (C) in case this Debenture is exchanged in part only, upon such exchange, the Issuer shall execute and deliver to the Holder, at the expense of the Issuer, (I) a new Debenture of an authorized denomination in aggregate principal amount equal to the unexchanged portion of the aggregate principal amount of the Debenture tendered to the Issuer in connection with the exercise of such Debenture Exchange Right and (II) a certificate representing the related MRM Voting Preferred Stock, (D) the Issuer shall pay to the Holder an amount in cash equal to the accrued and unpaid interest on the portion of this Debenture surrendered by the Holder for exchange pursuant to exercise of a Newco Common Stock Exchange Right through but excluding the Newco Common Stock Exchange Date and (E) the Issuer shall deliver to the Holder an opinion of counsel, in form and substance satisfactory to the Holder, to the effect that (x) Newco has been duly organized and is validly existing and in good standing and (y) the Common Stock of Newco has been duly authorized and will, upon issuance, be validly issued, fully paid and nonassessable. -6- (c) Issuer to Cause Newco to Reserve Common Stock. The Issuer shall, at all times up until the day after the Newco Common Stock Exchange Right Termination Date, cause Newco to reserve and keep available, free from preemptive rights, out of Newco's authorized but unissued Common Stock, for the purpose of effecting the conversion of the Newco Debentures and the exercise of the Newco Common Stock Exchange Right, the full number of shares of Common Stock of Newco then issuable upon conversion of all outstanding Newco Debentures and exchange of all outstanding Debentures. SECTION 5. CONVERSION. (a) Conversion Right and Conversion Price. Subject to and upon compliance with the provisions of this Section 5, at the option of the Holder hereof, this Debenture or any portion of the principal amount hereof may be converted into a number of fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Issuer determined by dividing the aggregate principal amount of the Debenture to be converted by the Conversion Price in effect at the time of conversion. The "Conversion Price" shall be initially $7.00; provided, however, that the Conversion Price shall be reduced by $0.20 beginning on September 17, 2001 and by an additional $0.20 on each monthly anniversary thereafter until the date on which all Required Approvals shall have been obtained and the Restructuring shall have been completed. The Conversion Price shall be adjusted in certain instances as provided in (i) through (vii) of Section 5(e) hereof. In the event this Debenture is converted after any Interest Payment Date but on or prior to the regular record date relating to the next succeeding Interest Payment Date, the Issuer shall, on the Conversion Date (as defined below), pay to the Holder the pro rata portion of interest due on the Holder's Debentures surrendered for conversion up to, but excluding, the Conversion Date. In the event this Debenture is converted after any regular record date and on or prior to the next succeeding Interest Payment Date, interest that is due on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name this Debenture is registered at the close of business on such regular record date. Except as otherwise expressly provided in the two immediately preceding sentences, in the event this Debenture is converted, interest which would become payable on an Interest Payment Date falling after the date of conversion of this Debenture shall not be payable. (b) Exercise of Conversion Right. The Holder of this Debenture may exercise its conversion right by delivering to the Issuer irrevocable written notice of such election, substantially in the form of Annex II attached hereto, at least five days prior to the Business Day designated in such notice as the date of conversion (the "Conversion Date"). Such notice -7- shall also specify the principal amount of this Debenture to be converted. In the event any portion of this Debenture is to be converted, the Holder shall, on or before the Conversion Date, surrender the Debenture for cancellation together with the related MRM Voting Preferred Stock, duly endorsed or assigned to the Issuer or in blank, at the office or agency described in Section 10 hereof. The portion of this Debenture as to which the Holder shall have elected to convert shall be deemed to have been converted immediately prior to the close of business on the Conversion Date, and at such time the rights of the Holder as Holder shall cease as to such portion of this Debenture, and, upon conversion, the Holder shall be treated for all purposes as the record holder of Common Stock of the Issuer at such time. On the Conversion Date, the Issuer shall issue and deliver at the office or agency described in Section 10 hereof a certificate or certificates for the number of full shares of Common Stock of the Issuer issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 5(d). In the event this Debenture is converted in part only, upon such conversion the Issuer shall execute and deliver to the Holder, at the expense of the Issuer, (i) a new Debenture or Debentures of an authorized denomination in aggregate principal amount equal to the unconverted portion of the aggregate principal amount of such Debenture and (ii) a certificate representing the related MRM Voting Preferred Stock with voting rights equal to the aggregate voting rights of the Common Stock issuable upon conversion or exchange of such new Debenture. (c) Surrender of Debentures on Conversion Date. In the event the Holder wishes to exercise its right to convert this Debenture into Common Stock pursuant to Section 5(a) hereof, the Holder shall surrender to the Issuer Debentures in an aggregate principal amount at least equal to the applicable Conversion Price (as adjusted by Section 5(e), if applicable). (d) Fractions of Shares. No fractional shares of Common Stock shall be issued upon conversion of this Debenture. If all or a portion of the principal amount of this Debenture shall be surrendered for conversion at one time, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Debenture so converted. Instead of any fractional share of Common Stock, which would otherwise be issuable upon conversion of the Debenture (or specified portions thereof), the Issuer shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock (as determined as provided in Section 5(e)(vi)) at the close of business on the Conversion Date. (e) Adjustment of Conversion Price. (i) In the event that the Issuer shall pay or make a dividend or other distribution on any class of its capital stock in Common Stock or securities convertible into, or exercisable or exchangeable for, Common Stock ("Common -8- Stock Equivalents"), the Conversion Price applicable to conversions of this Debenture in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which (A) the numerator shall be the number of shares of Common Stock of the Issuer outstanding at the close of business on the date fixed for such determination and (B) the denominator shall be the sum of (x) such number of shares and (y) the total number of shares of Common Stock constituting such dividend or other distribution and shares of Common Stock issuable upon conversion, exercise or exchange of the Common Stock Equivalent constituting such dividend or other distribution, in each case, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph, the number of shares of Common Stock of the Issuer at any time outstanding shall not include shares held in the treasury of the Issuer or held by Subsidiaries of the Issuer but shall include shares of Common Stock issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock of the Issuer. The Issuer will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Issuer or held by Subsidiaries of the Issuer. (ii) In case the Issuer shall issue Common Stock of the Issuer at a price per share less than the higher of the Conversion Price then in effect or the current market price per share (determined as provided in Section 5(e)(vi)) of the Common Stock of the Issuer on the date on which such Common Stock is issued, the Conversion Price applicable to conversions of Debentures of the Issuer in effect at the opening of business on the day following such date shall be reduced by multiplying such Conversion Price by a fraction of which (A) the numerator shall be the number of shares of Common Stock of the Issuer outstanding at the close of business on such date plus the number of shares of Common Stock of the Issuer which the aggregate of the offering price of the total number of shares of Common Stock of the Issuer so issued or offered for subscription or purchase would purchase at the higher of such current market price or the Conversion Price and (B) the denominator shall be the sum of (x) the number of shares of Common Stock of the Issuer outstanding at the close of business on such date and (y) the number of shares of Common Stock of the Issuer so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following such date. In case the Issuer shall issue Common Stock Equivalents of the Issuer with a conversion, exercise or exchange price per share that, together with the issuance price per share of such Common Stock Equivalents, is less than the higher of the Conversion Price then in effect or the current market price per share (determined as provided in Section 5(e)(vi)) of the Common Stock of the Issuer on the date on which such Common Stock Equivalents are issued, the Conversion Price applicable to conversions of Debentures in effect at the opening of business on the day following such date shall be reduced by multiplying such Conversion -9- Price by a fraction of which (A) the numerator shall be the number of shares of Common Stock of the Issuer outstanding at the close of business on such date plus the aggregate number of shares of Common Stock of the Issuer that the sum of (x) the aggregate conversion, exercise or exchange price of all such Common Stock Equivalents and (y) the aggregate issuance price of all such Common Stock Equivalents would purchase if the sum of the conversion, exercise or exchange price, as applicable, per share of Common Stock of the Issuer and the issuance price of such Common Stock Equivalents were equal to the higher of such current market price or the Conversion Price and (B) the denominator shall be the number of shares of Common Stock of the Issuer outstanding at the close of business on such date plus the aggregate number of shares of Common Stock of the Issuer that are issuable upon conversion, exercise or exchange of all such Common Stock Equivalents at the actual conversion, exercise or exchange prices applicable to such Common Stock Equivalents, such reduction to become effective immediately after the opening of business on the day following such date. For the purposes of this clause (ii), the number of shares of Common Stock of the Issuer at any time outstanding shall not include shares of Common Stock held in the treasury of the Issuer or held by Subsidiaries of the Issuer but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Issuer will not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Issuer or held by Subsidiaries of the Issuer. If any rights or warrants shall expire without having been exercised, the Conversion Price shall thereupon be readjusted to eliminate the amount of its adjustment due to their issuance. (iii) In case outstanding shares of Common Stock of the Issuer shall be subdivided into a greater number of shares of Common Stock, the Conversion Price applicable to conversions of this Debenture in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock of the Issuer shall each be combined into a smaller number of shares of Common Stock, the Conversion Price applicable to conversions of this Debenture in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (iv) In case the Issuer shall, by dividend or otherwise, distribute to holders of its Common Stock evidences of its indebtedness or assets (including securities, but excluding any Common Stock Equivalents referred to in clause (ii) of this Section, any dividend or distribution paid in cash out of the retained earnings of the Issuer at a rate not exceeding $0.07 per share per quarter and any dividend or distribution referred to in clause (i) of this Section), the Conversion Price applicable to conversions of this Debenture shall be adjusted so that the same shall equal the price determined by multiplying the applicable Conversion Price in effect -10- immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which (A) the numerator shall be the higher of the Conversion Price then in effect or the current market price per share (determined as provided in Section 5(e)(vi)) of the Common Stock of the Issuer on the date fixed for such determination less the then fair market value (as determined in good faith by the board of directors of the Issuer, whose determination shall be described in a board resolution delivered to the Holder) of the portion of the assets or evidences of indebtedness so distributed applicable to one share of Common Stock of the Issuer and (B) the denominator shall be such current market price per share of the Common Stock of the Issuer, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution. (v) The reclassification of Common Stock into securities including other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 5(k) applies) shall be deemed to involve (A) a distribution of such securities other than Common Stock to all holders of Common Stock of the Issuer (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of clause (iv) of this Section), and (B) a subdivision or combination, as the case may be, of the number of shares of Common Stock of the Issuer outstanding immediately prior to such reclassification into the number of shares of Common Stock of the Issuer outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of clause (iii) of this Section). (vi) For the purpose of any computation under Section 5(d) or clauses (ii) and (iv) of this Section 5(e), the current market price per share of Common Stock of the Issuer on any date shall be deemed to be the average of the daily closing prices for the 10 consecutive Business Days selected by the Issuer commencing not less than 10 and no more than 20 Business Days before the day in question; provided, however, that the 10 consecutive Business Days selected for determination shall commence no earlier than three Business Days following the expiration of the Put Period. The closing price for each day shall be the closing price for such day reported in The Wall Street Journal or, if not so reported, the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the Common Stock of the Issuer is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which such Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotations National Market System or, if such Common Stock is not listed or admitted to trading on any national -11- securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by such Issuer for that purpose. In the absence of one or more such sale prices, quotes or bid and asked prices, the board of directors of the Issuer shall determine the current market price based on (A) the most recently completed arm's-length transaction between the Issuer and a Person other than an Affiliate of the Issuer and the closing of which occurs on such date or shall have occurred within the six months preceding such date, (B) if no such transaction shall have occurred on such date or within such six-month period, the value of the Common Stock most recently determined as of a date within the six months preceding such date by a nationally recognized investment banking firm or appraisal firm which is not an Affiliate of the Issuer (an "Independent Financial Advisor") or (C) if neither clause (A) nor (B) is applicable, the value of the Common Stock determined as of such date by an Independent Financial Advisor. (vii) In addition to the reductions in the Conversion Price that are required by clauses (i), (ii), (iii) and (iv) of this Section, the Issuer will make such reductions in the Conversion Price (A) as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients and (B) as may be necessary to account for any adjustments to conversion, exercise or exchange prices or rates made to any Common Stock Equivalents of the Issuer after the Original Issue Date, the result of which is that the conversion, exercise or exchange price or rate applicable to such Common Stock Equivalents is below the higher of the Conversion Price or the current market price per share (determined as provided in Section 5(e)(vi)) of the Common Stock of the Issuer, in each case in effect on the date of such adjustment. (f) Notice of Adjustments of Conversion Price. Whenever the Conversion Price is adjusted as herein provided: (i) the Issuer shall compute the adjusted Conversion Price in accordance with Section 5(a) and shall prepare a certificate signed by the Chief Financial Officer of the Issuer setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of this Debenture pursuant to Section 10; and (ii) a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall be mailed by the Issuer together with a copy of the certificate prepared in accordance with subsection (i) above to the Holder at its last address as it shall appear in the Debenture Register as soon as practicable after such adjustment. -12- (g) Notice of Certain Corporate Action. In case: (i) the Issuer shall declare a dividend (or any other distribution) on its Common Stock payable other than in cash out of its retained earnings at a rate not in excess of $0.07 per share per quarter; or (ii) the Issuer shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (iii) of any reclassification of the Common Stock of the Issuer, or of any consolidation or merger to which the Issuer is a party and for which approval of any of its shareholders is required, or of the sale or transfer of all or substantially all of the assets of the Issuer; or (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Issuer; then the Issuer shall cause to be filed at each office or agency maintained for the purposes of conversion of this Debenture pursuant to Section 10, and shall cause to be mailed to the Holder at its last address as it shall appear in the Debenture Register, at least 20 days (or 10 days in any case specified in clause (i) or (ii) above) prior to the applicable record or effective date hereinafter specified, a notice describing such event in reasonable detail and stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of record of such Issuer's Common Stock to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of record of the Issuer's Common Stock shall be entitled to exchange their shares of Common Stock of the Issuer for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. (h) Taxes on Conversions. The Issuer will pay any and all transfer or stamp taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of this Debenture pursuant hereto. The Issuer shall not, however, be required to pay any income tax payable with respect to conversion of this Debenture or any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Debenture to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Issuer the amount of any such tax, or has established to the satisfaction of the Issuer that such tax has been paid. -13- (i) Covenant as to Common Stock. The Issuer covenants that all shares of Common Stock which may be issued upon conversion of this Debenture will, upon issue, be validly issued, fully paid and nonassessable and, except as provided in Section 5(h), the Issuer will pay all taxes, liens and charges with respect to the issue thereof. (j) Cancellation of Converted Debenture. In the event this Debenture is delivered for conversion, in whole or in part, it and the related MRM Voting Preferred Stock shall be delivered to and canceled by the Issuer. (k) Provisions in Case of Consolidation, Merger or Sale of Assets. In case of any consolidation of the Issuer with, or merger of the Issuer into, any other Person, any merger of another Person into the Issuer (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Issuer) or any sale or transfer of all or substantially all of the assets of the Issuer, the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver a supplement to this Debenture providing that the Holder of this Debenture shall have the right thereafter to convert this Debenture only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares (including fractional shares) of Common Stock of the Issuer into which this Debenture might have been converted immediately prior to such consolidation, merger, sale or transfer, assuming such holder of Common Stock of the Issuer (i) is not a Person with which the Issuer consolidated or into which the Issuer merged or which merged into the Issuer or to which such sale or transfer was made, as the case may be ("constituent Person"), or an Affiliate of a constituent Person and (ii) failed to exercise its rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer; provided, however, that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each share of Common Stock of the Issuer held immediately prior to such consolidation, merger, sale or transfer by others than a constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this Section the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares. Such supplement to this Debenture shall provide for adjustments which, for events subsequent to the effective date of the event which triggers the requirement of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 5(k). The above provisions of this Section 5(k) shall similarly apply to successive consolidations, mergers, sales or transfers. -14- (l) No Impairment. The Issuer will not, by amendment of its memorandum of association or bye-laws or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Issuer, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. (m) Certain Limitations on Voting and Conversion Rights. (i) In the event that the Conversion Date in respect of any exercise by the Holder of its right to convert this Debenture into Common Stock of the Issuer pursuant to this Section 5 occurs prior to the time that the Form A approvals relating to the Transactions shall have been received by the Issuer, then, until such time as such Form A approvals are received by the Issuer, the Common Stock issuable to the Holder upon each conversion of this Debenture shall be limited in its voting rights to the Maximum Voting Right Percentage. The limitations on voting rights contained in this Section 5(m)(i) shall not in any way restrict the ability of the Holder to exercise its right to convert all or any portion of this Debenture. In addition, the provisions of this Section 5(m)(i) shall not in any manner restrict or otherwise affect the economic ownership percentage represented by the Common Stock of the Issuer issued in connection with any conversion of this Debenture; and (ii) In the event that the Conversion Date in respect of any exercise by the Holder of its right to convert this Debenture into Common Stock of the Issuer pursuant to this Section 5 occurs prior to the time that the shareholder approvals relating to the Transactions shall have been received by the Issuer, then, until such time as such shareholder approvals are received by the Issuer, the number of shares of Common Stock issuable to the Holder upon each conversion of this Debenture shall be limited to the Maximum Conversion Right Percentage. (n) When De Minimis Adjustment May Be Deferred. No adjustment in the number of shares of Common Stock of the Issuer issuable upon conversion of Debentures need be made unless the adjustment would require an increase or decrease of at least 1% in the number of shares of Common Stock issuable upon conversion of all Debentures. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest 1/100th of a share. SECTION 6. AFFIRMATIVE COVENANTS. The Issuer hereby agrees for the benefit of the Holder that, from and after the date hereof, so long as any Debentures remain outstanding and unpaid or any other amount is ow- -15- ing to the Holder under any Transaction Document, it will deliver to the Holder, or cause to be delivered to the Holder, the following materials and information: (a) Information. (i) As soon as available and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year, (A) consolidated and consolidating balance sheets of the Issuer and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, cash flows and shareholders' equity (deficit) for such quarter and for the portion of the fiscal year ended at the end of such quarter, setting forth, in each case, in comparative form the figures for the corresponding quarter and the corresponding portion of the previous fiscal year, accompanied by a certificate of the chief financial officer or the chief accounting officer of the Issuer to the effect that they fairly present the financial condition at such dates and the results of operations and cash flows for such periods and were prepared in accordance with GAAP (or, in the case of the Insurance Subsidiaries, Statutory Accounting Principles prescribed or permitted by the Insurance Acts), subject to year-end audit adjustments (consisting only of normal recurring accruals), (B) if the Holder is a holder of at least 10% of the outstanding Debentures, such operating information of the Issuer as may be reasonably requested by the Holder and (C) if the Holder is a holder of at least 10% of the outstanding Debentures, a comparison of the results of such quarter against the operating plan and budget, together with an explanation of any deviations therefrom; (ii) As soon as available and in any event within 90 days after the end of each fiscal year, (A) consolidated and consolidating balance sheets of the Issuer and its Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and shareholders' equity (deficit) for such fiscal year, setting forth, in each case, in comparative form the figures for the previous fiscal year, accompanied by a certificate of the chief financial officer or the chief accounting officer of the Issuer to the effect that they fairly present the financial condition at such dates and the results of operations and cash flows for such periods and were prepared in accordance with GAAP (or, in the case of the U.S. Insurance Subsidiaries, Statutory Accounting Principles prescribed or permitted by the Insurance Acts) and a report (unqualified as to scope) of a firm of independent public accountants of nationally recognized standing, (B) if the Holder is a holder of at least 10% of the outstanding Debentures, a "management letter" from such firm regarding the internal control structure of the Issuer and (C) if the Holder is a holder of at least 10% of the outstanding Debentures, and in exchange for the express agreement of such Holder to keep such information confidential, an opinion in form and substance reasonably satisfactory to the Holder as to the loss reserves of the Insurance Subsidiaries as of the end of such fiscal year by -16- Tillinghast, Towers & Perrin or another actuarial consultant selected by the Issuer and acceptable to the Holder; (iii) If the Holder is a holder of at least 10% of the outstanding Debentures, as soon as available and in any event within 60 days after the end of each fiscal quarter, the results of the "early warning" tests described in Section 7(m) and any supporting documentation requested by the Holder; (iv) If the Holder is a holder of at least 10% of the outstanding Debentures, as soon as available, prior to the beginning of each fiscal year and in exchange for the express agreement of such Holder to keep such information confidential, an annual budget and operating plan of the Issuer, including an investment policy and plan, presented on a quarterly basis for such fiscal year; (v) If the Holder is a holder of at least 10% of the outstanding Debentures and in exchange for the express agreement of such Holder to keep such information confidential, as soon as available, annual financial projections (including forecasted consolidated and consolidating balance sheets of the Issuer and its Subsidiaries and the related consolidated statements of income, cash flows and shareholders' equity (deficit)) for the fiscal years ending December 31, 2001 through December 31, 2006 (including monthly financial projections) and containing all material assumptions relating to such projections and data, accompanied by a statement by the Issuer that such projections are based on assumptions believed by it in good faith to be reasonable as to the future financial performance of the Issuer; (vi) If the Holder is a holder of at least 10% of the outstanding Debentures and in exchange for the express agreement of such Holder to keep such information confidential, as soon as available, and in any event within 30 days after the filing thereof, copies of annual and quarterly reports and all other filings of the Insurance Subsidiaries filed with the Insurance Departments; (vii) In exchange for the express agreement of the Holder to keep such information confidential, promptly following the occurrence thereof, notice and a description in reasonable detail of any material adverse change in the assets, liabilities, business, results of operations, condition (financial or otherwise), Permits or prospects of the Issuer and its Subsidiaries taken as a whole; (viii) As soon as available, copies of all reports and memoranda relating to the current status of the Restructuring and copies of all related applications, agreements and other documents executed in connection with the Restructuring; -17- (ix) If the Holder is a holder of at least 10% of the outstanding Debentures and in exchange for the express agreement of such Holder to keep such information confidential, from time to time such additional information regarding the financial position or business of the Issuer or any of its Subsidiaries as the Holder may reasonably request; and (x) In exchange for the express agreement of such Holder to keep such information confidential, copies of any presentation made by the Issuer or any of its Subsidiaries to S&P, Moody's, A.M. Best Company or any other rating agency. (b) Payment of Obligations. It will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, at or before maturity, all their respective obligations and liabilities, including tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same. (c) Maintenance of Property; Insurance. (i) It will keep, and will cause each of its Subsidiaries to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (ii) It will maintain, and will cause each of its Subsidiaries to maintain, (A) with financially sound and responsible insurance companies, insurance in at least such amounts and against such risks as are usually insured against in the same general areas by companies of established repute of similar size that are engaged in the same or a similar business and (B) such other insurance coverage in such amounts and with respect to such risks as the Purchaser may reasonably request. It will deliver to the Holder (x) upon request from time to time, full information as to the insurance carried, (y) within five days of receipt of notice from any insurer a copy of any notice of cancellation or material change in coverage from that existing on the date of this Debenture and (z) within five days of receipt, any notice of any cancellation or nonrenewal of coverage for the Issuer or any of its Subsidiaries. (d) Conduct of Business and Maintenance of Existence. It will continue, and will cause each of its Subsidiaries to continue, to engage in business of the same general type as now conducted by the Issuer and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each of its Subsidiaries to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges, licenses and franchises necessary or desirable in the normal conduct of business, except in each case as required or contemplated by the Restructuring. -18- (e) Compliance with Laws and Contractual Obligations. It will comply, and will cause each of its Subsidiaries to comply, in all material respects, with all applicable laws, ordinances, rules, regulations, and requirements of Governmental Entities, and with all contractual obligations, except where compliance in all material respects therewith is contested in good faith by appropriate proceedings, including, without limitation, with respect to itself and each member of the ERISA Group, (i) maintaining each Plan in compliance, in all material respects with the applicable provisions of ERISA, the Internal Revenue Code and other applicable law; (ii) causing each Plan which is qualified under Section 401(a) of the Internal Revenue Code to maintain such qualification; and (iii) making all required contributions to any Plan subject to Section 142 of the Internal Revenue Code. (f) Inspection of Property, Books and Records. It will keep, and will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to their respective businesses and activities; and will permit, and will cause each of its Subsidiaries to permit (during normal business hours and, unless a Default shall have occurred and be continuing, upon reasonable advance notice) officers, attorneys, agents and other representatives of the Holder to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective directors, officers, senior employees, independent public accountants and actuaries as often as may reasonably be requested. (g) Reservation of Common Stock. It will at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock or out of Common Stock held by a Subsidiary of the Issuer, for the purpose of effecting the conversion of the Debentures, the full number of shares of Common Stock then issuable upon the conversion of this Debenture and all outstanding Debentures. (h) Covenant to Guarantee. (i) At any time that any Subsidiary of the Issuer (A) shall be formed or acquired by the Issuer, including Newco (other than a U.S. Insurance Subsidiary) and such Subsidiary constitutes a Significant Subsidiary, (B) becomes a Significant Subsidiary or (C) shall guarantee any Debt of the Issuer or Newco other than the Debentures, then, in each such case, the Issuer will, at its expense: (A) within ten days after such event, cause each such Subsidiary to duly authorize, execute and deliver to the Holder a Guaranty, substantially in the form of Annex III attached hereto; -19- (B) within ten days after such event, deliver to the Holder a signed copy of a legal opinion, addressed to the Holder, of counsel for the Issuer reasonably acceptable to the Holder, as to such Guaranty being a legal, valid and binding obligation of such party thereto, enforceable in accordance with its terms and as to such other matters as the Holder may reasonably request; and (C) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such action as the Holder may deem necessary or reasonably desirable to obtain the full benefits of such Guaranty. (ii) Upon any exchange of this Debenture for a Newco Debenture pursuant to Section 4(a): (A) Mutual Risk Management Ltd. and Mutual Group Ltd. will immediately authorize, execute and deliver to the Holder a Guaranty, substantially in the form of Annex IV attached hereto; (B) within ten days after such exchange, deliver to the Holder a signed copy of a legal opinion, addressed to the Holder, of counsel for the Issuer reasonably acceptable to the Holder, as to such Guaranty being a legal, valid and binding obligation of such party thereto, enforceable in accordance with its terms and as to such other matters as the Holder may reasonably request; and (C) at any time and from time to time, promptly execute and deliver any and all further instruments and documents and take all such action as the Holder may deem necessary or reasonably desirable to obtain the full benefits of such Guaranty. (i) Insurance. It will maintain, in full force and effect, executive risk insurance in an amount which the Issuer reasonably believes to be sufficient for the conduct of its business. (j) Compliance Certificate. Concurrently with the delivery of each of the financial statements required by Sections 6(a)(i) and (ii), it will deliver to the Holders a compliance certificate by the Chief Financial Officer of the Issuer stating that the Issuer and its Subsidiaries are in compliance with each covenant contained in this Debenture, together with the calculations demonstrating such compliance in reasonable detail. -20- SECTION 7. NEGATIVE COVENANTS. The Issuer hereby agrees for the benefit of the Holder that, from and after the date hereof and so long as any portion of this Debenture remains outstanding and unpaid or any other amount is owing to the Holder under any Transaction Document, without the prior written consent of the Requisite Holders (which consent, in the case of Section 7(i), shall not be unreasonably withheld): (a) Restrictions on Amendments of Governance Documents. It will not, directly or indirectly, amend, and will not suffer, cause or permit to be amended, the memorandum of association, bye-laws or any other organizational document of the Issuer or any of its Significant Subsidiaries, or any partnership or shareholder agreement to which the Issuer or any of its Significant Subsidiaries is a party. (b) Prohibition on Restricted Payments. It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, declare or make any Restricted Payment other than, so long as no Default or Event of Default has occurred and is continuing or would result therefrom, (i) quarterly dividends to all shareholders of the Issuer, pro rata, in an amount no greater than $0.07 per share per quarter, (ii) the dividend or distribution by the Issuer of shares of Newco in order to comply with Section 2.1(b)(ii) of the Debenture Registration Rights Agreement entered into in connection with the issuance of the Debentures, (iii) Restricted Payments made to the Issuer or any Guarantor, (iv) Restricted Payments made to the holders of the Debentures pro rata based on the principal amount of Debentures held by each Holder, (v) dividends on Policy Holder Preferred Shares made solely in connection with the CRM business and determined in a manner consistent with past practices and (vi) dividends made in respect of shares issued pursuant to the Hemisphere Restricted Stock Plan and the repurchase of such shares, in each case in accordance with such plan and consistent with past practices. (c) Consolidations and Mergers. It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, consolidate or merge with or into, or acquire, any other Person; provided, however, that the foregoing shall not prohibit (i) a merger of a Subsidiary of the Issuer with and into the Issuer or a Subsidiary, (ii) a merger or consolidation of the Issuer with a Subsidiary or any other Person incorporated under the laws of Bermuda or a state of the United States, if the Issuer is the surviving corporation and continues to be a Bermuda company and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, (iii) the Restructuring or (iv) so long as no Default or Event of Default shall have occurred and be continuing or would result therefrom, acquisitions of Persons in -21- the same or substantially the same business as the Issuer and its Subsidiaries for aggregate consideration of no more than $30.0 million in any twelve-month period. (d) Investments. It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, make or acquire any Investment, other than (i) Investments pursuant to the Issuer's investment policy as adopted by the Issuer's board of directors and in accordance with the Issuer's annual plan and budget, (ii) after the completion of the Restructuring, the Investment of up to $80.0 million of the net proceeds from the original issuance of the Debentures into the Issuer's U.S. Insurance Subsidiaries, as contemplated by the Securities Purchase Agreement, (iii) Investments in Subsidiaries of the Issuer made in connection with the Restructuring, (iv) Investments in the Collateral Account (as defined in the Securities Purchase Agreement) and in Cash Equivalents and U.S. Government Obligations (as defined in the Collateral Agreement), (v) Investments by Subsidiaries of the Issuer in the Issuer or any Guarantor and (vi) other Investments not exceeding $10.0 million in the aggregate outstanding at any one time. (e) Limitation on Incurrence and Repayment of Debt. (i) It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume or suffer to exist any Debt; provided, however, that the foregoing shall not prohibit the issuance or existence of (A) the Debentures (including any Guarantees thereof), (B) the Existing Bank Debt and any Permitted Refinancings thereof, (C) Debt in an aggregate principal amount not in excess of $32.0 million consisting of, or issued in connection with, the RHINOS, (D) no more than $15.0 million of principal amount of accreted value of other Debt of the Issuer outstanding on the Original Issue Date, (E) additional Debt of the Issuer in an aggregate principal amount not to exceed $22.0 million at any one time outstanding; provided, however, that any Debt incurred pursuant to this clause (E) shall be subordinated to the Debentures pursuant to subordination provisions in form and substance satisfactory to the Requisite Holders and (F) Debt consisting of reimbursement obligations (or guarantees thereof) in respect of letters of credit issued under a letter of credit facility entered into solely in connection with the issuance of Policy Holder Preferred Shares consistent with past practices. (ii) It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, make any voluntary principal pre-payments in respect of any Debt, whether at or prior to its stated maturity, other than (A) the Debentures in accordance with their terms, (B) Permitted Refinancings of the Existing Bank Debt in accordance with the terms of the Existing Bank Agreement as in effect on the date hereof, (C) Debt consisting of, or issued in connection with, the RHINOS in an aggregate -22- principal amount not in excess of $32.0 million and (D) reimbursement obligations (or guarantees thereof) in respect of letters of credit issued under a letter of credit facility entered into solely in connection with the issuance of Policy Holder Preferred Shares consistent with past practices. (f) Negative Pledge. It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except for (i) Liens which may be created in the ordinary course of business (it being understood that no Lien securing Debt shall be deemed to have been created in the ordinary course of business), (ii) Liens on funds deposited into the Collateral Account (as defined in the Collateral Agreement) and other Liens on assets of the Issuer and its Subsidiaries in favor of the holders of the Debentures, (iii) Liens securing letters of credit issued under a letter of credit facility entered into solely in connection with the issuance of Policy Holder Preferred Shares, consistent with past practices, (iv) Liens on assets of the Issuer or any of its Subsidiaries that are junior to first priority Liens securing the Debentures on such assets and (v) after the expiration of the Put Term, Liens securing the Debentures, the Existing Bank Debt, any Permitted Refinancing of Existing Bank Debt, Debt permitted under Section 7(e)(i)(E) hereof, and the RHINOS on a pari passu basis. (g) Transactions with Affiliates. It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets to, purchase any assets from, or participate in, or effect or suffer to exist any other transaction with, or for the benefit of, any Affiliate of the Issuer or any Related Person, except (i) upon fair and reasonable terms that are no less favorable to it than it would obtain in a comparable arm's-length transaction with an unrelated Person and pursuant to the reasonable requirements of its business or (ii) as contemplated by this Debenture and the Securities Purchase Agreement (including, without limitation, the Restructuring). (h) Fundamental Changes. It will not, and will not cause or permit any of its Subsidiaries to, wind-up, liquidate or dissolve their respective affairs, except any such action taken with the unanimous consent of the Issuer's board of directors. It will not, and will not cause or permit any of its Subsidiaries to, commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to themselves or their respective debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seek the appointment of a trustee, receiver, liquidation, custodian or other similar official of them or any substantial part of their prop- -23- erty, or consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against them, or make a general assignment for the benefit or creditors, or fail generally to pay their respective debts as they become due or on demand, or take any corporate action to authorize any of the foregoing, except any such action taken with the unanimous consent of the Issuer's board of directors. (i) Business. It will not, and will not cause or permit any of its Subsidiaries to, make any material change in the nature of its business or its underwriting strategy or investment policy other than as expressly contemplated by the Restructuring. (j) Limitation on Restrictions Affecting Subsidiaries. It will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, enter into, or suffer to exist, any consensual agreement with any Person which prohibits or limits the ability of any Subsidiary to (i) pay dividends or make other distributions or pay any Debt owed to the Issuer or any of its Subsidiaries, (ii) make loans or advances to the Issuer or any of its Subsidiaries or (iii) transfer any of its properties or assets to the Issuer or any of its Subsidiaries, except for such agreement or restrictions existing under or by reason of any of the following: (A) The Debentures, any agreement in effect on the Original Issue Date, including the Existing Bank Debt Documents and the documents governing the terms of any Permitted Refinancing thereof; (B) The Newco Debentures; (C) Customary non-assignment provisions of any lease governing a leasehold interest of the Issuer or any of its Subsidiaries; (D) Any agreement or other instrument of a Person acquired by the Issuer or any of its Subsidiaries in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any Person, or properties or assets of any Person, other than the Person, or the Property or assets of the Person, so acquired; and (E) Any limitations under applicable laws as to dividends payable by Insurance Subsidiaries. (k) Minimum Capital and Surplus. It will not permit its U.S. Insurance Subsidiaries' capital and surplus, as defined in the Pennsylvania or Illinois Insurance -24- Code, as applicable, to be less than the greater of (i) the minimum amount required under any applicable insurance law to which it is subject and (ii) $350.0 million in any quarterly period beginning May 1, 2001. (l) Maximum Combined Ratio. The statutory "combined ratio" for the Issuer's U.S. Insurance Subsidiaries, measured with respect to all business written by the Insurance Subsidiaries as the sum for such U.S. Insurance Subsidiaries of (i) the Loss Ratio and (ii) the Expense Ratio, shall not exceed 125%. The Issuer will measure the statutory combined ratio for the previous 12 months as of the end of each fiscal quarter. In the event such statutory combined ratio exceeds 120%, the Issuer and the U.S. Insurance Subsidiaries will establish and implement a plan in order to lower the statutory combined ratio below 115%. (m) Minimum Risk-Based Capital. It will not permit the Risk-Based Capital for any U.S. Insurance Subsidiary to be less than 175% of the Authorized Control Level and for all such U.S. Insurance Subsidiaries (collectively, on a combined basis) to be less than 175% of the Authorized Control Level. The Issuer will measure Risk-Based Capital as of each December 31, commencing December 31, 2001, and will run the "early warning" tests established by the NAIC as of each March 31, June 30, September 30 and December 31, commencing June 30, 2001. If the Issuer and the U.S. Insurance Subsidiaries fail to comply with any such "early warning" tests, the Issuer and the U.S. Insurance Subsidiaries will establish and implement a plan in order to improve such test results. In no event will the Issuer and the U.S. Insurance Subsidiaries fail to comply with more than three such "early warning" tests. (n) Limitation on Asset Sales. It will not, and will not cause or permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the Issuer or the applicable Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets sold or otherwise disposed of and (ii) the consideration received for the assets sold by the Issuer or such Subsidiary, as the case may be, in such Asset Sale are in the form of cash or Cash Equivalents, in each case received at the time of such Asset Sale. It will not, and will not cause or permit any of its Subsidiaries to, in a single transaction or a series of related transactions, directly or indirectly, sell, lease or otherwise transfer, directly or indirectly, all or substantially all of the assets of the Issuer and its Subsidiaries to any Person other than the Issuer or any of its wholly owned Subsidiaries. (o) Restrictions on Certain Equity Issuances. It will not issue any Capital Stock or any Common Stock Equivalents (other than pursuant to employee stock option plans in effect on the Original Issue Date and other than upon conversion of the Debentures) until at least 30 days following the date on which the Required Approvals -25- have been obtained and the Restructuring has been consummated; provided, however, that the Issuer may comply with its obligations under the RHINOS and the documents executed in connection therewith. (p) Restrictions on Amendments of Existing Debt. It will not, and will not cause or permit any of its Subsidiaries to, amend, supplement or otherwise modify any of the Existing Bank Debt Documents or any of the documents related to the RHINOS (or permit any of the foregoing) without the prior written consent of the Requisite Holders, which consent will not be unreasonably withheld or delayed, other than as may be necessary in order to complete the Restructuring; provided, however, that after the earlier of (i) the addition of Newco as a Guarantor of the Debentures and (ii) the exchange of at least 51% of the Convertible Exchangeable Debentures due 2006 of the Issuer issued on the Original Issue Date for Newco Common Stock or Newco Debentures (or any combination thereof) pursuant to Section 3 hereof, the Existing Bank Debt Documents may be amended solely to add Newco as an additional obligor thereunder. (q) Restrictions on Amendment of Certain CRM Documents. It will not, and will not cause or permit any of its Subsidiaries to, amend or modify any of the agreements or arrangements between Newco or any of its Subsidiaries and the Issuer or any of its Subsidiaries relating to the retention of a portion of any premium by, or the payment of any fees to, the Issuer or any of its Subsidiaries in connection with the writing of the underlying insurance policies related to the CRM business. (r) Consolidated Debt to Consolidated Total Capital Ratio. It will not permit the ratio of Consolidated Debt to Consolidated Total Capital to exceed (i) 0.50 to 1 at any time from the Original Issue Date to March 21, 2002, or (ii) 0.45 to 1 at any time thereafter. (s) Shareholders' Equity. It will maintain a Shareholders' Equity which is not at any time less than the sum of (i) $350.0 million (without giving effect to no more than $15.0 million of adjustments required by FASB 115), plus (ii) 50% of cumulative positive consolidated net income (without deduction for any net loss for any period) of the Issuer and its Subsidiaries after March 31, 2001. (t) No Change in Accounting. It will not, and will not cause or permit any of its Subsidiaries to, make any material change in any accounting policy or practice including, without limitation, with respect to accounting for loss reserves and/or reinsurance recoverables other than any such changes that are required by law or any order of any Governmental Entity having jurisdiction over the Issuer or any such Subsidiary. -26- (u) XL Consent Rights. Until the earlier of such time as XL owns less than 20% of the principal amount of outstanding Debentures or such time as 80% or more of the principal amount of Debentures originally issued on the Original Issue Date are converted to Common Stock of the Issuer in accordance with Section 5, (x) it will not, and will not cause or permit any of its Subsidiaries to, enter into or consummate any transaction described in the foregoing Sections 7(a), 7(c), 7(h), 7(i), 7(p), 7(q) and 7(t) without the prior written consent of XL and (y) XL shall have the right to approve the Insurance Subsidiary or other entity that writes the principal insurance policies relating to the CRM business in connection with the Issuer's IPC (i.e., rent-a-captive) companies. --- SECTION 8. EVENTS OF DEFAULT. (a) Events of Default. If one or more of the following events (each, an "Event of Default") shall have occurred and be continuing: (i) there shall be a failure to pay when due (whether at maturity, upon mandatory redemption, acceleration or otherwise) all or any part of the principal of this Debenture; (ii) there shall be a failure to pay when due all or any part of the interest or premium due on this Debenture or any other amount payable by the Issuer or any of its Subsidiaries to the Holder under any Transaction Document, which failure remains unremedied for a period of 10 days after the due date thereof; (iii) the Issuer or any of its Subsidiaries shall fail to observe or perform any covenant or agreement contained in Sections 7(a), 7(b), 7(f), 7(h), 7(j), 7(q), 7(r) or 7(s) of this Debenture; (iv) the Issuer or any of its Subsidiaries shall fail to observe or perform any of its other agreements or covenants hereunder (other than those covered by clauses (i), (ii) and (iii) above) or in any other Transaction Document and such failure continues for 30 days; (v) any representation, warranty, certification or statement made by the Issuer or any of its Subsidiaries in any Transaction Document shall prove to have been untrue, misleading or inaccurate in any material respect when made or deemed made; (vi) (A) the Issuer or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any Debt (including the Existing Bank Debt) with an aggregate principal amount in excess of $5.0 million beyond the grace period, if any, or the holder or holders of any Debt with an aggregate principal amount -27- in excess of $5.0 million shall have accelerated the maturity of such Debt as a result of an event of default thereunder or (B) at any time prior to the expiration of the Put Term, any principal amount of the Existing Bank Debt or the RHINOS shall become due or payable for any reason or the holders of any Existing Bank Debt or RHINOS shall have the right to accelerate the maturity thereof; (vii) the Issuer or any of its Subsidiaries commences a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or consents to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or makes a general assignment for the benefit of creditors, or fails generally, or admits in writing its inability, to pay its debts as they become due or on demand, or takes any corporate action to authorize any of the foregoing; (viii) an involuntary case or other proceeding is commenced against the Issuer or any of its Subsidiaries seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property and such case or proceeding continues undismissed or undischarged for a period of 30 days, or an order for relief is entered against the Issuer or any of its Subsidiaries under the U.S. Bankruptcy Code or any other bankruptcy or insolvency law; (ix) any material attachment, sequestration or similar proceeding (each, a "Proceeding") shall be filed against any assets or properties of the Issuer or any of its Subsidiaries, which Proceeding remains undischarged, unbonded by the Issuer or undismissed for a period of 30 days after the commencement thereof; (x) one or more judgments for the payment of money shall be rendered against the Issuer or any of its Subsidiaries for an amount in excess of $5.0 million and such judgment(s) shall continue unsatisfied and in effect for a period of 30 consecutive days without being vacated, discharged, satisfied or stayed or bonded pending appeal; (xi) a Change of Control Event shall occur; or (xii) any insurance license or other authorization or permit necessary for the conduct by any Insurance Subsidiary of its business is revoked or withdrawn or otherwise fails to be in full force and effect, which failure, revocation or withdrawal, in the judgment of the Holder, has a material adverse change in the assets, liabilities, busi- -28- ness, results of operations, condition (financial or otherwise), Permits or prospects of the Issuer and its Subsidiaries taken as a whole. then, and in every such occurrence, unless at such time all obligations under the Transaction Documents have been paid in full in cash, the holders of at least 25% in aggregate principal amount of the outstanding Debentures may, by notice to the Issuer, declare all amounts under the Debentures and all other amounts owing to the holders of Debentures under the Transaction Documents (together with accrued interest thereon) to be, and the Debentures and such other Debt held by the Holder and the other holders of Debentures shall thereon become, immediately due and payable; provided, however, that in the case of any of the Events of Default specified in clause (vii) or (viii) above then, without any notice to the Issuer or any other act by any holder, the entire principal amount of the Debentures and such other Debt and amounts owing to the holders of Debentures, together with accrued interest thereon, shall become immediately due and payable; provided, further, however, that in the case of an Event of Default specified in clause (vi)(B) above, then any Holder may, by notice to the Issuer, declare all amounts under the Debenture held by such Holder to be immediately due and payable. The rights provided for herein are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law. (b) Waivers of Defaults. The Requisite Holders, by notice to the Issuer, may waive an existing Default and its consequences; provided, however, that a waiver of a Default described under Sections 8(a)(i) or (ii) shall not be effective as to any holder without its consent. When a Default is waived, it is cured and ceases, but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 9. GUARANTEE. (a) The Guarantee. Each of the Guarantors hereby, jointly and severally, unconditionally guarantees to the Holder and its successors and assigns the prompt payment in full when due (whether at stated maturity, upon mandatory redemption, by acceleration or otherwise) of the principal of and interest on this Debenture and all other amounts from time to time owing to the Holder under any Transaction Document (such obligations being herein collectively called the "Guaranteed Obligations"). Each of the Guarantors hereby further agrees that if the Issuer shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, the Guarantors will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. -29- (b) Obligations Unconditional. The Guaranteed Obligations are absolute, irrevocable and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Issuer under any Transaction Document, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 9(b) that the Guaranteed Obligations shall be absolute, irrevocable and unconditional, joint and several, under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Guarantors hereunder which shall remain absolute, irrevocable and unconditional as described above: (i) at any time or from time to time, without notice to any of the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any Transaction Document shall be done or omitted; or (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any Transaction Document shall be amended, modified or waived in any respect or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with. Each of the Guarantors hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Purchaser or the Holder exhaust any right, power or remedy or proceed against the Issuer under any Transaction Document, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. Each of the Guarantors waives any and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by the Holder upon this guarantee or acceptance of this guarantee. This guarantee shall be construed as a continuing, absolute, irrevocable and unconditional guarantee of payment without regard to any right of offset with respect to the Guaranteed Obligations at any time or from time to time held by the Holder, and the Guaranteed Obligations shall not be conditioned or contingent upon the pursuit by the Holder or any other Person at any time of any right or remedy against the Issuer or against any other Person which may be or become liable in respect of all or any part of the Guaranteed Obligations or against any collateral security or guarantee therefor or right of offset with respect thereto. This guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the -30- issuer and its successors and assigns thereof, and shall inure to the benefit of the Holder, and its successors and assigns. (c) Subrogation; Subordination. Each of the Guarantors hereby agrees that until the payment and satisfaction in full in cash of all Guaranteed Obligations it shall not exercise any right or remedy arising by reason of any performance by it of its guarantee in Section 9(a), whether by subrogation or otherwise, against the Issuer or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. The payment of any amounts due with respect to any indebtedness of the Issuer now or hereafter owing to any of the Guarantors by reason of any payment by such Guarantor under this Section 9 is hereby subordinated to the prior payment in full of the Guaranteed Obligations. Each Guarantor agrees that it will not demand, sue for or otherwise attempt to collect any such indebtedness of the Issuer to such Guarantor until the Guaranteed Obligations shall have been paid in full. If, notwithstanding the foregoing sentence, a Guarantor shall prior to the payment in full of its Guaranteed Obligations collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Guarantor as trustee for the Holder and paid over to the Holder on account of its Guaranteed Obligations without affecting in any manner the liability of such Guarantor under the other provisions of the guaranty contained herein. (d) Limitation on Guarantee. Each Guarantor and by its acceptance hereof the Holder hereby confirms that it is the intention of all such parties that the guarantee by such Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of any state or Federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, the Holder and such Guarantor hereby irrevocably agree that the obligations of such Guarantor under the Guarantee shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to subsection (e) below, result in the obligations of such Guarantor under the Guarantee not constituting such fraudulent transfer or conveyance. (e) Contribution. In order to provide for just and equitable contribution among the Guarantors, the Guarantors agree, inter se, that in the event any payment or distribution is made by any Guarantor (a "Funding Guarantor") under the Guarantee, such Funding Guarantor shall be entitled to a contribution from all other Guarantors in a pro rata amount based on the Adjusted Net Assets of each Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Issuer's obligations with respect -31- to any Debentures or any other Guarantor's obligations with respect to the Guarantee. "Adjusted Net Assets" of such Guarantor at any date shall mean the lesser of the amount by which (x) the fair value of the property of such Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date and after giving effect to any collection from any other Subsidiary of the Guarantor in respect of the obligations of its Guarantee), but excluding liabilities under the Guarantee, of such Guarantor at such date and (y) the present fair salable value of the assets of such Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Guarantor on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date and after giving effect to any collection from any other Subsidiary of the Issuer in respect of the obligations of such Guarantor under its Guarantee), excluding debt in respect of the Guarantee of such Guarantor, as they become absolute and matured. SECTION 10. REGISTRATION; EXCHANGE, SUBSTITUTION OF DEBENTURES. (a) Registration of Debentures. The Issuer shall keep at its principal executive office a register for the registration and registration of transfers of this Debenture (the "Debenture Register"). The name and address of each holder of Debentures, each transfer of this Debenture and the related MRM Voting Preferred Stock and the name and address of each transferee of one or more Debentures shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name this Debenture shall be registered shall be deemed and treated as the owner and Holder hereof for all purposes hereof, and the Issuer shall not be affected by any notice or knowledge to the contrary. The Issuer shall give to the Holder of at least 5% of the original aggregate principal amount ($112.5 million) of all Debentures promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Debentures. (b) Transfer and Exchange of Debentures. (i) So long as XL owns any Debentures, any transfer of this Debenture or portion hereof shall be subject to the prior written approval of XL, such approval not to be unreasonably withheld (it being understood that it is reasonable for XL to withhold its approval of any proposed transfer of this Debenture or portion hereof to a competitor of the Issuer or XL or to any investor whose ownership might, in the judgment of XL, adversely affect the tax status of the Issuer, Newco, XL or any of their respective Subsidiaries or shareholders). In the event the Holder desires to transfer this Debenture or any portion hereof, the Holder shall deliver to XL written notice of such intention (such notice shall identify the amount to be transferred and the identity of the proposed transferee) at XL Insurance Ltd., c/o XL Capital Ltd., XL House, One Bermudiana Road, Hamilton HM 11, Bermuda, telecopy: (441) 292-8618, Attention: Paul Giordano. XL shall notify the Holder in writing by 5:00 p.m. (Bermuda time) on the fifth Business Day following its receipt of written notice from the Holder of its request to transfer this Debenture or portion hereof of -32- its decision whether to approve such transfer and, if its decision is not to approve such transfer, its reasons therefor. The failure by XL to notify the Holder of its decision to approve a proposed transfer within such time period shall be deemed to be an approval by XL of the proposed transfer. Notwithstanding the foregoing, the holders of the RHINOS Debentures will have the right to transfer the RHINOS Debentures, subject to applicable securities laws, to any institutional portfolio or hedge fund investor (other than a direct or indirect competitor of the Issuer or XL or any entity whose ownership might, in the judgment of XL, adversely affect the tax status of the Issuer, Newco, XL or any of their respective Subsidiaries or their shareholders). (ii) This Debenture may not be transferred or exchanged separately from, and may be transferred or exchanged only together with, shares of MRM Voting Preferred Stock representing the same percentage of the total amount of outstanding shares of MRM Voting Preferred Stock that the principal amount of Convertible Exchangeable Debentures due 2006 of the Issuer proposed to be transferred or assigned represents of the total principal amount of outstanding Convertible Exchangeable Debentures due 2006. (iii) Upon surrender of this Debenture and the related MRM Voting Preferred Stock at the principal executive office of the Issuer for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered Holder or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of this Debenture or part thereof), the Issuer shall execute and deliver, at the Issuer's expense (except as provided below), one or more new Debentures (as requested by the Holder) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Debenture and a new certificate representing the related MRM Voting Preferred Stock with voting rights equal to the aggregate voting rights of the Common Stock issuable upon conversion or exchange of such new Debenture. Each such new Debenture shall be payable to such Person as such Holder may request and shall be substantially in the form of this Debenture. Each such new Debenture shall be dated and bear interest from the date on which interest shall have been paid on the surrendered Debenture or dated the date of the surrendered Debenture if no interest shall have been paid hereon. The Issuer may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Debentures. This Debenture shall not be transferred in denominations of less than $100.00; provided, however, that if necessary to enable the registration of transfer by the Holder of the entire amount of this Debenture, one Debenture may be in a denomination of less than $100.00. Any transferee, by its acceptance of a Debenture registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Sections 4.2 and 4.3 of the Securities Purchase Agreement. -33- (c) Replacement of this Debenture. Upon receipt by the Issuer of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Debenture, and (i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it, or (ii) in the case of mutilation, upon surrender and cancellation thereof, the Issuer at its own expense shall execute and deliver, in lieu thereof, a new Debenture, dated and bearing interest from the date to which interest shall have been paid on this Debenture or dated the date of this Debenture if no interest shall have been paid thereon. SECTION 11. DEFINITIONS; CONSTRUCTION. (a) Definitions. The following terms, as used herein, have the following meanings: "Adjusted Net Assets" has the meaning set forth in Section 9(e). "Affiliate" means, with respect to any Person (the "Subject Person"), (i) any other Person (a "Controlling Person") that directly, or indirectly through one or more intermediaries, Controls the Subject Person or (ii) any other Person which is Controlled by or is under common Control with a Controlling Person; provided, however, that the Holder and its Affiliates shall not be deemed Affiliates of the Issuer or any of its Subsidiaries. "Asset Sale" means any direct or indirect sale, issuance, conveyance, lease, assignment, transfer or other disposition for value by the Issuer or any of its Subsidiaries to any Person other than the Issuer or any of its wholly owned Subsidiaries (any such transaction, a "disposition") of any asset of the Issuer or any of its Subsidiaries, excluding (i) any disposition in the ordinary course of business, (ii) any disposition of Cash Equivalents in the ordinary course of business, (iii) any disposition of Investment Securities in the ordinary course of business the proceeds of which are used to purchase other Investment Securities or invested in Cash Equivalents pending such purchase and (iv) any disposition of assets (or series of related dispositions) the Fair Market Value of which does not exceed $1.0 million in the aggregate. "Authorized Control Level" means "Authorized Control Level" as defined by the NAIC from time to time and as applied in the context of the Risk-Based Capital Guidelines promulgated by the NAIC (or any term substituted therefor by the NAIC). In the event that there is a conflict between the risk-based capital formulas adopted by the NAIC and any applicable department of insurance, the calculation of the applicable department of insurance shall govern. -34- "Business Day" means any day except a Saturday, Sunday or other day on which (i) commercial banks in The City of New York are authorized or required by law to close or (ii) the New York Stock Exchange is not open for trading. "Capital Stock" means, with respect to any Person, any and all shares, partnership interests or equivalents (however designated and whether voting or non-voting) of such Person's capital stock, whether outstanding on the date hereof or hereafter issued. "Cash Equivalents" means (i) marketable direct obligations issued or unconditionally guaranteed by the United States government or issued by any agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's; (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (A) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (B) has Tier I capital (as defined in such regulations) of not less than $250.0 million; (v) certificates of deposit or banker's acceptances maturing within one year from the date of acquisition thereof issued by the Bank of Bermuda or The Bank of N.T. Butterfield & Son Limited; (vi) shares of any money market mutual fund that (a) has its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500.0 million, and (c) has the highest rating obtainable from either S&P or Moody's; and (vii) repurchase agreements with respect to, and which are fully secured by a perfected security interest in, obligations of a type described in clause (i) or clause (ii) above and are with any commercial bank described in clause (iv) above. "Change of Control Event" shall mean any of the following: (i) the Issuer shall cease to own, directly or indirectly, 100% on a Fully Diluted Basis of the economic and voting interest in the Capital Stock of the Insurance Subsidiaries (other than (w) Tremont International Insurance LTD., (x) as a result of the conversion of any Debentures, (y) the exercise of any Newco Common Stock Exchange Right or (z) the Policy Holder Preferred Shares) or (ii) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act) shall have (x) acquired beneficial ownership of 33% or more on a Fully Diluted Basis of the voting and/or economic interest in the Issuer's Capital Stock, other than any such acquisition resulting solely from the conversion of Debentures (for purposes of this calculation, only the denominator shall be calculated on a Fully Diluted Basis) or (y) obtained the power (whether -35- or not exercised) to elect a majority of the Issuer's directors or (iii) the board of directors of the Issuer shall cease to consist of a majority of Continuing Directors or (iv) any event or condition which constitutes a change of control under the Existing Bank Agreement or the documents governing the RHINOS. "Common Stock" means the common stock or common shares of the referenced Person. "Common Stock Equivalents" has the meaning set forth in Section 5(e). "Consolidated Debt" means, with respect to the Issuer and its Subsidiaries at any date, the Debt of the Issuer and its Subsidiaries, determined on a consolidated basis as of such date including, without limitation, all Debt evidenced by the Debentures. "Consolidated Total Capital" means, with respect to the Issuer and its Subsidiaries at any date, the sum, without duplication, of Consolidated Debt and Shareholders' Equity. "Constituent person" has the meaning set forth in Section 5(k). "Continuing Directors" shall mean the directors of the Issuer on the Closing Date and each other director whose nomination for the election to the board of directors of the Issuer is recommended by a majority of the then Continuing Directors. "Control" (including, with correlative meanings, the terms "Controlling," "Controlled by" and "under common Control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or interests, by contract or otherwise. "Conversion Date" has the meaning set forth in Section 5(b). "Conversion Price" has the meaning set forth in Section 5(a). "CRM" has the meaning set forth in the definition of "Restructuring." "Debenture" means this Convertible Exchangeable Debenture due 2006 and "Debentures" means, collectively, this Debenture and any other Convertible Exchangeable Debentures due 2006 of the Issuer and Convertible Debentures due 2006 of Newco. "Debenture Exchange Date" has the meaning set forth in Section 4(a). "Debenture Exchange Right" has the meaning set forth in Section 4(a). -36- "Debenture Register" has the meaning set forth in Section 10(a). "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money (other than (except for purposes of Section 8(a)(vi)) regularly scheduled interest payments, including interest payable in the form of additional Debt obligations), (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments issued by such Person, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person under any Financing Lease, (v) all reimbursement obligations of such Person in respect of letters of credit or other similar instruments, (vi) Disqualified Capital Stock of such Person (other than Policy Holder Preferred Shares), (vii) Preferred Stock of any Subsidiary of such Person (other than Policy Holder Preferred Shares), (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (ix) all Debt of others Guaranteed by such Person; provided, however, that Debt shall not include the accretion of principal amount on zero coupon discount obligations. "Default" means any event or condition which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured within the stated time period or waived, become an Event of Default. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, or requires the payment of any dividends, in each case at any time that any obligation under the Transaction Documents is outstanding. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Group" means the Issuer and its Subsidiaries and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Issuer or any of its Subsidiaries, are treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" has the meaning set forth in Section 8(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Bank Agreement" means the Credit Agreement dated as of September 21, 2000 among the Issuer, Mutual Group, Ltd., Bank of America, N.A., as Administrative -37- Agent, and the Lenders party thereto, as in effect on the Original Issue Date or as amended, modified or refinanced in accordance with Sections 7(e) and 7(p) hereof. "Existing Bank Debt" means the Debt in an aggregate principal amount of no more than $180.0 million of the Issuer outstanding under the Existing Bank Agreement. "Existing Bank Debt Documents" means the Existing Bank Agreement and all other documentation related to the Existing Bank Debt as in effect on the Original Issue Date or as amended, modified or re-executed in accordance with Sections 7(e) and 7(p) hereof. "Expense Ratio" means a ratio equal to (i) Other Underwriting Expenses Incurred divided by (ii) Net Premiums Written (as set forth in the Issuer's combined annual statements of the U.S. Insurance Subsidiaries). "Fair Market Value" means, with respect to any Asset Sale, the price (after taking into account any liabilities relating to such asset) which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction. "FAS 115" means Statement No. 115 ("Accounting for Certain Investments in Indebtedness and Equity Securities") issued by the Financial Accounting Standards Board. "Financing Lease" means any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "Fully Diluted Basis" means after giving effect to the exercise of all outstanding options, warrants and other rights to purchase Capital Stock of the relevant Person and the conversion or exchange of all securities convertible or exchangeable into Capital Stock of the relevant Person (whether or not then exercisable, exchangeable or convertible and whether or not "in the money"). "Funding Guarantor" has the meaning set forth in Section 9(e). "GAAP" has the meaning set forth in Section 11(b). "Governmental Entity" means any court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency, including any insurance regulatory authority or agency or Insurance Department. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing (whether by virtue of partnership arrangements, by agreement to keepwell, to purchase assets, goods, securities or services, to take-or-pay, or to -38- maintain a minimum net worth, financial ratio or similar requirements, or otherwise) any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part). The term "Guarantee" used as a verb has a corresponding meaning. "Guaranteed Obligations" has the meaning set forth in Section 9.1(a). "Guarantors" means each of the Subsidiaries of the Issuer named on the signature pages to this Debenture and each additional entity required to become a Guarantor pursuant to Section 6(h) hereof. "Holder" has the meaning set forth in the introductory paragraphs hereto. "Independent Financial Advisor" has the meaning set forth in Section 5(e). "Insurance Acts" means all applicable insurance laws and the applicable rules and regulations thereunder. "Insurance Department" means the Bermuda Registrar of Companies and the Departments of Insurance of the States of Pennsylvania and Illinois. "Insurance Subsidiaries" means (i) Legion Insurance Company, Legion Indemnity Ltd. and Villanova Insurance Company and (ii) each other Subsidiary of the Issuer that is a licensed insurance company. "Interest Payment Date" has the meaning set forth in Section 1. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, advance, time deposit or otherwise. "Investment Securities" means "securities" classified as "trading securities" or "available-for-sale securities" for purposes of FAS 115, in each case within the meaning of FAS 115. "IPC" means Insurance Profit Center. "Issuer" has the meaning set forth in the introductory paragraphs hereto. -39- "Lien" means any lien, mechanic's lien, materialmen's lien, lease, easement, charge, encumbrance, mortgage, conditional sale agreement, title retention agreement, voting trust agreement, assignment by way of security, restriction on voting or transfer, agreement to sell or convey, option, claim, title imperfection, encroachment or other survey defect, pledge, restriction, security interest or adverse claim of any kind, whether arising by contract or under law or otherwise (including any Financing Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the UCC or comparable law of any jurisdiction in respect of any of the foregoing). "Loss Ratio" means a ratio equal to (i) Losses Incurred plus Loss Expenses Incurred (inclusive of allocated and unallocated loss adjustments) divided by (ii) Net Premiums Earned (as set forth in the Issuer's combined annual statements of the U.S. Insurance Subsidiaries). "Maturity Date" has the meaning set forth in the introductory paragraphs hereto. "Maximum Conversion Right Percentage" means a percentage of the total equity ownership of the Issuer, calculated in accordance with the rules and regulations of the New York Stock Exchange, equal to the product of (i) 19.9% and (ii) a fraction, the numerator of which is the number of shares of Common Stock of the Issuer issuable upon conversion of this Debenture subject to the conversion right giving rise to the need to calculate such Maximum Conversion Right Percentage and the denominator of which is the sum of (x) the aggregate number of shares of Common Stock of the Issuer issued or issuable upon conversion of the Convertible Exchangeable Debentures due 2006 of the Issuer and (y) the number of shares of Common Stock of the Issuer issued or issuable upon exercise of the Warrants. "Maximum Voting Rights Percentage" means a percentage of the total voting power of the Issuer equal to (A) the product of (i) 9.9% and (ii) a fraction, the numerator of which is the number of shares of Common Stock of the Issuer issuable upon conversion of this Debenture subject to the conversion right giving rise to the need to calculate such Maximum Voting Right Percentage and the denominator of which is the sum of (w) the aggregate number of issued and outstanding shares of MRM Voting Preferred Stock held by the Holder of this Debenture, (x) the number of shares of Common Stock of the Issuer issued to the Holder of this Debenture as a result of conversion of the Convertible Exchangeable Debentures due 2006 of the Issuer, (y) in case this Debenture is held by a holder who holds Warrants, the number of shares of Common Stock of the Issuer issued or issuable upon exercise of the Warrants held by such holder minus (B) the percentage of the total voting power of the Issuer represented by securities of the Issuer (other than the Transaction Securities) then held by the Holder. "Moody's" means Moody's Investors Service, Inc. or its successor. "MRM Voting Preferred Stock" means shares of preferred stock of the Issuer having a nominal liquidation preference and par value, no dividend rights and aggregate voting rights -40- equal to the aggregate voting rights of the Common Stock of the Issuer issuable upon conversion of all Debentures issued on the Original Issue Date. "Multiemployer Plan" means at any time a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NAIC" means the National Association of Insurance Commissioners. "Newco" has the meaning set forth in the definition of "Restructuring". "Newco Aggregate Ownership Percentage" means 35.9% of the equity ownership of Newco, on a Fully Diluted Basis; provided, however, that if the RHINOS Debentures are issued, "Newco Aggregate Ownership Percentage" shall mean 42.4% of the equity ownership of Newco, on a Fully Diluted Basis. "Newco Common Stock Exchange Date" has the meaning set forth in Section 4(b). "Newco Common Stock Exchange Right" has the meaning set forth in Section 4(b). "Newco Debenture" has the meaning set forth in Section 4(a). "Newco Exchange Right Termination Date" means the date on which the closing sale price of the Issuer's Common Stock exceeds two times the then applicable Conversion Price on each trading day during any period of consecutive trading days beginning no earlier than 90 days after the Required Approvals are obtained and the Restructuring is completed and consisting of 120 trading days plus, if the holders of Debentures exercise a demand registration right pursuant to Section 2.1 of the Registration Rights Agreement entered into in connection with the issuance of the Debentures during such 120 trading day period, the number of trading days from such exercise until 15 days after the effective date of the registration statement filed in connection with such demand registration. "Newco Ownership Percentage" means a percentage ownership of the equity of Newco, on a Fully Diluted Basis, equal to the product of (i) the Newco Aggregate Ownership Percentage and (ii) a fraction, the numerator of which is the aggregate principal amount of this Debenture subject to the Newco Common Stock Exchange Right giving rise to the need to calculate such Newco Ownership Percentage and the denominator of which is the aggregate principal amount of all Debentures originally issued, including the RHINOS Debentures, if any. -41- "Newco Voting Preferred Stock" means shares of preferred stock of Newco having a nominal liquidation preference and par value, no dividend rights and aggregate voting rights equal to the aggregate voting rights of the Common Stock of Newco issuable upon conversion of all Debentures issued on the Original Issue Date. "non-electing share" has the meaning set forth in Section 5(k). "Obligors" means, collectively, the Issuer and the Guarantors; and "Obligor" means any of them. "Original Issue Date" has the meaning set forth in Section 1. "Other Investor Warrants" means the warrants to purchase Common Stock of the Issuer issued to First Union Merchant Banking 2001, LLC, High Ridge Capital Partners II, L.P., Century Capital Partners II and Taracay Investors Company. "Permits" means all domestic and foreign licenses, permits, consents, franchises, orders, authorizations, clearances, certificates, and approvals from Governmental Entities. "Permitted Refinancings" means any incurrence by the Issuer of Debt that refunds, refinances, replaces or extends the Existing Bank Debt of the Company or of a wholly owned Subsidiary of the Company, but only to the extent that (i) such Debt is subject to the Subordination Agreement (if then in effect) to at least the same extent as the Debt being refunded, refinanced, replaced or extended; (ii) such Debt is scheduled to mature either (a) no earlier than the Debt being refunded, refinanced or extended or (b) after the Maturity Date; (iii) such Debt is in an aggregate principal amount that is equal to or less than the sum of (a) the aggregate principal amount then outstanding under the Debt being refunded, refinanced or extended, (b) the amount of accrued and unpaid interest, if any, and premiums owed, if any, not in excess of preexisting prepayment provisions on such Debt being refunded, refinanced or extended, and (c) the amount of customary fees, expenses and costs related to the incurrence of such Debt; (iv) such Debt does not have a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Debt being refinanced; (v) such Debt contains covenants no more onerous that the Debt being refunded, refinanced, replaced or extended; and (vi) such Debt is incurred either by the same Person that initially incurred the Debt being refunded, refinanced, replaced or extended or by the Issuer. "Person" means an individual or a corporation, company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or any agency or political subdivision thereof) or other entity of any kind. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding stan- -42- dards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at the time a member of such ERISA Group for employees of any Person which was at the time a member of the ERISA Group. "Policy Holder Preferred Shares" means shares of Preferred Stock of an IPC (i.e., rent-a-captive) Subsidiary of the Issuer (or of a holding company thereof) issued to policy holders solely in connection with the CRM business consistent with past practices. "Preferred Stock" means, with respect to any Person, any Capital Stock of such Person that has preferential rights over any other Capital Stock of such Person with respect to dividends, distributions or upon liquidation. "Proceeding" has the meaning set forth in Section 8(a). "Program Business" means the business of the Issuer in which it acts as a conduit between producers of specialty books of business and reinsurers of such business. "Put Term" means the period beginning on September 17, 2001 and ending on the earlier of (i) November 17, 2001 and (ii) the date on which all of the Required Approvals have been obtained and the Restructuring has been completed; provided, however, that if any holder of Debentures has exercised its right to have any Debentures mandatorily redeemed pursuant to Section 3(b), the Put Term shall mean such longer period until all such Debentures are indefeasibly paid in full in cash. "Redemption Price" has the meaning set forth in Section 3(b). "Redemption Right" has the meaning set forth in Section 3(b). "Related Person" means any director, officer or employee of the Issuer or any of its Subsidiaries who is also an equity or debt holder of the Issuer or any of its Subsidiaries. "Required Approvals" means all federal, state and local government regulatory (including any Form A approvals and all other approvals relating to insurance) and shareholders approvals necessary for consummation of the Transactions, including all approvals necessary in order to remove any restrictions or limitations on voting rights or conversion contained in any of the Transaction Documents. "Requisite Holders" means the holders of a majority in principal amount of all outstanding Debentures; provided, however, that at any time when XL holds or has the right to vote a majority in principal amount of outstanding Debentures (other than RHINOS Deben- -43- tures), "Requisite Holders" shall mean a majority in principal amount of outstanding Debentures (other than RHINOS Debentures); provided, further, however, that as long as XL owns at least $50.0 million in principal amount of Debentures, XL will be deemed to hold a majority of the principal amount of outstanding Debentures. "Restricted Payment" means, with respect to any Person, (i) any dividend or other distribution on or in respect of any shares of Capital Stock of such Person (except dividends payable solely in shares of Capital Stock of the same class of such Person and except dividends or other distributions by a Subsidiary of the Issuer to the Issuer) or (ii) any direct or indirect payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of such Person's Capital Stock or (b) any option, warrant or other right to acquire shares of such Person's Capital Stock. "Restructuring" means the restructuring of the operating units of the Issuer into two separate holding company structures, resulting in (i) one holding company owning the Issuer's U.S. insurance operations and managing general agency entities and operating through subsidiaries as a specialty insurer writing a selected book of Program Business and (ii) the second holding company, a newly formed company organized under the laws of Bermuda ("Newco"), owning (A) all of the Issuer's fee generating businesses that presently comprise its Corporate Risk Management ("CRM"), Specialty Brokerage and Financial Services business segments and all of the Issuer's non-U.S. insurance operations and (B) the Issuer's IPC (i.e., rent-a-captive) companies, other than Mutual Indemnity (Dublin) Limited (which will be confined solely to its present business), that are principally dedicated to its CRM business segment. As part of the Restructuring, (x) Newco will be entitled to receive all of the fees attributable to the CRM business except that MRM's U.S. Insurance Subsidiaries that write the related policies (which will only be Villanova Insurance Company ("Villanova") where Villanova is legally entitled to write such policies and the prospective holder of the underlying policy does not object to the use of Villanova, or a new company in the case of new or renewal policies) may retain a portion of the premium equal to actual costs, but not more than 1 1/4% and (y) Newco will be given an option to purchase Villanova or such new company for book value. The Restructuring shall be effected in a manner reasonably acceptable to XL, including with respect to capitalization. "RHINOS" means the Auction Rate Reset Preferred Securities, known as "RHINOS," issued by an Affiliate of the Issuer, including the related documentation. "RHINOS Debentures" means Debentures issued to any current or former holders of RHINOS or any of their respective Affiliates in exchange for an equal principal amount of RHINOS and any Debentures issued in exchange for any such Debentures. -44- "Risk-Based Capital" means, for any Person, the ratio (expressed as a percentage), at any time, of the Total Adjusted Capital of such Person to the Authorized Control Level of such Person. "S&P" means Standard & Poor's Ratings Group or its successor. "Securities Act" means the Securities Act of 1933, as amended. "Securities Purchase Agreement" has the meaning set forth in the introductory paragraphs hereto. -45- "Shareholders' Equity" means, with respect to the Issuer and its Subsidiaries at any date, the shareholders' equity of the Issuer and its Subsidiaries determined on a consolidated basis in accordance with GAAP; provided, however, that, for purposes hereof, Shareholders Equity shall be determined without regard to the requirements of FAS 115; and provided, further, that the principal or face amount of the RHINOS shall not be considered to be Shareholders Equity. "Significant Subsidiaries" has the meaning set forth in Section 1-02(w) of Regulation S-X under the Securities Act. "Statutory Accounting Principles" means generally accepted statutory accounting principles for property and casualty insurance companies domiciled in Pennsylvania or Illinois, as applicable. "Subsidiary" means, with respect to any Person, (i) any corporation or other entity of which more than 50% of the Capital Stock or other ownership interests having ordinary voting power to elect more than 50% of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person and (ii) any partnership, association, joint venture or other entity in which such Person, directly or indirectly through Subsidiaries, has a greater than 50% equity interest; provided, however, that for all purposes of this Debenture, MRM Capital Trust I shall not constitute a Subsidiary of the Issuer. "Total Adjusted Capital" means "Total Adjusted Capital" as defined by the NAIC as of December 31, 1998 and as applied in the context of the Risk-Based Capital Guidelines promulgated by the NAIC. In the event that there is a conflict between the risk-based capital formulas adopted by the NAIC and any applicable department of insurance, the calculation of the applicable department of insurance shall govern. "Transaction Documents" means (i) the Debentures, (ii) the Securities Purchase Agreement, (iii) the Collateral Agreement, (iv) the registration rights agreements relating to the Debentures and the Warrants, (v) the Subordination Agreement, (vi) the certificates of designations relating to the MRM Voting Preferred Stock and the Newco Voting Preferred Stock, (vii) the MRM Voting Preferred Stock and the Newco Voting Preferred Stock, (viii) the Warrants and (ix) each other document executed in connection with or pursuant to the Securities Purchase Agreement, including the lock-up agreements and the directors' and officers' voting proxies. "Transaction Securities" means, collectively, the Debentures, the MRM Voting Preferred Stock, the Newco Voting Preferred Stock, the Warrants and the Common Stock of the Issuer or Newco issuable upon conversion or exchange of Debentures or upon exercise of the Warrants. -46- "Transactions" means the issuance, sale and conversion of the Debentures, the MRM Voting Preferred Stock, the Newco Voting Preferred Stock and each of the other transactions contemplated by the Transaction Documents, including the Restructuring, both before and after giving effect to permitted exchanges and/or conversions of the Debentures. "U.S. Insurance Subsidiaries" means Legion Insurance Company, Legion Indemnity Ltd. and Villanova Insurance Company. "Warrants" means collectively the XL Warrant and the Other Investor Warrants. "Weighted Average Life to Maturity" means, when applied to any Debt at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Debt into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "XL" means XL Insurance Ltd. "XL Warrant" means the warrant to purchase Common Stock of the Issuer issued to XL in connection with its purchase of Debentures. (b) Accounting Terms and Determinations. Unless otherwise specified herein, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect in the United States on the date hereof applied on a consistent basis ("GAAP"). (c) Rules of Construction. The definitions in Section 11(a) shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." (d) References. Unless the context shall otherwise require, all references herein to (i) Sections, Exhibits, Schedules and Annexes shall be deemed references to Sections of, and Exhibits, Schedules and Annexes to, this Debenture, (ii) Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons, (iii) agreements and other contractual instruments include subsequent amendments, assignments, and other modifications thereto to the date hereof and thereafter, but in the case of any amendment, assignment or modification after the date -47- hereof, only to the extent such amendments, assignments or other modifications thereto are not prohibited by their terms or the terms of any Transaction Document, (iv) statutes and related regulations include any amendments of same and any successor statutes and regulations, (v) time shall be deemed to be to New York City time and (vi) "ordinary course of business" (and similar phrases) shall mean the ordinary course of business of the Issuer and its Subsidiaries consistent with past practice. SECTION 12. MISCELLANEOUS. (a) This Debenture and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and shall be binding upon any entity succeeding to the Issuer by merger or acquisition of all or substantially all the assets of the Issuer. The Issuer may not assign this Debenture or any rights or obligations hereunder except as specifically provided herein. The Holder may transfer or assign this Debenture at any time without the prior consent of the Issuer, subject to the provisions and restrictions on transfer set forth herein. (b) All notices, demands and requests of any kind to be delivered to any party in connection with this Debenture shall be in writing and shall be deemed to have been duly given if personally or hand delivered or if sent by an internationally-recognized overnight delivery courier or by registered or certified mail, return receipt requested and postage prepaid, or by facsimile transmission addressed as follows: (i) if to the Issuer, to: Mutual Risk Management Ltd. 44 Church Street Hamilton HM12 Bermuda Attention: Chief Executive Officer Facsimile: (441) 292-1867 with a copy to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603-3441 Attention: Richard W. Shepro Facsimile: (312) 701-7711 (ii) if to the Holder, the Holder's address as set forth in the books and records of the Issuer, or to such other address as the party to whom notice is to be given may have fur- -48- nished to the other party hereto in writing in accordance with provisions of this Section 12. Any such notice or communication shall be deemed to have been effectively given (i) in the case of personal or hand delivery, on the date of such delivery, (ii) in the case of an internationally-recognized overnight delivery courier, on the second Business Day after the date when sent, (iii) in the case of mailing, on the fifth Business Day following that day on which the piece of mail containing such communication is posted and (iv) in the case of facsimile transmission, the date of telephone confirmation of receipt. (c) This Debenture may not be modified or amended, or any of the provisions hereof waived, except by written agreement of the Issuer and the Requisite Holders dated after the date hereof; provided, however, that the provisions of Section 1, 2, 3(a), 3(b), 4, 5, 8(a)(i), 8(a)(ii), this Section 12(c), Sections 12(d) and (f) and Section 11 with respect to the definitions of terms used in connection with the foregoing Sections may not be amended without the consent of each Holder of a Debenture affected thereby; and provided, further, however, that any modification or amendment which adversely affects the rights of any Holder shall require the consent of such Holder unless the modification or amendment adversely affects the rights of all Holders in the same manner. (d) THIS DEBENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. ANY DISPUTE UNDER THIS DEBENTURE THAT IS NOT SETTLED BY MUTUAL CONSENT SHALL BE FINALLY ADJUDICATED BY ANY FEDERAL OR STATE COURT SITTING IN THE CITY, COUNTY AND STATE OF NEW YORK, AND THE ISSUER CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS (OR ANY APPELLATE COURT THEREFROM) OVER ANY SUCH DISPUTE. THE ISSUER AND EACH GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN NEW YORK COUNTY IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS DEBENTURE OR ANY OF THE MATTERS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE ISSUER AND EACH GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -49- (e) By the execution and delivery of this Debenture, the Issuer and each Guarantor (i) acknowledges that it will, by separate written instrument, designate and appoint The CT Corporation System, Inc., 111 Eighth Avenue, New York, New York 10011 (and any successor entity) as its authorized agent upon which process may be served in any suit or proceeding arising out of or relating to any of the Transaction Documents that may be instituted in any Federal or state court in the State of New York, New York County or brought under Federal or state securities laws, and acknowledges that The CT Corporation System, Inc. will accept such designation, (ii) waives trial by jury, (iii) agrees that service of process upon The CT Corporation System, Inc. and written notice of said service to the Issuer in accordance with Section 12(b) shall be deemed in every respect effective service of process upon the Issuer or such Guarantor, as the case may be, in any such suit or proceeding and (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law. (f) All payments made or required to be made hereunder shall be made in U.S. dollars. The Issuer and each Guarantor, jointly and severally, agrees to indemnify the Holder against any loss incurred by such party as a result of any judgment or order being given or made against the Issuer or Guarantor, as the case may be, for any U.S. dollar amount due under this Debenture and such judgment or order being expressed and paid in a currency (the "Judgment Currency") other than United States dollars and as a result of any variation as between (i) the rate of exchange at which the United States dollar amount is converted into the Judgment Currency for the purpose of such judgment or order and (ii) the spot rate of exchange in The City of New York at which such party on the date of payment of such judgment or order is able to purchase United States dollars with the amount of the Judgment Currency actually received by such party if such party had utilized such amount of Judgment Currency to purchase United States dollars as promptly as practicable upon such party's receipt thereof. The foregoing indemnity shall continue in full force and effect notwithstanding any such judgment or order as aforesaid. The term "spot rate of exchange" shall include any premiums and costs of exchange payable in connection with the purchase of, or conversion into, United States dollars. All amounts paid to the Holder hereunder shall be paid free and clear of, and without any deduction or withholding for or on account of, any present or future taxes, duties, assessments or other governmental charges of whatever nature imposed or levied by or on behalf of Bermuda or any political subdivision thereof or by any authority therein or thereto or within any other jurisdiction in which the Issuer and Guarantors or any of their Subsidiaries is organized or engaged in business for tax purposes having power to tax, unless such deduction or withholding is required by applicable law, in which event, each of the other parties hereto agrees to pay additional amounts so that the persons entitled to such payments will receive the amount that such persons would otherwise have received but for such deduction or withholding. -50- (g) This Debenture may be executed and delivered to the Holder by a facsimile transmission; such transmission shall be deemed a valid signature. [Signature Pages Follow] IN WITNESS WHEREOF, the Issuer and the Guarantors have executed and delivered this Debenture on the date first above written. MUTUAL RISK MANAGEMENT LTD. By: ---------------------------------------------- Name: Title: By: ---------------------------------------------- Name: Title: MUTUAL GROUP LTD. By: ---------------------------------------------- Name: Title: LEGION FINANCIAL CORP. By: ---------------------------------------------- Name: Title: MGL INVESTMENTS LTD. By: ---------------------------------------------- Name: Title: MRM SECURITIES LTD. By: ---------------------------------------------- Name: Title: MUTUAL FINANCE LTD. By: ---------------------------------------------- Name: Title: MUTUAL RISK MANAGEMENT (HOLDINGS) LTD. By: ---------------------------------------------- Name: Title: ANNEX I FORM OF NOTICE OF ELECTION TO EXERCISE AN EXCHANGE RIGHT Date: To: Mutual Risk Management, Ltd. and [Name of Newco] From: Re: Exercise of an Exchange Right - -------------------------------------------------------------------------------- Pursuant to the terms of the Convertible Exchangeable Debenture Due 2006 (the "Debenture") issued by Mutual Risk Management, Ltd. (the "Issuer") to ______________ ("Holder") dated ___________, 200_, specifically Section 4 thereof, the Holder hereby notifies the Issuer and [Insert name of Newco] of its intention to exercise a right of exchange. [insert one of the following two paragraphs as appropriate:] [Pursuant to Section 4 of the Debenture, the Holder hereby elects to exchange U.S.$__________ in aggregate principal amount and all accrued and unpaid interest thereon for shares of Newco's Common Stock, par value $.01 per share. The date of exchange shall be __________, 200_.] [Pursuant to Section 4 of the Debenture, the Holder hereby elects to exchange U.S.$__________ in aggregate principal amount and all accrued and unpaid interest thereon for an equal aggregate principal amount of Newco's Debentures. The date of exchange shall be __________, 200_.] We have instructed our attorneys to contact the Issuer and [Insert name of Newco] to discuss the timing and documentation of the conversion. Sincerely, [HOLDER] By: --------------------------------------- Name: Title: ANNEX II FORM OF NOTICE OF ELECTION TO EXERCISE A CONVERSION RIGHT Date: To: Mutual Risk Management, Ltd. From: Re: Exercise of a Conversion Right - -------------------------------------------------------------------------------- Pursuant to the terms of the Convertible Exchangeable Debenture Due 2006 (the "Debenture") issued by Mutual Risk Management, Ltd. (the "Issuer") to ______________ ("Holder") dated ___________, 200_, specifically Section 5 thereof, the Holder hereby notifies the Issuer of its intention to exercise a right of conversion. Pursuant to Section 5 of the Debenture, the Holder hereby elects to convert U.S.$__________ in aggregate principal amount and all accrued and unpaid interest thereon for shares of the Issuer's Common Stock, par value $.01 per share. The date of conversion shall be __________, 200_. We have instructed our attorneys to contact the Issuer to discuss the timing and documentation of the conversion. Sincerely, [HOLDER] By: ------------------------------------- Name: Title: ANNEX III FORM OF GUARANTY The undersigned (the "Guarantor") hereby jointly and severally unconditionally guarantees, to the extent set forth in the Convertible Exchangeable Debenture Due 2006 dated as of May 17, 2001, issued by Mutual Risk Management Ltd. (as amended, restated or supplemented from time to time, the "Debenture") to which this Guaranty is attached, and subject to the provisions of the Debenture, (a) the due and punctual payment of the principal of, and premium, if any, and interest on the Debenture, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on overdue principal of, and premium and, to the extent permitted by law, interest, and the due and punctual performance of all other obligations of the Issuer to the Holders, all in accordance with the terms set forth in Section 9 of the Debenture, and (b) in case of any extension of time or payment or renewal of any Debenture or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of the Guarantor to the Holder pursuant to this Guaranty and the Debenture are expressly set forth in Section 9 of the Debenture and reference is hereby made to the Debenture for the precise terms and limitations of this Guaranty. [GUARANTOR] By: --------------------------------------- Name: Title: ANNEX IV FORM OF GUARANTY The undersigned (the "Guarantor") hereby jointly and severally unconditionally guarantees, to the extent set forth in the Convertible Debenture Due 2006 dated as of May 17, 2001, issued by [Newco] (as amended, restated or supplemented from time to time, the "Debenture") to which this Guaranty is attached, and subject to the provisions of the Debenture, (a) the due and punctual payment of the principal of, and premium, if any, and interest on the Debenture, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on overdue principal of, and premium and, to the extent permitted by law, interest, and the due and punctual performance of all other obligations of the Issuer to the Holders, all in accordance with the terms set forth in Section 9 of the Debenture, and (b) in case of any extension of time or payment or renewal of any Debenture or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of the Guarantor to the Holder pursuant to this Guaranty and the Debenture are expressly set forth in Section 9 of the Debenture and reference is hereby made to the Debenture for the precise terms and limitations of this Guaranty. [GUARANTOR] By: --------------------------------------- Name: Title: EX-3 4 xlex3.txt DEBENTURE REGISTRATION RIGHTS AGREEMENT EXECUTION COPY MUTUAL RISK MANAGEMENT LTD. DEBENTURE REGISTRATION RIGHTS AGREEMENT TABLE OF CONTENTS Page 1. Definitions..........................................................2 1.1 Other Definitions...........................................5 2. Registration Rights..................................................5 2.1 Demand Registrations........................................6 2.2 Piggyback Registration......................................9 2.3 Obligations of the Issuers..................................9 2.4 Furnish Information........................................11 2.5 Expenses of Registration...................................11 2.6 Underwriting Requirements..................................12 2.7 Indemnification............................................13 2.8 Termination of Registration Rights.........................16 2.9 "Lock-Up" Agreement........................................16 3. Indenture...........................................................16 4. Miscellaneous.......................................................16 4.1 Amendments; Waivers........................................16 4.2 After-Acquired Shares......................................17 4.3 Successors and Assigns.....................................17 4.4 Rights and Obligations of Transferees......................17 4.5 Further Assurances.........................................17 4.6 Notices....................................................18 4.7 Governing Law; Waiver of Jury Trial........................20 4.8 Severability; Interpretation...............................21 4.9 Table of Contents; Headings................................21 4.10 Entire Agreement...........................................21 4.11 Counterparts...............................................21 4.12 No Third-Party Beneficiaries...............................21 4.13 Execution by Newco.........................................21 (i) DEBENTURE REGISTRATION RIGHTS AGREEMENT THIS DEBENTURE REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of May 17, 2001, by and among Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), and XL Insurance Ltd ("XL"), First Union Merchant Banking 2001, LLC, High Ridge Capital Partners II, L.P., Century Capital Partners II, L.P., Robert A. Mulderig and Taracay Investors Company (each, a "Purchaser" and, collectively, the "Purchasers") and Intrepid Funding Master Trust (the "RHINOS Debenture Holder"). RECITALS WHEREAS, the Company, the Purchasers and the RHINOS Debenture Holder are parties to that certain securities purchase agreement dated as of May 8, 2001 (the "Securities Purchase Agreement") pursuant to which the Purchasers have agreed to purchase 9 3/8% convertible exchangeable debentures due 2006 of the Company in an aggregate principal amount of $112,500,000 (such debentures, together with any RHINOS Debentures issued on or prior to the closing date in respect of the purchase of debentures by the Purchasers, the "MRM Debentures") and the RHINOS Debenture Holder has agreed to exchange RHINOS (as defined in the Securities Purchase Agreement) for RHINOS Debentures having a principal amount equal to the aggregate liquidation preference of the RHINOS tendered in exchange therefor; WHEREAS, the MRM Debentures are convertible into Company Shares or exchangeable for Newco Shares and/or Newco Debentures; and WHEREAS, in order to induce the Purchasers to enter into the Securities Purchase Agreement and to purchase the MRM Debentures, the Company, Newco and the Purchasers desire to enter into this Agreement for the purpose, among others, of establishing certain registration and other rights of the Holders (as defined below); NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: -2- 1. Definitions. (a) "Act" shall mean the Securities Act of 1933, as amended. (b) "Agreement" shall have the meaning set forth in the Preamble to this Agreement. (c) "Business Day" shall mean any day that is not a Saturday, Sunday or a day on which (i) commercial banks in New York City are authorized or required to close or (ii) the New York Stock Exchange is not open for trading. (d) "Common Stock" shall mean the common stock or common shares of the referenced Person. (e) "Common Stock Equivalents" shall mean securities convertible into or exercisable or exchangeable for Common Stock of the referenced Person. (f) "Company" shall have the meaning set forth in the Preamble to this Agreement. (g) "Company Securities" shall mean, collectively, the MRM Debentures and the Company Shares. (h) "Company Shares" shall mean shares of Common Stock of the Company issuable upon conversion of the MRM Debentures. (i) "Debentures" shall mean, collectively, the MRM Debentures and the Newco Debentures. For all purposes of this Agreement, references to Debentures shall be deemed to include a reference to the Voting Preferred Stock issued in connection therewith. (j) "Demand Registration" shall mean a Company Demand Registration and/or a Newco Demand Registration. -3- (k) "Holder" shall mean, as applicable, any Person owning or having the right to acquire a Registrable Security from time to time. (l) "Issuer" shall mean either the Company or Newco, or both as the context requires. (m) "MRM Debentures" shall have the meaning set forth in the Preamble to this Agreement. For all purposes of this Agreement, references to MRM Debentures shall be deemed to include a reference to the Voting Preferred Stock issued in connection therewith. (n) "Newco" shall mean a new company organized under the laws of Bermuda and formed in connection with the Restructuring. (o) "Newco Debentures" means the convertible debentures due 2006 of Newco issued in exchange for MRM Debentures. For all purposes of this Agreement, references to Newco Debentures shall be deemed to include a reference to the Newco Voting Preferred Stock issued in connection therewith. (p) "Newco Securities" shall mean, collectively, the Newco Debentures and the Newco Shares. (q) "Newco Shares" shall mean shares of Common Stock of Newco issuable upon exchange of MRM Debentures or upon conversion of Newco Debentures. (r) "Newco Voting Preferred Stock" shall have the meaning assigned thereto in the Securities Purchase Agreement. (s) "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. (t) "Person" shall mean any individual or a corporation, company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or agency or political subdivision thereof) or other entity of any kind. -4- (u) "Purchaser(s)" shall have the meaning set forth in the Preamble to this Agreement. (v) "register," "registered" and "registration" shall mean a registration effected by preparing and filing with the SEC a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document. (w) "Registrable Securities" shall mean (i) the Company Shares, (ii) the Newco Shares, (iii) the MRM Debentures (including the Voting Preferred Stock issued in connection therewith) and/or (iv) the Newco Debentures (including the Newco Voting Preferred Stock issued in connection therewith), in each case until such time as such securities have been sold pursuant to an effective registration statement or an applicable exemption from registration under the Act and are no longer subject to restrictions on transfer the Act. (x) "Requisite Holders" shall mean the holders of a majority of the Registrable Securities (assuming, solely for purposes of this definition, that all MRM Debentures and Newco Debentures have been converted into Company Shares and Newco Shares, respectively, at the then applicable conversion price); provided, however, that at any time when XL holds a majority of the Registrable Securities (other than RHINOS Debentures), "Requisite Holders" shall mean a majority of the Registrable Securities (other than RHINOS Debentures); and provided, further, however, that so long as XL owns at least $50.0 million principal amount of Debentures, XL will be deemed to own a majority of the Registrable Securities. (y) "Restructuring" shall have the meaning assigned thereto in the Securities Purchase Agreement. (z) "RHINOS Debenture Holder" shall have the meaning set forth in the preamble to this Agreement. (aa) "RHINOS Debentures" shall have the meaning assigned thereto in the Securities Purchase Agreement. (bb) "Rule 144" shall mean Rule 144 promulgated under the Act. -5- (cc) "SEC" shall mean the Securities and Exchange Commission. (dd) "Securities Purchase Agreement" shall have the meaning set forth in the Recitals to this Agreement. (ee) "Voting Preferred Stock" shall have the meaning set forth in the Securities Purchase Agreement. (ff) "XL" shall have the meaning set forth in the preamble to this Agreement. 1.1 Other Definitions Defined Term in Section ---- ---------- "Company Demand Registration" .................. Section 2.1(a) "Indemnified Party".................................. Section 2.7(a) "Indemnified Person(s)".............................. Section 2.7(b) "Indenture".......................................... Section 3 "Initiating Holders"................................. Section 2.1(d) "Newco Demand Registration".......................... Section 2.1(b) "selling security holder"............................ Section 2.6 "Violation".......................................... Section 2.7(a) Other capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in the Securities Purchase Agreement. 2. Registration Rights. The Company and Newco, jointly and severally, covenant and agree as follows: -6- 2.1 Demand Registrations. (a) Holders of MRM Debentures/Company Shares. The Holders of (i) at least $10.0 million in principal amount of MRM Debentures or (ii) at least 9.0% of the then outstanding Company Shares shall have the right at any time to make a written request of the Company to register and, upon the receipt of such written request, the Company shall register under the Act the number or aggregate principal amount, as applicable, of Registrable Securities which are the subject of such request (each, a "Company Demand Registration"). (b) Holders of Debentures/Newco Shares. (i) The Holders of at least 20% of the outstanding Registrable Securities (other than Company Shares) shall have the right, with the prior written consent of XL (so long as XL owns at least 20% of the outstanding Registrable Securities (other than Company Shares) at such time), at any time to make a written request of Newco to register and, upon receipt of such written request, Newco shall register under the Act the number of Newco Shares that are the subject of such request or that are issuable upon exchange of the Debentures that are the subject of such request (each, a "Newco Demand Registration"). (ii).....The Holders of at least 20% of the outstanding Registrable Securities (other than Company Shares) may also require, with the prior written consent of XL (so long as XL owns at least 20% of the outstanding Registrable Securities (other than Company Shares) at such time), the Company to distribute up to 20% of the Common Stock of Newco owned by the Company to the holders of Common Stock of the Company in order to create a liquid trading market for such Common Stock of Newco. (c) (i) In connection with a Company Demand Registration made pursuant to Section 2.1(a), the Company shall: (A) within ten (10) days of the receipt thereof, give written notice of such request to all Holders of Company Securities; and (B) file as soon as practicable, and in any event within ninety (90) days of the receipt of such request, a registration statement under the Act covering all Company Securities constituting Registrable Securities (subject to the limitations of Section 2.1(d) and subject to the provisions of Section 2.6), which the Holders of the ap- -7- plicable Company Security request to be registered, within twenty (20) days of the mailing of such notice by the Issuer in accordance with Section 4.6. (ii) In connection with a Newco Demand Registration made pursuant to Section 2.1(b), Newco shall: (A) within ten (10) days of the receipt thereof, give written notice of such request to all Holders of Newco Securities; and (B) file as soon as practicable, and in any event within ninety (90) days of the receipt of such request, a registration statement under the Act covering all Newco Securities constituting Registrable Securities (subject to the limitations of Section 2.1(d) and subject to the provisions of Section 2.6), which the Holders of the applicable Newco Security request to be registered; within twenty (20) days of the mailing of such notice by the Issuer in accordance with Section 4.6. (d) If the Holders initiating a registration request pursuant to Section 2.1(a) and (b) (any such Holders, the "Initiating Holders") intend to distribute the applicable Registrable Securities covered by their request by means of an underwriting, they shall so advise the applicable Issuer as a part of their request made pursuant to Section 2.1(a) or (b), as the case may be, and such Issuer shall include such information in the applicable written notice referred to in Section 2.1(c)(i)(A) or 2.1(c)(ii)(A). The managing underwriter will be selected by the majority in interest of the Initiating Holders and shall be reasonably acceptable to the applicable Issuer, or, if such Initiating Holders so direct, the applicable Issuer shall select the managing underwriter, which shall be reasonably acceptable to the Initiating Holders. In any such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement, a custody agreement and a power of attorney, each in customary form with the underwriter or underwriters selected for such underwriting and deliver an opinion of counsel in customary form to such underwriter or underwriters. (e) Notwithstanding the foregoing, if the applicable Issuer shall furnish to Holders requesting a registration statement pursuant to this Section 2.1 a certificate signed by -8- the president or chief executive officer of the applicable Issuer stating that in the good faith judgment of its board of directors it would be materially adverse to such Issuer and its security holders for such registration statement to be filed at that time and it is therefore essential to defer the filing of such registration statement, or the filing of such registration statement would materially interfere with or otherwise adversely affect in any material respect any financing, acquisition, corporate reorganization or other material transaction or development involving such Issuer, such Issuer shall have the right to defer such filing for a period of not more than 90 days after receipt of the request of the Initiating Holders; provided, however, that each Issuer may utilize this right no more than once in any twelve-month period. (f) Notwithstanding anything else in this Agreement to the contrary, neither Issuer shall be obligated to effect, or to take any action to effect, any Demand Registration pursuant to this Section 2.1 for an Initiating Holder (other than an Initiating Holder that (x) holds at least $15.0 million in principal amount of Debentures or 13.0% of the then outstanding Company Shares and (y) has not previously initiated a Demand Registration) after the Issuers have, in the aggregate, effected three (3) Demand Registrations pursuant to this Section 2.1 and such Demand Registrations have been declared or ordered effective; provided, however, that such registrations remain effective under the Act until the earlier of (x) an aggregate of 120 days after the effective date thereof or (y) the consummation of the distribution by the Holders participating in such registration of all of the Registrable Securities covered thereby; provided, further, that a registration shall not constitute a Demand Registration if (A) after such Demand Registration has become effective such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason not attributable to the Initiating Holders and such interference is not thereafter eliminated or (B) the conditions specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived (other than any conditions, the satisfaction of which is solely within the control of the selling Holders). (g) A registration will not count as a Demand Registration until it has become effective (unless the Initiating Holders withdraw the Registrable Securities or if such failure to become effective results solely from the failure of the Initiating Holders to fulfill an obligation or satisfy a condition under this Agreement, in which cases such demand will count as a Demand Registration unless the Initiating Holders agree to pay all expenses of such registration (as described in Section 2.5)). Except as provided above, the Company will pay all expenses in connection with any registration initiated as a Demand Registration, whether or not it becomes effective. -9- 2.2 Piggyback Registration. (a) Debentures. If either Issuer proposes to register (including for this purpose a registration effected by the applicable Issuer for security holders other than the Holders) any debt securities solely for cash, then the applicable Issuer shall, at such time, promptly give each Holder of Company Debentures or Newco Debentures, as the case may be, written notice of such registration setting forth the date on which such Issuer proposes to file such registration statement (which date shall be no earlier than 20 days from the date of such notice). Upon the written request of any such Holder given within twenty (20) days after mailing of such notice by such Issuer in accordance with Section 4.6, the applicable Issuer shall cause to be registered under the Act and include in the same registration statement all of the Company Debentures or Newco Debentures, as the case may be, that each such Holder has requested to be registered and take any and all other actions reasonably necessary under United States federal or state laws or otherwise to permit such Holders to effect the proposed sale or other disposition of the Company Debentures or Newco Debentures, as the case may be. (b) Company/Newco Shares. If either Issuer proposes to register any of its Common Stock or Common Stock Equivalents under the Act in connection with the public offering of Common Stock or Common Stock Equivalents solely for cash, then such Issuer shall, at such time, promptly give each Holder of Company Shares or Newco Shares, as the case may be, written notice of such registration setting forth the date on which such Issuer proposes to file such registration statement (which date shall be no earlier than 20 days from the date of such notice). Upon the written request of any such Holder given within twenty (20) days after mailing of such notice by such Issuer in accordance with Section 4.6, such Issuer shall cause to be registered under the Act and include in the same registration statement all of the Company Shares or Newco Shares, as the case may be, that each such Holder has requested to be registered and take any and all other actions reasonably necessary under United States federal or state laws or otherwise to permit such Holders to effect the proposed sale or other disposition of the Company Shares or Newco Shares, as the case may be. 2.3 Obligations of the Issuers. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the applicable Issuer shall promptly: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and keep such registration statement effective for a period of up to one hundred twenty (120) days or until the distribution contemplated in the Regis- -10- tration Statement has been completed; provided, however, that before filing any such registration statement or amendments thereto, the applicable Issuer will furnish to the Holders of Registrable Securities proposed to be included in any such registration statement copies of all such documents proposed to be filed and afford such Holders a reasonable opportunity to comment thereon; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement; (c) furnish to the Holders of Registrable Securities proposed to be included in any such registration statement such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) use its best efforts to register and qualify the securities covered by such registration statement under the securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided, however, that the Issuer shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdictions; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement in usual and customary form with the managing underwriter of such offering and, in connection therewith, the applicable Issuer shall cooperate with the managing underwriter and shall attend such meetings and travel to such places to aid in the marketing of such underwritten public offering as the underwriters may reasonably request; (f) notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; -11- (g) use its best efforts to cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the applicable Issuer are then listed; (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration statement; (i) in the event of an underwritten public offering, use its best efforts to obtain, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 2, (i) an opinion, dated such date, of the counsel representing the applicable Issuer for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter, dated such date, from the independent certified public accountants of the applicable Issuer, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities; and (j) take such other customary and reasonable actions as the Holders of a majority of the Registrable Securities to be included in such registration statement or the underwriters, if any, reasonably request in order to facilitate the distribution of such Registrable Securities. 2.4 Furnish Information. It shall be a condition precedent to the obligations of the applicable Issuer to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to such Issuer such information regarding itself, the Registrable Securities held by it and the intended method of disposition of such Registrable Securities as shall be reasonably required to effect the registration of such Holder's Registrable Securities. 2.5 Expenses of Registration. All expenses (other than underwriting discounts and commissions) incurred in connection with registrations, filings or qualifications pursuant to Section 2.1 or 2.2, including (without limitation) all registration, filing and qualification fees, SEC and state "Blue Sky" filings, printers' and accounting fees (including the cost of "cold comfort" letters, if required), fees and disbursements of counsel for the applicable Issuer -12- and the reasonable fees and disbursements of one counsel for the Holders of Registrable Securities (selected by the Holders of a majority of Registrable Securities to be registered) included in each registration made pursuant to this Agreement shall be borne by such Issuer; provided, however, that such Issuer shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 if the registration request is subsequently withdrawn or the registration statement does not become effective, in each case, in the circumstances described in Section 2.1(g) (in which case all participating Holders shall severally and proportionately bear such expenses), unless the Requisite Holders agree to forfeit their right to one (1) demand registration right pursuant to Section 2.1(g). 2.6 Underwriting Requirements. (a) In connection with any offering involving an underwriting of Registrable Securities, such Issuer shall not be required under Section 2.2 to include any Registrable Securities of a Holder in such underwriting unless such Holder accepts the terms of the underwriting as agreed upon between the applicable Issuer and the underwriters; provided, however, that under no circumstances will any Holder be obligated to make representations or provide indemnities except with respect to information reasonably required to be furnished pursuant to Section 2.4. (b) With respect to a registration pursuant to Section 2.1, if the total amount of securities, including Registrable Securities, requested by security holders to be included in such offering exceeds the amount of securities that the managing underwriters with respect to such registration determine in their sole discretion is compatible with the success of the offering, then the applicable Issuer shall be required to include in the offering only that number of such securities which the managing underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the Holders according to the total amount of securities entitled to be included therein owned by each such Holder or in such other proportions as shall be mutually agreed to by such Holders); provided, however, that in no event shall any Registrable Securities proposed to be included in any registration be excluded from such offering if the securities of any selling security holder other than a Holder of Registrable Securities or any securities offered by either Issuer are included. (c) With respect to a registration pursuant to Section 2.2, if the total amount of securities, including Registrable Securities, requested by security holders to be included in such offering exceeds the amount of securities that the managing underwriters with respect to such registration determine in their sole discretion is compatible with the success of the offering, then the applicable Issuer shall be required to include in the offering only that number of such securities which the managing underwriters determine in their sole discretion -13- will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the applicable Issuer and the selling security holders, including the Registrable Securities, according to the total amount of securities entitled to be included therein owned by each such selling security holder or in such other proportions as shall mutually be agreed to by such selling security holders). 2.7 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 2: (a) To the extent permitted by law, each Issuer will indemnify and hold harmless each selling Holder, and each officer, director, employee, affiliate and each person, if any, who controls such Holder within the meaning of the Act or the 1934 Act (any of the foregoing persons, an "Indemnified Party"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state securities law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Issuer of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the applicable Issuer will pay to each Indemnified Party, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 2.7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the applicable Issuer (which consent shall not be unreasonably withheld or delayed). Nor shall any Issuer be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is directly based upon a Violation which occurs in reliance upon and in conformity with written information reasonably required by Section 2.4 furnished for use in connection with such registration by any Indemnified Party, or which results from the failure of an Indemnified Party to deliver a final, amended or supplemental prospectus furnished an Indemnified Party and required to be delivered if the Violation would not have occurred if the delivery had been made. -14- (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the applicable Issuer, each of its directors, officers, employees and affiliates, and each person, if any, who controls the applicable Issuer within the meaning of the Act or the 1934 Act, any other Holder selling securities in such registration statement and any controlling person of any such other Holder (any of the foregoing persons, an "Indemnified Person(s)"), against any losses, claims, damages or liabilities (joint or several) to which any of such Indemnified Persons may become subject under the Act, or the 1934 Act or other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are directly based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information reasonably required by Section 2.4 furnished by such Holder for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any such Indemnified Person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 2.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld or delayed. Nor shall such Holder be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which results from the failure of any Indemnified Person to deliver a final, amended or supplemental prospectus furnished to any Indemnified Person, and required to be delivered, if the Violation would not have occurred if the delivery had been made; provided, however, that in no event shall any indemnity under this Section 2.7(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually and reasonably satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, reasonably acceptable to the indemnifying party, with the reasonable fees and expenses of such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to -15- actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.7, but the omission so to deliver written notice to the indemnifying party will not relieve the indemnifying party of any liability that the indemnifying party may have to any indemnified party otherwise under this Section 2.7. (d) If the indemnification provided for in this Section 2.7 is held by a court of competent jurisdiction to be unavailable to an indemnified party or is insufficient to hold any indemnified party harmless with respect to any loss, liability, claim, damage, or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative benefits received by the indemnified party on the one hand and the indemnifying party on the other, and the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control; provided, however, that any party hereto who is adversely affected thereby has consented in writing to such provisions in the underwriting agreement. (f) The obligations of the Issuers and the Holders under this Section 2.7 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 2, and otherwise. -16- 2.8 Termination of Registration Rights. This Agreement (other than the provisions of Sections 2.7, 2.9, 3, 4.6 and 4.7) shall terminate and be of no further force and effect on the first date on which no Registrable Securities are outstanding. 2.9 "Lock-Up" Agreement. Each Issuer hereby acknowledges and agrees that for a period of 90 days after any date upon which any Holders have made a Company Demand Registration and for a period of 180 days after any date upon which any Holders have made a Newco Demand Registration, it shall not (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, in respect of any of its debt securities or capital stock, or any securities convertible into or exercisable or exchangeable therefor or (ii) enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of such securities, in cash or otherwise or (iii) file or cause to become effective any registration statement under the Act other than that related solely to a Demand Registration, in each case, other than such securities to be sold pursuant to the Securities Purchase Agreement and other than any securities issued pursuant to an employee benefit or employee stock option plan of the Issuer. 3. Indenture. Upon registration of any Debentures pursuant to this Agreement, the applicable Issuer will provide a trust indenture (the "Indenture") with an independent institutional trustee meeting the qualification requirements under the Trust Indenture Act of 1939, as amended. The Indenture shall govern the terms of the Debentures so registered and contain terms substantially identical to the terms of the Debentures so registered. 4. Miscellaneous. 4.1 Amendments; Waivers. The provisions of this Agreement may be modified or amended, and waivers and consents to the performance and observance of the terms hereof may be given, only by written instrument executed and delivered by each of the Company, Newco (if then a signatory) and the Requisite Holders; provided, however, that any modification or amendment which adversely affects the rights of any Holder shall require the consent of such Holder unless the modification or amendment adversely affects the rights of all Holders in the same manner. The failure at any time to require performance of any provision hereof shall in no way affect the full right to require such performance at any time thereafter (unless performance thereof has been waived in accordance with the terms hereof for all pur- -17- poses and at all times by the party to whom the benefit of such performance is to be rendered). The waiver by any party to this Agreement of a breach of any provision hereof shall not be taken or held to be a waiver of any succeeding breach of such provision or any other provision or as a waiver of the provision itself. 4.2 After-Acquired Shares. All provisions of this Agreement shall apply to all securities and instruments (i) received by a Holder as a dividend on or other payment made to holders of shares of capital stock of the Company, or (ii) issued in connection with a split of shares of capital stock of the applicable Issuer, or as a result of any exchange for or reclassification of shares of capital stock of the applicable Issuer, or a reorganization, recapitalization consolidation or merger. 4.3 Successors and Assigns. This Agreement and all covenants and agreements contained in this Agreement by or on behalf of the parties hereto shall bind, and inure to the benefit of, the respective successors and permitted assigns of the parties hereto. 4.4 Rights and Obligations of Transferees. If a Holder transfers any or all of its Registrable Securities to any person in accordance with the terms of the Debentures and the Securities Purchase Agreement, such person and each subsequent transferee shall have the same rights hereunder as are given to such Holder, and shall be subject to the same obligations as are imposed upon such Holder by the terms hereof (and all references herein to a Holder shall include such transferee), unless otherwise provided herein. Any such transferee shall execute and deliver to the applicable Issuer an instrument acknowledging such transferee's rights and obligations hereunder to be consistent with this Section 4.4. 4.5 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable legal requirements, to consummate and make effective the transactions contemplated by this Agreement. (b) If at any time after the closing any further action is necessary or reasonably desirable to carry out the purposes of this Agreement, the parties hereto shall take or cause to be taken all such necessary or convenient action and execute, and deliver and file, or cause to be executed, delivered and filed, all necessary or convenient documentation. -18- (c) Each of the Issuers agrees that after the date of this Agreement, it shall not grant any Person registration rights other than piggyback registration rights which are subordinate to the Holders hereunder with respect to any class of debt or equity security of the Issuers without the consent of the Requisite Holders, which consent shall not be unreasonably withheld. 4.6 Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered by hand or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and shall be deemed given when so delivered by hand, or if mailed, three Business Days after mailing (two Business Days in the case of express mail or overnight courier service), as follows: (i) If to the Company: Mutual Risk Management Ltd. 44 Church Street Hamilton HM12 Bermuda Attention: Chief Executive Officer Telephone: (441) 295-5688 Facsimile: (441) 292-1867 with a copy to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603 Attention: Richard W. Shepro Telephone: (312) 782-0600 Facsimile: (312) 701-7711 -19- (ii) If to the Purchasers: XL Insurance Ltd c/o XL Capital Ltd. XL House One Bermudiana Road Hamilton HM 11 Bermuda Attention: Paul Giordano Telephone: (441) 294-7162 Facsimile: (441) 292-5280 First Union Merchant Banking 2001, LLC One First Union Center - 12th Floor 201 South College Street Charlotte, North Carolina 28288-0732 Attention: Wellford Tabor Telephone: (704) 374-4540 Facsimile: (704) 374-6711 High Ridge Capital Partners II, L.P. 105 Rowayton Avenue Rowayton, Connecticut 06853 Attention: James L. Zech Telephone: (203) 831-0104 Facsimile: (203) 831-0480 Century Capital Partners II, L.P. c/o Century Capital Management Inc. One Liberty Square Boston, Massachusetts 02109 Attention: Craig Eisenacher Telephone: (617) 482-3060 Facsimile: (617) 542-9398 Taracay Investors Company 104 Wallacks Point Stamford, Connecticut 06902 -20- Attention: Robert Clements Telephone: (203) 862-4343 Facsimile: (203) 625-8366 (iii) If to the RHINOS Debenture Holders: Intrepid Funding Master Trust c/o Wilmington Trust Company, as Owner-Trustee Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Mary Kay Pupillo Telephone: (302) 651-8558 Facsimile: (302) 651-8882 4.7 Governing Law; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. ANY DISPUTE UNDER THIS AGREEMENT THAT IS NOT SETTLED BY MUTUAL CONSENT SHALL BE FINALLY ADJUDICATED BY ANY FEDERAL OR STATE COURT SITTING IN THE CITY, COUNTY AND STATE OF NEW YORK, AND THE ISSUER CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS (OR ANY APPELLATE COURT THEREFROM) OVER ANY SUCH DISPUTE. EACH OF THE COMPANY AND NEWCO HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN NEW YORK COUNTY IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE MATTERS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. EACH OF THE COMPANY AND NEWCO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -21- 4.8 Severability; Interpretation. If any provision in this Agreement is agreed by the parties hereto to be, is deemed to be or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto, (i) such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties hereto, it will be deleted, with effect from the date of such agreement or such earlier date as the parties hereto may agree, and (ii) the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 4.9 Table of Contents; Headings. The table of contents and section headings herein are for convenience only and shall not affect the construction hereof. 4.10 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto relating to the subject matter hereof and supersedes any and all prior oral or written agreements, representations or warranties, contracts, understandings, correspondence, conversations and memoranda, whether written or oral, between the parties hereto, or between or among any agents, representatives, parents, subsidiaries, affiliates, predecessors in interest or successors in interest, with respect to the subject matter hereof. 4.11 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties other than Newco and delivered to the other party. 4.12 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and the Holders and is not intended to confer any benefit upon any other person or entity or infringe upon any rights or remedies, except as contemplated in this Section 4. 4.13 Execution by Newco. Promptly after the formation of Newco, the Company will cause Newco to execute and deliver a counterpart to this Agreement by signing in the space provided on the signature page hereof, pursuant to which Newco shall, by so executing this Agreement, become a party to this Agreement as if Newco were an original party hereto and upon which this Agreement shall constitute a valid and binding agreement of Newco, enforceable in accordance with its terms. -22- [Signature Pages Follow] -23- IN WITNESS WHEREOF, the parties hereto have executed this Debentures Registration Rights Agreement as of the date first above written. MUTUAL RISK MANAGEMENT LTD. By: /s/ Elizabeth B. Price ------------------------------------------ Name: Elizabeth B. Price Title: Secretary XL INSURANCE LTD By: /s/ Clive Tobin ------------------------------------------ Name: Clive Tobin Title: President & Chief Executive Officer FIRST UNION MERCHANT BANKING 2001, LLC By: /s/ Frederick W. Eubank, II ------------------------------------------ Name: Frederick W. Eubank, II Title: Partner -24- HIGH RIDGE CAPITAL PARTNERS II, L.P. By: /s/ Steve Tynan ----------------------------------------- Name: Steve Tynan Title: President, Liberty Street Corp., as general partner of Liberty Street Partners, LP, as member of High Ridge GP II LLC, as general partner of High Ridge Capital Partners II, L.P. CENTURY CAPITAL PARTNERS II, L.P. By: CCP CAPITAL II LLC, its general partner By: /s/ Craig Eisenacher ---------------------------------------- Name: Craig Eisenacher Title: Managing Member /s/ Robert A. Mulderig ------------------------------------- Robert A. Mulderig TARACAY INVESTORS COMPANY By: /s/ Robert Clements ------------------------------------------ Name: Robert Clements Title: -25- INTREPID FUNDING MASTER TRUST By: /s/ Mary Kay Pupillo ------------------------------------------ Name: Mary Kay Pupillo Title: Senior Fianncial Services Officer EX-4 5 xlex4.txt WARRANT REGISTRATION RIGHTS AGREEMENT MUTUAL RISK MANAGEMENT LTD. WARRANT REGISTRATION RIGHTS AGREEMENT TABLE OF CONTENTS Page 1. Definitions..........................................................1 1.1 Other Definitions...........................................3 2. Registration Rights..................................................3 2.1 Demand Registration.........................................3 2.2 Piggyback Registration......................................5 2.3 Obligations of the Company..................................6 2.4 Furnish Information.........................................7 2.5 Expenses of Registration....................................8 2.6 Underwriting Requirements...................................8 2.7 Indemnification.............................................9 2.8 Termination of Registration Rights.........................12 2.9 "Lock-Up" Agreement........................................12 3. Miscellaneous.......................................................12 3.1 Amendments; Waivers........................................12 3.2 After-Acquired Shares......................................12 3.3 Successors and Assigns.....................................13 3.4 Rights and Obligations of Transferees......................13 3.5 Further Assurances.........................................13 3.6 Notices....................................................13 3.7 Governing Law; Waiver of Jury Trial........................15 3.8 Severability; Interpretation...............................16 3.9 Table of Contents; Headings................................16 3.10 Entire Agreement...........................................16 3.11 Counterparts...............................................16 3.12 No Third-Party Beneficiaries...............................17 (i) WARRANT REGISTRATION RIGHTS AGREEMENT THIS WARRANT REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of May 17, 2001, by and among Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), and XL Insurance Ltd ("XL"), First Union Merchant Banking 2001, LLC, High Ridge Capital Partners II, L.P., Century Capital Partners II, L.P. and Taracay Investors Company (each, a "Purchaser" and, collectively, the "Purchasers"). RECITALS WHEREAS, the Company and the Purchasers are parties to that certain securities purchase agreement dated as of May 8, 2001 (the "Securities Purchase Agreement") pursuant to which the Purchasers and certain other purchasers have agreed to purchase 9 3/8% convertible exchangeable debentures due 2006 of the Company (the "MRM Debentures") in an aggregate principal amount of $112,500,000; WHEREAS, in connection with the purchase of MRM Debentures, the Company has agreed to issue warrants (the "Warrants") to purchase an aggregate of 2,151,943 shares of Common Stock of the Company (the Common Stock issuable upon exercise of the Warrants being referred to herein as the "Warrant Shares") to the Purchasers; and WHEREAS, in order to induce the Purchasers to enter into the Securities Purchase Agreement and to purchase the MRM Debentures, the Company and the Purchasers desire to enter into this Agreement for the purpose, among others, of establishing certain registration and other rights of the Holders (as defined below); NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. (a) "Act" means the Securities Act of 1933, as amended. (b) "Agreement" shall have the meaning set forth in the Preamble to this Agreement. -2- (c) "Business Day" shall mean any day that is not a Saturday, Sunday or a day on which (i) commercial banks in New York City are authorized or required to close or (ii) the New York Stock Exchange is not open for trading. (d) "Common Stock" shall mean the common stock or common shares of the referenced Person. (e) "Common Stock Equivalents" shall mean securities convertible into or exercisable or exchangeable for Common Stock of the referenced Person. (f) "Company" shall have the meaning set forth in the Preamble to this Agreement. (g) "Holder" shall mean, as applicable, any Person owning or having the right to acquire a Registrable Security from time to time. (h) "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. (i) "Person" shall mean any individual or a corporation, company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or agency or political subdivision thereof) or other entity of any kind. (j) "Purchasers" shall have the meaning set forth in the Preamble to this Agreement. (k) "register," "registered" and "registration" shall mean a registration effected by preparing and filing with the SEC a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document. (l) "Registrable Securities" shall mean the Warrants and the Warrant Shares, in each case until such time as such securities have been sold pursuant to an effective registration statement or an applicable exemption from registration under the Act and are no longer subject to restrictions on transfer under the Act. (m) "Requisite Holders" shall mean the holders of a majority of the outstanding shares of Common Stock of the Company issued or issuable upon exercise of the Warrants and constituting Registrable Securities. -3- (n) "Rule 144" shall mean Rule 144 promulgated under the Act. (o) "SEC" shall mean the Securities and Exchange Commission. (p) "Securities Purchase Agreement" shall have the meaning set forth in the Recitals to this Agreement. (q) "Warrants" shall have the meaning set forth in the Recitals to this Agreement. (r) "Warrant Shares" shall have the meaning set forth in the Recitals to this Agreement. 1.1 Other Definitions Defined Term in Section ---- ---------- "Demand Registration" .......................... Section 2.1(a) "Indemnified Party".................................. Section 2.7(a) "Indemnified Person(s)".............................. Section 2.7(b) "Initiating Holders"................................. Section 2.1(c) "selling security holder"............................ Section 2.6 "Violation".......................................... Section 2.7(a) Other capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in the Securities Purchase Agreement. 2. Registration Rights. The Company covenants and agrees as follows: 2.1 Demand Registration. (a) The Holders of a majority of the then outstanding Registrable Securities shall have the right at any time to make a written request of the Company to register and, upon the receipt of such written request, the Company shall register under the Act the number or aggregate principal amount, as applicable, of Registrable Securities which are the subject of such request (each, a "Demand Registration"). (b) In connection with a Demand Registration made pursuant to Section 2.1, the Company shall: -4- (i) within ten (10) days of the receipt thereof, give written notice of such request to all Holders of Warrants and Warrant Shares; and (ii) file as soon as practicable, and in any event within ninety (90) days of the receipt of such request, a registration statement under the Act covering all Warrants or Warrant Shares, as the case may be, constituting Registrable Securities (subject to the limitations of Section 2.1(c) and subject to the provisions of Section 2.6), which the Holders of the applicable Registrable Securities request to be registered, within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.6. (c) If the Holders initiating a registration request pursuant to Section 2.1(a) (any such Holders, the "Initiating Holders") intend to distribute the applicable Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2.1(a) and the Company shall include such information in the applicable written notice referred to in Section 2.1(b)(i). The managing underwriter will be selected by the majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company, or, if such Initiating Holders so direct, the Company shall select the managing underwriter, which shall be reasonably acceptable to the Initiating Holders. In any such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement, a custody agreement and a power of attorney, each in customary form with the underwriter or underwriters selected for such underwriting and deliver an opinion of counsel in customary form to such underwriter or underwriters. (d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.1 a certificate signed by the president or chief executive officer of the Company stating that in the good faith judgment of its board of directors it would be materially adverse to the Company and its security holders for such registration statement to be filed at that time and it is therefore essential to defer the filing of such registration statement, or the filing of such registration statement would materially interfere with or otherwise adversely affect in any material respect any financing, acquisition, corporate reorganization or other material transaction or development involving the Company, the Company shall have the right to defer such filing for a period of not more than 90 days after receipt of the request of the Initiating Holders; provided, however, that the Company may utilize this right no more than once in any twelve-month period. -5- (e) Notwithstanding anything else in this Agreement to the contrary, (i) the Company shall not be obligated to effect, or to take any action to effect, any Demand Registration pursuant to this Section 2.1 for an Initiating Holder after the Company has effected one (1) Demand Registration pursuant to this Section 2.1 in response to a registration request by such Initiating Holder and such Demand Registration has been declared or ordered effective; provided, however, that such registration remains effective under the Act until the earlier of (x) an aggregate of 120 days after the effective date thereof or (y) the consummation of the distribution by the Holders participating in such registration of all of the Registrable Securities covered thereby; provided, further, that a registration shall not constitute a Demand Registration if (A) after such Demand Registration has become effective such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason not attributable to the Initiating Holders and such interference is not thereafter eliminated or (B) the conditions specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived (other than any conditions, the satisfaction of which is solely within the control of the selling Holders). (f) A registration will not count as a Demand Registration until it has become effective (unless the Initiating Holders withdraw the Registrable Securities or if such failure to become effective results solely from the failure of the Initiating Holders to fulfill an obligation or satisfy a condition under this Agreement, in which cases such demand will count as a Demand Registration unless the Initiating Holders agree to pay all expenses of such registration (as described in Section 2.5)). Except as provided above, the Company will pay all expenses in connection with any registration initiated as a Demand Registration, whether or not it becomes effective. 2.2 Piggyback Registration. (a) Company Shares. If the Company proposes to register any of its Common Stock or Common Stock Equivalents under the Act in connection with the public offering of Common Stock or Common Stock Equivalents solely for cash, then the Company shall, at such time, promptly give each Holder of Registrable Securities written notice of such registration setting forth the date on which the Company proposes to file such registration statement (which date shall be no earlier than 20 days from the date of such notice). Upon the written request of any such Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.6, the Company shall cause to be registered under the Act and include in the same registration statement all of the Registrable Securities that each such Holder has requested to be registered and take any and all other actions reasonably -6- necessary under United States federal or state laws or otherwise to permit such Holders to effect the proposed sale or other disposition of the Registrable Securities. 2.3 Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall promptly: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and keep such registration statement effective for a period of up to one hundred twenty (120) days or until the distribution contemplated in the Registration Statement has been completed; provided, however, that before filing any such registration statement or amendments thereto, the Company will furnish to the Holders of Registrable Securities proposed to be included in any such registration statement copies of all such documents proposed to be filed and afford such Holders a reasonable opportunity to comment thereon; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement; (c) furnish to the Holders of Registrable Securities proposed to be included in any such registration statement such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) use its best efforts to register and qualify the securities covered by such registration statement under the securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdictions; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement in usual and customary form with the managing underwriter of such offering and, in connection therewith, the applicable Company shall cooperate with the managing underwriter and shall attend such meetings and travel to such places to aid in the marketing of such underwritten public offering as the underwriters may reasonably request; -7- (f) notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) use its best efforts to cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; (h) provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration statement; (i) in the event of an underwritten public offering, use its best efforts to obtain, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 2, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter, dated such date, from the independent certified public accountants of the applicable Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities; and (j) take such other customary and reasonable actions as the Holders of a majority of the Registrable Securities to be included in such registration statement or the underwriters, if any, reasonably request in order to facilitate the distribution of such Registrable Securities. 2.4 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that the Holder shall furnish to such Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities as shall be reasonably required to effect the registration of such Holder's Registrable Securities. -8- 2.5 Expenses of Registration. All expenses (other than underwriting discounts and commissions) incurred in connection with registrations, filings or qualifications pursuant to Section 2.1 or 2.2, including (without limitation) all registration, filing and qualification fees, SEC and state "Blue Sky" filings, printers' and accounting fees (including the cost of "cold comfort" letters, if required), fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the Holders of Registrable Securities (selected by the Holders of a majority of Registrable Securities to be registered) included in each registration made pursuant to this Agreement shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 if the registration request is subsequently withdrawn or the registration statement does not become effective, in each case, in the circumstances described in Section 2.1(f) (in which case all participating Holders shall severally and proportionately bear such expenses), unless the Requisite Holders agree to forfeit their right to one (1) demand registration right pursuant to Section 2.1(f). 2.6 Underwriting Requirements. (a) In connection with any offering involving an underwriting of Registrable Securities, the Company shall not be required under Section 2.2 to include any Registrable Securities of a Holder in such underwriting unless such Holder accepts the terms of the underwriting as agreed upon between the Company and the underwriters; provided, however, that under no circumstances will any Holder be obligated to make representations or provide indemnities except with respect to information reasonably required to be furnished pursuant to Section 2.4. (b) With respect to a registration pursuant to Section 2.1, if the total amount of securities, including Registrable Securities, requested by security holders to be included in such offering exceeds the amount of securities that the managing underwriters with respect to such registration determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities which the managing underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the Holders according to the total amount of securities entitled to be included therein owned by each such Holder or in such other proportions as shall be mutually agreed to by such Holders); provided, however, that in no event shall any Registrable Securities proposed to be included in any registration be excluded from such offering if the securities of any selling security holder other than a Holder of Registrable Securities or any securities offered by the Company are included. (c) With respect to a registration pursuant to Section 2.2, if the total amount of securities, including Registrable Securities, requested by security holders to be included in such offering exceeds the amount of securities that the managing underwriters with -9- respect to such registration determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities which the managing underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the Company and the selling security holders, including the Registrable Securities, according to the total amount of securities entitled to be included therein owned by each such selling security holder or in such other proportions as shall mutually be agreed to by such selling security holders). 2.7 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 2: (a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and each officer, director, employee, affiliate and each person, if any, who controls such Holder within the meaning of the Act or the 1934 Act (any of the foregoing persons, an "Indemnified Party"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state securities law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each Indemnified Party, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 2.7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed). Nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is directly based upon a Violation which occurs in reliance upon and in conformity with written information reasonably required by Section 2.4 furnished for use in connection with such registration by any Indemnified Party, or which results from the failure of an Indemnified Party to deliver a final, amended or supplemental prospectus furnished an -10- Indemnified Party and required to be delivered if the Violation would not have occurred if the delivery had been made. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, officers, employees and affiliates, and each person, if any, who controls the Company within the meaning of the Act or the 1934 Act, any other Holder selling securities in such registration statement and any controlling person of any such other Holder (any of the foregoing persons, an "Indemnified Person(s)"), against any losses, claims, damages or liabilities (joint or several) to which any of such Indemnified Persons may become subject under the Act, or the 1934 Act or other federal or state securities law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are directly based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information reasonably required by Section 2.4 furnished by such Holder for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any such Indemnified Person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 2.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld or delayed. Nor shall such Holder be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which results from the failure of any Indemnified Person to deliver a final, amended or supplemental prospectus furnished to any Indemnified Person, and required to be delivered, if the Violation would not have occurred if the delivery had been made; provided, however, that in no event shall any indemnity under this Section 2.7(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually and reasonably satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, reasonably acceptable to the indemnifying party, with the reasonable fees and expenses of such -11- counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.7, but the omission so to deliver written notice to the indemnifying party will not relieve the indemnifying party of any liability that the indemnifying party may have to any indemnified party otherwise under this Section 2.7. (d) If the indemnification provided for in this Section 2.7 is held by a court of competent jurisdiction to be unavailable to an indemnified party or is insufficient to hold any indemnified party harmless with respect to any loss, liability, claim, damage, or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative benefits received by the indemnified party on the one hand and the indemnifying party on the other, and the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control; provided, however, that any party hereto who is adversely affected thereby has consented in writing to such provisions in the underwriting agreement. (f) The obligations of the Company and the Holders under this Section 2.7 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 2, and otherwise. -12- 2.8 Termination of Registration Rights. This Agreement (other than the provisions of Sections 2.7, 2.9, 3.6 and 3.7) shall terminate and be of no further force and effect on the first date on which no Registrable Securities are outstanding. 2.9 "Lock-Up" Agreement. The Company hereby acknowledges and agrees that for a period of 90 days after any date upon which any Holders have made a Demand Registration, it shall not (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, in respect of any of its debt securities or capital stock, or any securities convertible into or exercisable or exchangeable therefor or (ii) enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of such securities, in cash or otherwise or (iii) file or cause to become effective any registration statement under the Act other than that related solely to a Demand Registration, in each case, other than such securities to be sold pursuant to the Securities Purchase Agreement and other than any securities issued pursuant to an employee benefit or employee stock option plan of the Company. 3. Miscellaneous. 3.1 Amendments; Waivers. The provisions of this Agreement may be modified or amended, and waivers and consents to the performance and observance of the terms hereof may be given, only by written instrument executed and delivered by each of the Company and the Requisite Holders; provided, however, that any modification or amendment which adversely affects the rights of any Holder shall require the consent of such Holder unless the modification or amendment adversely affects the rights of all Holders in the same manner. The failure at any time to require performance of any provision hereof shall in no way affect the full right to require such performance at any time thereafter (unless performance thereof has been waived in accordance with the terms hereof for all purposes and at all times by the party to whom the benefit of such performance is to be rendered). The waiver by any party to this Agreement of a breach of any provision hereof shall not be taken or held to be a waiver of any succeeding breach of such provision or any other provision or as a waiver of the provision itself. 3.2 After-Acquired Shares. All provisions of this Agreement shall apply to all securities and instruments (i) received by a Holder as a dividend on or other payment made to holders of shares of capital stock of the Company, or (ii) issued in connection with a split of shares of capital stock of the Company, or as a result of any exchange for or reclassification of -13- shares of capital stock of the Company, or a reorganization, recapitalization consolidation or merger. 3.3 Successors and Assigns. This Agreement and all covenants and agreements contained in this Agreement by or on behalf of the parties hereto shall bind, and inure to the benefit of, the respective successors and permitted assigns of the parties hereto. 3.4 Rights and Obligations of Transferees. If a Holder transfers any or all of its Registrable Securities to any person in accordance with the terms of the Warrants and the Securities Purchase Agreement, such person and each subsequent transferee shall have the same rights hereunder as are given to such Holder, and shall be subject to the same obligations as are imposed upon such Holder by the terms hereof (and all references herein to a Holder shall include such transferee), unless otherwise provided herein. Any such transferee shall execute and deliver to the Company an instrument acknowledging such transferee's rights and obligations hereunder to be consistent with this Section 3.4. 3.5 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable legal requirements, to consummate and make effective the transactions contemplated by this Agreement. (b) If at any time after the closing any further action is necessary or reasonably desirable to carry out the purposes of this Agreement, the parties hereto shall take or cause to be taken all such necessary or convenient action and execute, and deliver and file, or cause to be executed, delivered and filed, all necessary or convenient documentation. (c) The Company agrees that after the date of this Agreement it shall not grant any Person registration rights other than piggyback registration rights which are subordinate to those of the Holders hereunder with respect to any class of equity security of the Company without the consent of the Requisite Holders, which consent shall not be unreasonably withheld. 3.6 Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered by hand or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and shall be deemed given when so delivered by hand, or if mailed, three Business Days after mailing (two Business Days in the case of express mail or overnight courier service), as follows: -14- (i) If to the Company: Mutual Risk Management Ltd. 44 Church Street Hamilton HM12 Bermuda Attention: Chief Executive Officer Telephone: (441) 295-5688 Facsimile: (441) 292-1867 with a copy to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinios 60603 Attention: Richard W. Shepro Telephone: (312) 782-0600 Facsimile: (312) 701-7711 (ii) If to the Purchasers: XL Insurance Ltd c/o XL Capital Ltd. XL House One Bermudiana Road Hamilton HM 11 Bermuda Attention: Paul Giordano Telephone: (441) 294-7162 Facsimile: (441) 292-5280 First Union Merchant Banking 2001, LLC One First Union Center - 12th Floor 301 South College Street Charlotte, North Carolina 28288-0732 Attention: Wellford Tabor Telephone: (704) 374-4540 Facsimile: (704) 374-6711 -15- High Ridge Capital Partners II, L.P. 105 Rowayton Avenue Rowayton, Connecticut 06853 Attention: James L. Zech Telephone: (203) 831-0104 Facsimile: (203) 831-0480 Century Capital Partners II, L.P. c/o Century Capital Management, Inc. One Liberty Square Boston, Massachusetts 02019 Attention: Craig Eisenacher Telephone: (617) 482-3060 Facsimile: (617) 542-9398 Taracay Investors Company 104 Wallacks Point Stamford, Connecticut 06902 Attention: Robert Clements Telephone: (202) 862-4343 Facsimile: (203) 625-8366 3.7 Governing Law; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. ANY DISPUTE UNDER THIS AGREEMENT THAT IS NOT SETTLED BY MUTUAL CONSENT SHALL BE FINALLY ADJUDICATED BY ANY FEDERAL OR STATE COURT SITTING IN THE CITY, COUNTY AND STATE OF NEW YORK, AND THE COMPANY CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS (OR ANY APPELLATE COURT THEREFROM) OVER ANY SUCH DISPUTE. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN NEW YORK COUNTY IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE MATTERS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF -16- ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 3.8 Severability; Interpretation. If any provision in this Agreement is agreed by the parties hereto to be, is deemed to be or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto, (i) such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties hereto, it will be deleted, with effect from the date of such agreement or such earlier date as the parties hereto may agree, and (ii) the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 3.9 Table of Contents; Headings. The table of contents and section headings herein are for convenience only and shall not affect the construction hereof. 3.10 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto relating to the subject matter hereof and supersedes any and all prior oral or written agreements, representations or warranties, contracts, understandings, correspondence, conversations and memoranda, whether written or oral, between the parties hereto, or between or among any agents, representatives, parents, subsidiaries, affiliates, predecessors in interest or successors in interest, with respect to the subject matter hereof. 3.11 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to the other party. 3.12 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and the Holders and is not intended to confer any benefit upon any other person or entity or infringe upon any rights or remedies, except as contemplated in this Section 3. [Signature Pages Follow] -17- IN WITNESS WHEREOF, the parties hereto have executed this Warrant Registration Rights Agreement as of the date first above written. MUTUAL RISK MANAGEMENT LTD. By: /s/ Elizabeth B. Price ---------------------------------------------- Name: Elizabeth B. Price Title: Secretary XL INSURANCE LTD By: /s/ Clive Tobin ---------------------------------------------- Name: Clive Tobin Title: President & Chief Executive Officer FIRST UNION MERCHANT BANKING 2001, LLC By: /s/ Frederick W. Eubank, II ---------------------------------------------- Name: Frederick W. Eubank, II Title: Partner HIGH RIDGE CAPITAL PARTNERS II, L.P. By: /s/ Steve Tynan ---------------------------------------------- Name: Steve Tynan Title: President, Liberty Street Corp., as general partner of Liberty Street Partners, LP, as member of High Ridge GP II LLC, as general partner of High Ridge Capital Partners II, L.P. -18- CENTURY CAPITAL PARTNERS II, L.P. BY: CCP CAPITAL II LLC, its general partner By: /s/ Craig Eisenacher ---------------------------------------------- Name: Craig Eisenacher Title: Managing Member -19- TARACAY INVESTORS COMPANY By: /s/ Robert Clements ---------------------------------------------- Name: Robert Clements Title: EX-5 6 xlex5.txt IRREVOCABLE VOTING PROXY MUTUAL RISK MANAGEMENT LTD. (the "Company") IRREVOCABLE VOTING P R O X Y The Undersigned, Robert A. Mulderig of 44 Church Streeet, Hamilton, Berumda, the holder of 285,714 Series A Preferred Stock due 2006 of the Company and $2,000,000 principal amount of 9 3/8% Convertible Exchangeable Debentures due 2006 of the Company HEREBY IRREVOCABLY APPOINTS XL Capital Ltd. of Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM JX, Bermuda or any of its Directors or Officers or any other person authorised by any such Director or Officer (the "Proxy Holder") AS MY PROXY to vote on my behalf at any general meeting of the Company or at any separate class meeting of the holders of Securities, any and all Securities from time to time held by me and AS MY ATTORNEY to sign any shareholder resolutions in lieu of a meeting and any other consents or waivers in relation to any or all Securities from time to time held by me. For the purposes of this Irrevocable Voting Proxy, the term "Securities" means, collectively, the Debentures, Voting Preferred Stock, Newco Voting Preferred Stock and Common Stock of the Company and Newco into which such Debentures are convertible or for which they are exchangeable (all such capitalised terms having the meanings set forth in the Securities Purchase Agreement dated as of May 8, 2001 among the Company and the Investors named therein). -2- THIS PROXY IS COUPLED WITH AN INTEREST AND IS IRREVOCABLE and exclusive and shall remain in full force and effect for a period of five years from the date hereof or until there shall be no Debentures outstanding, whichever is later. The undersigned hereby ratifies and confirms all that the Proxy Holder may lawfully do or cause to be done by virtue hereof. This Irrevocable Voting Proxy shall be governed by the laws of Bermuda and the parties irrevocably submit to the jurisdiction of the courts of Bermuda in relation to the matters contained herein. IN WITNESS WHEREOF the undersigned has executed this Irrevocable Voting Proxy this 7th day of May 2001. SIGNED, SEALED AND DELIVERED ) by the said Robert A. Mulderig ) in the presence of: ) SIGNED ROBERT A. MULDERIG ) ) SIGNED ROBERTA J. HENRY witness - ----------------------- ROBERTA J. HENRY name of witness - ---------------- -----END PRIVACY-ENHANCED MESSAGE-----